**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-K**

**(Mark One)**

**x**                               ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31, 2006**

**or**

**o**                                  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the transitionperiod from                      to                      .**

**Commission file number: 000-28229**

**Caliper Life Sciences, Inc.**

(Exactname of registrant as specified in its charter)

| **Delaware**                             |   | **33-0675808**      |
|------------------------------------------|--------|---------------------|
| (State or other jurisdiction of          |   | (I.R.S. Employer    |
| incorporation or organization)           |   | Identification No.) |
| **68 Elm Street**                        |   | ** **          |
| **Hopkinton, MA**                        |   | **01748**           |
| (Address of principal executive offices) |   | (Zip Code)          |

 

**Registrant’stelephone number, including area code** (508) 435-9500

**Securitiesregistered pursuant to Section 12(b) of the Exchange Act:**

| **Title of each class**                  |   | **Name of exchange on which registered** |
|------------------------------------------|--------|------------------------------------------|
| Common Stock, $0.001 Par Value Per Share |   | NASDAQ Global Market                     |

 

Securitiesregistered pursuant to Section 12(g) of the Exchange Act: **None**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o   No x

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o   No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Largeaccelerated filer o      Acceleratedfiler x      Non-acceleratedfiler o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o   No x

The aggregate market value ofthe registrant’s voting and non-voting common stock held by non-affiliates ofthe registrant (without admitting that any person whose shares are not includedin such calculation is an affiliate), as of the last business day of theregistrant’s most recently completed second fiscal quarter was $170.6 million.

As of March 12, 2007,the registrant had 47,141,370 shares of common stock outstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Certain information requiredin Part III of this Annual Report on Form 10-K is eitherincorporated from the Registrant’s Definitive Proxy Statement for theRegistrant’s 2007 Annual Meeting of Stockholders or from a future amendment tothis Form 10-K, in either case to be filed with the Securities andExchange Commission not later than 120 days after the end of the fiscal yearcovered by this Form 10-K.

 

 

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**CALIPER LIFESCIENCES, INC.**

**FORM 10-KFor the Fiscal Year Ended December 31, 2006**

**TABLEOF CONTENTS**
|                   | ** ** | ** **                                                                                                         | ** ** | **Page** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |
| Item 1.           |       | Business                                                                                                           |       | 1        |
| Item 1A.          |       | Risk Factors                                                                                                       |       | 28       |
| Item 1B.          |       | Unresolved Staff Comments                                                                                          |       | 41       |
| Item 2.           |       | Properties                                                                                                         |       | 42       |
| Item 3.           |       | Legal Proceedings                                                                                                  |       | 42       |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                |       | 44       |
| **PART II**  |
| Item 5.           |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 45       |
| Item 6.           |       | Selected Financial Data                                                                                            |       | 46       |
| Item 7.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       | 47       |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       | 62       |
| Item 8.           |       | Financial Statements and Supplementary Data                                                                        |       | 64       |
| Item 9.           |       | Changes in and Disagreements with Accountants on Accounting  and Financial Disclosure                              |       | 64       |
| Item 9A.          |       | Controls and Procedures                                                                                            |       | 64       |
| Item 9B.          |       | Other Information                                                                                                  |       | 67       |
| **PART III** |
| Item 10.          |       | Directors , Executive Officers and Corporate  Governance                                                           |       | 67       |
| Item 11.          |       | Executive Compensation                                                                                             |       | 67       |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       | 67       |
| Item 13.          |       | Certain Relationships and Related Transactions and  Director Independence                                          |       | 67       |
| Item 14.          |       | Principal Accountant Fees and Services                                                                             |       | 67       |
| **PART IV**  |
| Item 15.          |       | Exhibits and Financial Statement Schedules                                                                         |       | 68       |
| Signatures        |       | 73                                                                                                                 |

 

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**INFORMATIONREGARDING FORWARD-LOOKING STATEMENTS**

This Annual Report on Form 10-K containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, and Section 21E of the Securities Exchange Act of1934. These statements relate to future events or our future financialperformance. We have identified forward-looking statements by terminologydenoting future events such as “anticipates,” “believes,” “can,” “continue,” “could,”“estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should”or “will” or the negative of these terms or other comparable terminology. Thesestatements are only predictions and involve known and unknown risks,uncertainties and other factors, including the risks outlined under Part I,Item 1A, “Risk Factors,” and under “Factors Affecting Operating Results”contained in Part II—Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” that may cause our actualresults, levels of activity, performance or achievements to be materiallydifferent from any future results, levels or activity, performance orachievements expressed or implied by these forward-looking statements.

Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. Our expectations are as of the date we file this Form 10-K,and we do not intend to update any of the forward-looking statements after thedate we file this Annual Report on Form 10-K to conform thesestatements to actual results, unless required by law.

**PART I**

**Item 1.   *Business***

**Overview**

Caliper Life Sciences, Inc. sells products,services and integrated systems comprised of instruments, software and reagentsto life sciences, biomedical and pharmaceutical researchers. We believe our offeringsenable our customers to accelerate drug discovery, enhance the diagnosis ofdisease and facilitate scientific research. Caliper’s strategy is to transformdrug discovery and development through technologies and services that arerelevant to and predictive of drug effects in humans. Our products andservices, assembled from our leading portfolio of microfluidics, automation,liquid handling, and molecular imaging technologies, address key issues alongthe critical path of pre-clinical drug discovery and development.

On August 9, 2006, we completed our acquisitionof Xenogen Corporation. Xenogen develops and markets products, technologies andservices for acquiring, analyzing and managing complex image data from liveanimals. Our acquisition of Xenogen provides us entry into the fast-growingmolecular imaging market, and positions us as one of the first life scienceinstrumentation companies able to provide an integrated portfolio of productsand services for both in vitro (referring to tests or reactions taking placeoutside a living organism) and in vivo (referring to tests or reactions takingplace inside a living organism) research. A large majority of drug candidatesthat seem promising in early in vitro studies fail during pre-clinicalanimal trials. By tracking this drug attrition, understanding its root causes,and pursuing solutions, we believe we can improve the clinical relevance ofearly drug discovery and development.

The initial focus of our strategic effort has been topursue oncology applications, and we are currently seeking new experimentalmodels, techniques and tools that bridge in vitro and in vivo experimentation inthis major therapeutic area. Future areas of interest include solutions forcardiovascular, metabolic disease and inflammation/immunology therapeuticprograms.

Our products and services currently address some ofthe key challenges that face the pharmaceutical and biotechnology industry,including shrinking drug candidate pipelines, late-stage drug failures, andunforeseen side effects coming to light late in the development process, orpost-commercialization. Using our products and services, researchers are ableto increase the speed and efficiency of their screening 

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efforts, make betterchoices earlier in the drug discovery and development process, and conductprofiling experiments that identify drug side effects well before the humanclinical trial stage.

We are pursuing the application of ourtechnology to the diagnostics market and believe that ourLabChip technologies may be able to provide ease of use, cost anddata quality benefits for certain diagnostic tests. These benefits are theanticipated result of chip-based integration, automation andminiaturization of the various workflow steps required to performthese tests. We are presently working with collaboration partners in this areathrough our Caliper Driven Program. Although most of these projects are stillin the feasibility or early development stages, we believe that one of ourCaliper Driven partners, Agilent Technologies, expects tocommercialize its first diagnostic test based on our LabChip technology in 2007.

Caliper was organizedunder the laws of the State of Delaware on July 26, 1995. Our principalexecutive offices are located at 68 Elm Street, Hopkinton, Massachusetts 01748,and our telephone number is (508) 435-9500. Our web site address iswww.caliperLS.com. Our Annual Reports on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K, andall amendments to those reports, are available to you free of charge throughthe Investor Relations section of our website as soon as reasonably practicableafter such materials have been electronically filed with, or furnished to, theSEC. The contents of our web site are not part of this Annual Report.

**Market Opportunity**

Our worldwide market consists of pharmaceutical,biotechnology and other companies engaged in biopharmaceutical research, andnot-for-profit institutions engaged in biomedical research. In the UnitedStates alone, there are over one thousand biotechnology companies, along with asmaller number of pharmaceutical companies. Although the pharmaceuticalcompanies are fewer in number, they are typically much larger in terms ofresources, size and capitalization. In addition to the foregoing, the UnitedStates alone has over 600 academic and not-for-profit institutions engaged inbiomedical research.

As highlighted in the FDA Critical Path Initiative,biomarker research and better experimentation models are essential to improvepredictability and efficiency along the critical path from laboratory tocommercial drug. We believe that the combination of our proprietarymicrofluidic and imaging technologies along with our automation expertiseaddresses these key research needs by creating molecular level solutions that encompassboth in vitro and in vivo experimentation. These technologies offer exceptionaldata quality and productivity advantages, and we believe that combining them tooffer a highly correlated suite of products and services should result inearlier, clinically relevant insights in the drug discovery process. We referto the continuum of these solutions as “the I-I Bridge,” which stands for invitro to in vivo testing bridge.

Caliper’s broad range of products and services aredesigned to enable biopharmaceutical companies to reduce costs and standardizeanalytical techniques across four key areas of the pre-clinical drug discoveryand development chain: biological screening; pharmacokinetics/pharmacodynamics;absorption, distribution, metabolism, excretion and toxicology (ADME/Tox); anddrug dosage and formulation testing. Our strategy is to provide tools andservices that are relevant to and ultimately predictive of clinical results. Webelieve we are one of the first life science instrumentation companies able toprovide an integrated package of products and services that span both in vitroand in vivo pre-clinical research.

Our in vitro technologies support a wide range ofapplications, such as biochemical, gene, protein and cellular assays in orderto assess the status of a given biological parameter at a point in time. Ourhigh quality****in vitro models are designed toallow researchers to integrate and automate experiments to achieve improveddata accuracy and reproducibility at a reduced cost and higher speed, leadingto expanded individual researcher capability and improved enterprise-wideproductivity.

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Our in vivo technologies allow researchers to validatea hypothesis concerning the effects of a drug on, or the role of a gene orprotein in, a biological system by testing the hypothesis in animal models. Invivo technologies have evolved over time from conventional animal models, togenetically modified animals in which specific genes are altered, and morerecently to transgenic animals in which a foreign gene of interest has beeninserted, deleted or replaced. Through the use of our in vivo imaging systems,researchers can follow the spread of a disease, or the effects of a drug, inthe same animal over time in order to better predict human response.

The graphic below depicts the span of Caliper’sintegrated solutions across the phases of pre clinical drug discovery:

 

**Technologies**

***Microfluidics***

Our LabChip microfluidicsolutions provide significant advances in laboratory experimentation for thepharmaceutical and biotechnology industries. Microfluidic chips are the keycomponents of our LabChip systems, which also include a LabChip instrument andexperiment-specific reagents and software. Our chips contain a network ofminiaturized, microfabricated channels through which fluids and chemicals aremoved to perform experiments. A single type of chip, used with customizedreagents and software to perform a particular experiment, comprises one LabChipapplication. Depending on the chip format, reagents are introduced eitherautomatically or by the user. The instrument and related software control themovement of fluids through the chip via pressure or voltage, and an integratedoptical system detects the results of the particular experiment. Because wehave great flexibility in channel design, and can exert split-second computercontrol over fluid flow, we have the ability to create chips for numerousapplications. Our LabChip systems miniaturize, integrate and automateexperiments and are designed to 

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provideimproved data accuracy and reproducibility, reduced cost and higher speed,leading to expanded individual researcher capability and improvedenterprise-wide productivity.

*Features of LabChipSystems*

·       *Miniaturization.  *A conventionallaboratory typically uses at least a drop of fluid, or 1 to 100 microliters, toperform each experiment. In many applications using our LabChip systems, thesample volume needed from external sources is reduced to below 1 nanoliter, areduction of up to 100,000-fold over conventional systems. In someprocesses within the chip, reagents are dispensed in the microchannels involumes down to tens of picoliters, another 10- to 100-foldreduction, which speeds analysis times and increases sample throughput. Amicroliter is one millionth of a liter, a nanoliter is one billionth of aliter, and a picoliter is one trillionth of a liter.

·       *Integration.  *Integration involvescombining multiple processes into a single process, or the inclusion ofmultiple functions into one device. Today many laboratory systems perform onlyone or two steps of an experimental protocol. Our LabChip systems can integratecomplete experiments involving half a dozen or more steps into one continuousprocess performed on a single chip.

·       *Automation.  *Many laboratory experiments are performedin multiple manual steps. With our LabChip systems, entire experiments can beautomated and performed inside a chip using one instrument, freeing up valuableresearch time and laboratory space and reducing labor requirements.

*Key Benefits ofLabChip Systems*

·       *Improved Data Quality and Accuracy.  *OurLabChip systems are designed to produce more accurate, consistent andreproducible data by reducing human error through increased automation,reducing the variability caused by the use of multiple instruments throughintegration of an application on a single system, and enabling more analyticalapproaches to experimentation that are impractical in traditional systems. Forexample, biochemical screening assays typically call for fast, “bulk”measurements of an experimental mixture. Reducing the volume size of theexperiment allows for rapid separation and measurement of individual molecularspecies in the test mixture, which in turn enhances the accuracy of the overallresult. With higher quality data, our customers can make better decisionsearlier in the drug discovery and development process. This enables ourcustomers to avoid the time and expense of performing additional analyses andexperiments on “false positive” results from their primary screeningexperiments.

·       *Improved Sensitivity.  *When screeningagainst drug targets, such as kinases, the higher quality data from our LabChipsystems allows customers to detect more subtle drug compound activities thancan be detected with traditional microplate well-based assays. This has twoadvantages: (1) an increase in the pool of potential lead compounds, and (2) thepossibility that a “hit” found at lower levels of inhibition will be moreselective for the target of interest than a hit found at higher levels ofinhibition because compounds that hit at higher levels of inhibition may alsoproduce unacceptable levels of inhibition on other, non-target kinases.

·       *Reduced Reagent and Labor Cost.  *OurLabChip systems utilize only a small fraction of the usual amount of expensivereagents used in experiments performed in test tubes, 96-well plates, or384-well plates, and reduce the labor involved in each experiment. Webelieve that saving on reagent and labor costs will enable pharmaceuticalcompanies to expand the scale of experimentation in ways that would otherwisenot be commercially feasible*.*

·       *High Speed.  *We believe our LabChipsystems can, depending on the application, accelerate some experiments as muchas 100-fold or more. For example, molecular separations such as 

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electrophoresis may taketwo hours or more using conventional equipment. Using a chip, however, theseseparations can be performed in less than one minute.

·       *Faster Assay Development.  *Traditionalassays, particularly those used for enzymatic screening, can require complexand time-consuming assay development. For example, some popular assays rely ondeveloping specific antibodies for the assay—a process that can take up to sixweeks or more. Because our LabChip assays eliminate the requirement for assaydevelopment steps such as antibody preparation, they are much faster todevelop. In addition, we have exploited the predictable nature of fluid andreagent movement inside microfluidic channels and have developed software toolsto facilitate the process of optimizing the experimental conditions necessaryfor a successful enzymatic assay on a LabChip device, such as separating asubstrate peptide from its product. Typically, our customers have found thatthese combined benefits shorten a two- to three-month assay developmentprocess for a traditional assay to just a week or two for a LabChip assay.

·       *Expanded Individual Researcher Capability.  *Becauseour LabChip systems can combine a multi-step, complex experiment into onestep, we believe that individual researchers can perform experiments previouslyoutside their areas of expertise. By comparison, with conventional, non-integratedequipment, researchers need to master the complexities of performing eachindividual step.

·       *Improved Enterprise-Wide Productivity.  *We believe thatour LabChip systems improve data quality and reproducibility so much thatresearchers will be able to utilize data generated outside their laboratory ororganization if such data was generated on a LabChip system. This has thepotential to greatly improve enterprise-wide productivity by supporting datasharing and reducing the need to repeat experiments. For example, a typicalprimary screen produces approximate, “yes/no” answers about the activity oflibrary compounds against a particular kinase target, and therefore theinformation from such primary screens is only useful for one primary screeningexperiment. With LabChip assays, the primary screening data is more specific interms of the degree of inhibition, and more reproducible. This could enable anorganization to build a database of primary screening data that couldultimately be mined by other scientists within the organization interested in aparticular compound/target interaction.

***Imaging***

Our optical imaging solutions allow researchers toobserve disease and molecular mechanisms in living, intact organisms in anon-invasive manner. This process is generally referred to as “molecularimaging”. Our products and services allow researchers to focus on those stagesof disease progression within animal models that are most predictive of humanresponse. With this information, researchers can follow the spread of adisease, or the effects of a drug, in the same animal over time.

The real-time capabilities of biophotonic imagingenable visual observation of mechanisms of action or cascading events withinthe animal that would not otherwise be detected using conventional animalmodels. This capability is particularly important in studies in which genes arealtered by environmental determinants and in studies in which drugs aredelivered and affect biological pathways of whole tissues in a manner thatcellular systems or other in vitro systems do not. We believe the combinationof genetically modified animals and biophotonic imaging has created morereliable animal models. Transgenic animal models developed for biophotonicimaging are disease-specific and enable analysis of gene expression, proteinactivity and disease progression. In our genetically modified animals, known as“LPTA animal models,” the gene for luciferase is inserted behind the promoterof a particular gene of interest. Relative levels of transcription of the geneof interest can then be monitored directly by light emission. In addition togenetically modified animals, we have modified cells and microorganisms aloneto express the luciferase 

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gene, known as “Bioware”products, for tracking and monitoring these cells within an unmodifiedlaboratory animal.

Increasing the throughput of in vivo animal testingand utilizing it earlier in the drug development cycle may substantially reducethe costs of drug development and improve the time to market of successful drugcandidates by identifying drug candidate failures earlier in the developmentprocess. We believe that implementation of our molecular imaging technologywill allow consolidation and acceleration of the target validation, leadoptimization and preclinical stages of the drug development process. Likewise,efficacy and toxicity tests can be performed earlier in the drug developmentcycle to avoid late-stage failures.

Forexample, the pictures below demonstrate, at left, the biophotonic image of atumor growing in a live animal over time and, at right, the quantitativemeasurement of the relative tumor size as time progresses. This example usesone of our Bioware tumor cell lines that has been genetically modified toexpress the luciferase gene, and ultimately, light, in an ordinary mouse and isimaged using our specially designed camera system, known as the “IVIS ImagingSystem.”

|  |   |  |
|--|--------|--|

 

Additionally, through ourXenogen Biosciences Corporation subsidiary, we offer to biopharmaceuticalcompanies and biomedical researchers animal production and phenotyping servicesto create both traditional and bioluminescent transgenic animal models to testthe effects of a drug on, or the role of a gene or protein in these relevantmodel systems. Whereas previously, biopharmaceutical companies tended toperform all research and development in-house, there is a trend in recent yearsto focus in-house R&D departments on core competencies, and to outsourcespecific technologies and products to specialized service providers andvendors. As a consequence, a large industry segment has formed in recent yearsto deliver various specialized technologies and services to biopharmaceuticalcompanies. Over the past 16 years, Xenogen Biosciences has offered many ofthese specialized technologies, including the creation and phenotypiccharacterization of transgenic and gene knockout animals, in vivo evaluation ofcompounds at various stages of development, and utilization of biophotonicimaging to perform biodistribution, drug delivery and/or biochemical studies.Specifically, the technology most relied upon for target validation within thepharmaceutical industry today is gene knockout technology in concert withcomprehensive phenotypic analysis. Genetically engineered mice can be highlyinformative in the discovery of gene function and pharmaceutical utility of apotential drug target, as well as in the determination of the potentialon-target side effects associated with a given target. Aside from whether agene is a good drug target, genetically engineered animals also provideinvaluable models to assess the pharmacology, and increasingly the toxicology,of drug candidates, making them well-accepted validation models. XenogenBiosciences’ experience includes creating and characterizing these types ofanimal models, creating transgenic animal models, and producing thousands ofunique genetically-modified lines for academic, government and commercial customers.

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***Automation and Liquid Handling***

We offer a full range ofin vitro technologies that includes high- and ultra-high-throughput screeningsystems, liquid handlers, advanced robotics, storage devices, and dissolution,extraction and evaporation workstations. We group our key automation and liquidhandling product offerings into two general categories, drug discovery and lifesciences research, which we refer to as drug discovery, and pharmaceuticaldevelopment and manufacturing, which we refer to as drug development, toreflect the markets they primarily address.

***Drug Discovery Solutions***

Our advanced liquid handling systems provide fast andaccurate liquid transfers for 96-, 384- and 1536-wellmicroplates, and are designed to enable scientists to automate and acceleratetime- and labor-intensive tasks resulting in increased walkaway time andimproved data quality.

Our family of liquid handling instruments andintegrated systems supports a wide range of applications related to the targetidentification and target validation phases of the drug discovery process.Adapted to support the rapidly changing nature of research in life science, ourliquid handlers are well-suited for genomics applications, cell-basedassays, ADME/Tox, screening and enzymatic assays.

Our microplate managementand storage automation systems provide users with the ability to automate severallab instruments and build completely automated work cells, with expandablestorage capacity, to enable valuable walk-away time for scientists andresearchers.

***Drug Development Solutions***

Our drug developmentproducts fully automate quantitative sample preparation and analysis ofpharmaceutical samples, such as tablets, capsules, granulations and bulk drugs.Benefits of our MultiDose G3, TPW III, and APW products include increasedanalyst productivity, decreased technician-to-technicianvariability, and easy method transfer from one laboratory to another. In thedevelopment function, our workstations are designed to improve speed to marketwith efficient method development, process scale-up, validation, and stabilityprograms. In the quality analysis laboratory, our products can reduce inventorycycle time and improve data collection and summarization. In all departments,analysts can be freed up to contribute to more value-added responsibilities.Precise, technique-independent results ensure smooth method transfer to otherlaboratories. Our workstations meet the rigorous regulatory requirements of theFood and Drug Administration (FDA)*,*UnitedStates Pharmacopeia (USP), and other regulatory bodies.

**Products andServices**

The following discussionsummarizes Caliper’s products and services portfolio as of December 31, 2006.

***Microfluidics Systems***

*LabChip3000 Drug Discovery System.**  *Using proprietary “sipper” chips to automaticallysample library compounds from 96- or 384-well plates, the LabChip3000 performs unattended, high-volume screening, producing high-quality datathat minimizes false positives and false negatives and detects weak inhibitorswith high accuracy, potentially identifying drug candidates that conventionaltechniques can miss. Each chip has either 4 or 12 “sippers,” small glasscapillary tubes attached to the chip. Once the researcher prepares the chip andplaces it into a LabChip 3000 system, minute quantities of sample can beintroduced, or “sipped,” through the capillary tube onto the chip. This sippingprocess can be repeated 

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many times with differentcompounds, enabling a single chip to analyze thousands of samples quickly andwithout human intervention.

Assays are available for the LabChip 3000 system forenzymatic drug targets such as kinases, proteases, phosphatases, andlipid-modifying enzymes, and cell-based targets such as G-protein coupledreceptors, or GPCRs. New system capabilities allow screening against bothadherent and non-adherent cell types, and the small volumes of cells requiredenable screening against cells that are in short supply, for example primarycells. Our LabChip 3000 system is a fast, cost-effective way to generatenumerous assays to meet the evolving requirements of pharmaceutical companies’specific profiling strategies.

*DesktopProfiler Kinase Profiling System.**  *The Desktop Profiler instrument,which was introduced during 2006, with ProfilerPro reagent kits, provides aconvenient, affordable approach to kinase profiling, helping researchersdetermine the interaction between drug candidates and the many different kinasesfound in the human body. Kinases are an important class of drug discoverytargets since they have been shown to play a role in cancer, and cardiovasculardisease, as well as other diseases. A typical kinase drug development programwill focus on finding lead compounds that inhibit a particular kinase thoughtto play a role in the disease being studied. As scientists learn more about thehuman “kinome,” the collective term for the 518 different kinases found in thehuman body, they also are becoming increasingly concerned about theinteractions of lead compounds on non-target kinases, and the potential adverseside effects resulting from these interactions. As a result, selectivity or “profiling”screens, where lead compounds are screened against a representative group ofhuman kinases, are increasingly becoming a routine part of drug discoveryprograms. Our ProfilerPro kinase panel plate kits consist of a representative48 kinases that are pre-dispensed into a pair of 384-well microplates.This diverse set of kinases spans the human kinome, and is highly relevant in avariety of therapeutic research areas including oncology, the central nervoussystem, cardiovascular disease, inflammation and diabetes.

*LabChip 90 AutomatedElectrophoresis System.**  *Our LabChip 90 Automated Electrophoresis Systemautomates the sizing and concentration analysis of proteins and DNA fragments,and is designed to meet the needs of higher-throughput research and productionlaboratories that presently use SDS-PAGE and agarose gel electrophoresis. Usingour proprietary microfluidic sipper chips to introduce samples directly from 96-wellor 384-well plates, the LabChip 90 provides walk-away automation, reducedanalysis time, and immediate reporting of digital high-quality sizing andconcentration data. For DNA and protein separations, the LabChip 90 provides anautomated, higher-throughput alternative to the Agilent 2100 Bioanalyzer andBio-Rad Experion systems, each of which are discussed further below under thecaption, “Sales and Marketing.” As scientists identify needs forhigher-throughput research, they are increasingly finding the throughput, dataquality and reporting capabilities of the LabChip 90 system attractive.

***Imaging Systems***

*IVISImaging Systems and Living Image Software.*   TheIVIS 100, 200, Lumina, Spectrum and 3D Imaging Systems each include a highlysensitive camera, an ultra-dark box that serves as the imaging chamber and acomputer equipped with our Living Image Software. The throughput, imageresolution and analytical capabilities differ by IVIS model, and addressdifferent end user needs. The original IVIS 100 Series, introduced in 2000, andthe IVIS 200 Series, introduced in 2003, each have high-throughput andhigh-sensitivity. The IVIS 200 also has integrated fluorescence andbioluminescence capabilities, as well as high resolution and topographicanalysis. The IVIS 3D, launched in September 2005, is a high-sensitivitycamera that provides a full three-dimensional diffuse tomographic analysis ofbioluminescent light sources in living animals as well as two-dimensionalmulti-view fluorescent imaging capabilities. In 2006, Xenogen introduced theIVIS Lumina and IVIS Spectrum Imaging Systems. The IVIS Lumina, which replacedthe IVIS 50, is a highly-sensitive system that has integrated fluorescence andbioluminescence capabilities and features. The IVIS Lumina is a lowerthroughput system that is priced at the lower end of our imaging system pricerange. We believe the IVIS Lumina will have appeal to customers for both invitro and in vivo 

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imaging. The IVIS Spectrumis the only in vivo optical imaging system that can perform high sensitivitybioluminescent imaging and advanced fluorescent imaging, including spectralunmixing, trans-illumination, and 3D tomographic capabilities. With an opticalswitch to move from epi-illumination (reflection or top illumination) totrans-illumination (bottom illumination), IVIS Spectrum maintains highthroughput capability, while providing increased sensitivity in fluorescentimaging. This dual illumination capability enables tomographic localization ofboth shallow and deep tumors in 3D and reduces background interference. Advantagesof the IVIS Imaging Systems compared with other technologies such as PET, includehigher sensitivity, higher throughput, and the unique Living Image softwarewhich provides ease of use allowing one non-technical person to operate theimaging system and examine the data analysis simultaneously.

*Optionsand Accessories.**  *We offerseveral options and accessories to expand our IVIS workstations, which are soldseparately from the imaging systems. Our standard accessory package includes acalibration unit to ensure the overall performance and accuracy of the lightsources used in the system as well as a small animal holding unit. We alsooffer an anesthesia accessory package, which is designed to work with all ofour IVIS Imaging Systems. Our anesthesia package integrates a gas delivery systeminto the imaging chamber, so that mice or other small animals can beanesthetized when placed in the IVIS Imaging System, thus minimizing gasexposure to lab personnel.

*BiowareProducts—Light-Producing Cells and Microorganisms.**  *Our Bioware lines of light-producing cells andmicroorganisms enable researchers to analyze the spread and treatment of cancerand infectious diseases, as well as to study immunology. We currently offerapproximately 25 lines of light-producing microorganisms, including E. coli,Pseudomonas, Salmonella and other gram negative bacteria, as well asStaphylococcus aureus, Streptococcus pneumonia and other gram positivebacteria. We have also developed approximately 20 tumor cell lines for breast,melanoma and prostate cancer. In addition, we are able to create customlight-producing microorganisms and tumor cell lines in accordance with theneeds of our customers. All of our Bioware products are optimized to work withour IVIS Imaging Systems. 

*LPTAAnimal Models.**  *Our LPTAanimal models are pathway-specific model animals that enable researchers toanalyze gene expression, protein activity and disease progression. We currentlyhave over 30 types of commercially available, therapeutically-relevant LPTAanimal models designed to assist researchers in the areas of metabolic diseasesand liver failure, inflammation and drug metabolism. We are developing andin-licensing other types of LPTA animal models for use in the areas ofcardiovascular disease, diabetes, cancer, inflammation, metabolic disease,neurodegenration and toxicity. In addition, we are able to create customizedLPTA animal models in accordance with customer specifications. All of our LPTAanimal models are optimized to work with our IVIS Imaging Systems.

*Reagents.*   We offer severaltypes of reagents for use in connection with our Bioware products and LPTAanimal models. Our offerings include luciferin, a chemical compound that isintroduced into cells and organisms to produce bioluminescence, and VivoFluorfluorescent labeling kits for fluorescent imaging.

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***Automation and Liquid Handling Systems***

*CaliperSciclone.**  *OurCaliper Sciclone ALH series features interchangeable 96- and 384-channelpipetting heads that can pipette and dispense volumes from 100 nanoliters to200 microliters. The Caliper Sciclone i-series, based on MEMS(microelectromechanical systems) technology, addresses volumes ranging from 10nanoliters to 1 milliliter and embeds real-time adaptive algorithms ensuringconsistent liquid delivery in changing environmental conditions such astemperature and sample viscosity. Each pipetting channel can dispense anindependent volume and offers its own liquid level detection capability,allowing scientists to “poll” a plate to determine the liquid level and volumein each well. The benefit of this type of control over the dispensing andmonitoring of fluids is higher quality data and increased probability that aparticular experiment will not have to be repeated.

Both series of the Caliper Sciclone liquid handleroffer multiple accessories such as an independent 8-channel pipettor forsingle-well access, and bulk reagent dispense modules for efficient reagentbroadcasting. Other available accessories include the Sciclone gripper,microplate shakers, a positive pressure filtration system, and temperature-controlledlocators. The control software enables ease-of-use capabilities and supports21CFR Part 11 compliance.

The Caliper Sciclone liquid handler can be used as astandalone instrument, or integrated in a more complete system thatincorporates automated plate carriers such as our Twister robot, and otheranalytical instruments.

*Zephyr.**  *The Zephyr liquid handling instrument, which wasintroduced during 2006, was developed in response to a market demand for acompact, cost-effective, multi-channel liquid handler. Zephyr is designed tohandle key applications for compound management, HTS, genomics, proteomics andbio-analytical assays, as well as numerous commercially available kits. Theseapplications include: DNA/RNA purification clean-ups, PCR setup, proteinprecipitation, solid phase extraction (SPE), protein purification solubility assays,kinase assays and cell-based assays. Zephyr’s small footprint makes it idealfor workbench operation, while the convenient deck design provides ready accessfrom all four sides to consumables and accessories.

*StaccatoAutomated Workstations.**  *Staccato workstations provide fast, reliable andscalable automation for drug discovery, genomics, proteomics and drugdevelopment laboratories. Staccato systems are available in three baseconfigurations: Mini Workstation Series, Application Series and CustomSystems Series. Staccato Mini Workstations offer the minimal amount ofequipment required to automate basic liquid handling and material managementtasks. Staccato Application Series are pre-configured and pre-integratedsolutions for common applications such as plate reformatting and replication,hit-picking, enzyme-linked immunosorbent assays (ELISA), and a variety ofcell-based assays. Staccato Custom Systems use proven automation-friendlybuilding blocks, iBlox, that are designed into custom configurations asdictated by the needs of the end user.

*TwisterI and II.**  *TheTwister Universal Microplate Handler automates the movement of microplates toand from a microplate reader, washer, or other microplate-processinginstrument. Twister I has a capacity of 80 microplates, and is used as adedicated autoloader with a wide variety of scientific instruments. The TwisterII provides increased integration capabilities and increased handling up to 400standard microplates.

*MultiDoseG3.**  *TheMultiDose G3 is a fully automated dissolution testing system that works withinan open architecture, allowing the use of industry-standard accessories. Itperforms eight unattended dissolution runs without intervention. Benefits ofthe workstation include decreased labor requirements and technique-independentresults. Used in pharmaceutical method and dosage form development, dissolutiontesting and quality assurance work, the MultiDose G3 operating system is USPand 21 CFR Part 11 compliant.

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*TPWIII (Tablet Processing Workstation III).**  *The TPW III instrument, which wasintroduced during 2006, performs quantitative sample preparation onpharmaceutical dosage forms such as tablets or capsules, automating processessuch as content uniformity testing and stability analysis. Suitable for use inmethod development and routine quality assurance work, TPW III complies withthe requirements for 21 CFR Part 11.

*APW (Active PharmaceuticalIngredient Workstation).*   The APW instrument,also introduced during 2006, automates pharmaceutical sample preparation forsamples such as bulk drug substances, performing tasks such as solventaddition, extraction, sample transfer, mixing and dilutions. Capabilities alsoinclude on-line HPLC and UV detection. Used in pharmaceutical methodsdevelopment and quality assurance labs, the APW operating system complies with21 CFR Part 11.

***Services***

We provide a wide range of services to our customers.In December 2006, we combined our drug discovery services operations,comprised of in vitro services, provided by our NovaScreen BiosciencesCorporation subsidiary, which we acquired in October 2005, and in vivo servicesprovided by Xenogen Biosciences, into a single group named Caliper DiscoveryAlliances & Services. We believe that our ability to offer both in vitro and in vivo**drug discovery research services,and our ability to deliver customer service through our global infrastructure,are important competitive strengths that are critical to our future growth. Ourservice offerings include:

*ContractResearch and Transgenic Animal Services.**  *We performresearch projects and studies for customers on a contract basis, including invivo compound profiling and animal model research and development. In addition,we provide professional services for the production of transgenic and geneknockout animals. We have created a portfolio of transgenic animals comprisingover 3,000 unique lines proprietary to our clients for use by researchers in awide range of research and drug discovery and development areas.

Most of this work is performed through ourwholly-owned subsidiary, Xenogen Biosciences Corporation, and entails contractsfor which the performance extends over multiple years. For example, XenogenBiosciences and Pfizer Inc. entered into two separate collaborativeresearch agreements in 2000 and 2001 under which Xenogen Biosciences receivedfunding from Pfizer to develop a comprehensive mouse phenotyping protocol, todevelop and test that protocol on certain genetically engineered mice, and tocreate, house, breed and genotype genetically engineered mice forcharacterization in the aforementioned phenotyping program. Both agreementshave been extended annually by Pfizer and were renewed in December 2006.

Xenogen Biosciences’ phenotyping program includes over85 standardized and validated bioassays, or challenge assays, designed toprofile key physiological pathways associated with various disorders, includingallergic diseases, arthritis, cardiovascular diseases, diabetes,immunology/inflammation, neurodegeneration, obesity, osteoporosis, pain,psychiatric disorders, sexual health, and urological disorders. Mostimportantly, Xenogen Biosciences’ proprietary techniques allow our scientiststo perform multiple assays on a group of animals, maximizing the data set peranimal without compromising its integrity, resulting in fewer animals used andless time required.

In addition, we have implemented a comprehensivecompound profiling program. Our compound profiling program is designed toconfirm primary indications and screen for secondary indications and sideeffects for preclinical compounds, as well as to discover secondary indicationsand other effects for later stage compounds and existing therapeutics.

*DrugDiscovery and Development Services.**  *Through NovaScreen, we are able toprovide innovative drug discovery and development services designed to improvethe productivity, accelerate the pace and 

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reduce the cost ofpharmaceutical research and development. NovaScreen develops and offers a widerange of primary and secondary screening, profiling and assay developmentservices to major pharmaceutical, biotechnology and academic researchinstitutions worldwide. In addition to its core screening and assay developmentservices in pharmacology, NovaScreen provides in vitro**ADME/TOXservices. NovaScreen also offers screening, pharmacological testing anddatabase development to government agencies such as the National Institutes ofHealth (NIH), in particular, the National Institute of Allergy and InfectiousDiseases (NIAID) and National Institute on Drug Abuse (NIDA). In addition,NovaScreen has developed a content database and pharmacoinformatics tool thatprovides statistical predictability in the drug discovery process.

*ProductSupport.**  *Inour worldwide technical support centers, service engineers and applicationspecialists provide support for our customers’ specific needs, therebymaximizing each product’s efficiency and productivity. The range of productsupport services we provide includes technical telephone support, fieldengineering support for both emergency and preventative maintenance, fieldapplications support, formal classroom training at Caliper and customerlocations, a repair depot, and loaner support. Our maintenance contracts aretypically for one- to three-year terms.

*Validation Services.**  *Primarily targeted atpharmaceutical development and quality control laboratories, these servicesinclude on-site validation of equipment to meet current Good ManufacturingPractices, transfer of manual methods to automated methods, and applicationssupport.

**Sales and Marketing**

We have multiple channels of distribution for ourproducts and services: direct to customers, indirect through our internationalnetwork of distributors, through partnership channels under our Caliper Drivenprogram, and through joint marketing agreements.

*DirectSales.**  *Wesell our products and services principally through our direct sales andmarketing organization. Our sales force includes regional sales representativesin North America, Europe and Japan and additional technical fieldrepresentatives. Within each region we have sales representatives with aparticular product, service or customer focus. Our applied science andtechnical application group and our physicists are integrated into the salesprocess for maximum impact. Many of these individuals have Ph. D. degreesin biology, biochemistry or physics, and provide support for the sales andmarketing team, as well as providing customer service support in the areas ofbiology, physics and microfluidics. We generate customer leads throughpresentations, exhibiting at and attending scientific and partnering meetings,tradeshows, publications and advertisements in scientific journals. We alsoreceive many qualified leads through our website, targeted promotional effortsto strategic accounts and referrals from current customers.

*Distributors.**  *We work through local distributors in certain marketsoutside of North America and Europe. We currently have over 40 distributorarrangements covering countries located in Africa, Europe, the Middle East, thePacific Rim, Scandinavia and South America. Under our distribution agreements,most of the distributors assume responsibility for the installation andpost-sales support of systems. In 2006, sales through distributors comprisedapproximately 7% of our total sales.

*CaliperDriven Program.**  *OurCaliper Driven program is core to our business strategy and complementary toour direct sales and distribution network activities, as it enables us toextend the commercial potential of our LabChip and advanced liquid handlingtechnologies into new industries and new applications with experiencedcommercial partners. Under this program, we supply liquid handling products,microfluidics chips, and other products on an OEM basis, and when requested,provide product development expertise to our commercial partners, who thentypically integrate an application solution and market it to their endcustomers. In addition, as part of our Caliper Driven program, we licenseportions or all of our extensive patent estate to other companies for variousapplications. We view out-

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licensing under ourCaliper Driven program as a way for us to extend our technologies into certainapplication areas that we do not have a present strategic intent to addressdirectly, or that may require the greater technical, marketing or financialresources of our licensing partner, in order to obtain more rapid adoption ofour technology in a particular application area. By using direct and indirectdistribution, and out-licensing our technology under our Caliper Drivenprogram, we seek to maximize penetration of our products and technologies intothe marketplace, and to position Caliper as a leader in the life sciences toolsmarket.

**Current OEM partners include:**

Affymetrix.   We co-developed the GeneChip(R) ArrayStation (GCAS), an automated target preparation and microarray processingsystem that increases accuracy and lowers the total cost per sample forlarge-scale studies. Affymetrix markets and distributes the co-branded GCASsystem, which was introduced in 2005. We serve as the OEM supplier of thesesystems and partner with Affymetrix to provide installation, training and fieldservice for these new automated systems. The complete system includesautomation instrumentation, Affymetrix’s GeneChip microarrays, optimized assaysand reagents, and open software architecture.

Agilent Technologies.   In June 2005, weentered into a new five-year supply agreement to be the exclusive supplier ofplanar chips to Agilent for both research and diagnostic applications. Theplanar chips, based on our microfluidic LabChip technologies, are utilized onthe Agilent 2100 Bioanalyzer which Agilent first introduced in September 1999.The Agilent 2100 Bioanalyzer is a desktop instrument designed to performa menu of analyses including DNA, RNA, protein and cell assays, based onthe particular chip utilized. We believe that Agilent is planning tocommercialize its first diagnostic test based on the 2100 Bioanalyzer platformin 2007.

Bio-Rad Laboratories.   In the fall of 2004,Bio-Rad launched the Experion automated electrophoresis system as a product ofa multi-year product development and commercialization agreement we enteredinto with Bio-Rad in June 2003. Bio-Rad is a long-established leader ingel electrophoresis separations, particularly protein separations, and theExperion product represents its first microfluidics-based product for thismarket. Under the terms of the agreement, we receive royalties on all futuresales of co-developed instruments, and we are the exclusive manufacturer ofLabChip devices for use with co-developed instrument platforms, such as theExperion. The Experion system provides rapid, reproducible analysis of proteinand RNA samples. In 2005, we extended Bio-Rad’s license rights to include theanalysis of DNA samples. In September 2005, we entered into a secondcollaboration agreement with Bio-Rad under which the companies will study thefeasibility of developing a new microfluidics platform. The details of theplatform have not been disclosed.

*Marketing Agreements.**  *Through our acquisition of Xenogen, we assumed along-term agreement with Taconic Farms, one of the largest providers oflaboratory animals in the world, for joint marketing and distribution ofcertain transgenic animals with a single luminescence reporter gene compatiblewith our IVIS imaging technology. Taconic may sell those animals only tolicensees of our imaging patents and under limited use agreements. We grantedTaconic the right to breed, distribute and sell certain LPTA animal models toits customers and we share in profits received from their sale.

**Customers**

Our current customers include many of the world’sleading biomedical and pharmaceutical companies as well as OEM providers ofcomplementary life science solutions. Approximately 63%, 67%, and 63% of ourtotal revenues for 2006, 2005, and 2004, respectively, were derived fromcustomers in the United States. See Note 18 of the Notes to ConsolidatedFinancial Statements included in this Annual Report for revenues from customersand long-lived assets attributable to geographic areas outside of the UnitedStates. During 2006, no single customer accounted for 10% or more of our totalrevenue. See Note 2 of the 

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Notes to ConsolidatedFinancial Statements included in this Annual Report for more information onconcentration of our revenues.

We have typicallyexperienced higher revenues in the second half of our fiscal year as a resultof the capital spending patterns of our customers although this trend may beaffected prospectively as a result of the acquisition of Xenogen. Historically,Xenogen’s revenue was subject to seasonal variations as a result of customerbudget cycles. For example, in the biomedical research community, grantproposals are due in October, February and June with funds deliveredthe following June, October and March, respectively. Due to the grantcycle, Xenogen historically achieved higher revenues in the second and fourthquarters.

**Backlog**

For a portion of our sales, we manufacture productsbased on our forecast of customer demand and maintain inventories in advance ofreceipt of purchase orders. Our net sales in any given quarter depend upon acombination of (1) orders received in that quarter for shipment in thesame quarter, (2) shipments from our backlog of orders from previousquarters, and (3) recognition of revenues that had been previouslyrecorded as deferred revenue pursuant to our revenue recognition policy. Ourproducts are typically shipped within ninety days of purchase order receipt. Asa result, we do not believe that the amount of backlog at any particular dateis indicative of our future level of sales in any succeeding quarter. The levelof backlog at December 31, 2006 was $18.6 million. In our backlog, weinclude only the total value of open purchase orders for products and servicesthat management has concluded have a reasonable probability of being deliveredover the subsequent twelve-month period. This amount specifically excludesdeferred revenue, and products and services to be provided in the futurepursuant to terms of contractual agreements for which we have not yet receivedpurchase orders.

Our backlog at thebeginning of each quarter does not include all product sales needed to achieveexpected revenues for that quarter. Consequently, we are dependent on obtainingorders for products to be shipped in the same quarter that the order isreceived. Moreover, customers may reschedule shipments, and productiondifficulties could delay shipments. Accordingly, we have limited visibilityinto future product shipments, and our results of operations are subject tovariability from quarter to quarter.

**Research andDevelopment**

***Research and Development Infrastructure***

We employ personnel withlegal and scientific expertise as part of our in-licensing and out-licensingprograms. We also have biological scientists that work together with ourelectromechanical engineers, physicists and tissue optics experts to createscientific applications in oncology, inflammation, and drug metabolism,cardiovascular disease, metabolic disease and toxicology. We also employ atechnical applications group to interact at the scientific level with ourcustomers, in order to understand our customers’ technological needs, both forfuture product development purposes and to help our customers understand newapplications that we have developed.

***Technology Research***

Today we have ongoing core technology research andapplied product development efforts in several areas:

*ChipDesign.**  *Weare investigating the development of new microfluidic chips using a variety ofmaterials including glass, quartz, and plastics. Using the principles ofphysics and engineering, we create patterns of interconnected channels thatpermit execution of the various common steps of experimentation. Designs fromone chip can be used for other chips needing similar fluidic functions for adifferent application. Analytical and computer simulation models are employedto minimize the number of 

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iterations necessary toachieve new functional chip designs. These modeling capabilities are alsoessential for optimizing assay conditions for specific analytes and reagents,on-chip thermal control, and determining quality control parameters forproduction chips. We have made substantial investments in lab-on-a-chipresearch since our inception, and believe that we have established a leadingposition in lab-on-a-chip technology.

*ChipManufacturing.**  *Wecontinue to seek ways to improve the yield and decrease the cost of manufacturingour chips. We are exploring novel fabrication techniques and the use of newmaterials that offer functional advantages, such as superior optical featuresor lower manufacturing costs. We have development programs exploringmanufacturing technology for chips made of plastic. Plastic devices potentiallyoffer cost advantages and can offer favorable surface chemistry or designfeatures for some applications. One area of continuous improvement ismicromachining technology for precisely attaching capillaries to our sipperchips. In automated experimentation, the number of these capillaries governsthe level of throughput. Accordingly, we have developed high-yield fabricationmethods to enable us to cost-effectively manufacture chips with manycapillaries. Another important area of development is surface chemistry - inparticular, controlling the reproducibility of channel surface characteristicsin our LabChip products.

*ImagingInstrumentation and Software.*   Our physicsresearch and development department, in conjunction with our biology productplanning group, is responsible for new imaging product and applicationdevelopment. New product concepts for instrumentation are evaluated by ourphysics research and development department, and those chosen are taken fromconcept through the pre-production prototype stage. This department also worksclosely with our manufacturing operations to transition the pre-productionprototype to full production, provides initial user support and any requireddesign modifications, and develops and provides initial support for newapplications of our instrumentation until such applications are sufficientlydeveloped for transition to our instrument manufacturing group.

*Reagentsand Bioware Products.*   Our biology productplanning group is responsible for identifying new animal models to be developedthat will provide particularly high value to our customers. Our biology productplanning group produces these validated new applications comprising animalmodels and cell lines from three different sources: (1) we in-license andperform quality control on reagents that have already been made by others forconventional methodologies that complement our noninvasive imaging methodology;(2) we build and validate proprietary cell lines and models in ourresearch laboratories; and (3) we in-license rights to cell lines andanimal models made by certain of our customers who have used our technology tocreate animal models. Through these strategies, we are able to leverage theresearch and development expenditures of third parties to further our sales andthe adoption of our technology.

*LiquidHandling and Automation Instrument Manufacturing and Software Design.**  *Our skilled electrical engineers, optical engineers,mechanical engineers, product designers and software engineers create newliquid handling and automation instruments and software that are designed tooptimize liquid handling and automation of life science laboratoryapplications, or to control fluid movement, temperature control, and detectionfunctionality for our microfluidic chips. Software engineers write computerprograms to manage tasks such as controlling chip functionality, collectingdata, communicating between different instrument modules and communicatingbetween Caliper’s and other manufacturer’s instruments.

*Systemsand Assay Integration.*   When developingcommercial products, we seek to incorporate functionalities that are necessaryto perform a specific experiment, and configure the assay so that it offerstangible benefits to users as compared to existing, traditional technologies.By carefully characterizing the problems and existing bottlenecks in anend-user’s workflow, as well as the solution, we are able to define preciseproduct specifications to meet customer needs. The resulting complete solutionoften includes a LabChip device, liquid handling to manage “bulk” reagent needsof the chip, instrumentation to control 

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flow and temperature,robotics for automating the handling of sample plates and detection optics,computer software for instrument control and data analysis, and reagents. Ourrecent development efforts have focused on continuing to increase functionalintegration on chip, including sample purification, reaction reagent assembly,reaction incubation (sometimes with temperature cycling), post reactionseparation, and detection.

Our research and development expenses for the yearsended December 31, 2006, 2005, and 2004 were approximately $24.6 million,$17.7 million and $23.2 million, respectively. As a percentage of revenues, weexpect research and development spending to decrease in the future to theextent that our revenues grow, and as we slow the pace of discretionaryspending on research programs by focusing on those opportunities with maximumcommercial viability and sharing the funding of R&D programs with partners.

In 2006, R&D funded bycustomers and government grants, which we include in our contract revenues, wasapproximately 25% of our research and development expense. This percentagecould vary significantly in a given year based on our ability to obtaincustomer funding and on the nature of the development projects chosen for aparticular year. Nonetheless, we believe that this shared investment risk modelis important, not only because it offsets at least a portion of our R&Dexpense, but also because it provides important customer validation regardingthe potential commercial value of a particular R&D project. Through thesemeasures, we have been able to reduce our research and development expenses inrecent years, and utilize our resources more efficiently.

**Manufacturing andSupply**

All of our instrument manufacturing is performed inour Hopkinton, Massachusetts manufacturing facility, which is ISO 9001:2000compliant. The International Standards Organization, or ISO, sets internationalstandards for quality in product design, manufacturing and distribution.

We manufacture some subassemblies ourselves, and othercomponents are made to our specifications by outside vendors. To ensure thequality and on-time delivery of parts and subassemblies, we track our topsuppliers and score them on a monthly basis. The subassemblies are inspectedand tested before being placed into final product assemblies. Production cycletimes range from several hours to five days for more complex workstations.

Systems and workstations are produced from componentsbased on a wide variety of proprietary technologies, including intricatemechanical actuators, precision fluid handling systems, computers and software.We produce systems by combining certain of our products with third-party vendorequipment, primarily detection instrumentation. The systems are a combinationof standard components, assembled in either standard or custom configurationsto meet a customer’s specific needs. A typical production cycle ranges from 30to 90 days from receipt of an order to shipment of a system. The final productsare then put through an extensive testing cycle before being released forshipment. Testing at our factory and/or the customer’s site establishes thatthe system is performing to the customer’s specifications.

We manufacture all of our chips in a Class 1000clean room facility in Mountain View, California. Caliper is ISO 9001:2000compliant for the development, manufacture and distribution of our chips andreagents. We contract with third parties to supply raw materials, componentparts and sub-assemblies used in our chips and reagents kits. We intend tocontinue to invest in our infrastructure for the manufacture and distributionof our chips while reviewing outsourcing options for manufacturing at a lowercost. For a discussion of the methods we use to manufacture our chips see thesections above titled “Technologies”, “Products and Services” and “Research andDevelopment.”

In August 2006, following our acquisition ofXenogen, our Hopkinton manufacturing facility took over the engineering design,prototyping, assembly, quality assurance, installation and service for all IVISImaging Systems. We use OEM providers for various parts of the imaging systemsincluding the cameras, 

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boxes, certainsubassemblies, filters and lenses. We rely on two primary camera vendors, AndorTechnology, Ltd. and Spectral Instruments, Inc., to provide camerasfor all of our IVIS Imaging Systems. Under the Andor supply agreement, Andormanufactures and sells to Xenogen a CCD camera and related equipment for usewith the IVIS Imaging System Lumina Series. Under the Spectral Instrumentssupply agreement, Spectral manufactures and sells to us a CCD camera for ourother imaging systems. That agreement was amended in April 2005 andautomatically renews each October for an additional 12-month period unlessexplicitly terminated by either party six months prior to the expiration dateor unless there is an uncured breach, bankruptcy or insolvency of either party.

We obtain key components of our chips, instruments andreagent-based products from a number of suppliers, including, in certain cases,single-source or limited-source suppliers. For instance, we receive proprietarydyes, which are used in many of our LabChip products, from a single source.Furthermore, we depend on a foreign single-source supplier for the glass usedin the manufacture of certain types of our chips. However, the majority of keycomponents for our chips and instruments are available on a short lead timefrom our suppliers. The only component requiring any significant lead time toacquire is our glass stock, as our supplier requires a minimum order to coveran entire production run. We anticipate that current inventories of thismaterial, at current production levels, will be sufficient for the next 12months.

Although we have established licensing arrangementsand supply agreements with most of our suppliers, there can be no assurancesthat these companies could not in some way be adversely affected in the future,and be unable to meet our critical supply needs. If the supply of componentsfrom these suppliers were interrupted, we might not be able to manufacture ourproducts at all or in a timely fashion, which would disrupt our delivery ofproducts to our customers.

We believe our currentmanufacturing capacity is sufficient to meet current and anticipated demandthrough 2010.

**Animal Production**

We maintain separate animal vivaria to prevent thespread of disease, which could cause a loss of valuable strains of animals. OurXenogen Biosciences operation in Cranbury, New Jersey, houses our animalproduction facility including a large barrier animal vivarium that isaccredited by the Association for the Assessment and Accreditation ofLaboratory Animal Care, or AAALAC, and has an Assurance of Compliance with OLAW(Office of Lab Animal Welfare). In this Specific Pathogen Free (SPF) facility,we perform genetically modified animal production, characterization ofgenetically modified animals (phenotyping), and in vivo compound profiling. We ship animals to our clients andprovide in vivo research capabilities to ourcustomers from this facility. We have scientists and animal resources personnelspecially trained in animal care, handling, and science who provide services toour customers and are available to collaborate with other divisions of CaliperLife Sciences. Proprietary animal strains that are distributed non-exclusivelyare shipped from the Cranbury facility. In addition, some of the strains mostwidely used by our customers are also housed and distributed by one of twooutside vendors, Charles River Laboratories or Taconic.

Our Alameda, California facility has one vivarium anda separate animal imaging suite. We perform breeding and model validation inthis facility, which has an animal resources program with personnel speciallytrained in animal care and handling. In 2003, one of the animal facilities inAlameda was contaminated by a mouse virus introduced through one of Xenogen’sanimal vendors. That facility was closed for decontamination, and Xenogentransferred its most valuable strains to third party breeders for rederivationso that Xenogen could continue to provide animals to our customers. Thedecontamination process took approximately three months. Xenogen has moved allof these operations to a new barrier facility to reduce the contamination risk.Similar contamination occurred again in 2005. Neither event 

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represented a loss ofrevenue, but did affect Xenogen’s operational costs by increasing its animalsupport costs.

Each facility hasindividual environmental controls, as well as a veterinary consultant to assistus in monitoring the health of our animal population.

**Reagents andBioware**

We maintain laboratoryspace in our Alameda facility to create and maintain stocks of microorganismand cell line reagents. We have an exclusive supply agreement with BiosynthInternational, Inc. for the supply of luciferin, a chemical compound thatis introduced into cells and organisms in order to produce bioluminescence, andwhich we, and our customers, use with our Bioware products and LPTA animalmodels. Luciferin is stored and shipped out of our Mountain View, Californiafacility. VivoFluor fluorescent labeling kits for in vivo imaging, which arecustom-developed for us by Invitrogen, are also stored and shipped out of ourMountain View facility.

**Competition**

In general, markets for instruments, animal models andreagents and services (collectively life science tools and services) designedfor life sciences applications are very competitive, and we believe thesemarkets will remain competitive in the future. The competition we face in thesemarkets arises from other companies selling life science tools and servicesthat are directly competitive with us, and from companies selling other typesof life science tools and services who are competing for the same, scarce fundsin a potential customer’s capital budget. Although we believe that we havesignificant intellectual property protection to prevent others from developingcompeting integrated products, there are other manufacturers of similarindividual technologies.

*Automationand Liquid Handling Systems.**  *Thereare many companies providing competitive liquid handling products, automationproducts and integration services for applications such as high throughputscreening, ADME, Active Pharmaceutical Ingredient (API) and Dosage Form Developmentand Quality Assurance. We believe the primary competitive factors in thesemarkets are productivity enhancement, breadth of applications, accuracy,ease-of-use, price, performance, product reliability and service support.Direct and indirect competition for these types of products and services comesfrom many companies, including Beckman Coulter, BioTek Instruments, CyBio,Hamilton, Innovodyne, Gilson, LabCyte, Molecular Devices, PerkinElmer,Protodyne, Tecan, Thermo Electron, Velocity 11, Symix and Sotax.

*InVitro Compound Profiling Services.**  *Wecompete with other companies that provide in vitro assay development, screeningand profiling services to drug discovery and development laboratories. Webelieve the primary competitive factors in these markets are cost per compoundtested, data quality, innovation, and turn-around time. Competition for thesetypes of services comes from many companies, including Cerep, MDS Pharma,Millipore, Invitrogen, and Carna Biosciences.

*LabChipDrug Discovery.**  *Wecompete with established alternative technologies for enzymatic assayssuch as Promega, Invitrogen, Millipore and Cisbio as wellas companies developing their own microfluidics or lab-on-a-chiptechnologies and products, such as Fluidigm, Gyros, Micronics, BioTrove,Microfluidic Systems, Nanostream, 3M, Applied Biosystems and Cepheid.Microfluidic technologies have undergone and are expected to continue toundergo rapid and significant change. Our future success will depend in largepart on our ability to establish and maintain a competitive position in theseand future technologies, which we may not be able to do. Rapid technologicaldevelopment may result in our products or technologies becoming obsolete.Products offered by us could be made obsolete either by less expensive or moreeffective products based on similar or other technologies.

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*LabChipElectrophoresis Separations.**  *Wecompete with companies that supply both traditional gel technologies, and morecontemporary microfluidic technologies, for gel electrophoretic separations forproteins, DNA and RNA. We believe the primary competitive factors in thesemarkets are cost per sample analyzed, throughput and productivity enhancement,data quality, ease of use and service support. Competition for these types ofproducts and services comes from many companies, including Agilent, Bio-RadLaboratories, Beckman Coulter, and Invitrogen.

In markets where we sell products based on our LabChiptechnology, we not only need to demonstrate the advantages of our products overcompeting technologies and products, but we must also often overcome acustomer’s resistance to switching from a well-established, traditionaltechnology to a fundamentally new technology.

Under the surviving terms of our original collaborationagreement with Agilent, Agilent has a non-exclusive, royalty-bearing license tocertain of our LabChip technologies. Under the terms of this license, Agilentis able to develop, make and sell certain LabChip devices in the field of ourcollaboration, although we are their exclusive provider of planar chips.

*Imaging.**  *We compete with conventional molecular imagingtechnologies, including clinical imaging modalities such as PET, MRI, x-ray, CTand SPECT, which utilize the penetrating radiation of positrons, radio waves,x-rays and gamma rays. Most of these technologies require operation by a highlytrained technician. In addition, some are limited by the need for radioactivityand concomitant shielding, storage and disposal issues. Other of thesetechnologies image anatomy, rather than molecular events. By comparison, our invivo bioluminescent and fluorescent imaging technique involves an opticalimaging approach that does not require the use of specially trained techniciansor radioactive substances. Compared to these other imaging technologies inwhich one animal is imaged over time, our instruments and imaging methodologyallows for relatively high-throughput animal imaging and data collection.

Our primary competition in the in vivo imaging marketis from traditional in vivo animal models. While numerous technologies foranimal analyses exist, we believe we are the only company to offer anintegrated system of equipment, software and reagents for the biophotonicimaging of animals. Still, while we believe that our integrated system ofinstruments and equipment, software and reagents improve the productivity andefficiency of drug discovery and development, the up-front costs and licensingfees associated with the use of our systems make their use generally moreexpensive than conventional technologies for in vivo testing.

*Light-ProducingAnimal Models.**  *Thereare more than 100 light-producing animal models currently used in conventionalapplications, many of which can be used in our IVIS Imaging Systems. Producersof these models, generally biomedical researchers at not-for-profitinstitutions, would potentially require one or more licenses from us and thirdparties to commercialize these models for biophotonic imaging. Consequently,these models comprise a sizable pool of potential in-licensing candidates forus.

*BiophotonicCameras.**  *Severalcompanies sell highly sensitive cameras capable of biophotonic imaging,including Eastman Kodak Company, Berthold Detection Systems GmbH, HamamatsuPhotonics, VisEn, K.K., Olympus Corporation, Roper Scientific, Inc., andBiospace, in addition to several privately-held companies. While these camerashave similar features and imaging capabilities to our IVIS Imaging Systems,none of those companies have the right to sell their cameras for applicationsclaimed by our patents.

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*Light-ProducingReagents.*   We compete with large companies whodevelop light-producing reagents used in animal models such as GE HealthcareDiscovery Systems and Invitrogen Corporation. We have agreements in place withPromega Corporation and The Regents of the University of California, underwhich we non-exclusively sublicense several patents on a royalty-bearing basisfor use of a modified firefly luciferase gene in living organisms, such as ourLPTA animal models and certain of our Bioware products. Other companies mustobtain similar licenses from those two entities in order to use that gene as atagging reagent in animal models for commercial purposes. Other companies can,however, create animal models using alternative technologies that do notcontain luciferase.

*Creationof Genetically-Modified Animals.*   We also competewith companies who produce genetically-modified animals (i.e., transgenics orgene knockouts), including Lexicon Genetics and DeltaGen. Lexicon and DeltaGenboth use animal models based on knockout mice technology. Lexicon, however,primarily focuses on developing its own pipeline of therapeutic products,rather than providing in vivo animal products and services to third parties.Other companies that perform in vivo animal production include ArtemisPharmaceuticals, GenOway, Ozgene Pty Ltd. and Ingenious TargetingLaboratory, Inc. We believe that, for certain applications, thecombination of our genetically-modified animal models with our in vivobiophotonic imaging technology provides more predictive data than ourcompetitors can offer. Additionally, none of these companies offers a completepackage of instrumentation and reagents for use in accelerating preclinicaldevelopment.

*Phenotyping.*   Althoughmany pharmaceutical companies perform phenotyping services internally, thereare only a small number of companies that offer phenotypic analysis of animalmodels on a fee-for-service basis, including Jackson Laboratories, TaconicFarms, MDS, Inc., PsychoGenics, Inc., Charles River Laboratories, andRIKEN Yokohama Institute-Genomic Sciences Center. However, we believe thatXenogen Biosciences offers a greater breadth and scope ofpharmacologically-validated bioassays and challenge assays. Additionally, webelieve that the proprietary nature of our phenotyping program offers customersservices that use fewer mice, and therefore are more cost-efficient, than thoseoffered by competitors or those available to large pharmaceutical companiesfrom internal resources.

*InVivo Compound Profiling Analysis.*   In addition tothose competitors that conduct therapeutically-focused or comprehensivephenotypic analysis of genetically-modified animal models, there are othercompanies that have developed scientific platforms for the in vivocharacterization of lead compounds, drug development candidates and/or clinicaldevelopment candidates. This chemical characterization platform is known byvarious designations, but primarily as compound/drug repositioning, repurposingand/or indications discovery. Competitors in the in vivo chemicalcharacterization space consist of those that focus primarily in one or a fewtherapeutic areas, such as Sention, Inc., Vela Pharmaceuticals, Inc.,Bionaut Pharmaceuticals Inc., ChemGenex Therapeutics Inc., andCombinatoRx Inc., and those that have designed and validated comprehensiveprograms, such as Gene Logic Inc., Vanda Pharmaceuticals and MeliorDiscovery, Inc.

In many instances, ourcompetitors have or may have substantially greater financial, technical,research and other resources and larger, more established marketing, sales,distribution and service organizations than we do. Many of our competitors alsohave greater name recognition than we do, and may offer more favorable pricingas a competitive tactic. In addition, given the larger scale of theiroperations, many of our competitors spend more on research and development thanwe do. Accordingly, we cannot be sure that our competitors will not succeed indeveloping or marketing technologies or products that are more effective orcommercially attractive than our products or that would render our technologiesand products obsolete. Also, we may not have the financial resources, technicalexpertise or marketing, distribution or support capabilities to competesuccessfully in the future. Our success will depend in large part on ourability to maintain a competitive position with our technologies.

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**IntellectualProperty**

We consistently seek thorough patent protection forour lab-on-a-chip, imaging and other technologies. As of December 31,2006, we owned approximately 335 issued U.S. patents and 125 pending U.S.patent applications, some of which derive from a common parent application. Weare also the exclusive licensee of approximately 40 U.S. patents. Foreigncounterparts of many of these patents and applications have been filed and/orissued in one or more other countries. We also rely upon copyright protection,trade secrets, know-how, continuing technological innovation and licensingopportunities to develop and maintain our competitive intellectual propertyposition. Our success will depend, in part, on our ability to obtain patentprotection for our products and processes, to preserve our copyrights and tradesecrets, to operate without infringing the proprietary rights of third parties,and to acquire licenses to enabling technology and products. In addition, U.S.patents filed since 1995 generally have a term of 20 years from the dateof filing. In the life sciences industry, it often takes several years from thedate of filing of a patent application to the date of a patent issuance, oftenresulting in a shortened period of patent protection, which may adverselyaffect our ability to exclude competitors from our markets.

*Microfluidics andLaboratory Automation.*   A majority of our patentsand applications are directed to various technological areas which we believeare valuable to our microfluidics and laboratory automation business,including:

·       controlof movement of fluid and other material through interconnected microchannels;

·       continuousflow, high-throughput screening assay methods and systems;

·       chip-basedassay chemistries and methods;

·       chip-compatiblesample access;

·       softwarefor control of microfluidic based systems and data analysis;

·       chipmanufacturing processes;

·       analyticaland control instrumentation;

·       analyticalsystem architecture; and

·       automatedliquid handling systems.

We are also party to various exclusive andnon-exclusive license agreements with third parties which give us rights to usecertain technologies in our microfluidics and laboratory automation business.For example, we have exclusive licenses from UT-Battelle, LLC, relating topatents covering inventions by Dr. J. Michael Ramsey, and from theTrustees of the University of Pennsylvania covering microfluidic applicationsand chip structures. These licenses extend for the duration of the life of thelicensed patents. A failure to maintain some or all of the rights to thesetechnologies could seriously harm our business.

*Imaging.**  *We believe that our patent portfolio relating to invivo imaging methods presents a significant barrier to entry for the commercialpractice of our patented biophotonic imaging methods. Our imaging patentportfolio is built on two foundations: methods, applications and materialsrelating to the biological aspects of biophotonic imaging; and methods andapparatus relating to the instrumentation aspects of biophotonic imaging. Wehave also non-exclusively licensed patents relating to methods of animal productionthat add value and accelerate the production of specific types of modifiedanimals. In addition to our foundational claims for methods of biophotonicimaging, our patent portfolio includes issued and pending patent claims forspecific applications of biophotonic imaging and a number of areas that webelieve will be valuable to our business, including animal models of disease,transgenic animals useful in drug discovery research, imaging system componentsand computer-implemented methods for image acquisition and analysis.

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We license several patents from third parties that areimportant to our imaging business. Our core imaging patents and relatedapplications are licensed from Stanford University on an exclusive basis. Thelicense is worldwide, royalty-bearing and includes the right to grantsublicenses. The term of this license is for the life of the patents resultingfrom the applications, which do not begin to expire until 2015. One of thepatents that we have licensed from Stanford covering our method of in vivobiophotonic imaging was subject to a re-examination proceeding before the U.S.Patent and Trademark Office. The re-examination concluded in 2004, and thePatent and Trademark Office issued a re-examination certificate for that patentwith slightly narrowed claims. Such narrowed claims do not affect our currentlicenses or business. In connection with our patent infringement lawsuit withAntiCancer, Inc., AntiCancer is seeking a judgment to have this patentdeclared invalid. For a description of our litigation with AntiCancer, see Part I,Item 3, “Legal Proceedings.” On August 9, 2006, Stanford Universityprovided Xenogen with a copy of an audit report prepared by a third partyconsultant which asserted certain claims of underpayments under the licenseagreement between Stanford and Xenogen during the period from 2002 through March 31,2006, based upon the consultant’s interpretation of Xenogen’s exclusive licensewith Stanford. Upon review of the audit report, Caliper determined thatadditional royalties of $71,000 were owed to Stanford. This underpayment wasaccrued as an assumed obligation as of August 9, 2006, in connection withCaliper’s acquisition of Xenogen. We are contesting the remaining paymentobligation that is claimed in the Stanford audit report, and as a result, wehave not accrued for any liability beyond the $71,000 of royalties that havebeen accrued and paid. We are currently discussing with Stanford the scope ofXenogen products that are subject to the royalty provisions of the Stanfordlicense agreement. As a result of these discussions, the parties may amendthe license agreement to change the royalties we pay to Stanford for futureproduct sales. An amendment may also include the payment of back royalties toStanford for products Xenogen/Caliper has already sold. We have not discussedwith Stanford the specific terms and conditions of an amendment. At any time,either party may choose binding arbitration to resolve any dispute over theamount of back royalties owed, if any. The amount of any remaining contingentobligation, if any, cannot currently be estimated, nor is it probable that aliability exists. However, we believe that this matter will be resolved withinthe next twelve months.

The right to use the specific luciferase gene in ourLPTA animal models and certain of our Bioware products is licensed from PromegaCorporation and The Regents of the University of California undernon-exclusive, royalty-bearing licenses. The Promega agreement continues forthe life of the subject patent, which expires in 2014. Promega, however, mayterminate the agreement for breach of contract. The Regents agreement continuesfor the life of those subject patents, which expire in 2013; however, TheRegents may terminate the agreement for breach of contract or failure tosufficiently commercialize luciferase-bearing products.

Xenogen’s patents relating to the production ofgenetically-engineered animals by using gene-targeting methods have beenlicensed from Medarex, Inc., successor-in-interest to GenPharmInternational, Inc., since 1991. This license is non-exclusive,royalty-bearing and worldwide. Financial terms include a license issue fee, anannual fee that is creditable against earned royalties due, and a milestone feein the event the FDA approves a pharmaceutical product that includes a productproduced through practice under the licensed patents. The term of this licenseis for the life of the licensed patents, which are set to expire in 2014.

*Trademarks.*   Caliper,including our wholly-owned subsidiaries, has registered and applied to registera number of trademarks in the U.S. and in foreign markets where its productsare sold. Trademarks currently used by Caliper include: Caliper, the Caliperlogo, LabChip HT, LabChip Driven, Caliper Driven, LabChip, the LabChip logo,Discovery Alliance and Services, Zymark, LibraryCard, Allegro, CLARA,MultiDose, Prelude, RapidPlate, RapidTrace, Staccato, TurboVap, Twister, iLink,iLink Pro, inL10, Desktop Profiler, Desktop ProfilerPro, ProfilerPro, Zephyr,APW3, TPW3, Sciclone, Z-8, FLIT, Automation Certified, MultiFill, EasyFill,Presto, Autotrace, Zymate, EasyLab, and iBlox. NovaScreen, 

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and RSMDB aretrademarks of NovaScreen Biosciences Corporation, which is a wholly-ownedsubsidiary of Caliper. Xenogen, the Xenogen logo, IVIS, Living Image, LPTA,Bioware, VivoVision, Life Changing, Discovery in the living organism andDiscovery at the speed of light are trademarks of Xenogen Corporation, which isa wholly-owned subsidiary of Caliper.

**Environmental Matters**

Our manufacturing and laboratory sites utilizechemicals and other potentially hazardous materials, and generate bothhazardous and non-hazardous waste, the transportation, treatment, storage anddisposal of which are regulated by various governmental agencies. Although webelieve that our safety procedures for handling and disposing of such materialscomply with state and federal laws and regulations, the risk of accidentalcontamination or injury from these materials cannot be completely eliminated. Inthe event of such an accident, we could be held liable for any damages thatresult and any liability could exceed our resources.

We continuously assess thecompliance of our operations with applicable federal, state and localenvironmental laws and regulations. Our policy is to record liabilities forenvironmental matters when loss amounts are probable and reasonablydeterminable. When needed, we have engaged environmental consultants to assistwith our compliance efforts. We believe we are currently in compliance with allapplicable environmental permits and are aware of our responsibilities underapplicable environmental laws. Any expenditures necessitated by changes in lawand permitting requirements cannot be predicted at this time, although we donot expect such costs to be material to our financial position, results ofoperations or competitive position.

**GovernmentRegulation**

Our products and services are not regulated by anygovernmental agency. Our subsidiary, Xenogen Biosciences’ line of businessassociated with animal production, however, may, in the future, be subject tovarious laws and regulations regarding the treatment of animals if the federalAnimal Welfare Act, or AWA, is amended. The AWA does not currently apply torats of the genus Rattus or mice of the genus Mus, bred for use in research,and consequently, we are not currently required to be in compliance with theAWA. Where applicable, the AWA imposes a wide variety of specific requirementson producers and users of research animals, including requirements related topersonnel, facilities, sanitation, cage size, feeding, watering and shippingconditions. Although the AWA does not currently apply to our animal productionbusiness, we have voluntarily sought and received accreditation by AAALAC,which sets industry standards for care and treatment of animals used inresearch. In the event that the AWA is amended to include mice or rats withinthe scope of regulated animals, and consequently, our animal productionbusiness, we believe compliance with such regulations would require us tomodify our current practices and procedures, which could require significantfinancial and management resources. We are not currently aware of legislationpending before the U.S. Congress to amend the AWA to cover the mice or ratsused by us. In addition, some states have their own regulations, includinggeneral anti-cruelty legislation, which establishes certain standards inhandling animals. With respect to the products and services we provideoverseas, we also are required to comply with foreign laws, such as theEuropean Convention for the Protection of Animals During InternationalTransport and other anti-cruelty laws. The Council of Europe is presentlyconsidering proposals to more stringently regulate animal research.

Many of our pharmaceutical and biotechnology licenseesemploy our technology to develop preclinical animal data on therapeuticproducts in development that may be submitted to governmental agencies as partof a regulatory application to commence human clinical testing or tocommercialize their products. It is our belief that preclinical data collectedusing our technology has been submitted by several of our clients and acceptedby the FDA to support commencement of clinical trials, and that in severalcases regulatory approval has been received for a therapeutic product based, inpart, on data collected 

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using our technology.There can be no assurance that the FDA or other regulatory agencies willcontinue to accept preclinical data collected using our technology andsubmitted as part of an application to support initiation of clinical trials,or that such data can or will be used to support regulatory approval tocommercialize therapeutic products.

Additionally, exports ofcertain products and biological reagents to foreign customers and distributorsare governed by the International Traffic in Arms Regulations, the ExportAdministration Regulations, the Patriot Act and the Bioterrorism Safety Act.Although these laws and regulations do not restrict our present foreign salesprograms, there can be no assurance that future changes to these regulatoryregimes will not affect or limit our foreign sales.

**Other BusinessRisks**

In addition to the risksto our business associated with suppliers, competition and intellectualproperty discussed above, our business is subject to a number of othersignificant risks, including the risks that our products may not achieve widemarket acceptance and that we may not be successful in developing new andenhanced products. These and other risks that may cause our actual results,financial performance or achievements to be materially different from ourpresent expectations are discussed in more detail below under Item 1A, “RiskFactors”.

**Employees**

As of December 31,2006, we had a total of 550 employees, including 102 in research anddevelopment, 277 in operations and service, 99 in sales and marketing and 72 inadministration and finance. None of our employees is represented by a collectivebargaining agreement, nor have we experienced any work stoppage. We considerour relations with our employees to be good.

**Executive Officersof the Registrant**

The following are our executive officers and keyemployees, together with their ages and biographical information:

*E.Kevin Hrusovsky,* age 45, was appointed President and CEO immediately following theacquisition of Zymark Corporation, a liquid handling instruments company, by usin July 2003. Prior to the acquisition, Mr. Hrusovsky had served as Presidentand CEO of Zymark since 1996. From 1992 to 1996, Mr. Hrusovsky wasDirector of International Business, Agricultural Chemical Division, andPresident of the Pharmaceutical Division, for FMC Corporation, a diversifiedholding company. From 1983 to 1992, Mr. Hrusovsky held several managementpositions at E.I. DuPont de Nemours, including North American Sales andMarketing Head, Teflon. He has also served as a board member of the Associationfor Laboratory Automation since January 2003. He received his B.S. inMechanical Engineering from Ohio State University, an M.B.A. from OhioUniversity, an Extended M.B.A. from Harvard University, and an honorarydoctorate from Framingham State College for his contributions to life sciences.Mr. Hrusovsky had also been a director of Xenogen Corporation since June 2005.

*BruceJ. Bal,***48,currently serves as Senior Vice President, Operations and AftermarketBusinesses, and was appointed to the position of Vice President, Operations andAftermarket Businesses following the combination of Caliper with Zymark. Mr. Baljoined Zymark in 1997 as Vice President of R&D and Operations. Hepreviously worked at FMC Corporation, a diversified holding company, in theBiotechnology Division as Director of Operations. He has also held a wide rangeof management positions in his 13 years at E.I. DuPont de Nemours and wasgeneral manager of United States Pollution Control, Inc. in Utah. Mr. Balreceived a B.S. in Chemical Engineering from the University of Wisconsin in1981 and an MBA from Loyola University, Louisiana in 1986.

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*EnriqueBernal,***68,was appointed to the position of Vice President, Instrument R&D followingthe acquisition of Zymark. Mr. Bernal joined Zymark in February 1999,prior to which he worked at Galileo Corporation of Sturbridge, Massachusetts, adeveloper and manufacturer of electron multipliers and optical fiber products,where he was responsible for all engineering functions and product development.Previously, he had spent 29 years at Honeywell Inc. He received a B.S. inPhysics from the College of St. Thomas, and a Masters in Physics from theUniversity of Minnesota.

*PaulaJ. Cassidy,* 38,was appointed Vice President, Human Resources in November 2005. Ms. Cassidypreviously was Vice President, Human Resources at Virtusa, Corp., a globalprovider of software development and related IT services. In that position, Ms. Cassidywas responsible for all aspects of the human resources function and sheestablished a cohesive and unified global HR practice. Prior to joining VirtusaCorp in 2003, Ms. Cassidy was with Innoveda, Inc., a publicly tradedprovider of software and services for the electronic design automationindustry. Innoveda had facilities all over the world including the UnitedStates, Europe, Israel and Asia. Prior to Innoveda, Ms. Cassidy was VicePresident, Human Resources for a wholly-owned subsidiary of Synopsys, Inc.Ms. Cassidy started her career in Human Resources at Viewlogic Systems, Inc.and held various management positions while at Viewlogic. Ms. Cassidyholds a bachelors degree with honors from St. Anselm College.

*AndreaW. Chow, Ph.D.,* 49, was appointed to the position ofVice President, Microfluidics R&D, in December 2003. Prior to that,she held the position of Senior Director of Microfluidics at Caliper. Beforejoining the company in 1997, Dr. Chow conducted research at the LockheedPalo Alto Research Laboratories and SRI International, and completed apostdoctoral fellowship at the University of Bristol in the United Kingdom. Dr. Chowreceived her B.S. degree in Chemical Engineering from the University ofSouthern California, and M.S. and Ph.D. degrees in Chemical Engineering fromStanford University.

*StephenE. Creager,**53,* currently serves as SeniorVice President, General Counsel and Secretary. Mr. Creager joined thecompany in October 2002 as Associate General Counsel and was appointed tothe position of Vice President, General Counsel and Secretary following thecombination of Caliper with Zymark. Previously, Mr. Creager was VicePresident of Business Development for Tyco Electronics, an operating unit ofTyco International involved in the development and manufacture of electroniccomponents. In this role, he provided the legal support for the businessdevelopment initiatives of Tyco Electronics, including the acquisition of over40 businesses. Prior to taking on these business development responsibilitiesat Tyco Electronics, Mr. Creager served as the General Counsel of TycoElectronics. Prior to that, Mr. Creager served as Associate General Counselof Raychem Corporation, a manufacturer of electronic components, from November 1993until August 1999, when Raychem was acquired by Tyco Electronics. Prior tohis experience at Raychem, Mr. Creager was in private legal practice fornine years. Mr. Creager received a B.A. degree from The Evergreen StateCollege, and a Masters of Philosophy degree in economics and a J.D. degree,both from Yale University.

*ThomasT. Higgins,**54,* joined the company in January 2005as Executive Vice President and Chief Financial Officer. Previously, Mr. Higginswas Executive Vice President, Operations and Chief Financial Officer at V.I.Technologies, Inc. (now Panacos Pharmaceuticals, Inc.), abiotechnology company developing novel anti-infective technologies. In thatposition, Mr. Higgins was responsible for finance and accounting, capitalfinancing activities, investor relations, and research and development supportactivities. Mr. Higgins also had responsibility for the New York-basedplasma manufacturing business until its divesture in 2001. Prior to joiningV.I. Technologies in 1998, Mr. Higgins was with Cabot Corporation, aglobal specialty chemicals company, from 1985 where he held various senioroperations and finance positions during his tenure. In his last position heserved as Executive Vice President of Cabot’s LNG operations, and prior to thatwas responsible for Cabot’s Asia Pacific carbon black operations. He alsoserved in other senior management roles for Cabot’s Asia business. BeforeCabot, Mr. Higgins was with PricewaterhouseCoopers. Mr. Higgins holdsa B.B.A with honors from Boston University.

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*WilliamC. Kruka,**46,* currently serves as Senior VicePresident, Business Development, and joined the Company in 2002 as VicePresident, Business Development. Previously, Mr. Kruka was Senior Managerof Business Development with Applied Biosystems Group, an Applera Corporationbusiness, a leading life science tool provider. In this role, he led thebusiness development initiatives for proteomics, including related mass spectrometry,sample preparation, chromatography and microfluidic technologies. Theseinitiatives included developing strategy, formulating deal structures andnegotiating collaborations, licensing deals and divestitures. He also chairedan internal business development council that addressed strategic andoperational matters from a cross-functional business and technologyperspective. Prior to Applied Biosystems, Mr. Kruka held a number ofcorporate business development, sales, marketing and administration positionswith Applera and its predecessors, PE Corporation and The Perkin-ElmerCorporation, from 1983 to 2002.

*DavidM. Manyak, Ph.D.,* 54, joined the Company in 2005 asExecutive Vice President, Drug Discovery Services. Previously, Dr. Manyakwas Chief Executive Officer of NovaScreen Biosciences, which was acquired in October 2005,since January 1993. Dr. Manyak has nearly 20 years of experience inresearch, financial analysis, and management of biotechnology companies. Dr. Manyakwas a biotechnology industry consultant and was co-founder and former Directorof GeneMedicine Inc., a gene therapy company that had its initial publicoffering in 1994 and has since merged to form Valentis Corp. He was previouslyemployed by Merrill Lynch & Co. (from 1985 to 1990) as Vice President,Senior Biotechnology Industry Analyst for Merrill Lynch & Co.(1985-90) and held a similar position with Value Line Inc. (from 1983 to 1985).Dr. Manyak holds a Ph.D. in Zoology/Biochemistry from Duke University anda B.A. from Brown University.

*PeterF. McAree,**42,* was appointed to the positionof Vice President, Finance following the acquisition of Zymark. Mr. McAreejoined Zymark as Chief Financial Officer in May 2001 after serving in thesame capacity as an independent consultant since November 2000. From January 2000through November 2000, Mr. McAree served as Chief Financial Officerof Iconomy.com, Inc., a commerce solutions provider. From January 1999through December 1999, Mr. McAree was an independent consultant. FromJanuary 1997 through December 1998, Mr. McAree served asExecutive Vice President and Vice President, Finance at Elcom International, Inc.,a commercial distributor of personal computers, and as President of itselectronic commerce software business, Elcom Systems, Inc. Prior to Elcom,Mr. McAree was Chief Financial Officer of Geerlings & Wade, Inc.,a direct marketer of wine, from 1995 through 1996. Mr. McAree began hiscareer with Arthur Andersen, Boston, where he held various positions, mostrecently as Senior Manager in 1995. He received his B.S. in Accountancy fromBentley College, and is a licensed Certified Public Accountant inMassachusetts.

*BradleyW. Rice, Ph.D.,**47,* currently serves as VicePresident, Biophotonic Imaging R&D. Dr. Rice had served as the ChiefTechnical Officer and Vice President of Xenogen since January 2005. From1999 through 2004, he served as the Senior Director of Imaging R&D andplayed a key role in developing the suite of IVIS Imaging Systems. Prior tojoining Xenogen, Dr. Rice worked for 15 years as a scientist at LawrenceLivermore National Laboratory developing optical diagnostic instrumentation inthe magnetic fusion energy program. Dr. Rice received his B.A. in Physicsfrom Colorado College, M.S. in Electrical Engineering from the University ofWisconsin-Madison, and his Ph.D. in Applied Science from the University ofCalifornia-Davis. He is the author or co-author of over 50 refereed journalpublications and co-inventor of nine issued patents related to biophotonicimaging.

*Mark T.Roskey, Ph.D.,* 47, currently serves as Vice President,Applied Biology and Reagents, and was appointed to the position of VicePresident, Worldwide Marketing following the acquisition of Zymark, where hehad held this role since he joined Zymark in December 2001. Prior to that,Dr. Roskey worked for six years at Applied Biosystems, a life sciencescompany, where he served as Director of Marketing. He has more than 15 years ofexperience in product research, development and strategic marketing with complexbiological solutions and automated instrument systems. Dr. Roskey holds aB.S. in Biology from 

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Framingham State College,a Ph.D. in Microbiology from the University of Notre Dame and completed apostdoctoral fellowship in Molecular Immunobiology at the Harvard MedicalSchool.

*Jean-Louis Rufener,*61, from November 2006 to the end of the year held the role of VicePresident, Worldwide Sales and Automation Marketing. He was appointed to theposition of Vice President, International Operations following the acquisitionof Zymark. At Zymark, he had held this position since Zymark acquired ScitecAutomation Holdings in August 1999. During his tenure at Scitec, a liquidhandling and laboratory automation company, Mr. Rufener held the positionof President and CEO. Prior to Scitec, Mr. Rufener was President of TecanCorporation. Mr. Rufener holds a degree in Chemical Engineering from theInstitute of Technology, Canton Bern, Switzerland.

**Item 1A.   *Risk Factors***

***Risks Related To Our Business***

*Our LabChipproducts may not achieve widespread market acceptance, which could cause ourrevenue to grow slowly or decline and make it more difficult for us to achieveor maintain profitability.*

The commercial success of our LabChip products dependsupon market acceptance of the merits of our drug discovery and automatedelectrophoresis separations systems by pharmaceutical and biotechnologycompanies, academic research centers and other companies that rely upon laboratoryexperimentation. However, because our microfluidic drug discovery and automatedelectrophoresis systems have been in operation for only a limited period oftime, their accuracy, reliability, ease-of-use and commercial value have notyet gained widespread commercial acceptance. If these systems do not continueto gain further market acceptance, our revenue may grow more slowly thanexpected or decline.

In addition, our strategy for the LabChip 3000 system,our microfluidic-based screening product, depends upon the early users of thesesystems buying additional units as they spread the adoption of this technologythroughout their organizations worldwide. New customers for our drug discoverysystems may wait for indications from our initial drug discovery systemcustomers that our drug discovery systems work effectively and generatesubstantial benefits. If the early users of our LabChip 3000 systems do notendorse the further adoption of these systems because they fail to generate theexpected quantities and quality of data, are too difficult or costly to use, orare otherwise deficient in meeting the screening needs of these customers,further sales of these systems to these early users may be limited, and salesto new users will be more difficult.

Because drug screening systems represent substantialcapital expenditures, it is important that these systems be capable ofperforming a wide variety of different types of assays and experiments in orderto justify the cost of the systems. We intend to continue to lower the cost ofthese systems and to develop new versions of our microfluidic-based drugdiscovery systems with enhanced features that address existing and emergingcustomer needs, such as offering a broad range of standardized, easy-to-useassays. In this regard, we recently launched a new LabChip system, the DesktopProfiler, designed specifically to facilitate secondary kinase screening byproviding a more highly automated system and making available our ProfilerProreaction ready plates already loaded with required reagents. If the commercialadoption of our other existing LabChip products and this new LabChip system isslower than we presently expect, we may experience a decline in revenue or slowrevenue growth and may not achieve or maintain profitability.

For all of the foregoing reasons, we cannot assure youthat our efforts to increase the adoption of our LabChip-based drug screeningand automated electrophoresis systems, by both existing and new users, will beexpeditious or effective.

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In summary, marketacceptance of our LabChip systems will depend on many factors, including:

·       ourability to demonstrate the advantages and potential economic value of ourLabChip drug discovery systems over alternative, well-established technologies;

·       ourability to develop a broader range of standard assays and applications thatenable customers and potential customers to perform many different types ofexperiments on a single LabChip instrument system;

·       ourability to penetrate the market for secondary kinase screening with our newDeskTop Profiler and ProfilerPro products; and

·       ourability to market and sell our drug discovery systems and related consumableproducts through our marketing and sales organization without the involvementof our senior management.

*If our in vivobiophotonic imaging products and services do not become widely used bypharmaceutical, biotechnology, biomedical and chemical researchers, our revenuewill grow more slowly than expected or decline and make it more difficult forus to achieve or maintain profitability.*

We acquired XenogenCorporation on August 9, 2006 in order to add its suite of in vivobiophotonic imaging products and other drug discovery and development servicesto our existing suite of in vitro products and services. Pharmaceutical,biotechnology, biomedical and chemical researchers have historically conductedin vivo biological assessment using a variety of technologies, including avariety of animal models. Compared to these technologies, Xenogen in vivobiophotonic imaging technology is relatively new, and the number of companiesand institutions using our technology is relatively limited. The commercialsuccess of these products will depend upon the widespread adoption of ourtechnology as a preferred method to perform in vivo biological assessment. Inorder to be successful, these products must meet the technical and costrequirements for in vivo biological assessment within the life sciencesindustry. Widespread market acceptance will depend on many factors, including:

·       thewillingness and ability of researchers and prospective customers to adopt newtechnologies;

·       ourability to convince prospective strategic partners and customers that ourtechnology is an attractive alternative to other methods of in vivo biologicalassessment;

·       ourcustomers’ perception that our products can help accelerate efforts and reducecosts in drug development; and

·       ourability to sell and service sufficient quantities of our products.

Because our in vivo biophotonic imaging technology hasnot yet achieved widespread market adoption, our ability to assist the drugdevelopment process in leading to the approval of drugs with commercialpotential has yet to be fully proven. If commercial advantages are not realizedfrom the use of in vivo biophotonic imaging, our existing customers could stopusing our products, and we could have difficulty attracting new customers.Because of these and other factors, our biophotonic imaging products may notgain widespread market acceptance or become the industry standard for in vivo biologicalassessment.

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*We had no sales ofour GCAS automated target preparation system to Affymetrix during the yearended December 31, 2006, and the future revenue growth of our laboratoryautomation business depends to a significant extent on additional sales of GCASsystems by Affymetrix. If Affymetrix discontinues selling the GCAS system, orif end-user demand for this product is not as strong as anticipated byAffymetrix, our revenue targets may not be achieved.*

In collaboration with Affymetrix, we have developed anew automated system for the preparation of nucleic acid target material to beapplied to Affymetrix’s GeneChip devices, which system is based on our Scicloneliquid handling instrument. Affymetrix began to ship the commercial version ofthe GCAS system during the third quarter of 2005. Under the terms of thecollaboration agreement, we supply the GCAS system to Affymetrix on an OEMbasis, and Affymetrix markets and sells the GCAS system to end user customers.Affymetrix announced in 2005 that low initial-production yields of itscommercial Mapping 500K Set Array had constrained shipment volumes for thisproduct. Because users of Affymetrix’s Mapping 500K Set Array product are alsoexpected to be users of the GCAS systems, if Affymetrix continues to have lowproduction volumes for this product or experiences difficulties in launchingother GeneChip applications, the demand for GCAS systems will be adverselyaffected. In addition, Affymetrix may experience other difficulties in themarketing, sale, and support of the GCAS system. For these reasons, ourrevenues from the sale of GCAS systems have been less than we originallyanticipated, and had no revenue from the sale of GCAS systems to Affymetrixduring 2006. We believe that Affymetrix is addressing the production and othertechnical issues associated with its Mapping 500K Set Assay products, and wepresently expect our sales of GCAS systems to Affymetrix to resume during 2007.However, if Affymetrix continues to experience production and other technicalissues with its products, our revenue from the sale of GCAS systems will beless than expected. In addition, because the GCAS system is a relatively newproduct for which there is limited commercial experience, there can be noassurance that the demand for this product will materialize as expected.

*Because we receiverevenue principally from pharmaceutical, biotechnology and chemical companiesand biomedical research institutions, the economic conditions and regulatoryrequirements faced by those companies and institutions and their capitalspending policies may have a significant effect on the demand for our products.*

We market our products to pharmaceutical,biotechnology and chemical companies and biomedical research institutions, andthe capital spending policies of these entities can have a significant effecton the demand for our products. These policies vary significantly betweendifferent customers and are based on a wide variety of factors, including theresources available for purchasing research equipment, the spending prioritiesamong various types of research companies and the policies regarding capitalexpenditures. In particular, economic conditions and regulatory requirementsfaced by pharmaceutical and biotechnology companies have at certain timesdirectly affected their capital spending budgets. In addition, continuedconsolidation within the pharmaceutical industry will likely delay and maypotentially reduce capital spending by pharmaceutical companies involved insuch consolidations. During the past several years, many of our customers andpotential customers, particularly in the biopharmaceutical industry, havereduced their capital spending budgets because of these generally adverseprevailing economic conditions, consolidation in the industry and increasedpressure on the profitability of such companies, due in part to competitionfrom generic drugs. If our customers and potential customers do not increasetheir capital spending budgets, because of continuing adverse economicconditions or further consolidation in the industry, we could face weak demandfor our products. Similarly, changes in availability of grant moneys may impactour sales to academic customers. Recent developments regarding safety issuesfor widely used drugs, including actual and/or threatened litigation, also mayaffect capital spending by pharmaceutical companies. Any decrease or delay incapital spending by life sciences or chemical companies or biomedicalresearchers could cause our revenue to decline and harm our profitability.

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In addition, consolidation within the pharmaceuticalindustry may not only affect demand for our products, but also existingbusiness relationships. For example, if two or more of our present or futurebiophotonic imaging customers merge, we may not receive the same aggregateamount of fees under one license agreement with the combined entity that wereceived under separate license agreements with these customers prior to theirmerger. Moreover, if one of our biophotonic imaging customers merges with an entitythat is not such a customer, the new combined entity may prematurely terminateour license agreement. Any of these developments could materially harm ourbusiness or financial condition.

*Our future revenueis unpredictable and could cause our operating results to fluctuatesignificantly from quarter to quarter.*

Our quarterly and annual operating results havefluctuated in the past and are likely to do so in the future. Our operatingresults have been historically stronger in the fourth quarter due to thedecision-making process of our customer base. Xenogen’s operating results havehistorically been stronger in the second and fourth quarters. The sale of manyof our products typically involves a scientific evaluation and commitment ofcapital by customers. Accordingly, the initial sales cycles of many of ourproducts are lengthy and subject to a number of significant risks that arebeyond our control, including customers’ budgetary constraints and internalacceptance reviews. As a result of this lengthy and unpredictable sales cycle,our operating results have historically fluctuated significantly from quarterto quarter, and we expect this trend to continue. In addition, a large portionof our expenses are relatively fixed. Historically, customer buying patternsand our revenue growth have caused a substantial portion of our revenues tooccur in the last month of the quarter. Delays in the receipt of orders, ourrecognition of product or service revenue or the manufacture of product nearthe end of the quarter could cause quarterly revenues to fall short ofanticipated levels. Because our operating expenses are based on anticipatedrevenue levels and a high percentage of our expenses are relatively fixed, lessthan anticipated revenues for a quarter could have a significant adverse impacton our operating results. Accordingly, if our revenue declines or does notincrease as we anticipate, we might not be able to correspondingly reduce ouroperating expenses in a timely enough manner to avoid incurring additionallosses. Our failure to achieve our anticipated level of revenue couldsignificantly harm our operating results for a particular fiscal period.

The following areamong additional factors that could cause our operating results to fluctuatesignificantly from period to period:

·       changesin the demand for, and pricing of, our products and services;

·       thelength of our sales cycles and buying patterns of our customers, which maycause a decrease in our operating results for a quarterly period;

·       thenature, pricing and timing of other products and services provided by us or ourcompetitors;

·       changesin our renewable contracts, including licenses;

·       ourability to obtain key components for products and manufacture and install themon a timely basis to meet demand;

·       changesin the research and development budgets of our customers;

·       customerresistance to paying technology licensing fees in conjuction with future IVISimaging system purchases;

·       customerreactions to our recent merger with Xenogen;

·       acquisition,licensing and other costs related to the expansion of our operations;

·       expensesrelated to our patent infringement litigation with AntiCancer and otherlitigation in which we are or may become involved; and

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·       expensesrelated to, and the results of, patent filings and other proceedings relatingto intellectual property rights.

Due to the possibility of fluctuations in our revenueand expenses, we believe that quarter to quarter or annual comparisons of ouroperating results are not a good indication of our future performance.

*Our intellectualproperty rights may not provide meaningful commercial protection for ourproducts, which could enable third parties to use our technology, or verysimilar technology, and could reduce our ability to compete in the market.*

We rely on patent, copyright, trade secret andtrademark laws to limit the ability of others to compete with us using the sameor similar technology in the U.S. and other countries. However, these lawsafford only limited protection and may not adequately protect our rights to theextent necessary to sustain any competitive advantage we may have. In addition,our current and future patent applications may not result in the issuance ofpatents in the U.S. or foreign countries. The laws of some foreign countries donot protect proprietary rights to the same extent as the laws of the U.S., andmany companies have encountered significant problems in protecting theirproprietary rights abroad. These problems can be caused by the absence ofadequate rules and methods for defending and enforcing intellectualproperty rights.

We will be able to protect our technology fromunauthorized use by third parties only to the extent that they are covered byvalid and enforceable patents or are effectively maintained as trade secrets.The patent positions of companies developing tools for pharmaceutical,biotechnology, biomedical and chemical industries, including our patentposition, generally are uncertain and involve complex legal and factualquestions, particularly as to questions concerning the enforceability of suchpatents against alleged infringement. The biotechnology patent situationoutside the U.S. is even more uncertain, particularly with respect to thepatentability of transgenic animals. Changes in either the patent laws or ininterpretations of patent laws in the U.S. and other countries may thereforediminish the value of our intellectual property. Moreover, our patents andpatent applications may not be sufficiently broad to prevent others frompracticing our technologies or from developing competing products. We also facethe risk that others may independently develop similar or alternativetechnologies or design around our patented technologies.

We own, or control through exclusive licenses, avariety of issued patents and pending patent applications. However, the patentson which we rely may be challenged and invalidated, and our patent applicationsmay not result in issued patents. For example, in 2005 AntiCancer filed alawsuit against Xenogen alleging infringement of five patents and requestingthat the court declare invalid one of our primary patents covering methods ofin vivo biophotonic imaging. For a description of our litigation withAntiCancer, see Part I, Item 3, “Legal Proceedings”.

We have taken measures to protect our proprietaryinformation, especially proprietary information that is not covered by patentsor patent applications. These measures, however, may not provide adequateprotection of our trade secrets or other proprietary information. We seek toprotect our proprietary information by entering into confidentiality agreementswith employees, collaborators and consultants. Nevertheless, employees,collaborators or consultants may still disclose our proprietary information,and we may not be able to protect our trade secrets in a meaningful way. If welose employees, we may not be able to prevent the unauthorized disclosure oruse of our technical knowledge or other trade secrets by those former employeesdespite the existence of nondisclosure and confidentiality agreements and othercontractual restrictions to protect our proprietary technology. In addition,others may independently develop substantially equivalent proprietaryinformation or techniques or otherwise gain access to our trade secrets.

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*We are currently involvedin patent litigation and we may need to initiate other lawsuits to protect orenforce our patents or other proprietary rights, 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 and may cause our stockprice to decline.*

The patents on which we rely may be challenged andinvalidated, and our patent applications may not result in issued patents. Forexample, in 2005 AntiCancer filed a lawsuit against Xenogen alleginginfringement of five patents and requesting that the court declare invalid oneof our primary patents covering methods of in vivo biophotonic imaging. For adescription of our litigation with AntiCancer, see Part II, Item 1 (“LegalProceedings”). In addition, in order to protect or enforce our patent rights,we may initiate patent litigation against third parties, such as infringementsuits or interference proceedings. This risk is exacerbated by the fact thatthose third parties may have access to substantially greater financialresources than we have to conduct such litigation.

These lawsuits could be expensive, take significanttime and could divert management’s attention from other business concerns.These lawsuits would put our patents at risk of being invalidated orinterpreted narrowly and our patent applications at risk of not issuing.Additionally, we may suffer reduced instrumentation sales and/or licenserevenue as a result of pending lawsuits or following final resolution oflawsuits. Further, these lawsuits may also provoke these third parties toassert claims against us. Attempts to enforce our patents may trigger thirdparty claims that our patents are invalid. We may not prevail in any of thesesuits and any damage or other remedies awarded to us, if any, may not becommercially valuable. During the course of these suits, there may be publicannouncements of results of hearings, motions and other interim proceedings ordevelopments in the litigation. If securities analysts or others perceive anyof these results to be negative, it could cause our stock price to decline.

*Acquisitions mayhave unexpected consequences or impose additional costs on us.*

Our business is highly competitive and our growth isdependent upon market growth and our ability to enhance our existing products,introduce new products on a timely basis and offer our customers products thatprovide a more complete solution. One of the ways we may address the need todevelop new products is through acquisitions of complementary businesses andtechnologies, such as our acquisition of Zymark in July 2003, ouracquisition of NovaScreen in October 2005, and our acquisition of Xenogenin August 2006. From time to time, we consider and evaluate potentialbusiness combinations involving our acquisition of another company andtransactions involving the sale of our company through, among other things, apossible merger or consolidation of our business into that of another entity.

Acquisitionsinvolve numerous risks, including the following:

·       difficultiesin integration of the operations, technologies and products and services of theacquired companies;

·       therisk of diverting management’s attention from normal daily operations of thebusiness;

·       potentialcost and disruptions caused by the integration of financial reporting systemsand development of uniform standards, controls, procedures and policies;

·       accountingconsequences, including amortization of acquired intangible assets or other requiredpurchase accounting adjustments, resulting in variability or reductions of ourreported earnings;

·       potentialdifficulties in completing projects associated with purchased in-processresearch and development;

·       risksof entering markets in which we have no or limited direct prior experience andwhere competitors in these markets have stronger market positions;

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·       thepotential loss of our key employees or those of the acquired company due to theemployment uncertainties inherent in the acquisition process;

·       theassumption of known and potentially unknown liabilities of the acquiredcompany;

·       therisk that we may find that the acquired company or business does not furtherour business strategy or that we paid more than what the company or business wasworth;

·       ourrelationship with current and new employees and customers could be impaired;

·       theacquisition may result in litigation from terminated employees or third partieswho believe a claim against us would be valuable to pursue;

·       ourdue diligence process may fail to identify significant issues with productquality, product architecture and legal contingencies, among other matters; and

·       theremay be insufficient revenues to offset increased expenses associated withacquisitions.

Acquisitions may also cause us to issue common stockthat would dilute our current stockholders’ percentage ownership; recordgoodwill and non-amortizable intangible assets that will be subject toimpairment testing and potential periodic impairment charges; incur amortizationexpenses related to certain intangible assets; or incur other large andimmediate write-offs.

We cannot assure you that future acquisitions will besuccessful and will not adversely affect our business. We must also maintainour ability to manage growth effectively. Failure to manage growth effectivelyand successfully integrate acquisitions that we make could harm our business.

*Our future revenuegrowth depends to a significant extent on the revenue growth of our NovaScreenbusiness, which we acquired in October 2005. If NovaScreen’s revenue doesnot grow as we anticipate, our future revenue targets may not be achieved.*

In October 2005 we acquired NovaScreenBiosciences Corporation, a privately held business which provides in vitro highthroughput screening and compound profiling services. We completed thisacquisition, in part, because we believe that the market for these serviceswill grow at a relatively high rate as more pharmaceutical and biotechcompanies increase their outsourcing of these services. There can be noassurance, however, that pharmaceutical and biotech companies will continue toincrease their demand for these services. If the trend toward more outsourcingof these services does not continue to grow, our revenues from the NovaScreenbusiness may not increase as anticipated, making it more difficult for us toachieve our future revenue growth targets.

*We may not realizeall of the anticipated benefits of the Xenogen acquisition.*

The success of ouracquisition of Xenogen will depend, in part, on our ability to realize theanticipated synergies, cost savings, and growth opportunities from integratingthe businesses of Xenogen with our business. While our integration of Xenogenis substantially complete, there are risks that could still adversely impactour ability to achieve all of the anticipated benefits of the acquisition,which include:

·       consolidatingresearch and development and manufacturing operations;

·       retainingkey employees;

·       consolidatingcorporate and administrative infrastructures;

·       coordinatingsales and marketing functions;

·       preservingour and Xenogen’s research and development, distribution, marketing, promotion,and other important relationships;

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·       minimizingthe diversion of management’s attention from ongoing business concerns; and

·       coordinatinggeographically separate organizations.

We cannot assure you that the integration of Xenogenwith us will result in the realization of the full benefits anticipated by usto result from the merger.

*We expect to incurfuture operating losses and may not achieve profitability.*

We have experienced significant operating losses eachyear since our inception and we expect to incur an operating loss in 2007. Asof December 31, 2006, Caliper had an accumulated deficit of approximately$210.0 million. As of the effectiveness date of our merger with Xenogen,Xenogen had an accumulated deficit of approximately $199.1 million. Ourlosses have resulted principally from costs incurred in research anddevelopment and product marketing and from general and administrative costsassociated with our operations. These costs have exceeded our cumulative cashproceeds which, to date, have been generated principally from product sales,collaborative research and development agreements, technology access fees,license fees, litigation settlement proceeds and interest income on cash andinvestment balances. To achieve profitability, we will need to generate andsustain substantially higher revenue than we have to date, while achievingreasonable costs and expense levels. We may not be able to generate enoughrevenue to achieve profitability. We may not achieve or maintain reasonablecosts and expense levels. Even if we become profitable, we may not be able tosustain or increase profitability on a quarterly or annual basis. If we fail toachieve profitability within the timeframe expected by securities analysts orinvestors, the market price of our common stock will likely decline.

*Failure to raiseadditional capital or generate the significant capital necessary to expand ouroperations and invest in new products could reduce our ability to compete andresult in lower revenue.*

We anticipate that our existing capital resources,together with the revenue to be derived from our commercial partners and fromcommercial sales of our products and services, will enable us to maintaincurrently planned operations at least through the year 2008. However, wepremise this expectation on our current operating plan, which may change as aresult of many factors, including the prospect of future acquisitions or otherinvesting activities that could require substantial additional financing.Consequently, we may need additional funding sooner than anticipated. Ourinability to raise needed capital would seriously harm our business and productdevelopment efforts. In addition, we may choose to raise additional capital dueto market conditions or strategic considerations even if we believe that wehave sufficient funds for our current or future operating plans. To the extentthat additional capital is raised through the sale of equity or convertibledebt securities, the issuance of these securities could result in dilution toour stockholders.

On August 9, 2006, we entered into a creditfacility with a bank which permits us to borrow up to $20.0 million in the formof revolving loan advances including up to $5.0 million in the form of lettersof credit. This credit facility includes traditional lending and reportingcovenants including that certain financial covenants applicable to liquidityand earnings are to be maintained by us and tested as of the last day of eachquarter. The credit facility also includes several potential events of defaultsuch as payment default, material adverse change conditions and insolvencyconditions that could cause interest to be charged at prime plus two percentagepoints, or for any uncured events of default result in the bank’s right todeclare all outstanding obligations immediately due and payable. As discussedin Note 10 of the Notes to Consolidated Financial Statements in Item 15 of thisAnnual Report, we were not incompliance with one financial covenant as of December 31,2006. Such covenant violation was subsequently waived by the bank and thecovenant was also amended on a forward basis. Our ability to remain incompliance with applicable loan covenants through the credit facility’smaturity in 2008 depends upon our results of operations not deteriorating orany other material adverse change occurring with our business, we may become indefault of one or more covenants under the credit facility.

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If such events were to occur, we currently have noalternative committed sources of capital. In addition, to the extent thatoperating and capital resources are insufficient to meet future requirements, wewill have to raise additional funds to continue the development andcommercialization of our technologies. These funds may not be available onfavorable terms, or at all. If adequate funds are not available on attractiveterms, we may be required to curtail operations significantly or to obtainfunds by entering into financing, supply or collaboration agreements onunattractive terms.

*The termination ornon-renewal of a large contract or the loss of, or a significant reduction in,sales to any of our significant customers could harm our operating results.*

We currently derive, and we expect to continue toderive, a significant percentage of our total revenue from a relatively smallnumber of customers. If any of these customers terminates or substantially diminishesits relationship with us, our revenue could decline significantly. Our newlyacquired Xenogen business often sells products and provides services pursuantto agreements that are renewable on an annual basis. Failure to renew or thecancellation of these agreements by any one of our larger customers couldresult in a significant loss of revenue.

*We may not fully realizeour revenue under long-term contracts, which could harm our business and resultin higher losses than anticipated.*

We have long-term contracts for custom animalproduction and/or phenotyping services with two customers that are renewedannually and are expected to generate future revenues. These two long-termcontracts may not be renewed annually and may be terminated at any time duringtheir terms. In addition, we may not be able to maintain our sublicensed rightsunder certain patents relating to these contracts. Termination of thesecontracts for any reason would result in the loss of significant revenue wouldnegatively impact our results of operations or limit our ability to execute ourstrategy.

*Our success willdepend partly on our ability to operate without infringing or misappropriatingthe proprietary rights of others.*

We may be exposed to future litigation by thirdparties based on claims that our products infringe the intellectual propertyrights of others. This risk is exacerbated because there are numerous issuedand pending patents in the life sciences industry and, as described above, thevalidity and breadth of life sciences patents involve complex legal and factualquestions. Our competitors may assert that their U.S. or foreign patents maycover our products and the methods we employ. For example, we are involved inpatent litigation with AntiCancer in which it has alleged that we haveinfringed certain of its patents. We have counterclaimed with allegations thatAntiCancer infringes our imaging patents, as well as allegations that certainAntiCancer’s patents are invalid. For a description of our litigation withAntiCancer, see Part I, Item 3,”Legal Proceedings”. Also, because patentapplications can take many years to issue, there may be currently pendingapplications of which we are unaware that may later result in issued patentsthat our products may infringe. There could also be existing patents of whichwe are not aware that one or more of our products may inadvertently infringe.

From time to time, we have received, and may receivein the future, letters from third parties asking us to license certaintechnologies that the third party believes we may be using or would like us touse. If we do not accept a license, we may be subject to claims ofinfringement, or may receive letters alleging infringement. Infringement andother intellectual property claims, with or without merit, can be expensive andtime-consuming to litigate and can divert management’s attention from our corebusiness.

If we lose a patent infringement lawsuit, we could beprevented from selling our products unless we can obtain a license to use technologyor ideas covered by such patent or are able to redesign the products to avoidinfringement. A license may not be available at all or on terms acceptable tous, or we may not be able to redesign our products to avoid any infringement.If we are not successful in obtaining a license or redesigning our products, wemay be unable to sell our products and our business could suffer.

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*Our rights to theuse of technologies licensed to us by third parties are not within our control,and without these technologies, our products and programs may not be successfuland our business prospects could be harmed.*

We rely on licenses to use various technologies thatare material to our business, including licenses, with sublicense rights, tocertain microfluidic technologies and in vivo imaging methods, licenses to theuse of certain biological materials, and licenses to engineer and commercializetransgenic animals. We do not own the patents that underlie these licenses. Ourrights to use these technologies and employ the inventions claimed in thelicensed patents are subject to the negotiation of, continuation of andcompliance with the terms of those licenses and the continued validity of thesepatents. In some cases, we do not control the prosecution or filing of the patentsto which we hold licenses, or the enforcement of these patents against thirdparties. For example, under the Promega Corporation and The Regents of theUniversity of California licenses for a patented form of firefly luciferaseused in our LPTA animal models and certain of our bioware, we do not have theright to enforce the patent, and neither licensor is obligated to do so on ourbehalf. Certain of our licenses contain diligence obligations, as well asprovisions that allow the licensor to terminate the license upon specificconditions. Some of the licenses under which we have rights, such as ourlicenses from the University of Pennsylvania and from UT Battele for certainmicrofluidic technologies and from Stanford University for certain biophotonic imagingmethods, provide us with exclusive rights in specified fields, including theright to enforce the licensed patents, but the scope of our rights andobligations under these and other licenses may become subject to dispute by ourlicensors or third parties. For example, we are currently discussing withStanford the scope of products that we sell which are subject to the royaltyprovisions of our Stanford license agreement. As a result of thesediscussions, we may amend the license agreement to change the royalties we payto Stanford for future product sales. The amendment may also include thepayment of back royalties to Stanford for products we have alreadysold. We have not discussed with Stanford the specific terms andconditions of an amendment or the amount of any back royalty payments. Anyincrease in the royalties we pay to Stanford would negatively impact our grossmargins.

*Our tax netoperating losses and credit carryforwards may expire if we do not achieve ormaintain profitability.*

As of December 31, 2006, we had federal and statenet operating loss carryforwards of approximately $283.0 million and $86.0million, respectively. We also had federal and state research and developmenttax credit carryforwards of approximately $11.2 million and $3.8 million,respectively. The federal net operating loss and credit carryforwards willexpire at various dates through 2026 beginning in the year 2007 if notutilized. State net operating losses of approximately $141,000 expired in 2006.The current remaining state net operating losses have varying expiration datesthrough 2016.

Utilization of the federal and state net operatinglosses and credits may be subject to a substantial limitation due to the changein ownership provisions of the Internal Revenue Code of 1986 and similar stateprovisions. The annual limitation may result in the expiration of net operatinglosses and credits before utilization. As of December 31, 2005, Xenogenhad federal and state net operating loss carryforwards of approximately $126.3and $28.6 million, respectively. The acquisition of Xenogen resulted in Xenogenshareholders’ owning approximately one-third of Caliper and will likely resultin a change of ownership that will cause pre-merger losses of the mergedentities to be subject to limitation. The amount of limitation has not yet beendetermined. Because of our lack of earnings history and the uncertainty ofrealizing these net operating losses, the deferred tax assets have beensubstantially offset by a valuation allowance.

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*If we are unable to meetcustomer demand or quality expectations, it would adversely impact ourfinancial results and restrict our sales growth.*

Upon our acquisition ofXenogen, manufacturing of IVIS Imaging Systems was transferred to ourmanufacturing plant in Hopkinton, Massachusetts. While our manufacturing grouphas considerable expertise with the manufacture of complex systems, we arerelatively inexperienced in the manufacture of IVIS Imaging Systems. To besuccessful, we must manufacture our IVIS Imaging Systems in substantialquantities at acceptable costs. If we do not succeed in manufacturingsufficient quantities of our imaging systems to meet customer demand, we couldlose customers and fail to acquire new customers if they choose a competitor’sproduct because our imaging system is not available. We believe our currentmanufacturing capacity in Hopkinton, Massachusetts is sufficient to meet ourcurrent and forecasted demand over the foreseeable future. Certain componentsof our IVIS systems are specially manufactured by our limited and orsingle-source suppliers and supply of these parts to us requires adequate leadtime that can result in production delays. If we experience unexpected shiftsin customer demand that requires alterations to planned manufacturing, we mayexperience production delays that could restrict our sales growth. If we areunable to meet customer demand for IVIS Imaging Systems, it would adverselyaffect our financial results and restrict our sales growth.

*We depend on a limitednumber of suppliers for components of IVIS Imaging Systems, and we will beunable to manufacture or deliver our products if shipments from these suppliersare interrupted or are not supplied on a timely basis.*

We use original equipment manufacturers, or OEMs, forvarious parts of our IVIS Imaging Systems, including the cameras, boxes,certain subassemblies, filters and lenses. We obtain these key components froma small number of sources. For example, the lens for our IVIS 200 system isobtained from a single source on a purchase order basis from Coastal OpticalSystems Inc., and the CCD cameras for all of our IVIS Imaging Systems areobtained from two sources, Spectral Instruments, Inc. and Andor TechnologyLimited. We have binding supply agreements with Spectral and Andor. From timeto time, we may experience delays in obtaining components from certain of oursuppliers, which may have an impact on our ability to produce imaging systems.We believe that alternative sources for certain of these components in theevent of a disruption or discontinuation in supply would not be available on atimely basis, which would disrupt our operations and impair our ability tomanufacture and sell our IVIS Imaging Systems.

Our dependence uponoutside suppliers and OEMs exposes us to risks, including:

·       the possibility that one ormore of our suppliers could terminate their services at any time;

·       the potential inability ofour suppliers to obtain required components or products;

·       reduced control overpricing, quality and timely delivery due to the difficulties in switching toalternative suppliers;

·       the potential delays andexpense of seeking alternative suppliers; and

·       increases in prices of rawmaterials, products and key components.

*We face competitionfrom companies with established technologies for in vivo biological assessment,which may prevent us from achieving significant market share for our products.*

We compete with a variety of established and acceptedtechnologies for in vivo biological assessment that several competitors andcustomers may be using to analyze animal models. The most basic of thesetechnologies have remained relatively unchanged for the past 40 years, are wellestablished and are routinely used by researchers. We believe it may takeseveral years for all researchers to become fully educated about our in vivobiophotonic imaging technology.

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We believe that in thenear term, the market for in vivo biological assessment will be subject torapid change and will be significantly affected by new technology introductionsand other market activities of industry participants. As other companiesdevelop new technologies and products to conduct in vivo biological assessment,we may be required to compete with many larger companies that enjoy several competitiveadvantages, including:

·       establisheddistribution networks;

·       establishedrelationships with life science, pharmaceutical, biotechnology and chemicalcompanies as well as with biomedical researchers;

·       additionallines of products, and the ability to offer rebates or bundle products to offerhigher discounts or incentives to gain a competitive advantage; and

·       greaterresources for technology and product development, sales and marketing andpatent litigation.

Our principal competitors that use establishedtechnologies for in vivo biological assessment include Exelixis, Inc. andLexicon Genetics Incorporated. Each of these companies uses animal models inthe area of target validation in drug discovery and utilizes methods ofassessment based upon knockout mice as well as other organisms such as fruitflies, worms and yeast. We also face competition from several companiesincluding Eastman Kodak Company, Berthold Detection Systems GmbH, HamamatsuPhotonics, Olympus Corporation, K.K. and Roper Scientific, Inc., thatmarket systems which may be used to perform biophotonic imaging with theappropriate licenses. These companies are larger and have greater resourcesthan we do. There are also several privately-held companies that have recentlybegun to market systems that may be used to perform biophotonic imaging withthe appropriate licenses. At any time, other companies may develop additionaldirectly competitive products that could achieve greater market acceptance orrender our products obsolete.

*Contamination inour animal populations could damage our inventory, harm our reputation andresult in decreased sales.*

We offer a portfolio of transgenic animals and LPTAanimal models for use by researchers in a wide range of research and drugdiscovery programs and also perform breeding and model validation. We maintainanimal facilities in Alameda, California and Cranbury, New Jersey. Theseanimals and facilities must be free of contaminants, viruses or bacteria, orpathogens that would compromise the quality of research results. Contaminationof our isolated breeding rooms could disrupt our models, delay delivery tocustomers of data generated from phenotyping and result in decreased sales.Contamination would result in inventory loss, clean-up and start-up costs andreduced sales as a result of lost customer orders.

In 2003, one of Xenogen’s animal facilities in Alamedawas contaminated by a mouse virus introduced through one of our animal vendors.That facility was closed for decontamination, and the most valuable strainswere transferred to third party breeders for rederivation so that Xenogen couldcontinue to provide animals to its customers. The decontamination process tookapproximately three months. A similar contamination occurred again in 2005.

*Terrorist acts,acts of war and natural disasters may seriously harm our business and revenues,costs and expenses and financial condition.*

We rely on a single manufacturing location to produceour microfluidic chips and drug discovery systems, and a single location toproduce laboratory automation, imaging and robotics systems, with noalternative facilities. We rely principally on our facility in Cranbury, NewJersey, to produce LPTA animal models and our facility in Alameda, Californiato produce bioware cells and microorganisms. Alameda, California is also ableto serve as a back-up facility for producing our LPTA animal models. Thesefacilities and some pieces of manufacturing equipment are difficult to replaceand could require substantial replacement lead-time. Our manufacturingfacilities may be affected by natural disasters, such as 

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earthquakes and floods.Earthquakes are of particular significance because our LabChip productmanufacturing facility is located in Mountain View, California, anearthquake-prone area. In the event that our existing manufacturing facilitiesor equipment are affected by man-made or natural disasters, we would be unableto manufacture products for sale, meet customer demands or meet salesprojections. If our manufacturing operations were curtailed or ceased, it wouldharm our business.

Terrorist acts, acts of war and natural disasters(wherever located around the world) may cause damage or disruption to us, ouremployees, facilities, partners, suppliers, distributors and customers, any andall of which could significantly impact our revenues, expenses and financialcondition. The terrorist attacks that took place in the United States onSeptember 11, 2001 were unprecedented events that have created manyeconomic and political uncertainties. The potential for future terroristattacks, the national and international responses to terrorist attacks andother acts of war or hostility have created many economic and politicaluncertainties that could adversely affect our business and results ofoperations that cannot presently be predicted. We are largely uninsured forlosses and interruptions caused by terrorist acts, acts of war and naturaldisasters.

*We use hazardousmaterials in our business. Any claims relating to improper handling, storage ordisposal of these materials could be time consuming and costly.*

Our research and development processes, our anesthesiasystems used with our IVIS Imaging Systems to anesthetize the animals beingimaged and our general biology operations involve the controlled storage, useand disposal of hazardous materials including, but not limited to, biologicalhazardous materials and radioactive compounds. We are subject to federal, stateand local regulations governing the use, manufacture, storage, handling and disposalof these materials and waste products. Although we believe that our safetyprocedures for handling and disposing of these hazardous materials comply withthe standards prescribed by law and regulation, the risk of accidentalcontamination or injury from hazardous materials cannot be completelyeliminated. In the event of an accident, we could be held liable for anydamages that result, and any liability could exceed the limits or fall outsidethe coverage of our insurance. We currently maintain a limited pollutioncleanup insurance policy in the amount of $[1.0] million. We may not be able tomaintain insurance on acceptable terms, or at all. We could be required toincur significant costs to comply with current or future environmental laws andregulations.

*Compliance withgovernmental regulations could increase our operating costs, which wouldadversely affect the commercialization of our technology.*

The Animal Welfare Act, or AWA, is the federal lawthat covers the treatment of certain animals used in research. The AWAcurrently does not cover rats of the genus*Rattus*or mice of the genus*Mus* bred foruse in research, and consequently, we are not currently required to be incompliance with this law.

Currently, the AWA imposes a wide variety of specificregulations that govern the humane handling, care, treatment and transportationof certain animals by producers and users of research animals, most notablypersonnel, facilities, sanitation, cage size, feeding, watering and shippingconditions. If in the future the AWA is amended to include mice or rats bredfor use in research in the scope of regulated animals, we will become subjectto registration, inspections and reporting requirements. We believe compliance withsuch regulations would require us to modify our current practices andprocedures, which could require significant financial and management resources.

Furthermore, some states have their own regulations,including general anti-cruelty legislation, which establish certain standardsin handling animals. To the extent that we provide products and servicesoverseas, we also have to comply with foreign laws, such as the EuropeanConvention for the Protection of Animals During International Transport andother anti-cruelty laws. In addition, customers of our mice in certaincountries may need to comply with requirements of the European Convention forthe Protection of Vertebrate Animals Used for Experimental and Other ScientificPurposes. Additional or more stringent regulations in this area could impactour sales of laboratory animals into signatory countries.

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Since we develop animalscontaining changes in their genetic make-up, we may become subject to a varietyof laws, guidelines, regulations and treaties specifically directed atgenetically modified organisms. The area of environmental releases of geneticallymodified organisms is rapidly evolving and is currently subject to intenseregulatory scrutiny, particularly overseas. If we become subject to these laws,we could incur substantial compliance costs. For example, the BiosafetyProtocol, an international treaty adopted in 2000 to which the U.S. is not aparty, regulates the transit of living modified organisms, a category thatincludes our transgenic mice, into countries party to the treaty. As our miceare not intended for release into the environment or for use for food, feed orprocessing, the treaty imposes only identification, handling, packaging andtransport requirements for shipments into signatory countries. However,additional requirements may be imposed on such shipments in the future.

Additionally, exports ofour IVIS Imaging Systems and biological reagents to foreign customers anddistributors are governed by the International Traffic in Arms Regulations, theExport Administration Regulations, Patriot Act and Bioterrorism Safety Act.Although these laws and regulations do not restrict our present foreign salesprograms, any future changes to these regulatory regimes may negatively affector limit our foreign sales.

*Public perception of ethical and social issues maylimit or discourage the use of mice for scientific experimentation, which couldreduce our revenues and adversely affect our business.*

Governmental authoritiescould, for social or other purposes, limit the use of genetic modifications orprohibit the practice of our technology. Public attitudes may be influenced byclaims that genetically engineered products are unsafe for use in research orpose a danger to the environment. The subject of genetically modifiedorganisms, like genetically altered mice and rats, has received negative publicityand aroused significant public debate. In addition, animal rights activistscould protest or make threats against our facilities, which may result inproperty damage. Ethical and other concerns about our methods, particularly ouruse of genetically altered mice and rats, could adversely affect our marketacceptance.

**Risks Related toOwning Our Common Stock**

*Our stock price is extremely volatile, and you couldlose a substantial portion of your investment.*

Our stock has beentrading on the Nasdaq Global Market only since mid-December 1999. Weinitially offered our common stock to the public at $16.00 per share. Sincethen our stock price has been extremely volatile and has ranged, through March 9,2007 from a high of approximately $202.00 per share on March 2, 2000 to alow of $2.71 per share both on January 28, 2003 and February 6, 2003.Our stock price may drop substantially following an investment in our commonstock. We expect that our stock price will remain volatile as a result of anumber of factors, including:

·       announcementsby analysts regarding their assessment of us and our prospects;

·       announcementsby our competitors of complementary or competing products and technologies;

·       announcementsof our financial results, particularly if they differ from investors’expectations; and

·       generalmarket volatility for technology stocks.

These factors and fluctuations, as well as generaleconomic, political and market conditions, may materially adversely affect themarket price of our common stock.

*We have been sued, and are at risk of futuresecurities class action litigation.*

In the spring and summer of 2001, class actionlawsuits were filed against certain leading investment banks and over 300companies that did public offerings during the prior several years, includinglawsuits against Caliper and certain of its officers and directors as describedunder Part I, Item 3, “Legal Proceedings.” This and other securitieslitigation could result in potential liability, cause us to incur litigationcosts and divert management’s attention and resources, any of which could harmour business. In 

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addition, announcements offuture lawsuits of this or some other nature, and announcements of eventsoccurring during the course of the current and any future lawsuits, could causeour stock price to drop.

*Provisions of our charter documents and Delaware lawmay inhibit a takeover, which could limit the price investors might be willingto pay in the future for our common stock.*

Provisions in ourcertificate of incorporation and bylaws may have the effect of delaying orpreventing an acquisition in which we are not the surviving company or whichresults in changes in our management. In addition, because we are incorporatedin Delaware, we are governed by the provisions of Section 203 of theDelaware General Corporation Law. These provisions may prohibit stockholdersowning 15% or more of the outstanding voting stock, from consummating a mergeror combination which includes us. These provisions could limit the price thatinvestors might be willing to pay in the future for our common stock.

**Item 1B.**               *Unresolved Staff Comments*

Not applicable.

**Item 2.**                        *Properties*

Our headquarters is located in Hopkinton,Massachusetts, where we occupy two leased buildings totaling approximately130,000 square feet, which houses research and development, instrumentmanufacturing and administration. Our lease in Massachusetts expires in December 2015,with two additional 5-year renewal options. We lease three buildings totalingapproximately 111,000 square feet in Mountain View, California, of which weoccupied one building comprising approximately 53,000 square feet as of December 31,2006. Our Mountain View facilities are primarily used for microfluidicsresearch and development, LabChip device manufacturing, and certainadministrative functions. As of December 31, 2006, approximately 73% ofthe two other Mountain View, California facilities have been sublet. TheMountain View leases will expire in 2008. Our NovaScreen operation, located inHanover, Maryland, occupies approximately 26,000 square feet of leasedadministrative and laboratory space for drug discovery services. The Hanoverlease will expire in 2008. With the acquisition of Xenogen, we assumed leasescovering (i) approximately 36,000 square foot combined office, wetlaboratory, and vivarium space primarily used for imaging research located inAlameda, California under a lease that expires in April 2011; (ii) approximately41,000 square foot facility also located in Alameda, California, of which 24,000square feet are currently under a sublease and we expect the remaining 16,000to be subleased in 2007, under a lease that expires in April 2011; (iii) anapproximately 58,000 square foot facility in Cranbury, New Jersey that includesa combined office, wet laboratory, vivarium and expansion space which housesour Xenogen Bioscience in vivo services business, under a lease that expires inOctober 2009; and (iv) a 25,000 square foot facility of combinedoffice, wet laboratory, vivarium and expansion space in St. Louis, Missouri,which is currently unoccupied and which we intend to sublet, under a lease thatexpires in April 2010.

Our wholly ownedinternational subsidiaries are engaged in marketing, sales and serviceactivities in Europe and Japan. In total, our international subsidiaries occupyleased space of approximately 34,000 square feet under leases which expirethrough 2011. We believe that, based upon our long-term strategic facilitiesplan, our current facilities are adequate for our needs for the foreseeablefuture.

**Item 3.**                        *Legal Proceedings*

Commencing on June 7, 2001, Caliper and three ofits officers and directors (David V. Milligan, Daniel L. Kisner and JamesL. Knighton) were named as defendants in three securities class action lawsuitsfiled in the United States District Court for the Southern District of NewYork. The cases have been consolidated under the caption,*In re Caliper Technologies Corp. Initial PublicOffering Securities Litigation,* 01 Civ. 5072 (SAS) (GBD).Similar complaints were filed against approximately 300 other public 

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companies that conductedinitial public offerings of their common stock during the late 1990s (the “IPOLawsuits”). On August 8, 2001, the IPO Lawsuits were consolidated forpretrial purposes before United States Judge Shira Scheindlin of the SouthernDistrict of New York. Together, those cases are denominated*In re Initial Public Offering Securities Litigation,*21 MC 92(SAS). On April 19, 2002, a Consolidated Amended Complaint wasfiled alleging claims against Caliper and the individual defendants underSections 11 and 15 of the Securities Act of 1933, and underSections 10(b) and 20(a) of the Securities Exchange Act of 1934,as well as Rule 10b-5 promulgated thereunder. The Consolidated AmendedComplaint also names certain underwriters of Caliper’s December 1999initial public offering of common stock as defendants. The Complaint allegesthat these underwriters charged excessive, undisclosed commissions to investorsand entered into improper agreements with investors relating to aftermarkettransactions. The Complaint seeks an unspecified amount of money damages.Caliper and the other issuers named as defendants in the IPO Lawsuits moved on July 15,2002, to dismiss all claims on multiple grounds. By Stipulation and Order datedOctober 9, 2002, the claims against Messrs. Milligan, Kisner andKnighton were dismissed without prejudice. On February 19, 2003, the Courtgranted Caliper’s motion to dismiss all claims against it. Plaintiffs were notgiven the right to replead the claims against Caliper. The time to appeal thedismissal has not yet expired. In May 2003, a Memorandum of Understandingwas executed by counsel for plaintiffs, issuers and their insurers settingforth the terms of a settlement that would result in the termination of allclaims brought by plaintiffs against the issuers and individual defendantsnamed in the IPO Lawsuits. On July 7, 2003, a Special Litigation Committeeof the Caliper Board of Directors approved the settlement terms described inthat Memorandum of Understanding, which was subsequently set forth in adefinitive Settlement Agreement among the settling parties. On February 15,2005, Judge Scheindlin issued an order granting preliminary approval of thesettlement, subject to certain modifications. The parties agreed to thosemodifications and on August 31, 2005, Judge Scheindlin issued an ordergranting preliminary approval of the settlement as modified and certifyingsettlement classes. The fairness hearing for final approval of the settlementwas held on April 24, 2006. Before Judge Scheindlin issued any orderregarding the Court’s decision with respect to the final approval of thesettlement, on December 5, 2006 the Court of Appeals for the SecondCircuit issued an opinion reversing Judge Scheindlin’s prior certification ofthe plaintiff classes in several “focus” cases pending before her as part ofthe consolidated IPO lawsuits. The plaintiffs have petitioned the SecondCircuit for a rehearing on the class certification issue. Judge Scheindlin hasindicated that she will hold her consideration on the final approval of thesettlement in abeyance until the Second Circuit decides whether it will reviewthe December 5, 2006 opinion reversing Judge Scheindlin’s priorcertification of plaintiff classes in the “focus” cases. The final resolutionof this litigation is not expected to have a material impact on Caliper.

On March 7, 2005, AntiCancer, Inc. filed alawsuit against Xenogen in the U.S. District Court for the Southern District ofCalifornia (the “Court”) alleging infringement of five patents of AntiCancer.The complaint seeks damages and injunctive relief against the allegedinfringement. On March 29, 2005, AntiCancer amended its complaint toinclude an additional claim seeking a judgment that one of our imaging patentsexclusively in-licensed from Stanford University, U.S. patent No. 5,650,135,is invalid. On May 10, 2005, Xenogen filed its answer to AntiCancer’samended complaint. Xenogen denied all of AntiCancer’s allegations and assertedvarious affirmative defenses, including its position that AntiCancer’s patentscited in its complaint, and its patent claims relating to in vivo imaging offluorescence, are invalid. Caliper is vigorously defending itself againstAntiCancer’s claims and believes AntiCancer’s complaint is without merit.Concurrent with filing Xenogen’s answer to AntiCancer’s complaint, Xenogen hadfiled its own counterclaims against AntiCancer. These counterclaims allege thatAntiCancer infringes two of Xenogen’s U.S. patents, Nos. 5,650,135 and6,649,143, both relating to in vivo imaging and with a priority date beforeeach of the AntiCancer patents alleged in its amended complaint. Both partiesseek injunctive relief and an unspecified amount of damages, including enhanceddamages for willful infringement. Caliper intends to vigorously pursue itsclaims against AntiCancer. The Court held the first three days of a 

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Markman hearing relatingto these claims on June 13, 2006 through June 15, 2006. On July 14,2006, Xenogen filed a motion to disqualify AntiCancer’s attorneys due tonumerous violations of ethical rules by such attorneys. After a hearing onthis motion, on August 10, 2006, the Court issued an order grantingXenogen’s motion to disqualify AntiCancer’s attorneys. On October 18,2006, the Court issued a supplemental and clarifying order to its previous August 10,2006 order in which the Court, among other things, (i) granted Xenogen’smotion to restart the Markman hearing, (ii) granted Xenogen’s motion to prohibitthe transfer of tainted files to AntiCancer’s successor counsel, (iii) continuedXenogen’s motion for sanctions against AntiCancer’s previous counsel, and (iv) grantedAntiCancer permission until November 6, 2006 to amend its complaint. On November 6,2006, AntiCancer served its Third Amended Complaint in this matter andvoluntarily dismissed Stanford University from this proceeding. The ThirdAmended Complaint adds Caliper as a defendant. In response to AntiCancer’sThird Amended Complaint, Caliper has filed both (i) a motion to strike andfor a more definite statement and (ii) a motion for sanctions includingdismissal against AntiCancer for failure to comply with Federal Rule ofCivil Procedure 11. The Court has scheduled a hearing on both of these motionsfor April 16, 2007.

Caliper currently is not able to predict the outcomeof the patent infringement lawsuit with AntiCancer. Even if Caliper prevails inthis lawsuit, the defense of the lawsuit or similar lawsuits will be expensiveand time-consuming and may distract Caliper management from operating Caliper’sbusiness.

From time to time Caliperis involved in litigation arising out of claims in the normal course ofbusiness. Based on the information presently available, management believesthat there are no other claims or actions pending or threatened againstCaliper, the ultimate resolution of which will have a material adverse effecton our financial position, liquidity or results of operations, although theresults of litigation are inherently uncertain, and adverse outcomes arepossible.

**Item 4.**                        *Submission of Matters to a Vote of Security Holders*

Not applicable.

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**PART II**

**Item 5.**                     *Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities*

**Market Information**

Ourcommon stock has been quoted on the Nasdaq Global Market under the symbol “CALP”since our initial public offering in December 1999. Prior to that time,there was no public market for our common stock. The following table shows thehigh and low close prices per share of our common stock as reported on theNasdaq Global Market for the periods indicated.

| ** **       | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| **Fiscal 2006:** |       |     |       |    |       |
| First Quarter    |       | $        | 6.83       |    | $          | 5.17 |   |
| Second Quarter   |       | $        | 6.35       |    | $          | 4.06 |   |
| Third Quarter    |       | $        | 5.39       |    | $          | 4.16 |   |
| Fourth Quarter   |       | $        | 5.89       |    | $          | 4.64 |   |
| **Fiscal 2005:** |       |     |       |    |       |
| First Quarter    |       | $        | 8.03       |    | $          | 6.42 |   |
| Second Quarter   |       | $        | 6.45       |    | $          | 5.44 |   |
| Third Quarter    |       | $        | 7.17       |    | $          | 5.56 |   |
| Fourth Quarter   |       | $        | 7.36       |    | $          | 5.88 |   |

 

**Stockholders**

As of December 31,2006, there were approximately 442 holders of the 46,812,315 outstanding sharesof record of our common stock.

**Dividends**

We have never declared orpaid any dividends on our capital stock. We currently expect to retain futureearnings, if any, for use in the operation and expansion of our business.Although we have no restrictions on paying cash dividends, we do not anticipatepaying any cash dividends in the foreseeable future.

**Issuer Purchases ofEquity Securities**

Duringthe three months ended December 31, 2006, we repurchased 15,000 shares ofrestricted stock, which was subject to a right of repurchase by us, from anemployee who left our employment.

| ** **                   | ** ** | ** **            | ** ** | ** **             | ** ** | **Total Number of** | ** ** | **Maximum Approximate**              | ** ** |
|------------------------------|------------|-----------------------|------------|------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | ** **            | ** ** | ** **             | ** ** | **Shares Purchased**     | ** ** | **Dollar Value of Shares** | ** ** |
| ** **                   | ** ** | **Total Number** | ** ** | **Average Price** | ** ** | **as Part of**      | ** ** | **that may yet be**        | ** ** |
| ** **                   | ** ** | **of Shares**    | ** ** | **Paid Per**      | ** ** | **Publicly Announced**   | ** ** | **Purchased Under**                  | ** ** |
| **Period**                   | ** ** | ** **            | ** ** | **Purchased**          | ** ** | **Share**                     | ** ** | **Programs**                              | ** ** | **the Programs** | ** ** |
| October 1 through  31, 2006  |       |                  | —     |                   |       |                          | $          | —                                    |       |   |   | — |   |   |   | — |   |   |
| November 1  through 30, 2006 |       |                  | —     |                   |       |                          | $          | —                                    |       |   |   | — |   |   |   | — |   |   |
| December 1  through 31, 2006 |       |                  | 15,000     |                   |       |                          | $          | .001                                      |       |   |   | — |   |   |   | — |   |   |
| Total                        |       |                  | 15,000     |                   |       |                          | $          | .001                                      |       |   |   | — |   |   |   | — |   |   |
|                              |            |                       |            |                        |            |                               |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Unregistered Salesof Securities**

There were no sales ofunregistered securities during the year ended December 31, 2006.

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**Item 6.**                        *Selected Financial Data*

Thefollowing table sets forth selected consolidated financial data for each of ourlast five fiscal years. The selected financial data for each of the five yearsin the period ended December 31, 2006 have been derived from theconsolidated financial statements of the Company, which financial statementshave been audited by Ernst & Young LLP, independent registered publicaccounting firm. The aforementioned consolidated financial statements and thereport thereon are included elsewhere in this Annual Report on Form 10-K.This data should be read in conjunction with the detailed information,financial statements and related notes, as well as “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in Item 7.The historical results are not necessarily indicative of the results ofoperations to be expected in the future.

| ** **                                                                  | ** ** | **Years Ended December 31,**                        | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share data)** | ** ** |
| **Statements  of Operations Data(1):**                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Product revenue                                                             |       | $                                                                  | 69,248     |   | $ | 59,565 |   | $ | 57,808 |   | $ | 31,916 |   | $ | 15,644 |   |
| Service revenue                                                             |       | 24,454                                                             |       | 16,430 |   | 13,448 |   | 5,879 |   | 37 |   |
| License fees and contract revenue                                           |       | 14,169                                                             |       | 11,014 |   | 8,871 |   | 11,616 |   | 10,152 |   |
| Total revenues                                                              |       | 107,871                                                            |       | 87,009 |   | 80,127 |   | 49,411 |   | 25,833 |   |
| Costs and  expenses:                                                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cost of product revenue                                                     |       | 45,459                                                             |       | 40,126 |   | 38,536 |   | 23,550 |   | 10,927 |   |
| Cost of service revenue                                                     |       | 14,917                                                             |       | 8,312 |   | 6,695 |   | 2,486 |   | — |   |
| Cost of license fees                                                        |       | 219                                                                |       | — |   | — |   | — |   | — |   |
| Research and development                                                    |       | 24,591                                                             |       | 17,728 |   | 23,243 |   | 34,075 |   | 43,002 |   |
| Selling, general and administrative                                         |       | 43,570                                                             |       | 32,328 |   | 34,372 |   | 27,852 |   | 18,227 |   |
| Amortization of intangible assets                                           |       | 8,842                                                              |       | 4,069 |   | 3,805 |   | 2,756 |   | — |   |
| Restructuring charges (credits), net                                        |       | 258                                                                |       | (1,005 | ) | 6,018 |   | 11,535 |   | 314 |   |
| Total costs and expenses                                                    |       | 137,856                                                            |       | 101,558 |   | 112,669 |   | 102,254 |   | 72,470 |   |
| Operating loss                                                              |       | (29,985                                                            | )          | (14,549 | ) | (32,542 | ) | (52,843 | ) | (46,637 | ) |
| Interest income,  net                                                       |       | 478                                                                |       | 895 |   | 846 |   | 2,227 |   | 4,353 |   |
| Other income  (expense), net                                                |       | 469                                                                |       | (689 | ) | 517 |   | 1,279 |   | 1,320 |   |
| Loss before  income taxes                                                   |       | (29,038                                                            | )          | (14,343 | ) | (31,179 | ) | (49,337 | ) | (40,964 | ) |
| Benefit  (provision) for income taxes                                       |       | 104                                                                |       | (114 | ) | (377 | ) | (190 | ) | — |   |
| Net loss                                                                    |       | $                                                                  | (28,934    | ) | $ | (14,457 | ) | $ | (31,556 | ) | $ | (49,527 | ) | $ | (40,964 | ) |
| Net loss per  common share, basic and diluted                               |       | $                                                                  | (0.75      | ) | $ | (0.46 | ) | $ | (1.08 | ) | $ | (1.88 | ) | $ | (1.68 | ) |
| Shares used in computing  net loss per common share, basic and diluted |       | 38,743                                                             |       | 31,313 |   | 29,273 |   | 26,396 |   | 24,403 |   |

 

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| ** **                                                                    | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                    | ** ** | **(In thousands)**               | ** ** |
| **Balance Sheet Data(1):**                                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents, marketable securities and short-term restricted cash |       | $                                     | 24,937     |   | $ | 31,704 |   | $ | 50,237 |   | $ | 66,996 |   | $ | 154,602 |   |
| Working capital                                                               |       | 26,852                                |       | 33,525 |   | 52,234 |   | 66,577 |   | 155,583 |   |
| Total assets                                                                  |       | 225,053                               |       | 158,209 |   | 147,947 |   | 168,230 |   | 179,878 |   |
| Long-term  obligations, less current portion                                  |       | 8,587                                 |       | 320 |   | — |   | 646 |   | 1,986 |   |
| Total  stockholders’ equity                                              |       | 157,409                               |       | 118,438 |   | 111,579 |   | 134,797 |   | 167,558 |   |
|                                                                               |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Thestatement of operations data includes the results of Zymark beginning July 14,2003, the results of NovaScreen beginning October 3, 2005, and the resultsof Xenogen beginning August 9, 2006, the respective dates of theseacquisitions. The balance sheet data incorporates the effects of theseacquisitions as of December 31 of the year in which each respectiveacquisition was completed.

**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

*The followingdiscussion and analysis should be read with “Selected Financial Data” and ourfinancial statements and notes included elsewhere in this Annual Report on Form 10-K.The discussion in this Annual Report on Form 10-K containsforward-looking statements that involve risks and uncertainties, such asstatements of our plans, objectives, expectations and intentions. Thecautionary statements made in this Annual Report on Form 10-K shouldbe read as applying to all related forward-looking statements wherever theyappear in this Annual Report on Form 10-K. Our actual results coulddiffer materially from those discussed here. Factors that could cause orcontribute to these differences include those discussed in Part I, Item1A, “Risk Factors,” and “Factors Affecting Operating Results” below, as well asthose discussed elsewhere.*

The following discussionand analysis is based upon our financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates.

**Overview**

Caliper Life Sciences sells products, services andintegrated systems comprised of instruments, software and reagents to lifesciences biomedical and pharmaceutical researchers. We believe our offeringsenable our customers to accelerate drug discovery, enhance the diagnosis ofdisease and facilitate scientific research. Caliper’s strategy is to transformdrug discovery and development through technologies and services that arerelevant to and predictive of drug effects in humans. Our products andservices, assembled from our leading portfolio of microfluidics, automation,liquid handling, and molecular imaging technologies, address key issues alongthe critical path of pre-clinical drug discovery and development.

On August 9, 2006, we completed our acquisitionof Xenogen Corporation. Xenogen develops and markets products, technologies andservices for acquiring, analyzing and managing complex image data from liveanimals. Our acquisition of Xenogen provides us entry into the fast-growingmolecular imaging market, and positions us as one of the first life scienceinstrumentation companies able to provide an integrated portfolio of productsand services for both in vitro (referring to tests or reactions taking placeoutside a living organism) and in vivo (referring to tests or reactions takingplace inside a living organism) research. A large majority of drug candidatesthat seem promising in early in vitro studies fail during pre-clinical animaltrials. By tracking this drug attrition, understanding its root causes, andpursuing solutions, we believe we can improve the clinical relevance of earlydrug discovery and development.

The initial focus of our strategic effort has been topursue oncology applications, and we are currently seeking new experimentalmodels, techniques and tools that bridge in vitro and in vivo experimentationin 

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this major therapeuticarea. Future areas of interest include solutions for cardiovascular, metabolicdisease and inflammation/immunology therapeutic programs.

Our products and services currently address some ofthe key challenges that face the pharmaceutical and biotechnology industry,including shrinking drug candidate pipelines, late-stage drug failures, andunforeseen side effects coming to light late in the development process, orpost-commercialization. Using our products and services, researchers are ableto increase the speed and efficiency of their screening efforts, make betterchoices earlier in the drug discovery and development process, and conductprofiling experiments that identify drug side effects well before the humanclinical trial stage.

We are pursuing the application of ourLabChip technology to the diagnostics market and believe that ourLabChip technologies may be able to provide ease of use, cost anddata quality benefits for certain diagnostic tests. These benefits are theanticipated result of chip-based integration, automation andminiaturization of the various workflow steps required to performthese tests. We are presently working with collaboration partners in this areathrough our Caliper Driven program. Although most of these projects are stillin the feasibility or early development stages, we believe that one of ourCaliper Driven partners, Agilent, expects to commercialize its firstdiagnostic test based on our LabChip technology in 2007.

We have multiple channelsof distribution for our products: direct to customers, indirect through ourinternational network of distributors, through partnership channels under ourCaliper Driven program and through joint marketing agreements. Through ourdirect and indirect channels, we sell products, services and complete systemsolutions, developed by us, to end customers. Our Caliper Driven program is coreto our business strategy and complementary to our direct sales and distributionnetwork activities, as it enables us to extend the commercial potential of ourLabChip and advanced liquid handling technologies into new industries and newapplications with experienced commercial partners. We also utilize jointmarketing agreements to enable others to market and distribute our products. Byusing direct and indirect distribution, and out-licensing our technology underour Caliper Driven program, we seek to maximize penetration of our products andtechnologies into the marketplace and position Caliper as a leader in the lifesciences tools market.

***Overview of 2006***

Our acquisition of Xenogen was a transformative eventwhich we believe will significantly advance our capabilities as a leadingprovider of life sciences tools and services that are relevant to andultimately predictive of clinical results.

As highlighted in the FDA Critical Path Initiative,biomarker research and better experimentation models are essential to improvepredictability and efficiency along the critical path from laboratory tocommercial drug. We believe that the combination of our proprietarymicrofluidic and imaging technologies along with our automation expertise addressesthese key research needs by creating molecular level solutions that encompassboth in vitro and in vivo experimentation. These technologies offer exceptionaldata quality and productivity advantages, and we believe that combining them tooffer a highly correlated suite of products and services should result inearlier, clinically relevant insights in the drug discovery process. We referto the continuum of these solutions as “the I-I Bridge,” which stands for invitro to in vivo testing bridge.

We achieved the successful and rapid integration ofXenogen into Caliper, and reduced combined annual spending by over $11.0million through staffing reductions and facilities consolidation. We expect tobegin benefiting at this rate of savings starting in the first quarter of 2007.The majority of cost synergies occurred mainly in manufacturing and general andadministrative functions, and involved the elimination of redundant employmentpositions and excess facility needs.

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Other significant developments and trends during 2006included:

1) The launch offive new products during the second half of 2006. These new products span ourlab automation, microfluidics, and imaging product offerings, and include:

·       IVISSpectrum—in vivo imaging system with bioluminescence and fluorescence imagingcapabilities;

·       IVISLumina—low cost in vivo imaging system;

·       Zephyrautomated liquid handling system—a compact liquid handling system with theadvanced capabilities of our Caliper Sciclone liquid handler; which utilizesMaestro, our new application software for liquid handling;

·       LabChipDesktop Profiler—a microfluidic platform for the rapid profiling of kinases;and

·       ProfilerPro—a suite of reagent kits pre-loaded with 48 kinases for use with DesktopProfiler.

2) Continued progress with the adoption of our LabChipmicrofluidics technology. We achieved 32% growth in the number of LabChipinstrument placements with 58 new LabChip instruments placed, compared to 44 in2005. LabChip 90 sales were particularly strong throughout 2006. We alsoannounced that Canon U.S. Life Sciences selected our microfluidics technologyas the basis of development of Canon’s platform for nucleic acid diagnosticsand screening. In the fourth quarter we achieved initial sales of LabChipDesktop Profiler instruments and Profiler Pro reagent kits and are encouragedby early customer response. In addition, we believe that Agilent is planning tocommercialize it first Bioanalyzer-based diagnostic test in 2007. We feel thatthe long-term growth prospects for microfluidics remains strong, although themarket for our technologies may still take several years to develop.

3) Strongly competitive conditions in the markets forour liquid handling and automation products. Our liquid handling and labautomation product revenues declined by approximately $5.7 million in 2006 ascompared to 2005. The overall decline resulted from our not having any GCASsystem sales to Affymetrix in 2006, compared to $6.2 million of revenue fromGCAS system sales to Affymetrix in 2005. Recent customer consolidation andcompetitive market conditions may create challenges for expanding sales in thisarea of our business. However, we believe that our new Zephyr liquid handler,which was launched during the second half of 2006 and is targeted fortherapeutic laboratories will help us grow liquid handling and automationproduct sales in 2007. We also believe that our sales of GCAS systems toAffymetrix will resume during 2007.

4) Formation of theCaliper Discovery Alliances and Services unit. During the fourth quarter of2006, we combined our Novascreen and Xenogen Biosciences into a new “I-I” (invitro to in vivo) services unit. This combination enables us to offer acontinuum of in vitro and in vivo screening, profiling and animal phenotypingservices within a single organization. We also signed a significant contractwith Pfizer expanding our services relationship to include an in vivo compoundprofiling program to address both primary and alternative drug indications aswell as potential deleterious side effects.

*2006 FinancialPerformance*

·       Weachieved $107.9 million of total revenue in 2006, an increase of 24% from $87.0million of total revenue in 2005. Revenues from Xenogen and NovaScreen were thekey growth drivers, offsetting a revenue decline in our liquid handling andautomation business that was principally caused by the lack of any GCAS systemsales to Affymetrix during 2006.

·       Productgross margins improved to 34.4% in 2006 versus 32.6% in 2005 as a result ofincreased utilization of our Hopkinton, Massachusetts facility due to thetransfer of manufacturing operations for IVIS systems to that facility duringthe second half of the year.

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·       Servicegross margins declined to 39.0% in 2006 from 49.4% in 2005 due to the high fixedcost structure of the Xenogen Biosciences in vivo services facility inCranbury, New Jersey. We intend to address this cost alignment issue during2007 through an increased volume of services business from pharmaceuticalaccounts, including the new Pfizer agreement discussed above.

·       Operatingexpenses increased $24.1 million in 2006 in comparison to 2005. This increasereflects the incremental operating expenses of Xenogen and NovaScreen,including additional amortization and intangible write-off charges, andacquisition-related restructuring charges. As of December 31, 2006, wehave completed the integration of Xenogen.

·       We ended 2006 with $24.9million of cash, cash equivalents and investments, having exceeded ourprojected target minimum of $22 million. We also entered into a $20 millionbank credit facility that provides a source of borrowing to support our growthneeds.

**Results ofOperations**

***Revenue***

| ** **                         | ** ** | **Year Ended  December 31,  2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Year Ended  December 31,  2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **(In thousands)**                      | ** ** |
| Product revenue                    |       |                                         | $          | 69,248            |       |              | $          | 9,683                                        |       |              | 16         | %                 |       |                                         | $          | 59,565 |   |   |   | $ | 1,757 |   |   |   | 3 | % |   |   | $ | 57,808 |   |   |
| Service revenue                    |       |                                         | 24,454     |              |       | 8,024             |       |                                         | 49         | %                 |       |              | 16,430     |                                         |       |   | 2,982 |   |   |   | 22 | % |   |   | 13,448 |   |   |
| License fees and  contract revenue |       |                                         | 14,169     |              |       | 3,155             |       |                                         | 29         | %                 |       |              | 11,014     |                                         |       |   | 2,143 |   |   |   | 24 | % |   |   | 8,871 |   |   |
| Total Revenue                      |       |                                         | $          | 107,871           |       |              | $          | 20,862                                       |       |              | 24         | %                 |       |                                         | $          | 87,009 |   |   |   | $ | 6,882 |   |   |   | 9 | % |   |   | $ | 80,127 |   |   |

 

*TotalRevenue.**  *Ourtotal revenue increase over 2005 resulted primarily from growth driven by ouracquisitions of Xenogen in August of 2006 and NovaScreen in October of2005. Product growth was mainly attributable to post-acquisition sales ofXenogen IVIS imaging systems and other Xenogen product sales, which totaled$13.7 million. This Xenogen product revenue offset a decline in organic productsales caused mainly by a $6.2 million decrease in revenue from GCAS systemsales to Affymetrix in 2006 compared to 2005. Although we had no additionalGCAS system sales to Affymetrix during 2006, we believe sales of GCAS systemswill resume in the second half of 2007. In vivo and in vitro**drug discovery services provided by our Xenogen andNovaScreen service groups, respectively, were the principal drivers of servicegrowth during 2006 in comparison to 2005. In addition, license fees andcontract revenue increased over 2005 as a result of a substantial license grantunder our Caliper Driven licensing program.

Our total revenue increase in 2005 resulted fromgrowth in sales of our drug discovery product family, including the AffymetrixGCAS system, LabChip systems, services (including the drug discovery screeningand profiling services of then newly acquired NovaScreen), and license feesunder our Caliper Driven program. These growth areas were partially offset bylower drug development product family and other instrument revenues.

*ProductRevenue.*   Product revenue increased during 2006compared to 2005 primarily as a result of acquisition-related growth fromXenogen IVIS imaging systems and other Xenogen product sales, which generated$13.7 million of revenue in 2006. The total number of IVIS instruments soldduring the year was 120, a 24% increase over the 97 units sold by Xenogen in2005 when Xenogen was a stand alone reporting entity. Of the 120 IVIS unitssold during 2006, 67 of these units were sold post-acquisition and are includedin Caliper’s product revenues. Excluding a $6.2 million decline in GCAS systemsales to Affymetrix, other product sales grew by $2.2 million during 2006compared to 2005. The primary elements of this increase were TPW instrumentsales ($1.3 million increase) and LabChip system sales ($1.7 million increase),which 

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offset our aggregatedecline of $0.8 million in other product areas. During 2006 we placed a totalof 58 new LabChip systems with customers versus 44 systems in 2005.

Product revenue increased in 2005 due to a 13% growthin our drug discovery product lines, which represented 73% of total productrevenue which was offset partially by a 17% decline in our drug developmentproduct lines, which represented 27% of product revenue. Increased sales ofCaliper Sciclone-based instruments to Affymetrix, and to a lesser extentincreased sales of our LabChip 3000 and LabChip 90 systems and microfluidicLabChip devices contributed to the revenue growth in the drug discovery area.During 2005, we placed a total of 44 LabChip systems in comparison to a totalof 25 systems during 2004.

*ServiceRevenue.*   Service revenue increased during 2006in comparison to 2005 primarily as a result of acquisition-related growthrelating to our NovaScreen and Xenogen operations. During the year ended December 31,2006, traditional product support services decreased by 5% from 2005 due to ofthe retirement of older systems in the drug discovery automation serviceableinstalled base, as well as decreased installation services performed forAffymetrix. NovaScreen service revenues provided for the majority of theservice revenue increase during 2005, along with increases in other serviceofferings. We acquired NovaScreen on October 3, 2005.

*License Fees and ContractRevenue.**  *Licensefees and contract revenue increased during 2006 compared to 2005, primarily asa result of Small Business Innovation Research grant projects conducted atNovaScreen and in vivo imaging license revenue generated by Xenogen. Combined,these new sources of revenue generated approximately $3.0 million of revenue,which offset by a decrease of $1.6 million in third party funding ofcollaborative R&D projects due to projects that were finalized in 2005 and2006. During 2006 we also had a net increase of $1.8 million from new licensesunder our Caliper Driven program. Revenue from new licenses granted under ourCaliper Driven program provided for the majority of the revenue increase in2005, partially offset by a $1.4 million decline in third party funding ofcollaborative R&D projects. Collaborative funding declined in 2005 due tothe completion in 2004 of a major collaborative project effort with Bio-Radthat resulted in the launch of Bio-Rad’s Experion instrument in the fourthquarter of 2004.

***Cost of Revenue***

| ** **            | ** ** | **Year Ended  December 31,  2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Year Ended  December 31,  2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------------------|------------|
| ** **            | ** ** | **(In thousands)**                      | ** ** |
| Cost of               |       |                                         |       |              |       |              |       |                                         |       |              |       |              |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product revenue       |       |                                         | $          | 45,459            |       |              | $          | 5,333                                        |       |              | 13         | %                 |       |                                         | $          | 40,126 |   |   |   | $ | 1,590 |   |   |   | 4 | % |   |   | $ | 38,536 |   |   |
| Service revenue       |       |                                         | 14,917     |              |       | 6,605             |       |                                         | 79         | %                 |       |              | 8,312      |                                         |       |   | 1,617 |   |   |   | 24 | % |   |   | 6,695 |   |   |
| License fees          |       |                                         | 219        |              |       | 219               |       |                                         | —     | %                 |       |              | —     |                                         |       |   | — |   |   |   | — | % |   |   | — |   |   |
| Total Cost of Revenue |       |                                         | $          | 60,595            |       |              | $          | 12,157                                       |       |              | 25         | %                 |       |                                         | $          | 48,438 |   |   |   | $ | 3,207 |   |   |   | 7 | % |   |   | $ | 45,231 |   |   |

 

*Costof Product Revenue.**  *Costof product revenue increased during 2006 in comparison to 2005 primarily as aresult of increased product sales including increases related to material costsof $3.5 million, warranty costs of $0.8 million, freight costs of $0.5 million,SFAS 123R stock-based compensation expense of $0.3 million and all other itemsof $0.2 million. Manufacturing spending levels were relatively unchanged yearover year except with respect to approximately $1.0 million of transitionalmanufacturing spending incurred related to the acquisition of Xenogen,including $0.2 million in retention bonuses. By the end of 2006, all IVISimaging system manufacturing had been transferred to our facility in Hopkinton,Massachusetts. As a result, these transition costs will no longer occur as of January 1,2007.

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During 2005, cost of product revenue increasedprimarily due to increased spending on materials. Our product mix in 2005featured a greater proportion of revenue from sales of drug discoveryinstruments, including Caliper Sciclone sales to Affymetrix and LabChipsystems, which bear a proportionately higher material cost as a percentage ofrevenue in comparison to our drug development and other specialty products. Inthe fourth quarter of 2005, we began an initiative to target material costreductions through volume-based purchasing economies, vendor outsourcinganalysis and other identified opportunities. In 2005, we lowered ourmanufacturing costs by $1.0 million. This net decrease in spending wasdriven primarily by staff-related cost reductions, including the elimination ofa second manufacturing shift in our chip manufacturing operation, and reducedoperating supplies usage. These manufacturing savings were offset, however, byhigher freight costs of $0.6 million related to an increased number ofshipments and higher fuel and other transportation charges, and othermiscellaneous direct costs of $0.4 million.

*Costof Service Revenue.**  *Costof service revenue increased during 2006 primarily due to service related costsof Xenogen and NovaScreen which were new to Caliper in 2006 in comparison to2005. On a combined basis, costs related to these operations increased by $6.5million during 2006.

The increase in cost of service revenue in 2005included approximately $1.1 million of service costs resulting from ouracquisition of NovaScreen which was included in our operations only for thefourth quarter of 2005. The remaining net increase included $0.4 millionof allocated research and development staff related costs supporting assay developmentservices, $0.6 million of increased field service and customer supportstaff related costs, and an offsetting reduction of $0.5 million due toreduced training costs as a result of training-staff resources having beenengaged to a greater extent in internal training and pre-sales activities in2005.

*GrossMargins.**  *Grossmargin on product revenue was 34.4% for 2006, as compared to 32.6% during 2005.During 2006, margins improved by 1.8 percentage points primarily related to theincreased utilization of the Hopkinton plant driven by the acquisition ofXenogen. Greater cost absorption due to volume and changes in product mixresulted in a 4.1 percentage point improvement. The increase was offset byapproximately $1.0 million, or 1.4 percentage points, in transitionalmanufacturing costs related to Xenogen’s Alameda, California, manufacturingfacility, which remained open through October 31, 2006. In addition to theforegoing, the adoption of SFAS 123R had a 0.5 percentage point unfavorableimpact on product gross margins in comparison to 2005. Increased warranty costsresulted in the majority of the remaining 0.6 percentage points which offsetoverall margin improvements.

Gross margin on servicerevenue was 39.0% for 2006, as compared to 49.4% in 2005. The decrease in 2006in comparison to 2005 resulted from lower gross margins associated with Xenogenand NovaScreen’s drug discovery service revenues. Xenogen contributedapproximately $3.2 million of animal production and collaborative researchrevenue at a negative gross margin, while NovaScreen’s overall gross margins wereapproximately 38% for 2006, in each case lower than our historical servicebusiness margin of approximately 50%. NovaScreen’s service margins arecurrently influenced by a more significant proportion of government contractrevenue than is typical of NovaScreen’s historic business. As service revenuesexpand, both for NovaScreen and Xenogen, we expect to see increased grossmargin on service revenues.

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***Operating Expenses***

| ** **                            | ** ** | **Year Ended  December 31,  2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Year Ended  December 31,  2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **(In thousands)**                      | ** ** |
| Research and  development             |       |                                         | $          | 24,591            |       |              | $          | 6,863                                        |       |              | 39         | %                 |       |                                         | $          | 17,728 |   |   | $ | (5,515 | ) |   | (24 | )% |   |   | $ | 23,243 |   |   |
| Selling, general  and administrative  |       |                                         | 43,570     |              |       | 11,242            |       |                                         | 35         | %                 |       |              | 32,328     |                                         |       | (2,044 | ) |   | (6 | )% |   |   | 34,372 |   |   |
| Amortization of  intangible assets    |       |                                         | 8,842      |              |       | 4,773             |       |                                         | 117        | %                 |       |              | 4,069      |                                         |       | 264 |   |   | 7 | % |   |   | 3,805 |   |   |
| Restructuring  charges (credits), net |       |                                         | 258        |              |       | 1,263             |       |                                         | 126        | %                 |       |              | (1,005     | )                                            |       | (7,023 | ) |   | (117 | )% |   |   | 6,018 |   |   |
|                                  |       |                                         | $          | 77,261            |       |              | $          | 24,141                                       |       |              | 45         | %                 |       |                                         | $          | 53,120 |   |   | $ | (14,318 | ) |   | (21 | )% |   |   | $ | 67,438 |   |   |

 

*Researchand Development Expenses.**  *The $6.9 million net increase in research anddevelopment expenses during 2006 compared to 2005 included $2.9 million ofin-process research and development expenses in connection with the Xenogenacquisition and $4.3 million of new spending, including $2.8 million of imagingbiology and physics research performed by Xenogen, and $1.5 million of grant-relatedresearch and assay development research performed by NovaScreen. Xenogen’sresearch and development spending comprised approximately $1.4 million inlabor-related costs, $0.7 million in facilities-related costs and $0.7 millionof all other costs. NovaScreen’s research and development spending comprisedapproximately $0.7 million in labor-related costs, $0.3 million infacilities-related costs and $0.5 million of all other costs. In addition, theadoption of SFAS 123R resulted in additional stock-based compensation expenseof $0.7 million. All other research and development expenses, consistingprimarily of labor-related costs and project materials, decreased byapproximately $1.0 million during 2006 compared to 2005.

As a percentage of revenues, we expect research anddevelopment spending to generally decrease in the future, to the extent ourrevenues grow, and as we continue to closely manage discretionary spending onresearch programs with attractive commercial potential. As part of our CaliperDriven program, we may undertake potential projects that could cause ourresearch and development costs to increase as a percentage of revenue, althoughsuch increased spending may be fully or partially funded by our commercialpartners.

In 2005, the net decrease in research and developmentexpenses was comprised of a $1.0 million reduction for in-process research anddevelopment charges, $2.9 million of reduced staff-related costs as a result ofmore focused project spending - including approximately 17 fewer R&Dpersonnel on average versus 2004, $1.8 million of reduced depreciation as aresult of fully depreciated assets, $1.2 million of reduced facilities andinformation technology cost allocation associated with lower staffing levelsand square footage utilization by our R&D group, $1.2 million of increasedproject materials and other spending and $0.4 million of new R&D costsassociated with our purchase of NovaScreen.

*Selling,General and Administrative Expenses.**  *The net increase of $11.2 millionin selling, general and administrative expenses during 2006 compared to 2005comprised $6.4 million of new spending, including $5.3 million of Xenogenexpenses and $1.1 million of NovaScreen expenses. In addition, stock-basedcompensation expense included within our SG&A expenses increased byapproximately $3.0 million related to the adoption of SFAS 123R. Theremaining increase in SG&A expense of $1.8 million during the year includedincreased accounting, audit fees and consulting fees of approximately $1.2 millionwhich were largely related to Xenogen integration related activities andstrategic planning, $0.4 million of increased legal expenses related to patentwork, and increases in all other expenses of approximately 

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$0.2 million. Xenogen-relatedSG&A expenses included approximately $2.4 million of labor-relatedexpenses, $1.0 million of legal expenses consisting primarily of AntiCancerlitigation costs, and $1.9 million of spending across other areas. TheNovaScreen-related expenses in this area comprised approximately $0.8 millionin labor-related costs, $0.1 million in facilities-related costs and $0.2million of all other costs.

In 2005, the net decrease in SG&A expenses wasattributable to a $1.0 million reduction in depreciation as a result of fullydepreciated assets and leasehold retirements, $0.5 million of reducedprofessional costs—including accounting fees, consulting expenses and outsidepatent costs, $0.4 million of reduced miscellaneous taxes, insurance and otherfees, and $0.3 million of reduced miscellaneous spending across several expensecategories, partially offset by spending increases including $0.6 million ofnew costs added by NovaScreen and $0.5 million of increased selling expenseresulting from reallocated training department resources.

*Amortizationof Intangible Assets.*   Amortization expense was $8.8million, $4.1 million and $3.8 million during the years ended December 31,2006, 2005 and 2004, respectively, related to assets acquired with ouracquisitions of Zymark, NovaScreen and Xenogen. Amortization is computed basedupon the estimated timing of the undiscounted cash flows used to value eachrespective asset over the estimated useful life of the particular intangibleasset, or using the straight-line method over the estimated useful life of theintangible asset when the pattern of cash flows is not necessarily reflectiveof the true consumption rate of the particular intangible asset.

Amortization expense in 2006 included a charge of $1.7million related to the impairment of certain intangible assets established withthe acquisition of NovaScreen. The charge consisted of $990,000 related to theNovaScreen trade name and $719,000 related to government grants and contractseach of which was written off during the fourth quarter of 2006. The charge forthe trade name relates to Caliper’s decision to combine its drug discoveryscreening and profiling services for both in vitro and in vivo research under anew trade name, Caliper Discovery and Alliance Services. The charge forgovernment contracts and grants resulted from a relative lack of success inobtaining new sources of government research and development funding, due toincreased competition for funding.

*Restructuring Charges(Credits).**  *Weincurred restructuring charges in 2006, 2005 and 2004 related to acquisitionand integration activities that are more fully discussed in Footnote 12 ofNotes to Consolidated Financial Statements in Item 15 of this Form 10-K.Restructuring charges during 2006 relate to a charge for increased operatingcosts on idle facilities and accretion of interest on facilities, net ofsub-lease income. In 2005, we recorded a restructuring credit of $1.4 millionin connection with new subleases entered into during 2005. In determining theamount of restructuring credit to record, Caliper considered all futuresublease income for which we have reasonable assurance of collection anddiscounted the future cash flows using the same 5% discount rate that was usedoriginally to calculate the restructuring liability. The restructuring creditincludes sublease payments in 2005 of $233,000, net of broker fees of $68,000.We excluded $0.5 million of future sublease income from this estimate due tothe uncertain financial status of one sublease tenant. We also recordedaccretion expense and a corresponding increase in the short-term restructuringliability of $0.4 million.

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***Interest and OtherIncome and Expenses***

| ** **                   | ** ** | **Year Ended  December 31,  2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Year Ended  December 31,  2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------------------------|------------|
| ** **                   | ** ** | **(In thousands)**                      | ** ** |
| Interest income              |       |                                         | $          | 908               |       |              |       | $                                            | (24        | )                 |       |              | (3         | )%                                           |       |   | $ | 932 |   |   |   | (80 | ) |   |   | (8 | )% |   |   | $ | 1,012 |   |   |
| Interest expense             |       |                                         | (430       | )                 |       |              | (393       | )                                            |       |              | (1,062     | )%                |       |                                         | (37        | ) |   |   | 129 |   |   |   | 78 | % |   |   | (166 | ) |   |
| Other income  (expense), net |       |                                         | 469        |              |       |              | 1,158      |                                         |       |              | 168        | %                 |       |                                         | (689       | ) |   |   | (1,206 | ) |   |   | (233 | )% |   |   | 517 |   |   |
|                         |       |                                         | $          | 947               |       |              |       | $                                            | 741        |              |       |              | 360        | %                                            |       |   | $ | 206 |   |   |   | (1,157 | ) |   |   | (85 | )% |   |   | $ | 1,363 |   |   |

 

*InterestIncome*   Interest income decreased in both 2006and 2005 primarily due to lower cash, cash equivalents and marketablesecurities balances, on average, over the previous years due to cash used inoperating and investing activities.

*InterestExpense*   Interest expense increased in 2006compared to 2005 due to the new bank credit facility which was established in August 2006.Interest expense decreased in 2005 due to the reduction of our other financingobligations.

*Other Income, Net.**  *Other income, net increased in 2006compared to 2005 primarily from gains and losses associated with recordingaccount balances denominated in non-U.S. currencies at fair market value. During2006, we incurred foreign currency transaction gains of approximately $434,000compared to transaction losses of $661,000 in 2005. During 2005, we incurredforeign currency transaction losses of approximately $661,000 compared totransaction gains of $338,000 in 2004.

**Liquidity andCapital Resources**

As of December 31, 2006, we had $24.9 million incash, cash equivalents, marketable securities and short-term restricted cash,as compared to $31.7 million as of December 31, 2005 and $50.2 million asof December 31, 2004. In August 2006, we acquired cash of $7.0million, net of acquisition costs, in connection with our acquisition ofXenogen. As such, our 2006 cash flow changes in operating assets andliabilities are net of acquired current assets and liabilities of Xenogen. In October 2005,we used cash of $4.6 million in connection with the acquisition of NovaScreen,which was net of $1.0 million of NovaScreen’s cash on hand on the date ofacquisition. As such, our 2005 cash flow changes in operating assets andliabilities are reported net of the acquired current assets and liabilities ofNovaScreen.

On August 9, 2006, weentered into a credit facility with a bank which permits us to borrow up to$20.0 million in the form of revolving loan advances including up to $5.0million in the form of letters of credit. The credit facility will serveas a source of capital for our ongoing operations and working capital needs.Principal borrowings under the credit facility accrue interest at a floatingper annum rate equal to the prime rate if our unrestricted cash held at thebank exceeds $20.0 million, or prime plus one-half of one percentage point ifour unrestricted cash held at the bank is below $20.0 million. Under thecredit facility, we are permitted to borrow up to $20.0 million, provided wemaintain unrestricted cash of at least $20.0 million with the bank. If we donot maintain $20.0 million of unrestricted cash with the bank, our ability toborrow under the credit facility is subject to a borrowing base limitconsisting of up to (a) 80% of eligible accounts receivable, as defined,plus (b) the lesser of 90% of Caliper’s unrestricted cash maintained atthe bank or $10.0 million. The credit facility has a two-year initial maturity.During the first 18 months following Caliper’s merger with Xenogen, Caliper isrequired to pay interest on a minimum of $8.0 million of outstanding borrowings.Additional details related to covenants and other matters are more fullydiscussed in Note 10 of Notes to Consolidated Financial Statements in Item 15of this Form 10-K.

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**Cash Flows**

| ** **                  | ** ** | **Year Ended  December 31,  2006** | ** ** | **$ Change** | ** ** | **Year Ended  December 31,  2005** | ** ** | **$ Change** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|-------------------|------------|----------------------------------------------|------------|-------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **(In thousands)**                      | ** ** |
| Cash provided by (used  in) |       |                                         |       |              |       |                                         |       |              |       |                                         |       |   |   |   |   |   |   |
| Operating  Activities       |       |                                         | $          | (15,205           | )          |                                         | $          | (7,570            | )          |                                         | $          | (7,635 | ) |   | $ | 10,356 |   |   | $ | (17,991 | ) |   |
| Investing  Activities       |       |                                         | $          | 16,121            |       |                                         | $          | 10,979            |       |                                         | $          | 5,142 |   |   | $ | (7,870 | ) |   | $ | 13,012 |   |   |
| Financing Activities        |       |                                         | $          | 2,324             |       |                                         | $          | 705               |       |                                         | $          | 1,619 |   |   | $ | (2,968 | ) |   | $ | 4,587 |   |   |

 

*OperatingActivities.**  *In2006 we used $15.2 million of cash for operating activities which includedapproximately $3.6 million of restructuring accrual lease payments, net ofsublease income, primarily related to our idle facilities in Mountain View,California and idle facilities established and assumed with the Xenogenacquisition. We also used approximately $0.4 million to pay severance obligationsrelated to the Xenogen acquisition. We are scheduled to pay approximately $3.0million in final severance payments to former Xenogen employees during thefirst half of 2007. Net operating results and all other working capital changesconsumed approximately $11.2 million of cash with approximately $8.1million being consumed from operating cash losses. Primary working capitaleffects on our cash included $1.7 million of cash provided by tenantreimbursement funding from our Hopkinton, Massachusetts landlord, $0.6 millionused for inventory build up as a result of new product launches and slowedaccounts receivable collections which used $3.7 million. Our slower accountsreceivable collection turnover resulted from uncollected balances assumed inour acquisition of Xenogen and longer collection cycles that are associatedwith sales to academic and other not-for-profit institutions as well as salesto European customers. On average, these customers pay more slowly from ourhistorical experience. All other working capital changes consumed cash ofapproximately $0.5 million.

*InvestingActivities.**  *During2006, net proceeds from purchases, sales and maturities of marketablesecurities and unrestricted cash generated $14.1 million of cash, which weused for operations and property and equipment purchases. Our primary investingactivities included purchases of property and equipment of $4.9 million,of which the majority related to facility improvements made to our Hopkinton,Massachusetts headquarters. As noted above, we received tenant improvementfunding from our landlord reflected in operating activities which partiallyoffset this investment. In addition, we acquired $7.0 million of cash, net ofacquisition costs, in our acquisition of Xenogen.

*Financing Activities.**  *In 2006, financing cash proceedswere principally comprised of proceeds from option exercises and employee stockpurchase plan purchases. During 2006 we established a credit facility with abank and repaid existing debt assumed in connection with our acquisition ofNovaScreen. We used an initial draw under the credit facility to repayapproximately $8.0 million of assumed Xenogen debt.

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**ContractualObligations**

As of December 31,2006, we had commitments under leases and other contractual obligations as follows(in thousands):

| ** **                       | ** ** | **Payments due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than 1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5 years** | ** ** |
| ** **                       | ** ** | **(In thousands)**                   | ** ** |
| Long-term debt  obligations      |       | $                                         | 8,587      |   |   | $ | — |   |   | $ | 8,587 |   |   | $ | — |   |   |   | $ | — |   |   |
| Capital lease  obligations       |       | 98                                        |       |   | 98 |   |   | — |   |   | — |   |   |   | — |   |   |
| Operating lease  obligations     |       | 32,438                                    |       |   | 7,478 |   |   | 11,644 |   |   | 4,541 |   |   |   | 8,775 |   |   |
| Severance  obligations           |       | 3,041                                     |       |   | 3,041 |   |   | — |   |   | — |   |   |   | — |   |   |
| Idle facility  obligations       |       | 6,119                                     |       |   | 3,973 |   |   | 2,045 |   |   | 101 |   |   |   | — |   |   |
| Total obligations                |       | $                                         | 50,283     |   |   | $ | 14,590 |   |   | $ | 22,276 |   |   | $ | 4,642 |   |   |   | $ | 8,775 |   |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In addition to the commitments in the table above, asof December 31, 2006, we had a non-cancelable purchase commitment in theamount of approximately $414,000 with the foreign supplier of our glass stockused in the manufacture of certain types of chips and approximately $2.8million with one of our suppliers of cameras for in vivo imaginginstrumentation. These commitments are excluded from the above table due to thefact they are not specifically related to a given time period. We also haveminimum royalty obligations under separate license agreements with UT-Battelle,LLC, the Trustees of the University of Pennsylvania, and certain otherlicensors that in the aggregate would never exceed $250,000 per year. As of December 31,2006, we have established $3.3 million in standby letters-of-credit, whichrestrict available borrowing under our credit facility, related to facilityleases and customer deposits.

Our capitalrequirements depend on numerous factors, including market acceptance of ourproducts, the resources we devote to developing and supporting our products,and acquisitions. We expect to devote substantial capital resources tocontinuing our research and development efforts, expanding our support andproduct development activities, and for other general corporate activities. Ourfuture capital requirements will depend on many factors, including:

·       continuedmarket acceptance of our microfluidic and lab automation products;

·       themagnitude and scope of our research and product development programs;

·       ourability to maintain existing, and establish additional, corporate partnershipsand licensing arrangements;

·       thetime and costs involved in expanding and maintaining our manufacturingfacilities;

·       thepotential need to develop, acquire or license new technologies and products;and

·       otherfactors not within our control.

We ended 2006 with $24.9million in total cash, cash equivalents and marketable securities. We believeour current cash balances are adequate to satisfy our cash needs through theend of 2008. Notwithstanding, our actual cash needs could vary considerably,depending on opportunities and circumstances that arise over time. If, at anytime, cash generated by operations is insufficient to satisfy our liquidityrequirements, we may need to reduce our research and development efforts, selladditional equity or debt securities or draw down on our current creditfacility. The sale of additional equity or convertible debt securities mayresult in additional dilution to our stockholders. Additional financing may notbe available on terms acceptable to us or at all. The inability to obtainadditional financing may force delays in research and product developmentactivities and, ultimately, cause us to cease operations.

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*2007 FinancialProjections*

·       Ourrevenue projection for the first quarter of 2007 is $27 to $30 million,representing growth of 21 to 35%, and our revenue projection for the full year2007 is $137 to $143 million, representing growth of 27 to 33%.

·       We are projecting earningsbefore interest, taxes, depreciation and amortization costs to be positive in2007 on a full year basis. In addition, excluding cash payments to satisfyrestructuring obligations due in 2007, we expect to otherwise achieve positiveoperating cash flows as a result of earnings improvement and working capitalreductions.

The financial projectionsthat we have provided above are forward-looking statements that are subject torisks and uncertainties, and are only made as of the date of the filing of thisAnnual Report on Form 10-K. These projections are based uponassumptions that we have made and believe to be reasonable. However, actualresults may vary significantly from these projections due to the risks anduncertainties inherent in our business as described in Item 1A, “Risk Factors”.

**Impact of Inflation**

The effect of inflationand changing prices on our operations was not significant during the periodspresented.

**Off-Balance SheetArrangements**

As of December 31, 2006,Caliper did not have any “off-balance sheet arrangements,” as that term isdefined.

**Critical AccountingEstimates**

Our financial statements have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of our financial statements requires management to makeestimates and assumptions that affect the reported amounts of revenue andexpenses, and assets and liabilities during the periods reported. We useestimates when accounting for certain items such as warranty expense, sales andmarketing programs, employee compensation programs, depreciation andamortization periods, taxes, inventory values, and valuations of investmentsand intangible assets. We base our estimates on historical experience, where applicable,and other assumptions that we believe are reasonable under the circumstances.Actual results may differ from our estimates due to changing conditions or thevalidity of our assumptions. We believe that the following critical accountingpolicies affect our more significant judgments and estimates used in thepreparation of our financial statements.

*RevenueRecognition.**  *Revenuearrangements that include multiple deliverables are divided into separate unitsof accounting if the deliverables meet certain criteria, including whether thedelivered items have stand alone value and whether there is evidence of fairvalue of the undelivered items. In addition, we allocate the considerationamong the separate units of accounting based on their fair values, and considerthe applicable revenue recognition criteria separately for each of the separateunits of accounting. We determine “fair value” of undelivered items based uponour historic selling prices, or where no historic information exists, basedupon management’s estimate of the probable selling prices for such undelivereditems. The amount of our product revenue is affected by our judgments as towhether an arrangement includes multiple elements and if so, whether there isobjective evidence of fair value for those elements. Changes to the elements inan arrangement and the ability to establish objective evidence of fair valuefor those elements could affect the timing of revenue recognition. Theseconditions are sometimes subjective and actual results could vary from theestimated outcome, requiring future adjustments to revenue. We recognizecertain service and contract revenue for certain arrangements based uponproportional 

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performance which requiresthat we estimate resources required to perform the work. The extent to whichour resource estimates prove to be inaccurate could affect the timing of therevenue recognition for a particular contract arrangement.

*Goodwill.**  *We perform a test for theimpairment of goodwill annually or more frequently if events or circumstancesindicate that goodwill may be impaired. Because we have a single operatingsegment which is our sole reporting unit, we perform this test by comparing thefair value of the company with its book value, including goodwill. If the fairvalue exceeds the book value, goodwill is not impaired. If the book valueexceeds the fair value, we calculate the potential impairment loss by comparingthe implied fair value of goodwill with the book value. If the implied goodwillis less than the book value, an impairment charge would be recorded. Weperformed our fiscal 2006 annual impairment analysis in the fourth quarter of2006. Based upon our market capitalization at the time, we concluded that wedid not have any impairment.

*Valuationof Intangibles.*   Our business acquisitions haveresulted in intangible assets, net of accumulated amortization of $52.8 millionas of December 31, 2006. The determination of the value of such assetsrequires management to make estimates and assumptions that affect ourconsolidated financial statements.

We acquired Xenogen on August 9, 2006. Inconnection with this acquisition we used an independent appraisal to determinethe fair value of intangibles related to the Xenogen business. The fair valuewas determined based upon projected future discounted cash flows of identifiedintangible assets taking into account risks related to the characteristics andapplications of the technology, existing and future markets and assessments ofthe life cycle stage of developed technology. The valuation approach took intoconsideration discount rates commensurate with the inherent risk and projectedfinancial results associated with each identified intangible asset. Applicablediscount rates used ranged from 20% to 23%.

We acquired NovaScreen on October 3, 2005. Inconnection with this acquisition we used an independent appraisal to determinethe fair value of intangibles related to the NovaScreen business. The fairvalue was determined based upon projected future discounted cash flows ofidentified intangible assets taking into account risks related to thecharacteristics and applications of the technology, existing and future marketsand assessments of the life cycle stage of developed technology. The valuationapproach took into consideration discount rates commensurate with the inherentrisk and projected financial results associated with each identified intangibleasset. Applicable discount rates used ranged from 12% to 17%.

*Impairment.*   Wereview long-lived assets and identifiable intangibles for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. If indicators of impairment exist, we assessrecoverability of assets to be held and used by a comparison of the carryingamount of an asset to future undiscounted net cash flows expected to begenerated by the asset. We perform the recoverability measurement and estimateundiscounted cash flows at the lowest possible level for which there areidentifiable assets. If the aggregate undiscounted cash flows are less than thecarrying value of the asset, we calculate the resulting impairment charge to berecorded based on the amount by which the carrying amount of assets exceeds thefair value of the assets. Actual cash flows could vary from the assumptionsused in our assessment which could require future adjustments to our valuationof the assets. We report assets to be disposed of at the lower of the carryingamount or fair value less costs to sell.

*Stock-BasedCompensation.**  *On January 1,2006, we were required to adopt SFAS 123R, which requires all share-basedpayments, including grants of stock options, to be recognized in the incomestatement as an operating expense, based on their fair values.

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We estimate thefair value of each option award on the date of grant using aBlack-Scholes-Merton based option-pricing model. Various assumption are used inthese estimations, including:

·       Expectedvolatility, which is based on historical volatility of our stock and warrants;

·       Expectedoption term, which is based on our historical option exercise data taking intoconsideration the exercise patterns of the option holders during the option’slife;

·       Risk-freeinterest rate, based on the U.S. Treasury yield curve in effect at the time ofthe grant; and

·       Forfeiturerate.

A 10% unfavorable change in expected volatility andoption term, which represent the most sensitive and judgmental assumptions,would not have a material effect on our financial statements.

Prior to adopting FAS 123R, we accounted for stockbased compensation under Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, as permitted byStatement of Financial Accounting Standard No. 123, *Accountingfor Stock-Based Compensation*. We have applied the modifiedprospective method in adopting FAS 123R. Accordingly, periods prior to adoptionhave not been restated.

The implementation of FAS 123R has had no adverseeffect on our balance sheet or total cash flows, but it does impact ouroperating expenses, net loss and net loss per share. Because we are notrestating periods prior to adoption, comparability between periods has beenaffected. Additionally, management uses estimates of and assumptions aboutforfeiture rates, volatility and interest rates to calculate stock-basedcompensation. A significant change in these estimates could materially affectour operating results.

*AccountsReceivable Reserves.**  *Wegrant credit to customers based on evaluations of their financial condition,generally without requiring collateral. We attempt to limit credit risk bymonitoring our exposure for credit losses. This analysis may involve review ofhistorical bad debts, customer concentrations, customer credit-worthiness, andcurrent economic trends. We establish allowances for those accounts considereduncollectible based on the analysis of the recoverability of our trade accountsreceivable performed at the end of each reporting period. Establishing anadequate allowance for doubtful accounts involves the use of considerablejudgment and subjectivity. Actual results could vary from the assumptions weuse to estimate the adequacy of our accounts receivable reserves which couldrequire future adjustment to our reserve provisions. Our allowance for doubtfulaccounts was $582,000, and $482,000 as of December 31, 2006 and 2005,respectively. We wrote off $48,000 and $114,000 of accounts deemeduncollectible in 2006 and 2005, respectively.

*InventoryReserves.**  *Wereserve or write off 100% of the cost of inventory that we specificallyidentify and consider obsolete or excess. We define obsolete inventory asinventory that will no longer be used in the manufacturing process. Excessinventory is generally defined as inventory in excess of projected usage, andis determined using management’s best estimate of future demand at the time,based upon information then available to us. We use a twelve-month demandforecast and, in addition to the demand forecast, we also consider: (1) partsand subassemblies that can be used in alternative finished products; (2) partsand subassemblies that are unlikely to be impacted by engineering changes; and (3) knowndesign changes which would reduce our ability to use the inventory as planned.Determination of the excess balance is highly subjective and relies in part onthe accuracy of our forecasts and our assessment of market conditions. Ifactual conditions are less favorable than conditions upon which we base ourestimates, additional write-downs may be required. Conversely, if conditionsare more favorable than conditions upon which we base our estimates, inventorypreviously written down may be sold, resulting in lower cost of sales andhigher income from operations in that period. During 2006, 2005 and 2004,respectively, we recorded charges of $238,000, $23,000 and $1.2 million to costof product revenues for excess and obsolete inventories.

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*WarrantyProvision.**  *Atthe time revenue is recognized, we establish an accrual for estimated warrantyexpenses associated with sales, recorded as a component of cost of revenue. Weoffer a one-year limited warranty on instrumentation products and a 90-daywarranty on chips, which is included in the sales price of many of itsproducts. Our standard limited warranty covers repair or replacement ofdefective goods, a preventative maintenance visit on certain products, andtelephone based technical support. No upgrades are included in the standardwarranty. Provision is made for estimated future warranty costs at the time ofsale.

Factors that affect our warranty liability include thenumber of installed units, historical and anticipated rates of warranty claims,and cost per claim. We periodically assess the adequacy of our recordedwarranty liabilities and adjust amounts as necessary. During 2006, 2005 and2004, respectively, we recorded charges of $2.1 million, $1.7 million and $1.8million to cost of product revenues for estimated warranty costs. Actualresults could vary from the assumptions we use to establish the warrantyliability which could require future adjustments to our reserve positions.

*Restructuring Charges.**  *During the years ended December 31,2006, 2005, and 2004, we recorded restructuring charges (credits) of $0.3million, $(1.0) million, and $6.0 million, respectively. We established exitplans for activities which took place in the period 2004-2006 andaccounted for these plans in accordance with Emerging Issues Task Force Issue No. 94-3,*Liability Recognition for Certain Employee Benefitsand Other Costs to Exit an Activity (including Certain Costs incurred in aRestructuring)*, Statement of Financial Accounting Standards (SFAS) No. 146,*Accounting for Costs Associated with Exit orDisposal Activities*, and SEC Staff Accounting Bulletin No. 100(“SAB 100”), *Restructuring and Impairment*. Inaccordance with such standards, management makes certain judgmental estimatesrelated to these restructuring charges. For example, the consolidation offacilities required us to make estimates including with respect to contractualrental commitments or lease buy-outs for office space being vacated and relatedcosts, and ability of the tenant to pay leasehold improvement write-downs,offset by estimated sublease income. We review on at least a quarterly basisour sublease assumptions. These estimates include anticipated rates to becharged to a sub-tenant and the timing of the sublease arrangement. If therental markets change, our sublease assumptions may not be accurate and changesin these estimates might be necessary and could materially affect our financialcondition and results of operations. For example, in December 2005, werecorded a restructuring credit of approximately $1.4 million to recognize thenet present value of future sublease rental income based upon subleases we wereable to secure during 2005. For a further discussion of our restructuringactivities, see Note 12 of the Notes to Consolidated Financial Statements inItem 15 of this Annual Report.

**Recent AccountingPronouncements**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”).FIN 48 clarifies the accounting for uncertainties in income taxes recognized inan enterprise’s financial statements. The interpretation requires that wedetermine whether it is more likely than not that a tax position will besustained upon examination by the appropriate taxing authority. If a taxposition meets the more likely than not recognition criteria, FIN 48 requiresthe tax position be measured at the largest amount of benefit greater than 50percent likely to be realized upon ultimate settlement. This accountingstandard is effective for fiscal years beginning after December 15, 2006. TheCompany is currently evaluating FIN 48 and the effect, if any, that it willhave on our financial position and results of operations.

In September 2006,FASB issued SFAS No. 157 (“SFAS 157”), *Fair Value Measurements*.SFAS 157 defines fair value, establishes a framework for measuring fair valuein generally accepted accounting principles, and expands disclosures about fairvalue measurements. This accounting standard is effective 

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forfiscal years beginning after November 15, 2007. The effect, if any, ofadopting SFAS 157 on our financial position and results of operations has notbeen determined.

**Item 7A.**                *Quantitative and Qualitative Disclosures About Market Risk*

**Foreign Currency**

As a multinationalcompany, we are subject to changes in foreign currency fluctuations. We haveoperations in the United Kingdom, France, Germany, Belgium, Switzerland, Canadaand Japan. To the extent our sales and operating expenses are denominated inforeign currencies, our operating results may be adversely impacted by changesin exchange rates. While foreign exchange gains and losses have historicallybeen immaterial, we cannot predict whether such gains and losses will continueto be immaterial. We performed a sensitivity analysis assuming a hypothetical10% movement in exchange rates applied to our projected foreign operations forthe fiscal year 2006. A hypothetical 10% movement in exchange rates couldmaterially impact our reported sales. However, because both sales and expensesare denominated in local currency, this analysis indicated that such movementwould not have a material effect on net operating results or financialcondition. Translation gains and losses related to our foreign subsidiaries areaccumulated as a separate component of stockholders’ equity. We do notcurrently engage in foreign currency hedging transactions, but may do so in thefuture.

**Interest RateSensitivity**

Our exposure to market risk for changes in interestrates relates primarily to our investment portfolio. Fixed rate securities mayhave their fair market value adversely impacted due to fluctuations in interestrates, while floating rate securities may produce less income than expected ifinterest rates fall. Due in part to these factors, our future investment incomemay fall short of expectations due to changes in interest rates, or we maysuffer losses in principal if forced to sell securities that have declined inmarket value due to changes in interest rates.

The potential change in fair value for interest ratesensitive instruments has been assessed on a hypothetical 100 basis pointadverse movement across all maturities. We estimate that such hypotheticaladverse 100 basis point movement would not have materially impacted net incomeor materially affected the fair value of interest rate sensitive instruments ateither December 31, 2006 or 2005.

As of December 31, 2006 we had $8.6 million indebt outstanding under our credit facility. The interest rate on the facilityis based on the prime rate (currently 8.25%) and therefore has direct andimmediate response to changes in interest rates.

Our primary investment objective is to preserveprincipal while at the same time maximizing yields without significantlyincreasing risk. Our portfolio includes money markets funds, commercial paper,medium-term notes, corporate notes, government securities, and corporate bonds.The diversity of our portfolio helps us to achieve our investment objective. Asof December 31, 2006 and 2005, the average remaining maturities of ourinvestment portfolio were approximately five and six months, respectively. Allof our instruments are held other than for trading purposes. As of December 31,2006 and 2005, unrealized losses were considered to be temporary due to thefact, although available to be sold to meet operating needs or otherwise,securities are generally held to maturity.

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Thefollowing table presents by year of maturity the amounts of our cashequivalents and investments, and related weighted average interest rates, thatmay be subject to interest rate risk as of December 31, 2006:

| ** **                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **Total** | ** ** | **Fair Value  December 31,  2006** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|----------------------------------------------|------------|
| Cash and money market  funds:              |       |     |       |     |       |      |       |                                         |       |   |   |
| Fixed rate securities (in thousands)       |       | $        | 11,634     |     | $          | —    |       | $                                            | 11,634     |   |   | $ | 11,634 |   |   |
| Average interest rate                      |       | 0.23     | %          | —   |       | 0.23      | %          |                                         |       |   |   |
| Available for sale  marketable securities: |       |     |       |     |       |      |       |                                         |       |   |   |
| Fixed rate securities (in thousands)       |       | $        | 11,783     |     | $          | 1,438     |       | $                                            | 13,221     |   |   | $ | 13,303 |   |   |
| Average interest rate                      |       | 3.05     | %          | 4.43     | %          | 3.20      | %          |                                         |       |   |   |
| Total securities  (in thousands)           |       | $        | 23,417     |     | $          | 1,438     |       | $                                            | 24,855     |   |   | $ | 24,937 |   |   |
| Average interest  rate                     |       | 1.65     | %          | 4.43     | %          | 1.80      | %          |                                         |       |   |   |

 

Thisdiffers from our position at December 31, 2005, which the following tablepresents (dollars in thousands):

| ** **                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Total** | ** ** | **Fair Value  December 31,  2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|----------------------------------------------|------------|
| Cash and money market funds:               |       |     |       |     |       |     |       |      |       |                                         |       |   |   |
| Fixed rate securities (in thousands)       |       | $        | 8,096      |     | —     |     | —     |      | $          | 8,096                                        |       |   | $ | 8,096 |   |   |
| Average interest rate                      |       | 0.25     | %          | —   |       | —   |       | 0.25      | %          |                                         |       |   |   |
| Available for sale  marketable securities: |       |     |       |     |       |     |       |      |       |                                         |       |   |   |
| Fixed rate securities (in thousands)       |       | $        | 19,910     |     | $          | 2,983    |       | $         | 285        |                                         | $          | 23,178 |   |   | $ | 23,129 |   |   |
| Average interest rate                      |       | 3.60     | %          | 5.15     | %          | 3.32     | %          | 3.79      | %          |                                         |       |   |   |
| Total securities  (in thousands)           |       | $        | 28,006     |     | $          | 2,983    |       | $         | 285        |                                         | $          | 31,274 |   |   | $ | 31,225 |   |   |
| Average interest  rate                     |       | 2.58     | %          | 5.15     | %          | 3.32     | %          | 2.82      | %          |                                         |       |   |   |

 

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**Item 8.**                        *Financial Statements and Supplementary Data*

(a)   The following documents are filed as a partof this Annual Report:

(1)   *Financial Statements:*

The financial statements and supplementary data areincluded herein under Item 6 and in the Consolidated Financial Statements andrelated notes thereto. See Item 15 of this Form 10-K.

(2)   *Financial Statement Schedules:*

Schedule II, “Valuationand Qualifying Accounts” is included on page F-44 of this report. Allother schedules are omitted because they are not applicable or the requiredinformation is shown in the financial statements or notes thereto.

**Item 9.**                        *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure*

Not applicable.

**Item 9A.**                *Controls and Procedures*

**Evaluationof disclosure controls and procedures.****  **We have established disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15 (e) and15d-15(e)) that are designed to provide reasonable assurance that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934, such as this Annual Report on Form 10-K, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. Disclosure controls are also designed to provide reasonable assurancethat such information is accumulated and communicated to our management,including the principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

Based on their evaluation as of December 31,2006, our principal executive officer and principal financial officer haveconcluded that our disclosure controls and procedures are effective to providereasonable assurance that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

**Limitationson the Effectiveness of Disclosure Controls and Procedures.****  **Our management, including ourprincipal executive officer and principal financial officer, does not expectthat our disclosure controls and procedures will prevent all error and allfraud. A control system can provide only reasonable, not absolute, assurancethat the objectives of the control system are met. Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within Caliper have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people or by management override of the control. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

**Changesin internal controls.****  **Therewere no changes in our internal control over financial reporting, identified inconnection with the evaluation of such internal control that occurred duringthe fourth quarter of our last fiscal year, that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

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**Management’sreport on internal control over financial reporting.****  **Our management is responsible forestablishing and maintaining adequate internal control over financial reporting,as defined in Exchange Act Rules 13a-15(f), and 15d-15(f) forCaliper. As part of that process, as of December 31, 2006, the end of thefiscal year covered by this annual report on Form 10-K, under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we carried out anassessment of the effectiveness of Caliper’s internal control over financialreporting. The assessment was conducted following the framework in Committee ofSponsoring Organizations of the Treadway Commission (COSO) Internal Control—IntegratedFramework (1992). The assessment did not identify any material weaknesses inour internal control over financial reporting and our management concluded thatour internal control over financial reporting was effective as of December 31,2006. The independent registered public accounting firm that audited ourfinancial statements contained in this annual report has issued an attestationreport on management’s assessment of the effectiveness of our internal controlover financial reporting as of December 31, 2006.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andStockholders of Caliper Life Sciences, Inc.

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting, that Caliper Life Sciences, Inc. (theCompany) maintained effective internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Caliper Life Sciences, Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that Caliper Life Sciences, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2006, is fairlystated, in all material respects, based on the COSO criteria. Also, in ouropinion, Caliper Life Sciences, Inc. maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on****the COSO criteria.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofCaliper Life Sciences, Inc. as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2006 ofCaliper Life Sciences, Inc. and our report dated March 13, 2007expressed an unqualified opinion thereon.
|                                            | /s/ ERNST &  YOUNG LLP |
|--------------------------------------------|---------------------------------|
| Boston, Massachusetts  March 13, 2007 |                            |

 

65

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**Item 9B.**               *Other Information*

Not applicable.

**PART III**

**Item 10.**                 *Directors, Executive Officers and Corporate Governance*

Information concerning our Executive Officers is setforth under “Executive Officers of the Registrant” in Part I of thisAnnual Report on Form 10-K and is incorporated by reference here. Theremainder of the response to this item is incorporated by reference from thediscussion responsive thereto under the captions “Management,” “Compliance withSection 16(a) of the Securities Exchange Act of 1934,” “Code ofConduct and Ethics,” and “Corporate Governance Matters” in the our ProxyStatement for the 2007 Annual Meeting of Stockholders or in a future amendmentto this Form 10-K and is incorporated herein by reference.

We have adopted a Code of Business Conduct and Ethicsthat applies to all officers, directors and employees. The Code of BusinessConduct and Ethics is available for free on our website at www.caliperLS.comunder “Investor Relations.” If we make any substantive amendments to the Codeof Business Conduct and Ethics or grants any waiver from a provision of theCode to any executive officer or director, we will promptly disclose the natureof the amendment or waiver on our website or in a Current Report on Form 8-K.

**Item 11.**                 *Executive Compensation*

Information concerning director and executivecompensation required by this Item 11 will be set forth in the sectionsentitled “Compensation of Directors,” “Compensation of Executive Officers,” “CompensationCommittee Interlocks and Insider Participation” and “Compensation Committee Report” contained in our Proxy Statement orcontained in a future amendment to this Form 10-K and incorporatedherein by reference.

**Item 12.**                 *Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters*

Information concerning security ownership of certainbeneficial owners and management required by this Item 12 will be set forth inthe section entitled “Security Ownership of Certain Beneficial Owners andManagement” contained in our Proxy Statement or in a future amendment to this Form 10-Kand is incorporated herein by reference.

Information concerning securities authorized forissuance under equity compensation plans required by this Item 12 will be setforth in the table entitled “Equity Compensation Plan Information” andinformation thereunder contained in our Proxy Statement or in a futureamendment to this Form 10-K and is incorporated herein by reference.

**Item 13.**                 *Certain Relationships and Related Transactions and Director Independence*

Information concerning certain relationships andrelated transactions required by this Item 13 will be set forth in the sectionentitled “Certain Relationships and Related Transactions” and “ExecutiveCompensation–Employment, Severance and Change of Control Agreements” containedin our Proxy Statement or in a future amendment to this Form 10-Kand is incorporated herein by reference.

**Item 14.**                 *Principal Accountant Fees and Services*

Information concerningprincipal accountant fees and services required by this Item 14 will be setforth in the section entitled “Independent Registered Public Accounting Firm”contained in our Proxy Statement or in a future amendment to this Form 10-Kand is incorporated herein by reference.

66

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**PART IV**

**Item 15.**                 *Exhibits and Financial Statement Schedules*

See “Index to Consolidated Financial Statements andFinancial Statement Schedules” at Item 8 to this Annual Report on Form 10-K.Other financial statement schedules have not been included because they are notapplicable or the information is included in the financial statements or notesthereto.

(a)   Thefollowing documents are filed as a part of this Annual Report:

(1)   *Financial Statements:*
|                                                                                                                           | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report  of Ernst & Young LLP, Independent Registered Public Accounting Firm                                      |       | F-1      |
| Consolidated  Balance Sheets at December 31, 2006 and 2005                                                           |       | F-2      |
| Consolidated  Statements of Operations—For the Years Ended December 31, 2006, 2005 and 2004           |       | F-3      |
| Consolidated  Statement of Stockholders’ Equity—For the Years Ended December 31, 2006,  2005 and 2004 |       | F-4      |
| Consolidated  Statements of Cash Flows—For the Years Ended December 31, 2006, 2005 and 2004           |       | F-5      |
| Notes to Consolidated Financial Statements                                                                                |       | F-6      |

 

(2)   *Financial StatementSchedules:*

Schedule II, “Valuation and Qualifying Accounts” isincluded on page F-44 of this report. All other schedules areomitted because they are not applicable or the required information is shown inthe financial statements or notes thereto.

(3)   *Exhibits:*

Thefollowing is a list of exhibits filed as part of this Annual Report:
| Exhibit   Number | ** ** | **Description of Document**                                                                                                                                                     |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1(15)          |       | Stock Purchase Agreement, by and among Caliper,  Berwind Corporation and The Berwind Company LLC, dated June 9, 2003.                                                      |
| 2.2(15)          |       | Amendment No. 1 to  the Stock Purchase Agreement, by and among Caliper, Berwind Corporation and  The Berwind Company LLC, dated July 10, 2003.                        |
| 2.3(18)          |       | Amendment No. 2 to  the Stock Purchase Agreement, by and among Caliper, Berwind Corporation and  The Berwind Company LLC, dated April 1, 2004.                        |
| 2.4(19)          |       | Agreement and Plan of  Merger, among Caliper Life Sciences, Inc., Caliper Services, Inc.  and NovaScreen Biosciences Corporation, dated as of September 7, 2005. |
| 2.5(26)          |       | Agreement and Plan of  Merger, among Caliper Life Sciences, Inc., Caliper Holdings, Inc.  and Xenogen Corporation, dated as of February 10, 2006.                |
| 3.1(18)          |       | Amended and Restated  Certificate of Incorporation of Caliper.                                                                                                                  |
| 3.2(8)           |       | Certificate of  Designation Of Series A Junior Participating Preferred Stock.                                                                                              |
| 3.3(21)          |       | Amended and Restated  Bylaws of Caliper.                                                                                                                                        |
| 4.1              |       | Reference is made to  Exhibits 3.1, 3.2, 3.3 and 3.4.                                                                                                                           |

67

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| 4.2(20)      |   | Specimen Stock Certificate.                                                                                                           |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------|
| 4.3(9)       |   | Rights Agreement, dated as of December 18,  2001, between Caliper and Wells Fargo Bank Minnesota, N.A., as Rights Agent.         |
| 10.1(2)      |   | Lease Agreement, dated December 1, 1998,  between Caliper and 605 East Fairchild Associates, L.P.                                |
| 10.2(2)(3)   |   | 1996 Equity Incentive Plan.                                                                                                           |
| 10.3(2)(3)   |   | 1999 Equity Incentive Plan.                                                                                                           |
| 10.4(2)(3)   |   | 1999 Employee Stock Purchase Plan.                                                                                                    |
| 10.5(2)(3)   |   | 1999 Non-Employee Directors’ Stock Option Plan.                                                                                  |
| 10.6(3)(20)  |   | Form of Grant Agreement for 1999 Equity  Incentive Plan—Option Awards.                                                      |
| 10.7(3)(20)  |   | Form of Grant Agreement for 1999 Equity  Incentive Plan—Restricted Stock Unit Awards.                                       |
| 10.8(3)(20)  |   | Form of Grant Agreement for 1999 Non-Employee  Directors’ Stock Option Plan.                                                |
| 10.9(2)(3)   |   | Form of Indemnification Agreement entered into  between Caliper and its directors and executive officers.                        |
| 10.10(2)(4)  |   | Collaboration Agreement, dated May 2, 1998,  between Caliper and Hewlett-Packard Company (now Agilent  Technologies, Inc.). |
| 10.11(3)(20) |   | Form of Stock Option Grant Agreement for  Acquisition Equity Incentive Plan.                                                     |
| 10.12(3)(20) |   | Form of Stock Award Agreement for Acquisition  Equity Incentive Plan (pro rata vesting).                                         |
| 10.13(3)(20) |   | Form of Stock Award Agreement for Acquisition  Equity Incentive Plan (5 year cliff vesting).                                     |
| 10.17(3)(20) |   | Non-Employee Directors’ Cash Compensation Plan.                                                                                  |
| 10.18(3)(11) |   | Caliper Performance Bonus Plan.                                                                                                       |
| 10.19(3)(20) |   | Employment Offer Letter dated November 30, 2004  between Caliper and Mr. Thomas T. Higgins.                            |
| 10.20(3)(11) |   | Summary Cash Compensation Sheet.                                                                                                      |
| 10.23(2)(3)  |   | The Corporate Plan for Retirement Select Plan  Adoption Agreement and related Basic Plan Document.                                    |
| 10.27(6)     |   | Lease Agreement, dated June 23, 2000 and  effective July 5, 2000, between Caliper and Martin CBP Associates, L.P.           |
| 10.29(3)(20) |   | Key Employee Change of Control and Severance Benefit  Plan.                                                                           |
| 10.30(5)(8)  |   | Cross-License Agreement, dated March 12, 2001  between Aclara Biosciences, Inc. and Caliper.                                |
| 10.32(4)(7)  |   | Settlement Agreement and Mutual General Release  dated March 12, 2001 between Aclara Biosciences, Inc. and Caliper.         |
| 10.39(3)(9)  |   | 2001 Non-Statutory Stock Option Plan.                                                                                                 |
| 10.46(3)(20) |   | Form of Grant Agreement for 2001 Non-Statutory  Stock Option Plan.                                                               |
| 10.48(3)(10) |   | Key Employee Agreement, dated July 1, 2002,  between Caliper and Dr. Daniel Kisner.                                         |

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| 10.52(4)(16)  |   | Sole Commercial Patent License Agreement, effective  September 1, 1995, between UT-Battelle, LLC, the successor to Lockheed  Martin Energy Research Corporation, and Caliper, as amended on  November 1, 2002. |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.55(4)(12)  |   | Collaboration Agreement, dated June 4, 2003,  between Caliper and Bio-Rad Laboratories, Inc.                                                                                                                   |
| 10.56(3)(13)  |   | Key Employee Agreement, dated July 14, 2003,  between Caliper and E. Kevin Hrusovsky.                                                                                                                               |
| 10.62(3)(14)  |   | Acquisition Equity Incentive Plan.                                                                                                                                                                                       |
| 10.63(3)(17)  |   | Key Employee Agreement Amendment, dated  December 24, 2003, between Caliper and Dr. Daniel L. Kisner.                                                                                                          |
| 10.64(3)(17)  |   | Consulting Agreement, dated January 1, 2004,  between Caliper and Dr. David V. Milligan.                                                                                                                       |
| 10.66(4)(17)  |   | Collaboration and Supply Agreement, dated  January 9, 2004, among Caliper, Zymark Corporation and Affymetrix, Inc.                                                                                             |
| 10.67(3)      |   | Offer Letter dated September 7, 2005 between  Caliper Life Sciences, Inc. and David M. Manyak, Ph.D.                                                                                                           |
| 10.68(21)     |   | Loan and Security Agreement, dated as of  August 9, 2006, by and among Caliper, Silicon Valley Bank and NovaScreen  Biosciences Corporation.                                                                        |
| 10.69(22)     |   | Joinder Agreement, dated as of September 28,  2006, by and among Caliper, Silicon Valley Bank, Xenogen Corporation, Xenogen  Biosciences Corporation, and NovaScreen Biosciences Corporation.                       |
| 10.70(23)     |   | First Loan Modification Agreement dated as of  February 26, 2007, by and among Caliper, Silicon Valley Bank, NovaScreen  Biosciences Corporation, Xenogen Corporation, and Xenogen Biosciences  Corporation.        |
| 10.71(24)(25) |   | Agreement, dated as of May 5, 2000, between the  Board of Trustees of the Leland Stanford Junior University and Xenogen  Corporation.                                                                               |
| 10.72(3)      |   | Consulting Agreement, dated as of October 17,  2006, between Caliper and Pamela Contag.                                                                                                                             |
| 21.1          |   | Subsidiaries of the Registrant.                                                                                                                                                                                          |
| 23.1          |   | Consent of Ernst & Young LLP, Independent Registered  Public Accounting Firm.                                                                                                                                   |
| 24.1          |   | Power of Attorney (reference is made to the  signature page of this report).                                                                                                                                        |
| 31.1          |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) and 15d-14(a)                                                                                                                             |
| 31.2          |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) and 15d-14(a).                                                                                                                            |
| 32.1          |   | Certification Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                      |
| 32.2          |   | Certification Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                      |

----

       (1) Previously filed as Exhibit 3.4 to our Registration Statementon Form S-1, as amended, File No. 333-88827, filed on October 12,1999 and incorporated by reference herein.

69

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       (2) Previously filed as the like-numbered Exhibit to ourRegistration Statement on Form S-1, as amended, File No. 333-88827,filed on October 12, 1999 and incorporated by reference herein.

       (3) Management contract or compensatory plan or arrangement.

       (4) Confidential treatment has been granted for a portion of thisexhibit.

       (5) Previously filed as the like-numbered exhibit to Annual Report of Form 10-Kfor the year ended December 31, 1999 and incorporated by reference herein.

       (6) Previously filed as the like-numbered Exhibit to our RegistrationStatement on Form S-1, as amended, File No. 333-45942,filed on September 15, 2000, and incorporated by reference herein.

       (7) Previously filed as the like-numbered Exhibit to Form 10-Qfor the quarterly period ended March 31, 2001 and incorporated byreference herein.

       (8) Previously filed as Exhibit 99.1 to Current Report on Form 8-Kfiled December 19, 2001 and incorporated by reference herein.

       (9) Previously filed as Exhibit 99.1 to our Registration Statementon Form S-8, File No. 333-76636, filed January 11,2002 and incorporated by reference herein.

(10)   Previously filed as thelike-numbered Exhibit to Form 10-Q for the quarterly periodended September 30, 2002 and incorporated by reference herein.

(11) Previously filed as the like-numbered Exhibit to Current Reporton Form 8-K filed March 16, 2005 and incorporated by referenceherein.

(12) Previously filed as the like-numbered Exhibit to Form 10-Qfor the quarterly period ended June 30, 2003 and incorporated by referenceherein.

(13) Previously filed as the like-numbered Exhibit to Form 10-Qfor the quarterly period ended September 30, 2003 and incorporated byreference herein.

(14) Previously filed as Exhibit 99.1 to our Registration Statementon Form S-8, File No. 333-106946, filed June 10, 2003and incorporated by reference herein.

(15) Previously filed as the like-numbered Exhibit to Form 8-Kfiled July 25, 2003 and incorporated by reference herein.

(16) Previously filed as the like-numbered Exhibit to Form 10-Kfor the year ended December 31, 2002 and incorporated by reference herein.

(17) Previously filed as the like-numbered Exhibit to Form 10-Kfor the year ended December 31, 2003 and incorporated by reference herein.

(18) Previously filed as the like-numbered Exhibit to Form 10-Qfor the quarterly period ended March 31, 2004 and incorporated byreference herein.

(19) Previously filed as Exhibit 2.1 to our Registration Statementon Form S-3, File No. 333-129192, filed October 21,2005 and incorporated by reference herein.

(20) Previously filed as the like-numbered Exhibit to Form 10-Kfor the year ended December 31, 2004 and incorporated by reference herein.

(21) Previously filed as Exhibit 10.1 to Form 10-Q forthe quarterly period ended September 30, 2006 and incorporated byreference herein.

(22) Previously filed as Exhibit 10.2 to Form 10-Q forthe quarterly period ended September 30, 2006 and incorporated byreference herein.

70

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(23) Previously filed as the like numbered Exhibit to Form 8-Kfiled March 2, 2007 and incorporated by reference herein.

(24) Previously filed as Exhibit 10.3 to Form 10-Q forthe quarterly period ended September 30, 2006 and incorporated byreference herein.

(25)   Confidential treatment has beenrequested for a portion of this exhibit.

(26) Previouslyfiled as the like numbered Exhibit to Form 10-K for the year endedDecember 31, 2005 and incorporated by reference herein.

71

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                                 | **CALIPER LIFE SCIENCES, INC.** |
|---------------------------------|--------------------------------------|
|                            | By:                                  | /s/  E. KEVIN HRUSOVSKY |
|                            |                                 | E. Kevin  Hrusovsky |
| * *                        |                                 | *Chief  Executive Officer* |
| Date: March 14,  2007 |                                 | * * |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

|                               | **Signature** | ** **                              | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------------|---------------|-----------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/  E. KEVIN HRUSOVSKY       |          | President and Chief  Executive          |       | March 14,  2007 |
| E. Kevin  Hrusovsky           |          | Officer and Director*(Principal*        |       |                 |
|                          |          | *Executive Officer)*                    |       |                 |
| /s/  THOMAS T. HIGGINS        |          | Executive Vice President  and Chief     |       | March 14,  2007 |
| Thomas T. Higgins             |          | Financial Officer*(Principal Financial* |       |                 |
|                          |          | *Officer)*                              |       |                 |
| /s/  PETER F. MCAREE          |          | Vice President, Finance *(Principal*    |       | March 14,  2007 |
| Peter F. McAree               |          | *Accounting Officer)*                   |       |                 |
| /s/  DANIEL L. KISNER, M.D.   |          | Chairman of the Board of  Directors     |       | March 14,  2007 |
| Daniel L. Kisner,  M.D.       |          |                                    |       |                 |
| /s/ DAVID V.  MILLIGAN, PH.D. |          | Vice Chairman of the  Board of          |       | March 14,  2007 |
| David V.  Milligan, Ph.D.     |          | Directors                               |       |                 |
| /s/  VAN BILLET               |          | Director                                |       | March 14,  2007 |
| Van Billet                    |          |                                    |       |                 |
| /s/  ROBERT C. BISHOP, PH.D.  |          | Director                                |       | March 14,  2007 |
| Robert C. Bishop,  Ph.D.      |          |                                    |       |                 |

72

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| /s/ DAVID W. CARTER      |   | Director |   | March 14, 2007  |
|--------------------------|--------|----------|--------|----------------------|
| David W. Carter          |   |     |   |                 |
| /s/  ALLAN L. COMSTOCK   |   | Director |   | March 14,  2007 |
| Allan L. Comstock        |   |     |   |                 |
| /s/  MICHAEL R. EISENSON |   | Director |   | March 14,  2007 |
| Michael R.  Eisenson     |   |     |   |                 |
| /s/  KATHRYN A. TUNSTALL |   | Director |   | March 14,  2007 |
| Kathryn A.  Tunstall     |   |     |   |                 |

 

73

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

The Board of Directors and Stockholders of CaliperLife Sciences, Inc.

We have audited the accompanying consolidated balancesheets of Caliper Life Sciences, Inc. (the Company) as of December 31,2006 and 2005, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2006. Our audits also included the financial statementschedule listed in the Index at Item 15 (a). These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits.

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Caliper Life Sciences, Inc. at December 31, 2006 and2005, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2006, inconformity with U.S. generally accepted accounting principles. Also, in our opinion,the related financial statement schedule, when considered in relation to thebasic financial statements taken as a whole, presents fairly in all materialrespects the information set forth therein.

As discussed in Note 13 to the consolidated financialstatements, on January 1, 2006, the Company adopted the provisions ofStatement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004),“Share-Based Payment”, which requires the Company to recognize expense for allshare-based payments based on their fair values.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Caliper LifeSciences, Inc.’s internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 13, 2007 expressed an unqualified opinionthereon.
|                       | /s/ ERNST & YOUNG LLP |
|-----------------------|--------------------------------|
| Boston, Massachusetts |                           |
| March 13, 2007   |                           |

 

F-1

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**CALIPER LIFE SCIENCES, INC.CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                              | ** ** | **December 31,**                                                              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                              | ** ** | **2006**                                                                           | ** ** | **2005** | ** ** |
| ** **                                                                                                                                              | ** ** | **(In thousands, except  share and per share data)** | ** ** |
| **ASSETS**                                                                                                                                              |       |                                                                               |       |   |   |
| Current assets:                                                                                                                                         |       |                                                                               |       |   |   |
| Cash and cash  equivalents                                                                                                                              |       | $                                                                                  | 11,634     |   | $ | 8,096 |   |
| Marketable securities                                                                                                                                   |       | 13,303                                                                             |       | 23,129 |   |
| Restricted cash                                                                                                                                         |       | —                                                                             |       | 479 |   |
| Accounts receivable, net  of allowance for doubtful accounts of $582 and $482 in 2006 and 2005,  respectively                                      |       | 30,822                                                                             |       | 19,532 |   |
| Inventories                                                                                                                                             |       | 18,758                                                                             |       | 11,061 |   |
| Prepaid expenses and  other current assets                                                                                                              |       | 2,273                                                                              |       | 2,657 |   |
| Total current assets                                                                                                                                    |       | 76,790                                                                             |       | 64,954 |   |
| Restricted cash                                                                                                                                         |       | —                                                                             |       | 3,145 |   |
| Property and equipment,  net                                                                                                                            |       | 13,182                                                                             |       | 12,019 |   |
| Core technologies, net                                                                                                                                  |       | 28,765                                                                             |       | — |   |
| Developed and contract  technologies, net                                                                                                               |       | 14,285                                                                             |       | 11,565 |   |
| Other intangibles, net                                                                                                                                  |       | 9,756                                                                              |       | 5,257 |   |
| Goodwill                                                                                                                                                |       | 80,776                                                                             |       | 60,866 |   |
| Other assets                                                                                                                                            |       | 1,499                                                                              |       | 403 |   |
| Total assets                                                                                                                                            |       | $                                                                                  | 225,053    |   | $ | 158,209 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                          |       |                                                                               |       |   |   |
| Current liabilities:                                                                                                                                    |       |                                                                               |       |   |   |
| Accounts payable                                                                                                                                        |       | $                                                                                  | 8,740      |   | $ | 5,318 |   |
| Accrued compensation                                                                                                                                    |       | 7,417                                                                              |       | 6,774 |   |
| Other accrued liabilities                                                                                                                               |       | 11,563                                                                             |       | 8,342 |   |
| Deferred revenue and  customer deposits                                                                                                                 |       | 15,112                                                                             |       | 7,990 |   |
| Current portion of  accrued restructuring                                                                                                               |       | 7,008                                                                              |       | 2,872 |   |
| Current portion of  long-term obligations                                                                                                               |       | 98                                                                                 |       | 133 |   |
| Total current  liabilities                                                                                                                              |       | 49,938                                                                             |       | 31,429 |   |
| Noncurrent portion of accrued  restructuring                                                                                                            |       | 2,152                                                                              |       | 4,358 |   |
| Noncurrent portion of  credit facility and other long-term obligations                                                                                  |       | 8,587                                                                              |       | 320 |   |
| Other noncurrent  liabilities                                                                                                                           |       | 5,837                                                                              |       | 3,278 |   |
| Deferred tax liability                                                                                                                                  |       | 1,130                                                                              |       | 386 |   |
| Commitments and contingencies (Note 11)                                                                                                                 |       |                                                                               |       |   |   |
| Stockholders’ equity:                                                                                                                              |       |                                                                               |       |   |   |
| Preferred stock, $0.001  par value; 5,000,000 shares authorized; no shares issued and outstanding                                                       |       | —                                                                             |       | — |   |
| Common stock, $0.001 par  value; 100,000,000 shares authorized; 46,812,315 and 33,785,792 shares issued  and outstanding in 2006 and 2005, respectively |       | 47                                                                                 |       | 34 |   |
| Additional paid-in  capital                                                                                                                             |       | 366,942                                                                            |       | 302,412 |   |
| Deferred stock  compensation                                                                                                                            |       | —                                                                             |       | (3,003 | ) |
| Accumulated deficit                                                                                                                                     |       | (210,040                                                                           | )          | (181,106 | ) |
| Accumulated other  comprehensive income                                                                                                                 |       | 460                                                                                |       | 101 |   |
| Total stockholders’  equity                                                                                                                        |       | 157,409                                                                            |       | 118,438 |   |
| Total liabilities and stockholders’ equity                                                                                                         |       | $                                                                                  | 225,053    |   | $ | 158,209 |   |

 

See accompanying notes.

F-2

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**CALIPER LIFE SCIENCES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                             | ** ** | **Years Ended December 31,**                        | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| Revenue:                                                               |       |                                                               |       |   |   |   |   |
| Product revenue                                                        |       | $                                                                  | 69,248     |   | $ | 59,565 |   | $ | 57,808 |   |
| Service revenue                                                        |       | 24,454                                                             |       | 16,430 |   | 13,448 |   |
| License fees and contract revenue                                      |       | 14,169                                                             |       | 11,014 |   | 8,871 |   |
| Total revenue                                                          |       | 107,871                                                            |       | 87,009 |   | 80,127 |   |
| Costs and expenses:                                                    |       |                                                               |       |   |   |   |   |
| Cost of product revenue                                                |       | 45,459                                                             |       | 40,126 |   | 38,536 |   |
| Cost of service revenue                                                |       | 14,917                                                             |       | 8,312 |   | 6,695 |   |
| Cost of license fees                                                   |       | 219                                                                |       | — |   | — |   |
| Research and development                                               |       | 24,591                                                             |       | 17,728 |   | 23,243 |   |
| Selling, general and administrative                                    |       | 43,570                                                             |       | 32,328 |   | 34,372 |   |
| Amortization of intangible assets                                      |       | 8,842                                                              |       | 4,069 |   | 3,805 |   |
| Restructuring charges (credits), net                                   |       | 258                                                                |       | (1,005 | ) | 6,018 |   |
| Total costs and expenses                                               |       | 137,856                                                            |       | 101,558 |   | 112,669 |   |
| Operating loss                                                         |       | (29,985                                                            | )          | (14,549 | ) | (32,542 | ) |
| Interest income                                                        |       | 908                                                                |       | 932 |   | 1,012 |   |
| Interest expense                                                       |       | (430                                                               | )          | (37 | ) | (166 | ) |
| Other income (expense), net                                            |       | 469                                                                |       | (689 | ) | 517 |   |
| Loss before  income taxes                                              |       | (29,038                                                            | )          | (14,343 | ) | (31,179 | ) |
| Benefit  (provision) for income taxes                                  |       | 104                                                                |       | (114 | ) | (377 | ) |
| Net loss                                                               |       | $                                                                  | (28,934    | ) | $ | (14,457 | ) | $ | (31,556 | ) |
| Net loss per  common share, basic and diluted                          |       | $                                                                  | (0.75      | ) | $ | (0.46 | ) | $ | (1.08 | ) |
| Shares used in computing  net loss per common share, basic and diluted |       | 38,743                                                             |       | 31,313 |   | 29,273 |   |

 

See accompanying notes.

F-3

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**CALIPER LIFE SCIENCES, INC.CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

| ** **                                                                        | ** ** | **Stockholders’ Equity**               | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                        | ** ** | **Common Stock**                            | ** ** | **Additional  Paid-In** | ** ** | **Deferred  Stock** | ** ** | **Accumulated** | ** ** | **Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** ** |
| ** **                                                                        | ** ** | **Shares**                                       | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Compensation** | ** ** | **Deficit** | ** ** | **  Income/(Loss)  ** | ** ** | **      Equity      ** | ** ** |
| ** **                                                                        | ** ** | **(In thousands, except shares)** | ** ** |
| Balances at December 31, 2003                                                |       | 28,382,043                                       |       |   | $ | 28 |   |   |   | $ | 271,232 |   |   |   | $ | (1,808 | ) |   |   | $ | (135,093 | ) |   |   | $ | 438 |   |   |   | $ | 134,797 |   |   |
| Net loss                                                                          |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (31,556 | ) |   |   | — |   |   |   | (31,556 | ) |   |
| Foreign currency translation gain                                                 |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 232 |   |   |   | 232 |   |   |
| Change in unrealized gain on available-for-sale  securities                       |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (515 | ) |   |   | (515 | ) |   |
| Comprehensive loss                                                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (31,839 | ) |   |
| Issuance of common stock pursuant to stock plans                             |       | 1,939,785                                        |       |   | 2 |   |   |   | 6,343 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 6,345 |   |   |
| Issuance of common stock upon exercise of  warrants                          |       | 38,460                                           |       |   | — |   |   |   | 47 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 47 |   |   |
| Deferred compensation from issuance of restricted  common stock              |       | —                                           |       |   | — |   |   |   | 2,585 |   |   |   | (2,585 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization and reversals of deferred stock  compensation                   |       | —                                           |       |   | — |   |   |   | (96 | ) |   |   | 1,743 |   |   |   | — |   |   |   | — |   |   |   | 1,647 |   |   |
| Compensation expense associated  with modifications to certain stock options |       | —                                           |       |   | — |   |   |   | 540 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 540 |   |   |
| Compensation expense related to stock options issued  to non-employees            |       | —                                           |       |   | — |   |   |   | 58 |   |   |   | (16 | ) |   |   | — |   |   |   | — |   |   |   | 42 |   |   |
| Balances at December 31, 2004                                                |       | 30,360,288                                       |       |   | 30 |   |   |   | 280,709 |   |   |   | (2,666 | ) |   |   | (166,649 | ) |   |   | 155 |   |   |   | 111,579 |   |   |
| Net loss                                                                          |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (14,457 | ) |   |   | — |   |   |   | (14,457 | ) |   |
| Foreign currency translation loss                                                 |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (180 | ) |   |   | (180 | ) |   |
| Change in unrealized gain on available-for-sale  securities                       |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 126 |   |   |   | 126 |   |   |
| Comprehensive loss                                                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (14,511 | ) |   |
| Issuance of common stock upon acquisition of  NovaScreen                          |       | 2,576,933                                        |       |   | 3 |   |   |   | 17,572 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 17,575 |   |   |
| Issuance of common stock pursuant to stock plans                             |       | 848,571                                          |       |   | 1 |   |   |   | 2,181 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,182 |   |   |
| Deferred compensation from issuance of restricted  common stock              |       | —                                           |       |   | — |   |   |   | 2,100 |   |   |   | (2,100 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization and reversals of deferred stock  compensation                   |       | —                                           |       |   | — |   |   |   | (175 | ) |   |   | 1,760 |   |   |   | — |   |   |   | — |   |   |   | 1,585 |   |   |
| Compensation expense related to stock options issued  to non-employees            |       | —                                           |       |   | — |   |   |   | 25 |   |   |   | 3 |   |   |   | — |   |   |   | — |   |   |   | 28 |   |   |
| Balances at December 31, 2005                                                |       | 33,785,792                                       |       |   | 34 |   |   |   | 302,412 |   |   |   | (3,003 | ) |   |   | (181,106 | ) |   |   | 101 |   |   |   | 118,438 |   |   |
| Net loss                                                                          |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (28,934 | ) |   |   | — |   |   |   | (28,934 | ) |   |
| Foreign currency translation gain                                                 |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 228 |   |   |   | 228 |   |   |
| Change in unrealized gain on available-for-sale  securities                       |       | —                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 131 |   |   |   | 131 |   |   |
| Comprehensive loss                                                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (28,575 | ) |   |
| Issuance of common stock and warrants upon  acquisition of  Xenogen          |       | 12,108,877                                       |       |   | 12 |   |   |   | 59,227 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 59,239 |   |   |
| Issuance of common stock pursuant to stock plans                             |       | 917,646                                          |       |   | 1 |   |   |   | 2,736 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,737 |   |   |
| Deferred compensation reclass due to adoption of  SFAS 123R                  |       | —                                           |       |   | — |   |   |   | (3,003 | ) |   |   | 3,003 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Stock-based compensation                                                          |       | —                                           |       |   | — |   |   |   | 5,570 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,570 |   |   |
| Balances at  December 31, 2006                                               |       | 46,812,315                                       |       |   | $ | 47 |   |   |   | $ | 366,942 |   |   |   | — |   |   |   | $ | (210,040 | ) |   |   | $ | 460 |   |   |   | $ | 157,409 |   |   |

 

See accompanying notes.

F-4

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**CALIPER LIFE SCIENCES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                 | ** ** | **(In thousands) **               | ** ** |
| **Operating activities**                                                   |       |                                        |       |   |   |   |   |
| Net loss                                                                   |       | $                                           | (28,934    | ) | $ | (14,457 | ) | $ | (31,556 | ) |
| Adjustments to reconcile  net loss to net cash from operating  activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                              |       | 12,528                                      |       | 7,165 |   | 10,024 |   |
| Stock-based compensation expense, net                                      |       | 5,570                                       |       | 1,613 |   | 2,812 |   |
| In-process research and development                                        |       | 2,898                                       |       | — |   | — |   |
| Non-cash restructuring charge (credit), net                                |       | 258                                         |       | (1,170 | ) | 6,018 |   |
| Foreign currency transaction (gains) losses                                |       | (434                                        | )          | 661 |   | (337 | ) |
| Changes in  operating assets and liabilities, net of acquisitions:         |       |                                        |       |   |   |   |   |
| Accounts receivable                                                        |       | (3,771                                      | )          | (2,233 | ) | (7,150 | ) |
| Inventories                                                                |       | (2,054                                      | )          | (1,654 | ) | 1,410 |   |
| Prepaid expenses and other current assets                                  |       | 2,021                                       |       | 9 |   | 2,216 |   |
| Accounts payable and other accrued liabilities                             |       | 1,526                                       |       | 2,653 |   | 1,125 |   |
| Accrued compensation                                                       |       | (1,149                                      | )          | (58 | ) | 1,617 |   |
| Deferred revenue and customer deposits                                     |       | 106                                         |       | 488 |   | 566 |   |
| Other noncurrent liabilities                                               |       | 224                                         |       | 2,572 |   | (298 | ) |
| Payments of restructuring obligations, net                                 |       | (3,994                                      | )          | (3,224 | ) | (4,438 | ) |
| Net cash from operating activities                                         |       | (15,205                                     | )          | (7,635 | ) | (17,991 | ) |
| **Investing activities**                                                   |       |                                        |       |   |   |   |   |
| Purchases of  marketable securities                                        |       | (21,255                                     | )          | (6,025 | ) | (51,410 | ) |
| Proceeds from  sales of marketable securities                              |       | 11,529                                      |       | 11,321 |   | 61,058 |   |
| Proceeds from  maturities of marketable securities                         |       | 20,205                                      |       | 11,506 |   | 7,831 |   |
| Other assets                                                               |       | (86                                         | )          | — |   | 40 |   |
| Restricted cash                                                            |       | 3,624                                       |       | (511 | ) | (914 | ) |
| Purchases of  property and equipment                                       |       | (4,887                                      | )          | (6,515 | ) | (3,593 | ) |
| Acquisitions, net  of cash acquired                                        |       | 6,991                                       |       | (4,634 | ) | — |   |
| Net cash from investing activities                                         |       | 16,121                                      |       | 5,142 |   | 13,012 |   |
| **Financing activities**                                                   |       |                                        |       |   |   |   |   |
| Payments of  obligations under sale-leaseback arrangements                 |       | (242                                        | )          | (301 | ) | (1,443 | ) |
| Borrowings of  credit facility                                             |       | 8,587                                       |       | — |   | — |   |
| Payments of  credit facility, loans payable and other obligations          |       | (8,587                                      | )          | (403 | ) | (362 | ) |
| Proceeds from  issuance of common stock                                    |       | 2,566                                       |       | 2,323 |   | 6,392 |   |
| Net cash from financing activities                                         |       | 2,324                                       |       | 1,619 |   | 4,587 |   |
| Effect of  exchange rates on changes in cash and cash equivalents          |       | 298                                         |       | (471 | ) | 665 |   |
| Net increase  (decrease) in cash and cash equivalents                      |       | 3,538                                       |       | (1,345 | ) | 273 |   |
| Cash and cash  equivalents at beginning of year                            |       | 8,096                                       |       | 9,441 |   | 9,168 |   |
| Cash and cash  equivalents at end of year                                  |       | $                                           | 11,634     |   | $ | 8,096 |   | $ | 9,441 |   |
| **Supplemental disclosure of cash  flow information**                      |       |                                        |       |   |   |   |   |
| Interest paid                                                              |       | $                                           | 369        |   | $ | 37 |   | $ | 409 |   |
| Income taxes paid                                                          |       | $                                           | 203        |   | $ | 243 |   | $ | 103 |   |

 

See accompanying notes.

F-5

----

**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.   Organizationand Basis of Presentation**

Caliper Life Sciences, Inc.(Caliper) was incorporated in the state of Delaware on July 26, 1995.Caliper provides products and services spanning in vitro and in vivopre-clinical research to enable biopharmaceutical companies to reduce costs andstandardize analytical techniques across four key areas of the pre-clinicaldrug discovery and development chain: biological screening; pharmacokinetics/pharmacodynamics,ADME/Tox; and drug dosage and formulation testing. Caliper’s strategy is toprovide tools and services that are relevant to and predictive of drug effectsin humans. Caliper currently operates in one business segment: the developmentand commercialization of life science instruments and related consumables andservices for use in drug discovery and development and other life sciencesresearch.

***Financial Statement Presentation and Principles ofConsolidation***

Caliper’s financialstatements include the accounts of its wholly owned operating subsidiariesincluding Xenogen Corporation, Xenogen Biosciences Corporation (together,Xenogen Corporation and Xenogen Biosciences Corporation are herein referred toas Xenogen), NovaScreen Biosciences Corporation (NovaScreen), Caliper LifeSciences Limited (United Kingdom), Caliper Life Sciences Ltd. (Canada), CaliperLife Sciences N.V. (Belgium), Caliper Life Sciences GmbH (Germany), CaliperLife Sciences SA (France), and Caliper Life Sciences AG (Switzerland). Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

**2.   Summary ofSignificant Accounting Policies**

***Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

***Cash Equivalents and Marketable Securities***

Caliper considers all highly liquid investments withmaturities of three months or less from the date of purchase to be cashequivalents. Those instruments with original maturities between three andtwelve months are considered to be short-term marketable securities. Managementdetermines the appropriate classification of its investment securities at thetime of purchase and re-evaluates such determination at each reporting date.Management has classified Caliper’s marketable securities as available-for-salesecurities in the accompanying financial statements. Available-for-salesecurities are carried at fair value based on quoted market prices, withunrealized gains and losses reported in a separate component of stockholders’equity. Realized gains and losses and declines in value, if any, judged to beother than temporary on available-for-sale securities are reported in otherincome or expense. The cost of securities sold is based on the specificidentification method.

Caliper invests its excesscash in U.S. government and agency securities, debt instruments of financialinstitutions and corporations, and money market funds with strong creditratings. Caliper has established guidelines regarding diversification of itsinvestments and their maturities to maintain safety and liquidity.

F-6

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of Significant Accounting Policies (Continued)

***Customer Accounts Receivable***

Customer accountsreceivable are stated at billed amounts, net of related reserves. No collateralis required on these trade receivables. The majority of sales made by Caliperdo not include any return rights or privileges. Caliper has historically notexperienced significant credit losses in connection with its customerreceivables.

***Inventories***

Inventories for use in themanufacture of Caliper’s instruments include electronic and optical components,devices and accessories either produced or purchased from original equipmentmanufacturers. Inventories for use in the manufacture of LabChip technologiesconsist primarily of glass, quartz and reagents. Inventories are stated at thelower of cost or market, reflect appropriate reserves for potential obsolete,slow moving or otherwise impaired material, and include appropriate elements ofmaterial, labor and overhead.

***Restricted Cash***

At December 31, 2005,restricted cash consisted of deposits held as collateral against letters ofcredit to secure lease arrangements and certain customer deposits. During 2006,all restrictions on cash were released in connection with the establishment ofstandby letters-of-credit in connection with the new credit facility (see Note10).

***Property and Equipment***

Additions to property andequipment are recorded at cost. Major replacements and improvements arecapitalized, while general repairs and maintenance are expensed as incurred.Depreciation commences once the assets have been placed in service, and iscomputed using the straight-line method over the shorter of the financingperiod or the estimated useful lives of the assets, which primarily range fromthree to five years. Furniture and equipment acquired under equipment sale andlease back arrangements are amortized over the shorter of the useful lives orthe financing period, generally four years. Leasehold improvements areamortized over the shorter of the estimated useful life of the assets or thelease term, generally four to ten years.

***Impairment of Long-Lived Assets***

Caliper reviews long-livedassets and identifiable intangibles for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not be recoverable.If indicators of impairment exist, recoverability of assets to be held and usedis assessed by a comparison of the carrying amount of an asset to futureundiscounted net cash flows expected to be generated by the asset.Recoverability measurement and estimating of undiscounted cash flows is done atthe lowest possible level for which there are identifiable assets. If theaggregate undiscounted cash flows are less than the carrying value of theasset, the resulting impairment charge to be recorded is calculated based onthe amount by which the carrying amount of assets exceeds the fair value of theassets. Caliper also performs an annual assessment of impairment for allindefinitely-lived intangible assets. If the fair value exceeds the carrying valueof the asset, then the intangible is not impaired. If the fair value is lessthan the carrying 

F-7

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of Significant Accounting Policies (Continued)

value,then an impairment charge is recorded equal to the difference. Assets to bedisposed of are reported at the lower of the carrying amount or fair value lesscosts to sell.

***Fair Value of Financial Instruments***

The carrying amounts reflected in the consolidatedbalance sheets for cash and cash equivalents, accounts receivable, othercurrent assets, accounts payable and other accrued expenses approximate fairvalue due to their short-term maturities. Caliper’s available-for-salemarketable securities are carried at fair value based on quoted market prices,consistent with the requirements of Statement of Financial Accounting Standards(SFAS) No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. Caliper’s credit facilityis carried at book value as outstanding amounts approximate fair value asmonthly interest payments are indexed based on the prime rate.

The fair values of Caliper’scash, cash equivalents and marketable securities are subject to change as aresult of potential changes in market interest rates. The potential change infair value for interest rate-sensitive instruments has been assessed on ahypothetical 100 basis point adverse movement across all maturities. Caliper estimatesthat such hypothetical adverse 100 basis point movement would not havematerially impacted net income or materially affected the fair value ofinterest rate-sensitive instruments.

***Revenue Recognition***

*General Policy*

Caliper recognizes revenue when persuasive evidence ofan arrangement exists, delivery has occurred or services have been rendered,the fee is fixed or determinable, and collectibility is reasonably assured orprobable, as applicable. Revenue is recognized on product sales when goods areshipped under Caliper’s standard terms of “FOB origin.” Revenues on shipmentssubject to customer acceptance provisions are recognized only upon customeracceptance, provided all other revenue recognition criteria are met. Ingeneral, sales made by Caliper do not include general return rights orprivileges. In the limited circumstance where a right of return exists, Caliperrecognizes revenue when the right has lapsed. Based upon Caliper’s priorexperiences, sales returns are not significant and therefore a generalprovision for sales returns or other allowances is not recorded at the time ofsale. Revenue from services offered by Caliper is generally recognized as theservices are performed (or, as applicable, ratably over the contract serviceterm in the case of annual maintenance contracts). Provision is made at thetime of sale for estimated costs related to Caliper’s warranty obligations tocustomers.

Our revenue arrangements may include the sale of aninstrument, consumables, software, service, technology licenses, installationand training. Revenue arrangements may include one of these single elements, ormay incorporate one or more elements in a single transaction or combination ofrelated transactions. Caliper applies the following authoritative guidance toits various revenue arrangements:

*EmergingIssues Task Force (EITF) Issue 00-21, Revenue Arrangements with MultipleDeliverables, (EITF 00-21).*   When multiplecontractual elements exist in an arrangement, and software is incidental, thecontractual elements are divided into separate units of accounting if thedeliverables in the arrangement meet certain criteria under EITF 00-21.The criteria applied to multiple element arrangements are whether (a) eachdelivered element has standalone value to the customer, (b) there isobjective and reliable evidence of fair value of the undelivered elements, and,if applicable, (c) delivery or 

F-8

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of Significant Accounting Policies (Continued)

performance of theundelivered elements is probable and within the control of Caliper. Arrangementconsideration is allocated among the separate units of accounting based ontheir relative fair values, or based upon the residual method when fair valueexists only for remaining undelivered items, and the amount of revenueallocable to the delivered item(s) is recognized in accordance with therequirements of SAB 104, *Revenue Recognition (areplacement of SAB 101*) (SAB 104). In either case, the amount ofarrangement consideration allocated to the delivered item(s) is limited tothe amount that is not contingent on us delivering additional products orservices.

*Statementof Position 97-2, Software Revenue Recognition and EITF 03-5,Applicability of AICPA Statement of Position 97-2 to Non-SoftwareDeliverables in an Arrangement Containing More-than-Incidental Software( SOP 97-2).*   WhenCaliper’s revenue arrangements include the sale of an instrument where thesoftware is more than incidental, revenue is recognized in accordancewith SOP 97-2. Caliper allocates revenue on the arrangement betweensoftware and non-software related deliverables based on fair value as requiredby EITF 03-5. Revenue allocated to the software deliverable is recognizedin accordance with SOP 97-2. If there is vendor-specific objectiveevidence of the fair value(s) of the undelivered item(s) in anarrangement, but no such evidence for the delivered item(s), Caliper uses theresidual method to allocate the arrangement consideration associated with thesoftware deliverables. Revenue allocated to non-software deliverables isfurther allocated based on the separation criteria established in EITF 00-21.When items included in a multiple-element arrangement represent separate unitsof accounting and there is objective and reliable evidence of fair value forall items included in the arrangement, Caliper allocates the arrangementconsideration to the individual items based on their relative fair values. Ifthere is objective and reliable evidence of the fair value(s) of theundelivered item(s) in an arrangement, but no such evidence for thedelivered item(s), Caliper uses the residual method to allocate the arrangementconsideration. In either case, the amount of arrangement considerationallocated to the delivered item(s) is limited to the amount that is notcontingent on us delivering additional products or services.

Cash received fromcustomers as advance deposits for undelivered products and services, includingcontract research and development services, is recorded within customerdeposits until revenue is recognized. Revenue related to annual maintenancecontracts or other remaining undelivered performance obligations is deferredand recognized upon completion of the underlying performance criteria.

*Product Revenue*

Product revenue is recognized upon the shipment andtransfer of title to customers and is recorded net of discounts and allowances.Revenues on shipments subject to customer acceptance provisions are recognizedonly upon customer acceptance, provided all other revenue recognition criteriaare met. Customer product purchases are generally delivered under standardizedterms of “FOB origin” with the customer assuming the risks and rewards ofproduct ownership at the time of shipping from Caliper’s warehouse. Revenueassociated with customer product purchases delivered under terms of “FOBdestination” are deferred until product is delivered to the customer. Inaccordance with EITF 00-21 or SOP 97-2, Caliper defers the fairvalue of any elements that remain undelivered after product shipment and/oracceptance (as applicable) such as remaining services to be performed.

In certain cases,customers will be charged on a datapoint pricing basis for their usage ofchips. Datapoints are the test-results that Caliper’s customers record whenthey use Caliper’s instruments in 

F-9

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of Significant Accounting Policies (Continued)

order toperform a particular LabChip assay. Caliper records datapoint revenues in theperiod that Caliper’s customers produce these datapoints and communicate suchuse to Caliper. Under minimum datapoint fee arrangements, datapoint revenues arerecorded over the period during which the minimum applies, provided Caliper hasno ongoing performance obligations with respect to these minimum fees.

*Service and AnnualMaintenance Agreements*

Service revenue isrecognized as services are performed typically using the proportionalperformance method based upon defined outputs as applicable, or ratably overthe contract service term in the case of annual maintenance contracts.Customers may purchase optional warranty coverage during the initial standard warrantyterm and annual maintenance contracts beyond the standard warranty expiration.These optional service offerings are not included in the price Caliper chargescustomers for the initial product purchase. Under Caliper’s standard warranty,the customer is entitled to repair or replacement of defective goods. Noupgrades are included in the standard warranty.

*Licensing andRoyalty*

Revenue from up-frontlicense fees is recognized when the earnings process is complete and no furtherobligations exist. If further obligations exist, the up-front license fee isrecognized ratably over the obligation period. Royalties under licenses arerecorded as earned in accordance with contract terms, when third-party resultsare reliably measured and collectibility is reasonably assured.

*Contract Revenue*

Revenue from contractresearch and development services is recognized as earned based on theperformance requirements of the contract. Non-refundable contract fees, whichare neither time and materials- nor time and expense-based, nor tied tosubstantive milestones, are recognized using the proportional performancemethod, subject to the consideration of the guidance in SAB 104.

***Segment Reporting***

Caliper currently operatesin one business segment, the development and commercialization of life scienceinstruments and related consumables and services for use in drug discovery andother life sciences research and development. Caliper’s entire business iscomprehensively managed by a single management team that reports to the ChiefExecutive Officer. Caliper does not operate separate lines of business orseparate business entities with respect to its products or product candidates.Accordingly, Caliper does not accumulate discrete financial information withrespect to separate product areas and does not have separately reportablesegments as defined by SFAS No. 131, *Disclosure about Segmentsof an Enterprise and Related Information*.

***Goodwill***

In accordance with SFAS No. 141,*Business Combinations*, and SFAS No. 142,*Goodwill and Other Intangible Assets*,goodwill and certain other intangibles are not amortized but are insteadsubject to periodic impairment assessments. Caliper performs a test for theimpairment of goodwill annually following the related acquisition, or morefrequently if events or circumstances indicate that goodwill may be impaired.Because Caliper has a single operating segment which is the sole reportingunit, Caliper 

F-10

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of SignificantAccounting Policies (Continued)

performsthis test by comparing the fair value of Caliper with its book value, includinggoodwill. If the fair value exceeds the book value, goodwill is not impaired.If the book value exceeds the fair value, Caliper would calculate the potentialimpairment loss by comparing the implied fair value of goodwill with the bookvalue of goodwill. If the implied fair value of goodwill is less than the bookvalue, an impairment charge would be recorded equal to the difference.

***Foreign Currency Translation***

The financial statements of Caliper’s foreign subsidiariesare translated in accordance with SFAS No. 52, *ForeignCurrency Translation*. In translating the accounts of the foreignsubsidiaries into U.S. dollars, stockholders’ equity is translated athistorical rates, while assets and liabilities are translated at the rate ofexchange in effect as of the end of the period. Revenue and expensetransactions are translated using the weighted-average exchange rate in effectduring the period in which they arise. The resulting foreign currencytranslation adjustments are reflected as a separate component of stockholders’equity. Cumulative translation adjustments included in stockholders’ equity asof December 31, 2006 and 2005 were $378,000 and $150,000, respectively.

Foreign currencytransaction gains and losses from the settlement of account balancesdenominated in another currency are included in current period other income,net, as incurred. Foreign currency gains and losses on intercompany accountsare included in current period income as settlement of these accounts isanticipated in the foreseeable future.

***Research and Development***

Caliper charges research and development costs toexpense as incurred. Research and development costs consist primarily ofsalaries and related personnel costs, fees paid to consultants and outsideservice providers for development, material cost of prototypes and test units,facility and other research-related allocation expenses, and other expensesrelated to the design, development, testing and enhancement of Caliper’sproducts.

Caliper conductscollaborative research and development with several third parties. Funding ofresearch and development is typically based upon full-time equivalent billingrates for scientists and technicians working on each applicable project.Arrangements may include milestone funding and royalties on future productsbeing developed under existing arrangements.

***Warranty Obligations***

Caliper provides forestimated warranty expenses as a component of cost of revenue at the timeproduct revenue is recognized in accordance with FAS 5, *Accountingfor Contingencies* and FASB Interpretation No. 45 (FIN45), *Guarantor’s Accounting and Disclosure Requirements for Guarantees,including Indirect Guarantees of Indebtedness of Others*. Caliperoffers a one-year limited warranty on most products, which is included in theselling price. Caliper’s standard limited warranty covers repair or replacementof defective goods, a preventative maintenance visit on certain products, andtelephone-based technical support. Factors that affect Caliper’s warrantyliability include the number of installed units, historical and anticipatedrates of warranty claims, and cost per claim. Caliper periodically assesses theadequacy of its recorded warranty liabilities and adjusts amounts as necessary.

F-11

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of Significant Accounting Policies (Continued)

***Other Income (Expense)***

Otherincome (expense), net consists of the following (in thousands):

| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Realized (loss)  gain on marketable securities, net |       | $                                           | (22        | ) | $ | (59 | ) | $ | 124 |   |
| Foreign currency  transaction gains (losses)        |       | 434                                         |       | (661 | ) | 338 |   |
| Loss on sale of  equipment                          |       | (10                                         | )          | (27 | ) | (4 | ) |
| Other income, net                                   |       | 67                                          |       | 58 |   | 59 |   |
|                                                |       | $                                           | 469        |   | $ | (689 | ) | $ | 517 |   |

 

***Guarantees and Indemnifications***

Caliper recognizes liabilities for guarantees inaccordance with FIN 45 that requires upon issuance of a guarantee, theguarantor must recognize a liability for the fair value of the obligations itassumes under that guarantee.

Caliper, as permittedunder Delaware law and in accordance with its Bylaws, indemnifies its officersand directors for certain events or occurrences, subject to certain limits,while the officer or director is or was serving at Caliper’s request in suchcapacity. The term of the indemnification period is the officer’s or director’slifetime. Caliper may terminate the indemnification agreements with itsofficers and directors upon 90 days written notice, but termination will notaffect claims for indemnification relating to events occurring prior to theeffective date of termination. The maximum amount of potential futureindemnification is unlimited; however, Caliper has a director and officerinsurance policy that limits its exposure and may enable it to recover aportion of any future amounts paid. Caliper believes the fair value of theseindemnification agreements is minimal. Accordingly, Caliper has not recordedany liabilities for these agreements as of December 31, 2006 and 2005.

***Shipping and Handling Fees and Costs***

Shipping and handling feesbilled to customers for product shipments are recorded in “Product revenue” inthe accompanying consolidated statements of operations. Shipping and handlingcosts incurred for inventory purchases and product shipments are recorded in “Costof revenue” in the accompanying consolidated statements of operations.

***Advertising Expense***

Caliper expenses costs ofadvertising as incurred. Advertising costs were $1.4, $1.7 and $1.4 millionduring 2006, 2005 and 2004, respectively.

***Risk Management***

Caliper has purchasedcommercial insurance to cover its estimated future legal costs and settlementsrelated to workers’ compensation, product, general, auto, general liability anddirectors’ and officers’ liability claims. Caliper’s management decides theamount of insurance coverage to purchase from unaffiliated companies and theappropriate amount of risk coverage based on the cost and availability of 

F-12

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of Significant Accounting Policies (Continued)

insuranceand the likelihood of a loss. Management believes that the levels of risk thatCaliper has provided insurance coverage for are consistent with those of othercompanies in its industry. There can be no assurance that Caliper will notincur losses beyond the limits, or outside the coverage, of its insurance.

***Significant Concentrations, Credit and Other Risks***

Financial instruments, which potentially subjectCaliper to concentrations of credit risk, consist principally of cash (see Note5) and trade accounts receivable. Caliper invests excess cash in securitiesthat it believes bear minimal risk. These investments are of a short-termnature and include investments in commercial paper and government and corporatedebt securities. By policy, the amount of credit exposure to any oneinstitution or issuer is limited. These investments are generally notcollateralized and primarily mature within three years. Caliper has notexperienced any losses due to institutional failure or bankruptcy.

Caliper’s allowance for doubtful accounts at December 31,2006 and 2005 was $582,000 and $482,000, respectively. Caliper grants credit tocustomers based on evaluations of their financial condition, generally withoutrequiring collateral. However, credit risk is reduced through Caliper’s effortsto monitor its exposure for credit losses and maintain allowances, ifnecessary. In 2006, no customer accounted for greater than 10% of totalrevenues. One customer, accounted for approximately 10% and 11% of Caliper’stotal revenues in 2005 and 2004, respectively. As of December 31, 2006 nocustomer accounted for greater than 10% of Caliper’s outstanding gross accountsreceivable balance. As of December 31, 2005, one customer accounted forapproximately 12% of Caliper’s outstanding gross accounts receivable balance.Caliper’s policy is to perform an analysis of the recoverability of its tradeaccounts receivable at the end of each reporting period and to establishallowances for those accounts considered uncollectible. Caliper analyzeshistorical bad debts, customer concentrations, customer credit-worthiness, andcurrent economic trends when evaluating the adequacy of the allowance fordoubtful accounts.

Caliper’s products includecertain components that are currently sourced from single vendors. Caliperbelieves that other vendors would be able to provide similar equipment,however, the qualification of such vendors may require start-up time. In orderto mitigate any adverse impacts from a disruption of supply, Caliper attemptsto maintain an adequate supply of critical single-sourced equipment.

***Comprehensive Income (Loss)***

Caliper accounts forcomprehensive income (loss) in accordance with SFAS No. 130, *Reporting Comprehensive Income*. The components ofcomprehensive income (loss) are unrealized gains and losses onavailable-for-sale securities and foreign currency translation adjustments.Comprehensive income (loss) has been disclosed in the Statement of Stockholders’Equity. As of December 31, 2006, accumulated other comprehensive incomeincluded $378,000 in cumulative foreign currency translation gains and $82,000in unrealized gains on available-for-sale securities. As of December 31,2005, accumulated other comprehensive income included $150,000 in foreigncurrency translation gains and $49,000 in unrealized losses onavailable-for-sale securities.

***Stock-Based Compensation***

On January 1, 2006, Caliper was required to adoptStatement of Financial Accounting Standard No. 123R, *Share-BasedPayment* (“SFAS 123R”), which requires all share-based payments,including grants 

F-13

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of Significant Accounting Policies (Continued)

of stockoptions, to be recognized in the income statement as an operating expense,based on their fair values. Caliper estimates the fair value of each optionaward on the date of grant using the Black-Scholes-Merton based option-pricingmodel.

Prior to adopting SFAS123R, Caliper accounted for stock-based compensation under AccountingPrinciples Board Opinion No. 25, *Accounting for Stock Issuedto Employees* (“APB No. 25”). The modified prospective methodwas applied in adopting SFAS 123R and, accordingly, periods prior to adoptionhave not been restated.

The implementation of SFAS123R has had no adverse effect on Caliper’s balance sheet or total cash flows,but it does impact Caliper’s operating loss, loss before income taxes and netloss. Because periods prior to adoption have not been restated, comparabilitybetween periods has been affected. Additionally, estimates of and assumptionsabout forfeiture rates, volatility and interest rates are used to calculatestock-based compensation. A significant change to theses estimates couldmaterially affect Caliper’s operating results.

***Net Loss Per Share***

Basic earnings per shareis calculated based on the weighted-average number of common shares outstandingduring the period. Diluted earnings per share would give effect to the dilutiveeffect of common stock equivalents consisting of stock options, unvestedrestricted stock, unvested restricted stock units and warrants (calculatedusing the treasury stock method).

Common stock equivalentsequal to 13.5, 7.2 and 7.4 million shares (prior to the application of thetreasury stock method) were excluded from the computation of net loss per sharein each of the three year periods ended December 31, 2006, 2005 and 2004,respectively, as they would have an antidilutive effect due to Caliper’s netloss. Common stock equivalents used to determine net loss per share in 2005exclude contingently issuable shares in connection with the NovaScreen acquisition.

***Reclassifications***

Amounts in the 2005financial statements have been reclassified to conform to the 2006 financialstatement presentation. Employee stock-based compensation expense, which waspreviously disclosed as a separate income statement line item, has beenreflected within costs and expenses in accordance with SFAS 123R. Intangibleassets have been broken out on the face of the balance sheet by major class.These reclassifications had no effect on previously reported net loss, totalstockholders’ equity or net loss per share.

***Recent AccountingPronouncements***

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes*,an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48clarifies the accounting for uncertainties in income taxes recognized in anenterprise’s financial statements. The interpretation requires that Caliperdetermine whether it is more likely than not that a tax position will besustained upon examination by the appropriate taxing authority. If a taxposition meets the more likely than not recognition criteria, FIN 48 requiresthe tax position be measured at the largest amount of benefit greater than 50percent likely to be realized upon ultimate settlement. This accountingstandard is effective for fiscal years beginning after December 15, 2006.Caliper is currently evaluating FIN 48 and the effect, if any, that it willhave on our financial position and results of operations.

F-14

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   Summary of Significant Accounting Policies  (Continued)

In September 2006,FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. This accounting standard iseffective for fiscal years beginning after November 15, 2007. The effect,if any, of adopting SFAS 157 on Caliper’s financial position and results ofoperations has not been determined.

**3.   Acquisitions**

***Xenogen Corporation***

On August 9, 2006, Caliper completed itsacquisition of Xenogen for $62.1 million, including $52.2 million in Calipercommon stock, $7.1 million in warrants and $2.8 million of estimated directacquisition costs. Xenogen develops and markets products, technologies andservices for acquiring, analyzing and managing comprehensive image data fromlive animals. Xenogen’s in vivo biophotonic imaging system combinestechnologies in molecular biology and physiology to enable researchers to trackand monitor the dynamic properties associated with the mechanisms of diseaseand the impact of drugs on such mechanisms as they occur at the molecular levelin live animals. The principal goals of the acquisition were as follows:

·       *ImproveCaliper’s strategic position in the markets it serves by allowing it to supplyits customers with systems and services for use in both in vitro and in vivoresearch*.   The acquisition allows Caliper to supply thefast-growing molecular imaging market and is expected to position Caliper asone of the first life science instrumentation companies able to provide a comprehensiveoffering of products and services for both in vitro and in vivo research.

·       *Academic and commercial cross-selling opportunities.*   Caliperbelieves that the respective market strengths of Xenogen, with its strongacademic presence, and Caliper, with its strong commercial presence, complementeach other, potentially resulting in sales synergies.

·       *Improve ability to fulfill the needs of researchers.*   Caliperbelieves it is capable of enhancing Xenogen’s existing platforms to furthersatisfy the needs of researchers who are looking for increased applicationpower and flexibility in imaging research.

The value of the common stock issued was calculated inaccordance with the terms of the merger agreement and EITF No. 99-12,*Determination of the Measurement Date for theMarket Price of Acquirer Securities Issued in a Purchase Business Combination*.The value of the warrants issued and assumed was estimated using theBlack-Scholes-Merton option-pricing model. Caliper issued 12,108,877 shares ofcommon stock and warrants to purchase 4,701,733 shares of common stock, andassumed 1,830,581 of Xenogen warrants to purchase shares of common stock, inexchange for all of Xenogen’s equity securities outstanding at the closing. TheCaliper warrants have a term of five years from the closing and an exerciseprice of $6.79 per share. Caliper reserved 1,060,273 common shares and411,698 warrants to purchase shares of common stock for issuance subject to thefuture potential exercise of the Xenogen warrants assumed by Caliper.

Xenogen’s operations,assumed as of the date of the acquisition, are included in the results ofoperations of Caliper beginning on August 9, 2006. The acquisition wasaccounted for as a purchase business combination in accordance with SFAS No. 141,*Business Combinations*, and Caliperaccordingly 

F-15

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**3.**   Acquisitions (Continued)

allocated the estimated purchase price of Xenogenbased upon the fair value of net assets acquired and liabilities assumed. Thetotal purchase price was allocated to acquired assets and assumed liabilitiesas follows (in thousands):

| Cash and cash  equivalents                                                             |   | $       | 9,791  |   |
|----------------------------------------------------------------------------------------|--------|---------|--------|--------|
| Other current  assets                                                                  |   | 14,234  |   |
| Other assets                                                                           |   | 2,166   |   |
| Liabilities  assumed                                                                   |   | (27,459 | )      |
| Liabilities  established for employee terminations and facility closures (see Note 12) |   | (4,497  | )      |
| Identifiable  intangible assets                                                        |   | 44,849  |   |
| In-process  research and development                                                   |   | 2,898   |   |
| Goodwill                                                                               |   | 20,098  |   |
|                                                                                   |   | $       | 62,080 |   |

 

The allocation of thepurchase price is expected to be finalized within one year of the acquisitionupon resolution of assumed obligations and potential liabilities. Goodwillrelated to the Xenogen transaction is not tax deductible. Acquired intangible assetsconsisted of the following (in thousands):

| ** **                            | ** ** | **Useful Life** | ** ** | **Fair   Value** | ** ** |
|---------------------------------------|------------|----------------------|------------|-----------------------|------------|
| Backlog                               |       | 1 year               |       | $                     | 78         |   |
| Developed and  contract technologies  |       | 3 to 6 years         |       | 6,770                 |       |
| Customer  contracts and relationships |       | 8 years              |       | 4,990                 |       |
| Core technologies                     |       | 8 to 9 years         |       | 30,113                |       |
| Trade name                            |       | Indefinite           |       | 2,898                 |       |
|                                  |       |                 |       | $                     | 44,849     |   |

 

Fair value was determined by an independent appraisaland was based upon projected future discounted cash flows taking into accountrisks related to the characteristics and application of the technology,existing and future markets and assessments of life cycle stage of thetechnology.

As of December 31,2006, the weighted average amortization period for acquired intangibles,excluding the trade name, is 7.8 years. Amortization expense was approximately$2.1 million related to Xenogen in 2006. Future amortization of acquiredintangible assets is estimated as follows (in thousands):

| Years ending  December 31: |   |   |   |
|---------------------------------|--------|--------|--------|
| 2007                            |   | $      | 5,372  |   |
| 2008                            |   | 5,324  |   |
| 2009                            |   | 5,301  |   |
| 2010                            |   | 5,147  |   |
| 2011                            |   | 4,965  |   |
| Thereafter                      |   | 13,726 |   |
|                            |   | $      | 39,835 |   |

 

F-16

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**3.**   Acquisitions (Continued)

In-process research anddevelopment costs of approximately $2.9 million were expensed within researchand development during the year ended December 31, 2006 within theaccompanying Statement of Operations.

***NovaScreen Biosciences Corporation***

On October 3, 2005,Caliper completed the acquisition of NovaScreen for $23.3 million,including $17.6 million in Caliper common stock, $4.4 million of cashand $1.3 million of estimated direct acquisition costs. NovaScreen’soperations, assumed as of the date of the acquisition, are included in theresults of operations of Caliper beginning on October 3, 2005. NovaScreenshareholders can earn up to an additional $8.0 million contingent on theachievement of defined revenue milestones over the 30-month period fromthe closing date of the acquisition. As of December 31, 2006, none of thedefined milestones had been achieved, and due to the cumulative nature of themilestone targets, it is unlikely they will be met during the defined period.

***Unaudited Pro Forma Financial Information***

Unauditedpro forma operating results for Caliper for the years ended December 31,2006 and 2005, assuming the above acquisitions were completed as of January 1,2005, would have been as follows (in thousands, except per share amounts):

| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Revenue                                    |       | $        | 132,657    |     | $          | 132,445 |   |
| Operating loss                             |       | (41,042  | )          | (38,097  | )          |
| Net loss                                   |       | (40,191  | )          | (38,319  | )          |
| Basic and diluted  loss per share          |       | (0.87    | )          | (0.88    | )          |
| Pro forma weighted  average shares assumed |       | 46,042   |       | 43,422   |       |
|                                            |            |          |            |          |            |  |  |

 

The unaudited proforma financial information is presented for informational purposes only, andis not necessarily indicative of Caliper’s operating results had theacquisitions been completed on the date for which the pro forma results giveeffect. The pro forma results reflect the following pro forma adjustments:

·       Amortizationrelated to acquired intangible assets of $3.3 million and $6.5 million for 2006and 2005, respectively, have been included in the pro forma operating results.

·       Revenueof $1.9 million that would have been included in Xenogen’s reported revenue ona continuing GAAP basis has been added back to 2006 revenue. This adjustmentresulted from a $3.5 million purchase accounting adjustment to record deferredrevenues of Xenogen at fair value in accordance with SFAS No. 141 and EITFNo. 01-03, *Accounting in a BusinessCombination for Deferred Revenue of an Acquiree.*

·       Costof product revenue charges of $0.1 million related to the valuation ofinventories at fair value as of the date of acquisition have been excluded fromthe pro forma operating results shown above.

·       In-process research anddevelopment charges of $2.9 million, which are non-recurring, have beenexcluded from the pro forma operating results shown above.

F-17

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**4.**   AcquiredResearch and Development

In August 2006, inconnection with the Xenogen acquisition, Caliper expensed $2.9 million ofin-process research and development costs within research and developmentexpenses in the accompanying Statement of Operations. Projects in process as ofthe date of acquisition were evaluated in the context of SFAS No. 2, *Accounting for Research and Development Costs*, and FASBInterpretation No. 4, *Applicability of FASBStatement No. 2 to Business Combinations Accounted for by the PurchaseMethod*, which require costs to purchase in-process research anddevelopment be expensed as incurred. The IVIS Spectrum project was the keyelement of the $2.9 million charge. Fair value was determined by an independentappraisal and was based on future discounted cash flows.

On April 15, 2004,Caliper purchased from Amphora certain technology rights and know-how relatedto improving the performance of certain types of cell-based assays on amicrofluidic chip. Caliper paid $200,000 in cash and issued to Amphora creditsto purchase $900,000 worth of products from Caliper in exchange for theacquired technology and know-how. Through April 15, 2009, Caliper willalso pay royalties to Amphora based on datapoint revenue received by Caliperfrom end-users as a result of datapoints produced using the acquiredtechnology. Caliper is further developing the acquired technology to adapt itfor potential applications and uses on the LabChip 3000 instrument platform.The entire consideration was expensed as research and development expenseduring the second quarter of 2004. The transaction has been accounted for inaccordance with APB No. 29, *Accounting forNon-Monetary Transactions*, pursuant to which Caliper valued theacquired research and development based on the fair value of the productcredits and cash paid and established a deferred liability for the futureproduct credits owed to Amphora. Caliper recognized $810,000 of product revenue(the determined fair value of the credits) in 2004 based upon the productcredits that were fully utilized by Amphora as of December 31, 2004.

**5.**   Cash,Cash Equivalents and Marketable Securities

Caliper’scash, cash equivalents and marketable securities are invested in a diversifiedportfolio of financial instruments, including money market instruments,corporate notes and bonds, government or government agency securities and otherdebt securities issued by financial institutions and other issuers with strongcredit ratings. Marketable securities are freely tradable at any time,irrespective of their maturity dates. Caliper’s marketable securities areclassified within current assets as such investments are available to be soldin response to operating cash needs, or as a result of changes in theavailability of and the yield on alternative investments. By policy, the amountof credit exposure to any one institution is limited. Investments are generallynot collateralized and primarily mature within three years. The following is asummary of available-for-sale securities as of December 31, 2006 (inthousands):

| ** **                                     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------------------------------|------------|---------------------|------------|-------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| Cash and money market  funds                   |       |                | $          | 11,634                        |       |                         |       | $                              | —     |   |   |   | $ | — |   |   |   | $ | 11,634 |   |   |
| Bonds of the U.S.  Government and its agencies |       |                | 1,766      |                          |       |                         | (5         | )                              |       |   | 1 |   |   |   | 1,762 |   |   |
| Corporate debt  securities                     |       |                | 11,455     |                          |       |                         | (11        | )                              |       |   | 97 |   |   |   | 11,541 |   |   |
|                                           |       |                | $          | 24,855                        |       |                         |       | $                              | (16        | ) |   |   | $ | 98 |   |   |   | $ | 24,937 |   |   |
| Reported as:                                   |       |                |       |                          |       |                         |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                     |       |                | $          | 11,634                        |       |                         |       | $                              | —     |   |   |   | $ | — |   |   |   | $ | 11,634 |   |   |
| Marketable securities                          |       |                | 13,221     |                          |       |                         | (16        | )                              |       |   | 98 |   |   |   | 13,303 |   |   |
|                                           |       |                | $          | 24,855                        |       |                         |       | $                              | (16        | ) |   |   | $ | 98 |   |   |   | $ | 24,937 |   |   |

 

F-18

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**5.**   Cash, Cash Equivalents and Marketable Securities(Continued)

The following is a summaryof the cost and estimated fair value of available-for-sale securities at December 31,2006, by contractual maturity (in thousands):

| ** **                                 | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|--------------------------------------------|------------|---------------------|------------|--------------------------------|------------|
| Mature within one  year                    |       |                | $          | 11,783                         |       |   |   | $ | 11,775 |   |   |
| Mature after one  year through three years |       |                | 1,438      |                           |       |   | 1,528 |   |   |
| Total                                      |       |                | $          | 13,221                         |       |   |   | $ | 13,303 |   |   |

 

The following is a summaryof available-for-sale securities as of December 31, 2005 (in thousands):

| ** **                                     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------------------------------|------------|---------------------|------------|-------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| Cash and money  market funds                   |       |                | $          | 8,096                         |       |                         |       | $                              | —     |   |   |   | $ | — |   |   |   | $ | 8,096 |   |   |
| Bonds of the U.S.  Government and its agencies |       |                | 15,171     |                          |       |                         | (79        | )                              |       |   | — |   |   |   | 15,092 |   |   |
| Corporate debt  securities                     |       |                | 8,007      |                          |       |                         | (49        | )                              |       |   | 79 |   |   |   | 8,037 |   |   |
|                                           |       |                | $          | 31,274                        |       |                         |       | $                              | (128       | ) |   |   | $ | 79 |   |   |   | $ | 31,225 |   |   |
| Reported as:                                   |       |                |       |                          |       |                         |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                      |       |                | $          | 8,096                         |       |                         |       | $                              | —     |   |   |   | $ | — |   |   |   | $ | 8,096 |   |   |
| Marketable securities                          |       |                | 23,178     |                          |       |                         | (128       | )                              |       |   | 79 |   |   |   | 23,129 |   |   |
|                                           |       |                | $          | 31,274                        |       |                         |       | $                              | (128       | ) |   |   | $ | 79 |   |   |   | $ | 31,225 |   |   |

 

Thefollowing is a summary of the cost and estimated fair value ofavailable-for-sale securities at December 31, 2005, by contractualmaturity (in thousands):

| ** **                                 | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|--------------------------------------------|------------|---------------------|------------|--------------------------------|------------|
| Mature within one  year                    |       |                | $          | 19,910                         |       |   |   | $ | 19,838 |   |   |
| Mature after one  year through three years |       |                | 3,268      |                           |       |   | 3,291 |   |   |
| Total                                      |       |                | $          | 23,178                         |       |   |   | $ | 23,129 |   |   |

 

Gross realized gains and losses on sales ofavailable-for-sale securities were $37,000 and $59,000, respectively, in 2006,$10,000 and $69,000, respectively, in 2005, $153,000 and $29,000, respectively,in 2004, and have been included within other income in Caliper’s statement ofoperations. Caliper utilizes the specific identification basis to reclassifyamounts out of accumulated other comprehensive income into earnings.

As of December 31,2006, Caliper held available-for-sale securities having an aggregate value of$10.3 million which carried an unrealized loss position of $16,000, all ofwhich were in a loss position for less than twelve months. As of December 31,2005, $23.0 million of Caliper’s available-for-sale securities were in anunrealized loss position. Although available to be sold to meet operating needsor otherwise, securities are generally held through maturity. Therefore, suchunrealized losses are deemed temporary and have been included withinaccumulated other comprehensive income.

F-19

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**6.**   Inventories

Inventoriesare stated at the lower of cost (determined on a first-in, first-out basis, or “FIFO”)or market. Amounts are relieved from inventory and recognized as a component ofcost of sales on a FIFO basis. Inventories consist of the following (inthousands):

| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw material    |       | $                     | 9,998      |   | $ | 5,075 |   |
| Work-in-process |       | 1,380                 |       | 762 |   |
| Finished goods  |       | 7,380                 |       | 5,224 |   |
| Inventories     |       | $                     | 18,758     |   | $ | 11,061 |   |

 

Caliper reserves or writesoff the cost of inventory which it specifically identifies and considers to beobsolete or excess. Caliper defines obsolete inventory as inventory that willno longer be used in the manufacturing process. Excess inventory is generallydefined as inventory in excess of projected usage, and is determined usingmanagement’s best estimate of future demand at the time, based upon informationthen available to Caliper. Caliper uses a twelve-month demand forecast and, inaddition to the demand forecast, Caliper also considers: (1) parts andsubassemblies that can be used in alternative finished products, (2) partsand subassemblies that are unlikely to be impacted by engineering changes, and (3) knowndesign changes which would reduce Caliper’s ability to use the inventory asplanned. During 2006, 2005 and 2004, respectively, Caliper recorded charges of$238,000, $23,000, and $1.2 million to cost of product revenues for excess andobsolete inventories.

**7.**   Propertyand Equipment

Propertyand equipment consists of the following (in thousands):

| ** **                                 | ** ** | ** **                                          | ** ** | **December 31,**               | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| **Asset Classification**              | ** ** | ** **                                          | ** ** | **Estimated Useful Life** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Machinery and  equipment                   |       | 2-5  years                                          |       | $                                   | 16,803     |   | $ | 15,496 |   |
| Computers and  information systems         |       | 3-5  years                                          |       | 7,080                               |       | 6,949 |   |
| Office equipment,  furniture and fixtures  |       | 5  years                                            |       | 2,109                               |       | 2,131 |   |
| Leasehold  improvements                    |       | Shorter  of estimated useful  life or life of lease |       | 12,498                              |       | 9,908 |   |
|                                       |       |                                                |       | 38,490                              |       | 34,484 |   |
| Accumulated  depreciation and amortization |       |                                                |       | (25,308                             | )          | (22,465 | ) |
| Property and equipment,  net               |       |                                                |       | $                                   | 13,182     |   | $ | 12,019 |   |
|                                            |            |                                                     |            |                                     |            |  |  |  |  |  |  |

 

Depreciation expense, including amortization of assetsunder capital leases, was $3.6 million, $3.1 million, and $6.1 million for theyears ended December 31, 2006, 2005, and 2004, respectively. Theamortization of assets recorded under capital leases is not material and isincluded within depreciation expense in the current period.

F-20

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**8.   Goodwill andIntangibles**

***Goodwill***

The $19.9 million changein the carrying value of goodwill during 2006, resulted from Caliper’sacquisition of Xenogen in 2006 (see Note 3) and from final purchase priceadjustments affecting goodwill originally recorded for NovaScreen which wasacquired in 2005. No amount of the goodwill balance at December 31, 2006will be deductible for income tax purposes.

***Intangibles***

As of December 31,2006, intangible assets consists of the following (in thousands):

| **Asset Classification**                | ** ** | ** ** | ** ** | **Weighted Average  Amortization  Period** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------------------------------|------------|----------|------------|-------------------------------|------------|---------|------------|
| Amortized intangible  assets:                |       |       |       |                                            |       |     |       |                          |       |    |       |   |   |
| Core technologies                            |       |       | 8.8 years  |                                            |       | $        | 30,113     |                          |       | $       | (1,348     | ) |   | $ | 28,765 |   |
| Developed and  contract technologies         |       |       | 5.7 years  |                                            |       | 25,634   |       |                          | (11,349    | )       |       | 14,285 |   |
| Customer  contracts, lists and relationships |       |       | 6.5 years  |                                            |       | 10,110   |       |                          | (3,394     | )       |       | 6,716 |   |
| Other intangibles                            |       |       | 2.3 years  |                                            |       | 230      |       |                          | (88        | )       |       | 142 |   |
|                                         |       |       | 7.2 years  |                                            |       | $        | 66,087     |                          |       | $       | (16,179    | ) |   | $ | 49,908 |   |
| Unamortized trade name  intangible           |       |       |       |                                            |       | $        | 2,898      |                          |       |    |       |   |   |   |

 

As of December 31,2005, intangible assets consisted of the following (in thousands):

| **Asset Classification**                | ** ** | ** ** | ** ** | **Weighted Average  Amortization  Period** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------------------------------|------------|----------|------------|-------------------------------|------------|---------|------------|
| Amortized intangible  assets:                |       |       |       |                                            |       |     |       |                          |       |    |       |   |   |
| Developed  technologies                      |       |       | 5.7 years  |                                            |       | $        | 18,864     |                          |       | $       | (7,299     | ) |   | $ | 11,565 |   |
| Customer  contracts, lists and relationships |       |       | 5.0 years  |                                            |       | 5,120    |       |                          | (1,934     | )       |       | 3,186 |   |
| Government  contracts and grants             |       |       | 4.0 years  |                                            |       | 980      |       |                          | (62        | )       |       | 918 |   |
| Other intangibles                            |       |       | 3.1 years  |                                            |       | 174      |       |                          | (11        | )       |       | 163 |   |
|                                         |       |       | 5.5 years  |                                            |       | $        | 25,138     |                          |       | $       | (9,306     | ) |   | $ | 15,832 |   |
| Unamortized trade name  intangible           |       |       |       |                                            |       | $        | 990        |                          |       |    |       |   |   |   |

 

Amortization expense is computed based upon theestimated timing of the undiscounted cash flows used to value each respectiveasset over the estimated useful life of the particular intangible asset, orusing the straight-line method over the estimated useful life of the intangibleasset when the pattern of cash flows is not necessarily reflective of the trueconsumption rate of the particular intangible asset.

In 2006, Caliper recorded charges of $1.7 millionrelated to the impairment of intangible assets established with the acquisitionof NovaScreen classified within amortization of intangible assets. The chargeconsisted of $990,000 related to the NovaScreen trade name and $719,000 relatedto government grants and contracts each of which was written off during thefourth quarter of 2006 based upon the present value of remaining cash flowsrelated to these intangibles. The charge for the trade name relates to Caliper’sdecision to combine its drug discovery screening and profiling services forboth in vitro and in vivo research under a new trade name, Caliper Discoveryand Alliance Services. The charge for 

F-21

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**8.**   Goodwill and Intangibles (Continued)

government contracts andgrants resulted from a lack of success in obtaining new sources of governmentresearch and development funding, primarily due to increased competition forfunding. Caliper did not incur any impairment losses in 2005. In 2004, Caliperrecorded charges of $320,000 related to the impairment of certain leaseholdimprovements and other fixed assets no longer being utilized. Of this amount,$174,000 was classified within selling, general and administrative expenses and$146,000 was classified within research and development expenses. 

Amortizationexpense was $7.1 million, $4.1 million and $3.8 million during the years ended December 31,2006, 2005 and 2004, respectively. Scheduled amortization in future periods isas follows (in thousands):

| Years ending  December 31: |   |   |   |
|---------------------------------|--------|--------|--------|
| 2007                            |   | $      | 10,107 |   |
| 2008                            |   | 8,313  |   |
| 2009                            |   | 6,204  |   |
| 2010                            |   | 5,806  |   |
| 2011                            |   | 5,417  |   |
| Thereafter                      |   | 14,061 |   |
|                            |   | $      | 49,908 |   |

 

**9.   Other Current andNon-current Liabilities**

Othercurrent and non-current liabilities consist of the following (in thousands):

| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accrued bonus                       |       | $                     | 3,639      |   | $ | 4,081 |   |
| Accrued vacation  and other         |       | 3,778                 |       | 2,693 |   |
| Total accrued compensation          |       | $                     | 7,417      |   | $ | 6,774 |   |
| Accrued construction-in-process     |       | $                     | —     |   | $ | 1,644 |   |
| Accrued warranty                    |       | 2,235                 |       | 1,555 |   |
| Accrued VAT and  other taxes        |       | 1,793                 |       | 1,320 |   |
| Deferred rent                       |       | 1,192                 |       | 273 |   |
| Accrued other                       |       | 6,343                 |       | 3,550 |   |
| Total other accrued liabilities     |       | $                     | 11,563     |   | $ | 8,342 |   |
| Deferred rent                       |       | $                     | 5,105      |   | $ | 2,861 |   |
| Deferred revenue  and other         |       | 732                   |       | 417 |   |
| Total other  noncurrent liabilities |       | $                     | 5,837      |   | $ | 3,278 |   |

 

F-22

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**9.**   Other Current and Non-current Liabilities (Continued)

***Warranty Obligation***

Changesin Caliper’s warranty obligation during the years ended December 31, 2006,and 2005 are as follows (in thousands):

| Balance,  December 31, 2004                    |   | $      | 1,436  |   |
|-----------------------------------------------------|--------|--------|--------|--------|
| Warranties issued  during the period                |   | 1,671  |   |
| Settlements and  adjustments made during the period |   | (1,552 | )      |
| Balance,  December 31, 2005                    |   | 1,555  |   |
| Warranties issued  during the period                |   | 2,149  |   |
| Settlements and  adjustments made during the period |   | (1,469 | )      |
| Balance,  December 31, 2006                    |   | $      | 2,235  |   |

 

***Deferred Rent***

Deferred rent is comprisedof: i) the Hopkinton lease incentive described below; ii) the obligationestablished in purchase accounting related to the above fair market value leasein Cranbury, New Jersey; and iii) the effects of recording rent escalations ona straight line basis over the lease term. In connection with the new Hopkintonlease signed in 2005, Caliper made investments in building alterations andleasehold improvements of approximately $7.3 million, of which the landlordfunded approximately $3.7 million, with the balance funded by Caliper. Thecapitalized leasehold improvements are being amortized over the initial life ofthe lease. The improvements funded by the landlord are treated as leaseincentives under FASB Technical Bulletin No. 88-1, *IssuesRelating to Accounting for Lease*s. Accordingly, the funding receivedfrom the landlord was recorded as fixed asset additions and a deferred rentliability on the consolidated balance sheet. The deferred rent liability isbeing amortized as a reduction to rent expense over the life of the lease. Inaccordance with FASB No. 95, *Statement of Cash Flows*cash flows from the landlord for the reimbursement of improvements have beenreported within cash from operating activities, while cash flows remitted forthe acquisition of leasehold improvements are classified within investingactivity cash flows.

**10.   Credit Facilityand Other Long-Term Obligations**

On August 9, 2006, Caliper entered into a loanand security agreement with a bank (the “Credit Facility”) which permitsCaliper to borrow up to $20.0 million in the form of revolving loan advancesincluding up to $5.0 million in the form of letters of credit. Principalborrowings under the Credit Facility accrue interest at a floating per annumrate equal to the prime rate if Caliper’s unrestricted cash held at the bankexceeds $20.0 million, or prime plus one-half of one percentage point ifCaliper’s unrestricted cash held at the bank is below $20.0 million. Under theCredit Facility, Caliper is permitted to borrow up to $20.0 million, providedit maintains unrestricted cash of at least $20.0 million with the bank, or isotherwise subject to a borrowing base limit consisting of up to (a) 80% ofeligible accounts receivable, as defined, plus (b) the lesser of 90% ofCaliper’s unrestricted cash maintained at the bank or $10.0 million. The bankhas first priority and borrowings are secured by substantially all assets ofthe Company. The Credit Facility has a two-year initial maturity. During thefirst eighteen (18) months following Caliper’s merger with Xenogen, Caliper isrequired to pay interest on a minimum of $8.0 million of outstanding borrowings.

F-23

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**10.**   Credit Facility and Other Long-Term Obligations(Continued)

The Credit Facility includes traditional lending andreporting covenants including that certain financial covenants applicable toliquidity and earnings are to be maintained by Caliper and tested as of thelast day of each quarter. As of December 31, 2006, Caliper did not complywith one of two liquidity covenants under the Credit Facility. Subsequent toyear end, the bank waived the covenant violations as of December 31, 2006,as well as amended the Company’s required financial covenants for 2006 andprospectively. Caliper, upon receipt of the waiver, expects to remain incompliance with the amended covenants throughout 2007, and therefore continuesto reflect the Credit Facility as a long-term obligation. 

The Credit Facility also includes several potentialevents of default such as payment default, material adverse change conditionsand insolvency conditions that could cause interest to be charged at prime plustwo percentage points, or in the event of any uncured events of default, couldresult in the bank’s right to declare all outstanding obligations immediatelydue and payable.

In August 2006, Caliper utilized the CreditFacility to refinance Xenogen’s outstanding credit facility with a bank (approximately$8.0 million as of August 9, 2006), and consolidate other existing debtobligations of NovaScreen (approximately $370,000). In addition, Caliperfinanced certain loan fees, interest and costs through increased borrowings(approximately $217,000). The Credit Facility will serve as a source of capitalfor ongoing operations and working capital needs. 

Outstandingobligations under the Credit Facility and Other Obligations consisted of thefollowing (in thousands):

| ** **                                      | ** ** | **Interest Rates** | ** ** | **Payment Terms** | ** ** | **Repayment  Schedule** | ** **                     | **Due Date** | ** ** | **December 31,   2006** | ** ** | **December 31,   2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|--------------------------------|-------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Credit Facility                                 |       |                    | 8.75%      |                   |       |                    | Interest  only                 |              |       | Monthly,  Principal at  maturity  |       |                              | 2008       |   |   |   | $ | 8,587 |   |   |   | $ | — |   |   |
| Capital Loans                                   |       |                    | 9.57-9.94% |                   |       |                    | Principal &  interest |              |       | Monthly                           |       |                              | 2007       |   |   |   | 98 |   |   |   | — |   |   |
| Bank Notes  Payable                             |       |                    | 5.90-7.75% |                   |       |                    | Principal &  interest |              |       | Monthly                           |       |                              | 2009       |   |   |   | — |   |   |   | 453 |   |   |
|                                            |       |                    |       |                   |       |                    |                           |              |       |                              |       |                              |       |   |   |   | 8,685 |   |   |   | 453 |   |   |
| Less: Current  portion of long-term obligations |       |                    |       |                   |       |                    |                           |              |       |                              |       |                              |       |   |   |   | 98 |   |   |   | 133 |   |   |
| Credit Facility and  other loans payable        |       |                    |       |                   |       |                    |                           |              |       |                              |       |                              |       |   |   |   | $ | 8,587 |   |   |   | $ | 320 |   |   |

 

As of December 31,2006, future scheduled debt payments were as follows (in thousands):

| Years ending December 31: |   |   |   |
|------------------------------------------|--------|--------|--------|
| 2007                                     |   | $      | 98     |   |
| 2008                                     |   | 8,587  |   |
| Total payments                           |   | $      | 8,685  |   |

 

At December 31, 2006,Caliper had $11.4 million in available borrowings under the Credit Facility. Thisamount is restricted by $3.3 million in standby letters of credit related toCaliper’s facilities.

F-24

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.   Commitments andContingencies**

***Leases***

As of December 31,2006, future minimum payments under operating leases (excluding idledfacilities accounted for within accrued restructuring) were as follows (inthousands):

| Years ending  December 31: |   |   |   |
|---------------------------------|--------|--------|--------|
| 2007                            |   | $      | 7,478  |   |
| 2008                            |   | 7,080  |   |
| 2009                            |   | 4,564  |   |
| 2010                            |   | 2,574  |   |
| 2011                            |   | 1,967  |   |
| Thereafter                      |   | 8,775  |   |
| Total minimum  lease payments   |   | $      | 32,438 |   |

 

Rent expense relating to operating leases wasapproximately $4.6 million in 2006, $3.7 million in 2005, and $4.6 million in2004.

Caliper’s worldwide headquarters and instrumentmanufacturing operations are located in Hopkinton, Massachusetts. Caliper’sresearch and development and manufacturing operations for LabChip devices arelocated in Mountain View, California. Caliper’s research and developmentoperations for imaging, biology and reagents are located in Alameda, California.Caliper’s in vivo imaging services business is located in Cranbury, New Jersey.Caliper’s in vitro screening, profiling, and assay development operations arelocated in Hanover, Maryland. Caliper also has direct sales, service andapplication support operations in several European countries and Japan.

Caliper’s headquarters located in Hopkinton,Massachusetts occupy approximately 130,000 square feet of leased space wherethe initial term of the lease will expire on December 31, 2015. The leasecontains two five-year extension options, which are exercisable at Caliper’soption. Annual basic rent under this lease will be $1.2 million from January 1,2007 through June 30, 2008; $1.5 million from July 1, 2008 through December 2011;and $1.6 million from January 1, 2012 through December 31, 2015.Under the terms of the lease, Caliper is also required to pay utilities,property taxes, and other operating and maintenance expenses.

Caliper’s operationslocated in Mountain View, California occupy approximately 53,000 square feet ofleased space under an operating lease through November 2008. Annual basicrent under this lease will be $1.9 million from January 1, 2007 through November 30,2007; and $2.0 million from December 1, 2007 through November 30,2008. Caliper’s operations located in Alameda, California occupy approximately36,000 square feet of leased space under an operating lease through April, 2011.Annual basic rent under this lease will be $0.6 million for January 1,2007 through February 28, 2007; and $0.7 million from March 1, 2007through April 30, 2011. Caliper’s operations located in Cranbury, NewJersey occupy approximately 37,000 square feet of the 57,800 feet of leasedspace under an operating lease through October 2009. Annual basic rentunder this lease will be $2.0 million over the remaining term. Caliper’soperations located in Hanover, Maryland occupy approximately 26,000 square feetof leased space under an operating lease through October 2008. Annualbasic rent under this lease will be $211,000 from January 1, 2007 through October 31,2007; and $217,000 from November 1, 2007 through October 31,

F-25

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.**   Commitments and Contingencies (Continued)

2008.Caliper’s international subsidiary operations occupy an aggregate total ofapproximately 34,000 square feet of leased space under operating leases thatexpire through 2011.

***Letters-of-Credit***

In connection with itsMountain View, California leases, Caliper has standby letters-of-credit, whichrestrict available borrowing under its Credit Facility, in the outstandingamount of $1.8 million as of December 31, 2006 as security deposits underthe leases. In connection with its Hopkinton, Massachusetts lease, Caliper hasstandby letters-of-credit, which restrict available borrowing under its CreditFacility in the outstanding amount of $1.3 million. In addition, Caliper hasother standby letters-of-credit securing customer deposits outstanding in theamount of $225,000.

***Inventory Purchases***

As of December 31, 2006 and 2005, Caliper had anon-cancelable purchase commitment in the amount of approximately $414,000 and$449,000, respectively, with its foreign supplier for the purchase of glassstock used in the manufacture of certain types of its chips.

As of December 31,2006, Caliper had a non-cancelable purchase commitment in the amount ofapproximately $2.8 million with its CCD camera supplier for the purchase ofcameras used in the manufacture of in vivo imaging instrumentation.

***Royalty Commitments***

On August 9, 2006, Stanford University providedXenogen with a copy of an audit report prepared by a third party consultantwhich asserted certain claims of underpayments under the license agreementbetween Stanford and Xenogen during the period from 2002 through March 31,2006 based upon the consultant’s interpretation of Xenogen’s exclusive licensewith Stanford. Upon review of the audit report, Caliper determined thatadditional royalties of $71,000 were owed to Stanford. This underpayment wasaccrued as an assumed obligation as of August 9, 2006 in connection withCaliper’s acquisition of Xenogen. Caliper is contesting the remaining paymentobligation that is claimed in the Stanford audit report, and as a result, hasnot accrued for any liability beyond the $71,000 of royalties that have beenaccrued and paid. Caliper is currently discussing with Stanford the scope ofXenogen products that are subject to the royalty provisions of the Stanfordlicense agreement. As a result of these discussions, the parties may amendthe license agreement to change the royalties Caliper pays to Stanford forfuture product sales. An amendment may also include the payment of backroyalties to Stanford for products Caliper has already sold. Caliper has notdiscussed with Stanford the specific terms and conditions of an amendment. Atany time, either party may choose binding arbitration to resolve any disputeover the amount of back royalties owed, if any. The amount of any remainingcontingent obligation, if any, cannot currently be estimated, nor is itprobable that a liability exists. However, Caliper believes that this matterwill be resolved within the next twelve months. In accordance with SFAS 141,Caliper will account for any additional liability related to the identifiedcontingent obligation as of August 9, 2006 as additional purchase pricewhich will be recorded to goodwill.

During the fourth quarterof 2002, Caliper entered into an amendment and restatement of Caliper’sexisting license agreements with UT-Battelle, LLC under which Caliper hasobtained an exclusive license to the patents covering the inventions of Dr. J.Michael Ramsey. Royalty obligations to UT-Batelle, which 

F-26

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.**   Commitments and Contingencies (Continued)

exceededcertain minimums set forth in the amendment, were $195,000, $203,000 and$53,000 in 2006, 2005 and 2004, respectively. Caliper also has an exclusivelicense from the Trustees of the University of Pennsylvania to certain patentsrelating to certain microfluidic applications and chip structures. TheUniversity of Pennsylvania license includes minimum annual royalty obligationsthat increase $20,000 per year, up to $160,000 in 2008. Caliper incurredminimum royalties of $120,000, $100,000, and $80,000 in 2006, 2005 and 2004,respectively. Royalties are expensed when incurred.

**12.   RestructuringActivities**

During the periodfrom May 2003 through December 2006, Caliper incurred restructuringcharges and credits related to planned workforce reductions and facilityclosures that were undertaken by management to control costs and improve thefocus of its operations in order to reduce losses. Certain of these activitiestook place following Caliper’s acquisition of Zymark in 2003, and were actionsdesigned to eliminate redundant costs and to improve the overall operatingefficiency of the newly combined business. Included within the restructuringactivities, which were recorded within restructuring charges (credits), net inthe accompanying statement of operations, were a series of workforce reductionswhich were completed during 2004, and a series of facility closures asdescribed below:

·       InNovember 2003, Caliper closed one of its three facilities in MountainView, California that was used primarily for instrument manufacturing andresearch and development activities, and recognized a $7.7 million chargerelated to costs estimated over the remainder of the lease (which terminates inJune 2008), including leasehold improvements having a carrying value of$319,000 that had no further use.

·       InJune 2004, as a result of efficiencies achieved following Caliper’sstrategic prioritization of research and development programs, Caliper vacatedand shut down approximately one half of a second Mountain View facility thatwas primarily used for research and development activities, and recognized an additional$2.2 million charge related to costs estimated over the remainder of the lease(which terminates in June 2008), including leasehold improvements having acarrying value of $67,000 that had no further use.

·       InDecember 2004, Caliper was successful in achieving additional efficienciesthat enabled it to complete the full closure of the second facility above. Inconnection with this action, Caliper also reassessed its previous estimatessupporting the earlier charges taken and determined, on the basis of recentmarket information indicating at the time a low probability of obtainingsublease income from these idled facilities, that a $3.6 million charge wasnecessary to both account for the latest closure and reflect the fair value ofits remaining lease payments for both idled facilities as of December 31,2004. Of the total charge, $1.7 million was related to Caliper’s revisedestimate of the sublease income potential and $246,000 was related to leaseholdimprovements that had no further use.

·       InDecember 2005, Caliper adjusted its restructuring obligations by a $1.4million restructuring credit to reflect the net present value of futuresublease rental income based upon subleases it was able to secure in 2005. Therestructuring credit includes payments in 2005 of $233,000, net of broker feesof $68,000.

F-27

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12.**   Restructuring Activities (Continued)

·       InDecember 2006, Caliper adjusted its restructuring obligations by $124,000to reflect the anticipated increase in operating costs for both idled facilitiesover the remainder of the respective lease terms.

The facility closures were accounted for in accordancewith SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*, pursuant to whichCaliper recorded a liability equal to the fair value of the remaining leasepayments as of the cease-use date for each of the closed facilities. Fair valuewas determined based upon the discounted present value of remaining leaserentals (5% discount rate used), for the space no longer occupied, consideringsub lease income at each point in time.

The two vacated facilities in Mountain View,California each include 28,800 square feet of space. Minimum annual lease andoperating expense payments under these leases, which escalate at 3 to 4%annually, are approximately $3.8 million and $1.9 million in 2007 and 2008,respectively. During 2005, Caliper entered into sublease agreements forapproximately 73% of its idled facilities in Mountain View, California. Theagreements extend through June 2008, the end of the current leaseagreement for the facilities. Basic rent and operating expenses contractedunder the subleases is approximately $789,000 in 2007 and $403,000 in 2008. Inconnection with the subleases, $78,000 in deposits is being held by Caliper.

In connection withthe acquisition of Xenogen, Caliper incurred costs associated with theinvoluntary termination of certain employees of Xenogen as well as the closingof duplicate facilities. These costs have been accounted for in accordance withEITF No. 95-3, *Recognition of Liabilitiesin Connection with a Purchase Business Combination*, pursuant towhich Caliper recorded a liability based on a defined exit plan equal to thefair value of the facility obligations and the costs related to theinvoluntarily terminated individuals.

·       Caliperhas identified severance and other expenses relating to the involuntarytermination of personnel performing duplicative general and administrative andmanufacturing functions and established an assumed liability of $3.5 millionrelated to this activity. This action is expected to reduce the total Xenogenworkforce by 34 employees, or approximately 6%. Substantially all affectedemployees were terminated by December 31, 2006. All associated severancepayments will be completed by June 30, 2007.

·       Caliperleft unoccupied one of the Xenogen facilities in Alameda, California with theintention to sublease the facility. As of August 9, 2006, Caliperestablished a liability of $1.0 million related to this lease obligation. Thefair value of the lease obligation was determined based upon the discountedpresent value of remaining lease rentals (8.75% discount rate used) for thespace no longer occupied, considering sublease income potential of theproperty. The lease term expires April 30, 2011.

Caliper assumed a $1.0 million obligation related toXenogen’s St. Louis, Missouri operation. The facility closure was previouslyaccounted for in accordance with EITF 94-3, *Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity (IncludingCertain Costs Incurred in a Restructuring)*. The fair value of theassumed obligation was determined based upon the discounted present value ofremaining lease rentals (using a discount rate of 8.75%) for the space nolonger occupied, considering sublease income potential of the property. Thelease term expires April 30, 2010.

F-28

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12.**   Restructuring Activities (Continued)

The following tablesummarizes the restructuring accrual activity during (in thousands):

| ** **                                   | ** ** | **Severance  and  Related** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|----------------|------------|-----------|------------|
| Balance,  December 31, 2003             |       |                        | $          | 2,083          |       |      | $          | 7,819 |   | $ | 9,902 |   |
| Restructuring  charges                       |       |                        | 180        |           |       | 5,728     |       | 5,908 |   |
| Non-cash  restructuring charges              |       |                        | —     |           |       | (313      | )          | (313 | ) |
| Restructuring  credits                       |       |                        | (134       | )              |       | —    |       | (134 | ) |
| Reclassification  of deferred rent liability |       |                        | —     |           |       | 436       |       | 436 |   |
| Interest  accretion                          |       |                        | —     |           |       | 244       |       | 244 |   |
| Payments                                     |       |                        | (2,129     | )              |       | (2,309    | )          | (4,438 | ) |
| Balance,  December 31, 2004             |       |                        | —     |           |       | 11,605    |       | 11,605 |   |
| Restructuring  credits                       |       |                        | —     |           |       | (1,366    | )          | (1,366 | ) |
| Interest  accretion                          |       |                        | —     |           |       | 361       |       | 361 |   |
| Payments                                     |       |                        | —     |           |       | (3,370    | )          | (3,370 | ) |
| Balance,  December 31, 2005             |       |                        | —     |           |       | 7,230     |       | 7,230 |   |
| Restructuring  charges                       |       |                        | —     |           |       | 124       |       | 124 |   |
| Established  obligations with Xenogen        |       |                        | 3,451      |           |       | 1,046     |       | 4,497 |   |
| Assumed  obligations with Xenogen            |       |                        | —     |           |       | 981       |       | 981 |   |
| Interest  accretion                          |       |                        | —     |           |       | 322       |       | 322 |   |
| Payments                                     |       |                        | (410       | )              |       | (3,584    | )          | (3,994 | ) |
| Balance,  December 31, 2006             |       |                        | $          | 3,041          |       |      | $          | 6,119 |   | $ | 9,160 |   |

 

Therestructuring liability as of December 31, 2006 reflects the minimumfuture payment obligations related to base lease rentals and operating charges,net of sub lease income, over the remaining lease lives through April 2011,discounted at the borrowing rate in effect at the time of the restructuringevent (5% or 8.75%). The remaining severance and facility obligations are asfollows (in thousands):

| Years ending  December 31:       |   |   |   |
|---------------------------------------|--------|--------|--------|
| 2007                                  |   | $      | 7,377  |   |
| 2008                                  |   | 1,988  |   |
| 2009                                  |   | 339    |   |
| 2010                                  |   | 132    |   |
| 2011                                  |   | 8      |   |
| Total minimum  payments               |   | 9,844  |   |
| Less: Amount  representing interest   |   | 684    |   |
| Present value of  future payments     |   | 9,160  |   |
| Less: Current  portion of obligations |   | 7,008  |   |
| Noncurrent portion of  obligations    |   | $      | 2,152  |   |

 

Included within the above obligations is subleaseincome of $1.2 million in 2007 and 2008, $0.8 million in 2009 and 2010, and$0.3 million in 2011.

F-29

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.**   Stockholders’Equity

***Preferred Share Purchase Rights Plan***

In December 2001, theBoard of Directors and stockholders of Caliper adopted a Preferred SharePurchase Rights Plan (“Rights Plan”) under which Caliper issued as a dividendto all holders of its common stock certain rights to acquire additional sharesof common stock at a discount price under certain circumstances (“Rights”). Thedividend of the Rights was made to holders of Caliper’s common stock on recordas of January 8, 2002. Shares of common stock that are newly issued afterthis date will also carry Rights. The Rights Plan is designed to provideprotection to stockholders from unsolicited and abusive takeover tactics,including attempts to acquire control of Caliper at an inadequate price or totreat all stockholders equally. Under the Rights Plan, each stockholderreceived one Right for each share of Caliper’s outstanding common stock held bythe stockholder. Each Right will entitle the holder to purchase oneone-hundredth of a share of newly designated Series A Junior ParticipatingPreferred Stock of Caliper at an initial exercise price of $100. Initially, theRights are not detachable from Caliper’s common stock and are not exercisable.Subject to certain exceptions, they become immediately exercisable after anyperson or group (an “Acquiring Person”) acquires beneficial ownership of 15% ormore of Caliper’s common stock, or 10 business days (or such date as the Boardof Directors may determine) after any person or entity announces a tender orexchange offer that would result in a 15% or greater beneficial ownershiplevel. At no time will the Rights have any voting power. If the Rights becomeexercisable and a buyer becomes an Acquiring Person, all Rights holders, exceptthe Acquiring Person, will be entitled to purchase, for each Right held, $200worth of Caliper’s common stock for $100. Caliper’s Board of Directors mayamend or terminate the Rights Plan at any time or redeem the Rights prior tothe time a person acquires more than 15% of Caliper’s common stock. Issuance ofthe Rights will not affect the financial position of Caliper or interfere withits business plans. Issuance of the Rights will not affect reported earningsper share and will not be taxable to Caliper or Caliper’s stockholders except,under certain circumstances, if the Rights become exercisable.

***Warrants***

Inconnection with Caliper’s acquisition of Xenogen, Caliper granted Xenogenstockholders an aggregate of 4,701,733 warrants, and reserved an additional411,814 warrants for potential issuance upon the exercise of Xenogen warrants(see below) which were assumed by Caliper. Each warrant granted permits theholder to acquire one Caliper common share at an exercise price of $6.79 pershare through August 9, 2011. Caliper valued the issued warrants using theBlack-Scholes-Merton formula at $1.16 per warrant, or approximately $5.5million in total for all issued and outstanding warrants. This value isincluded in additional paid-in capital as of December 31, 2006. Keyassumptions used to value the warrants issued were as follows:

| Fair market value  at issuance |   | $       | 4.25   |   |
|--------------------------------|--------|---------|--------|--------|
| Exercise price                 |   | $       | 6.79   |   |
| Expected term                  |   | 5 years |   |
| Volatility                     |   | 40      | %      |
| Risk free rate of return       |   | 4.87    | %      |

 

As discussed above, Caliper also assumed certainoutstanding Xenogen warrants. As of August 9, 2006, there were 1,830,581Xenogen warrants outstanding, which were exercisable at $2.91 to $40.75 per 

F-30

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.**   Stockholders’ Equity (Continued)

warrant. Upon thepotential exercise of these warrants, the holders are entitled to receive thatnumber of Caliper shares and warrants that such holder would have been entitledto receive as a Xenogen stockholder as of the acquisition date. The terminationdate of the Caliper warrants that are to be issued upon the eventual exerciseof the Xenogen warrants may not be extended beyond the 5 year expiration date (August 9,2011).

Thefollowing table summarizes information with respect to warrants assumed fromXenogen which remain outstanding and exercisable at December 31, 2006:

| **Expiration Date**                         | ** ** | ** ** | ** ** | **Exercise  Price** | ** ** | **Number of  Xenogen   Warrants** | ** ** | **Equivalent  Caliper Warrants  (.2249 exchange ratio)** | ** ** | **Equivalent  Caliper Shares  (.5792 exchange ratio)** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| August 2,  2012                             |       |       | $          | 2.91                |       |                                        | 111,340    |                                                                    |       | 25,041                                                                |       |   |   | 64,488 |   |   |
| August 15,  2010                            |       |       | $          | 3.29                |       |                                        | 1,412,562  |                                                                    |       | 317,685                                                               |       |   |   | 818,156 |   |   |
| April 30,  2013                             |       |       | $          | 3.64                |       |                                        | 288,044    |                                                                    |       | 64,781                                                                |       |   |   | 166,835 |   |   |
| October 7,  2009 and February 28, 2010 |       |       | $          | 15.82               |       |                                        | 7,900      |                                                                    |       | 1,777                                                                 |       |   |   | 4,576 |   |   |
| October 18,  2011                           |       |       | $          | 40.74               |       |                                        | 8,159      |                                                                    |       | 1,835                                                                 |       |   |   | 4,726 |   |   |
| April 28,  2010                             |       |       | $          | 40.75               |       |                                        | 2,576      |                                                                    |       | 579                                                                   |       |   |   | 1,492 |   |   |
|                                             |       |       |       |                |       | 1,830,581                                   |       |                                                                    | 411,698    |                                                                  |       |   | 1,060,273 |   |   |

 

***Stock Plans***

Thefollowing is a summary of Caliper’s stock plans that are in place as of December 31,2006:

| **Plan**                              | ** ** | ** ** | ** ** | **Plan Shares  Authorized** | ** ** | **Plan Shares  Available** | ** ** | **Awards  Outstanding** | ** ** | **Common Stock  Reserved for  Future Issuance** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------|------------|---------------------------------|------------|-------------------------|------------|----------------------------------------------------------------|------------|
| Option Plans:                         |       |       |       |                             |       |                            |       |                    |       |                                                           |       |   |   |   |   |
| 1999 Equity Plan                      |       | 12,820,000 |       |                             | 2,355,981  |                            |       |                    | 6,176,910  |                                                           |       |   | 8,532,891 |   |   |
| 1999 Directors’  Plan            |       | 556,023    |       |                             | 396,223    |                            |       |                    | 152,800    |                                                           |       |   | 549,023 |   |   |
| 2001  Non-Statutory Stock Option Plan |       | 500,000    |       |                             | 149,516    |                            |       |                    | 350,484    |                                                           |       |   | 500,000 |   |   |
| Acquisition Plan                      |       | 900,000    |       |                             | 65,000     |                            |       |                    | 600,000    |                                                           |       |   | 665,000 |   |   |
|                                  |       | 14,776,023 |       |                             | 2,966,720  |                            |       |                    | 7,280,194  |                                                           |       |   | 10,246,914 |   |   |
| 1999 Purchase Plan                    |       | 1,777,053  |       |                             | 76,977     |                            |       |                    | —     |                                                           |       |   | 76,977 |   |   |

 

In October 1999, Caliper’s Board of Directors andstockholders adopted the 1999 Equity Incentive Plan (“1999 Equity Plan”). The1999 Equity Plan provided for an automatic annual increase in the sharesreserved for issuance for a period of ten years starting in 2000, by thegreater of 5% of outstanding shares on a fully-diluted basis or the number ofshares that have been made subject to awards granted under the 1999 Equity Planduring the prior 12-month period. Over the 10-year period, themaximum number of shares of common stock subject to incentive stock option grantsis limited to 12,820,000 shares. Stock awards under the 1999 Equity Plan may begranted in the form of stock options (incentive and nonstatutory stock options)or stock bonuses (restricted stock and restricted stock units). Each restrictedstock unit represents the recipient’s right to receive a stock bonus of oneshare of common stock, subject to vesting or other performance considerations.Stock awards cancelled under the 1999 Equity Plan are made available for futuregrants. Options granted under the Plan generally have a 10-year term andare subject 

F-31

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.**   Stockholders’ Equity (Continued)

to vesting provisions asdetermined by Caliper’s Board of Directors. The majority of employee equityawards carry a 4-year vesting term.

In October 1999, Caliper’s Board of Directors andstockholders adopted the 1999 Non-Employee Directors’ Stock Option Plan (“1999Directors’ Plan”) which provides for the automatic grant of options tonon-employee directors. The number of shares reserved for issuance willautomatically increase by the greater of 0.3% of outstanding shares on afully-diluted basis or the number of shares subject to options granted underthe 1999 Directors’ Plan during the prior 12-month period.

In December 2001, Caliper’s Board of Directorsadopted the 2001 Non-Statutory Stock Option Plan (“2001 Non-Statutory Plan”).Options under the 2001 Non-Statutory Plan cannot be issued to Caliper’s currentofficers and directors and was therefore not required to be voted on andapproved by stockholders.

In June 2003, Caliper’s Board of Directorsadopted the Acquisition Equity Plan (“Acquisition Plan”), which provides forthe grant of options and restricted shares as inducements to retain keyemployees in connection with a significant acquisition. In July 2003,Caliper granted 600,000 options and 275,000 shares of restricted common stockunder this plan in connection with the Zymark acquisition.

In October 1999, Caliper’s Board of Directors andstockholders adopted the 1999 Employee Stock Purchase Plan (“1999 Purchase Plan”).The initial number of shares reserved was 300,000 and under the 1999 EquityPlan, the number of shares reserved for issuance automatically increasesannually by the greater of 0.5% of outstanding shares on a fully-diluted basis,or the number of shares issued under the 1999 Purchase Plan during the prior 12-monthperiod. The automatic share reserve increase may not exceed 3 million shares inaggregate over the 10-year period.

The 1999 Purchase Plan permits eligible employees toacquire shares of Caliper’s common stock through payroll deductions of up to 10%of their gross earnings. No employee may participate in the 1999 PurchasePlan if, immediately after the grant, the employee has voting power over 5% ormore of the outstanding capital stock. The Board may specify offerings of up to27 months under the terms of the plan; however, Caliper’s Board of Directorshas currently limited offering periods to six months. Unless the Boarddetermines otherwise, common stock may be purchased at the lower of 85% of thefair market value of Caliper’s common stock on the first day of the offering or85% of the fair market value of Caliper’s common stock on the purchase date.The initial offering period began on the effective date of the initial publicoffering. Caliper issued 249,414, 208,031, and 363,199 shares under the 1999Purchase Plan in the years 2006, 2005 and 2004, respectively, at a weightedaverage price of $4.36, $4.89, and $3.48, respectively.

F-32

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.**   Stockholders’ Equity (Continued)

A summary of activityunder the stock plans, is as follows: 

| ** **                             | ** ** | ** **    | ** ** | ** **         | ** ** | ** **              | ** **        | **Weighted** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------------|------------|-------------------------|-------------------|--------------|------------|
| ** **                             | ** ** | ** **    | ** ** | **Outstanding**    | ** ** | **Average**             | ** **        |
| ** **                             | ** ** | ** **    | ** ** | **Number of** | ** ** | ** **              | ** **        | **Exercise** | ** ** |
| ** **                             | ** ** | **Available** | ** ** | **Shares**         | ** ** | **Exercise Price** | ** **        | **Price**    | ** ** |
| Balance at  December 31, 2005          |       | 3,991,260     |       | 6,993,421          |       | $                       | 0.00—$162.00 |         |       | $ | 5.98 |   |   |
| Authorized                             |       | —        |       | —             |       | —                  |              |         | —     |   |   |
| Granted                                |       | (1,358,500    | )          | 1,358,500          |       | $                       | 0.00—$6.63   |         |       | $ | 5.14 |   |   |
| Exercised                              |       | —        |       | (532,626           | )          | $                       | 0.47—$5.79   |         |       | $ | 3.56 |   |   |
| Vested                                 |       | —        |       | (186,633           | )          | $                       | 0.00              |         |       | $ | 0.00 |   |   |
| Un-vested Repurchased                  |       | 15,000        |       | (33,503            | )          | $                       | 0.00              |         |       | $ | 0.00 |   |   |
| Forfeited                              |       | 216,937       |       | (216,937           | )          | $                       | 3.63—$33.63  |         |       | $ | 18.48 |   |   |
| Canceled                               |       | 101,840       |       | (101,840           | )          | $                       | 3.27—$8.96   |         |       | $ | 5.63 |   |   |
| Balance at  December 31, 2006     |       | 2,966,537     |       | 7,280,382          |       | $                       | 0.00—$162.00 |         |       | $ | 5.81 |   |   |
| Exercisable at  December 31, 2006 |       |          |       | 4,823,650          |       | $                       | 0.47—$162.00 |         |       | $ | 6.43 |   |   |
| Exercisable at  December 31, 2005 |       |          |       | 4,576,505          |       | $                       | 0.47—$162.00 |         |       | $ | 6.87 |   |   |

 

***Stock Based Compensation***

On January 1, 2006, Caliper adopted SFAS 123R,which requires all share-based payments to be recognized in the incomestatement as an operating expense, based on their fair values. Caliper’sshare-based payment arrangements within the scope of SFAS 123R include options,restricted stock and other forms of stock bonuses, including restricted stockunits, awarded under its option plans, and its Employee Stock Purchase Plan (“ESPP”)which enables participating employees to purchase Caliper’s stock at a discountfrom fair market value. Caliper has applied the modified prospective method inadopting SFAS 123R. For stock option awards and ESPP purchases, Caliperestimates the fair value of share-based payments using the Black-Scholes-Mertonformula and, for all share-based payments made after the adoption of SFAS 123R,recognizes the resulting compensation expense using a straight-line recognitionmethod over the applicable service period of each award. The fair value ofrestricted stock awards (including restricted stock units) is determined basedupon the fair market value of Caliper’s stock on the date of grant. Forrestricted stock and restricted stock unit awards granted prior to January 1,2006, Caliper continues to recognize the resulting compensation expense underthe accelerated expense attribution method. Periods prior to adoption of SFAS123R have not been restated. The majority of the incentive and nonstatutorystock option grants and restricted stock awards carry a 4-year vestingterm, which is generally the requisite service period. There is typically noacceleration provision related to the stock option grants or restricted stockawards. The exercise price of stock option grants is equal to the fair marketvalue of Caliper’s stock on the date of grant. For certain restricted stockawards that cliff vest, Caliper recognizes the resulting compensation expenseusing a straight-line recognition method over the applicable service period ofeach award. Shares issued pursuant to option exercises or restricted stock unitconversion are generally made from previously authorized, but un-issued sharesof common stock, or if available, outstanding treasury shares.

Under the modified prospective method, compensationcost recognized in the year ended December 31, 2006 includes (a) allshare-based payments granted prior to, but not yet vested as of, 

F-33

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

January 1, 2006,based on the grant date fair value estimated in accordance with the originalprovisions of Statement of Financial Accounting Standard No. 123 (“SFAS123”), *Accounting for Stock-Based*

**13.**   Stockholders’ Equity(Continued)

*Compensation*,and (b) all share-based payments granted subsequent to January 1,2006, based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R. Prior to the adoption of SFAS 123R, forfeituresof unvested awards were accounted for in the period in which they occurred. Effectivewith the adoption of SFAS 123R, estimated prospective forfeitures are includedin the determination of compensation cost to be recognized. Caliper applied anexpected forfeiture rate of 5% to unvested stock options for which expense wasrecognized during the year ended December 31, 2006.

Prior to adopting SFAS 123R, Caliper accounted for itsstock options and equity awards in accordance with the intrinsic value methodunder the provisions of APB No.25, and related interpretations. Accordingly,prior to January 1, 2006, no compensation expense was recognized inCaliper’s financial statements for stock-based compensation granted toemployees other than for awards which had an exercise price less than the fairvalue of the underlying common stock on the date of grant. Upon the adoption ofSFAS 123R, deferred stock-based compensation of $3.0 million was reclassifiedto additional paid-in capital within stockholders’ equity.

Caliper accounts for options issued to non-employeesin accordance with the provisions of SFAS 123R and EITF No. 96-18,Accounting for Equity Instruments that are issued to other than Employees forAcquiring, or in Conjunction with Selling Goods or Services. For the yearsended December 31, 2006, 2005 and 2004, compensation expense related tostock-based compensation issued to non-employees was not material.

The adoption of SFAS 123R on January 1, 2006 hadthe effects of increasing Caliper’s operating loss, loss before income taxesand net loss for the year ended December 31, 2006 by $4.1 million over theamount of share-based compensation which would have been recognized under APB No. 25.Basic and diluted net loss per share for the year ended December 31, 2006would have been lower by $0.11 if Caliper had not adopted SFAS 123R. Theadoption of SFAS 123R had no impact on cash flows.

Stock-basedcompensation expense is included within costs and expenses as follows (inthousands):

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cost of product  revenue             |       | $                                           | 506        |   | $ | 166 |   | $ | 186 |   |
| Cost of service  revenue             |       | 151                                         |       | 21 |   | 22 |   |
| Research and  development            |       | 975                                         |       | 280 |   | 515 |   |
| Selling, general  and administrative |       | 3,938                                       |       | 1,118 |   | 2,047 |   |
| Total                                |       | $                                           | 5,570      |   | $ | 1,585 |   | $ | 2,770 |   |

 

F-34

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.**   Stockholders’ Equity (Continued)

The following tableillustrates the effect on net loss and net loss per share as if Caliper hadapplied the fair value-based method in each of the following years (inthousands, except per share data):

| ** **                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Net loss:                                                                                         |       |                                        |       |   |   |
| As reported                                                                                       |       | $                                           | (14,457    | ) | $ | (31,556 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss                     |       | 1,585                                       |       | 2,770 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method |       | (6,094                                      | )          | (12,827 | ) |
| Pro forma net loss                                                                                |       | $                                           | (18,966    | ) | $ | (41,613 | ) |
| Net loss per share:                                                                               |       |                                        |       |   |   |
| As reported                                                                                       |       | $                                           | (0.46      | ) | $ | (1.08 | ) |
| Basic and diluted                                                                                 |       |                                        |       |   |   |
| Pro forma                                                                                         |       |                                        |       |   |   |
| Basic and diluted                                                                                 |       | $                                           | (0.61      | ) | $ | (1.42 | ) |

 

Thefair value of each option award issued under Caliper’s equity plans isestimated on the date of grant using a Black-Scholes-Merton based optionpricing model that uses the assumptions noted in the following table. Expectedvolatilities are based on historical volatility of Caliper’s stock and warrants.The expected term of the options is based on Caliper’s historical optionexercise data taking into consideration the exercise patterns of the optionholder during the option’s life. The risk-free interest rate is based on theU.S. Treasury yield curve in effect on the date of the grant.

| ** **                   | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Expected  volatility (%)     |       | 40-46     |       | 63       |       | 78       |       |
| Risk-free  interest rate (%) |       | 4.63-4.88 |       | 3.96     |       | 3.11     |       |
| Expected term  (years)       |       | 4.16-4.30 |       | 4.1      |       | 4.0      |       |
| Expected dividend yield  (%) |       | —    |       | —   |       | —   |       |

 

F-35

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.**   Stockholders’ Equity (Continued)

A summary of stock optionand restricted stock unit activity under the Plans as of December 31,2006, and changes during the year then ended as follows:

| **Stock Options**                 | ** ** | ** ** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                             | ** ** | **(in thousands)**                             | ** ** |
| Outstanding at  December 31, 2005 |       | 6,381,195  |       |       | $          | 6.56                                   |       |                                                |       |                                |       |   |   |   |   |   |
| Granted                                |       | 1,183,500  |       |       | 5.90       |                                   |       |                                                |       |                                |       |   |   |   |   |
| Exercised                              |       | (532,626   | )          |       | 3.56       |                                   |       |                                                |       |                                |       |   |   |   |   |
| Canceled                               |       | (318,777   | )          |       | 14.31      |                                   |       |                                                |       |                                |       |   |   |   |   |
| Outstanding at  December 31, 2006 |       | 6,713,292  |       |       | $          | 6.31                                   |       |                                                |       | 6.08                                |       |   |   | $ | 5,311 |   |   |
| Exercisable at  December 31, 2006 |       | 4,823,650  |       |       | $          | 6.43                                   |       |                                                |       | 5.06                                |       |   |   | $ | 5,045 |   |   |
| Unvested at  December 31, 2006    |       | 1,889,642  |       |       | $          | 5.99                                   |       |                                                |       | 8.67                                |       |   |   | $ | 237 |   |   |

 

| **Restricted Stock Units**                  | ** ** | ** ** | ** ** | **Shares** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| Outstanding and  non-vested at December 31, 2005 |       | 612,226    |       |
| Granted                                               |       | 175,000    |       |
| Vested                                                |       | (186,633   | )          |
| Unvested  repurchases                                 |       | (33,503    | )          |
| Outstanding and  non-vested at December 31, 2006 |       | 567,090    |       |

 

Restricted stock units do not carry an exercise priceand typically vest over a four-year period, although the vesting period ofcertain awards may vary. As of December 31, 2006, the weighted averageremaining vesting term is 2.48 years and the aggregate intrinsic value ofoutstanding and non-vested restricted stock is approximately $3.2 million.

During the twelve months ended December 31, 2006,Caliper granted 1,183,500 options at a weighted average grant date fair valueof $2.41 per share, and 175,000 restricted stock units at a weighted averagegrant date fair value of $6.33 per share. The total intrinsic value of optionsexercised during the year ended December 31, 2006 was approximately $0.9million. The total fair value of restricted stock that vested during the yearended December 31, 2006 was approximately $0.9 million.

As of December 31,2006, there was $6.9 million of total unrecognized compensation cost related tounvested stock-based compensation arrangements granted under the Plans. Thatcost is expected to be recognized over a weighted-average remaining service(vesting) period of approximately 2.42 years.

F-36

----

**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**14.   Income Taxes**

Thecomponents of the provision (benefit) for income taxes are as follows (inthousands):

| ** ** | ** ** | **Years Ended  December 31,** | ** ** |
|------------|------------|-----------------------------------------|------------|
| ** ** | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal    |       | $                                       | (337       | ) | $ | — |   | $ | — |   |
| State      |       | 2                                       |       | 42 |   | — |   |
| Foreign    |       | 231                                     |       | 72 |   | 377 |   |
| Total      |       | $                                       | (104       | ) | $ | 114 |   | $ | 377 |   |

 

Total foreign pre-tax income (loss) was $0.2, $(1.5)and $0.4 million in 2006, 2005 and 2004, respectively. As a result of itshistoric operating loss position, Caliper has recorded no provision (benefit)for U.S. federal taxes for any period except for the tax benefit recordedin 2006 related to the write off of the NovaScreen trade name. Inaddition, no foreign tax benefit was recognized in jurisdictions in whichforeign losses were incurred during 2006, 2005 and 2004.

Areconciliation of income taxes at the statutory federal income tax rate to netincome taxes included in the accompanying statements of operations is asfollows (in thousands):

| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income tax provision  (benefit):    |       |                                        |       |   |   |   |   |
| At federal statutory rate           |       | $                                           | (9,837     | ) | $ | (4,876 | ) | $ | (10,601 | ) |
| State                               |       | 2                                           |       | 42 |   | — |   |
| Foreign                             |       | 231                                         |       | 72 |   | 377 |   |
| Permanent differences:              |       |                                        |       |   |   |   |   |
| Stock Compensation                  |       | 1,401                                       |       | (94 | ) | (685 | ) |
| In-process research and development |       | 985                                         |       | — |   | — |   |
| Other                               |       | (244                                        | )          | 121 |   | 95 |   |
| Unutilized net  operating losses    |       | 7,358                                       |       | 4,849 |   | 11,191 |   |
| Total                               |       | $                                           | (104       | ) | $ | 114 |   | $ | 377 |   |

 

F-37

----

**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**14.**   Income Taxes (Continued)

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets for financial reporting purposes and the amounts used forincome tax purposes. Significant components of Caliper’s deferred tax assetsfor federal and state income taxes are as follows (in thousands):

| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net operating  loss carryforwards     |       | $                     | 101,248    |   | $ | 52,991 |   | $ | 47,859 |   |
| Research credit  carryforwards        |       | 15,052                |       | 7,738 |   | 7,093 |   |
| Capitalized  research and development |       | 616                   |       | 2,567 |   | 2,567 |   |
| Restructuring  accrual                |       | 2,582                 |       | 2,892 |   | 4,473 |   |
| Intangible assets                     |       | (19,673               | )          | (6,330 | ) | (5,041 | ) |
| Non-amortized  intangibles            |       | (1,130                | )          | (386 | ) | — |   |
| Other, net                            |       | 6,700                 |       | 4,290 |   | 5,736 |   |
| Net deferred tax  assets              |       | 105,395               |       | 63,762 |   | 62,687 |   |
| Valuation  allowance                  |       | (106,525              | )          | (64,148 | ) | (62,687 | ) |
| Total                                 |       | $                     | (1,130     | ) | $ | (386 | ) | $ | — |   |

 

As of December 31, 2006, Caliper had federal andstate net operating loss carryforwards of approximately $283.0 million and $86.0million, respectively. Caliper also had federal and state research anddevelopment tax credit carryforwards of approximately $11.2 million and $3.8million, respectively. The federal net operating loss and credit carryforwardswill expire at various dates through 2026 beginning in the year 2007, if notutilized. State net operating losses of approximately $141,000 expired in 2006.The current remaining state net operating losses have varying expiration datesthrough 2016.

Because of Caliper’s lack of earnings history and theuncertainty of realizing these net operating losses, the deferred tax assetshave been fully offset by a valuation allowance. The valuation allowanceincreased by $42.4 million, $1.5 million and $15.6 million during the yearsended December 31, 2006, 2005 and 2004, respectively. The 2006 change invaluation allowance includes approximately $37.0 million of valuation allowancerecorded in connection with the acquisition of Xenogen.  Future reversals of such allowance, when theyoccur, will be recorded as reductions to goodwill.

Included in the federal net operating losscarryforwards are approximately $12.7 million of loss carryforwardsresulting from past stock option exercises. to the future potential tax benefitrelated to stock options will be credited to stockholder’s equity once they arerealized.

Utilization of the federaland state net operating losses and credits may be subject to a substantiallimitation due to the change in ownership provisions of the Internal RevenueCode of 1986 and similar state provisions. The annual limitation may result inthe expiration of net operating losses and credits before utilization. Theacquisition of Xenogen resulted in Xenogen stockholders owning approximately one-thirdof Caliper and, therefore, in all likelihood resulted in a change of ownershipthat will cause pre-merger losses to be subject to limitation.

F-38

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15.   401(k) Plans**

Caliper has a 401(k) plan qualified under section401(k) of the Internal Revenue code that is available to all eligibleemployees as defined in the plan. Caliper has not historically matched employeecontributions.

Caliper’s NovaScreen subsidiary had a 401(k) planqualified under section 401(k) of the Internal Revenue code that wasavailable to all eligible employees as defined in the plan through April 30,2006. In May, 2006, the NovaScreen 401(k) plan was merged into the Caliper401(k) plan. NovaScreen may make discretionary contributions to the Planbased on a percentage of each employee’s contributions. NovaScreen madecontributions of $9,000 and $14,000 for the years ended December 31, 2006and 2005, respectively.

Caliper’s Xenogen subsidiaryhas a 401(k) plan qualified under section 401(k) of the InternalRevenue Code that is available to all eligible employees as defined in the Plan.Under the Plan, employees may contribute up to 40% of their eligiblecompensation, with Xenogen making discretionary matching contributions, subjectto certain IRS limitations. To date, Xenogen has not made any discretionarymatching contributions to the Plan.

**16.   SupplementalDisclosure of Cash and Non-Cash Activities**

The following is a summary of supplemental disclosureof cash flow information related to acquisitions (in thousands):

| ** **                                                       | ** ** | **Year Ended  December 31, 2006** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Stock issued for  acquisition of Xenogen                         |       |                                             | $          | 52,149 |   |   |
| Warrants issued  for acquisition of Xenogen                      |       |                                             | 5,476      |   |   |
| Value of Xenogen  warrants assumed in acquisition                |       |                                             | 1,655      |   |   |
| Total non-cash  consideration                                    |       |                                             | 59,280     |   |   |
| Non-cash assets  and liabilities                                 |       |                                             | 52,289     |   |   |
| Xenogen cash acquired,  net of $2.8 million in acquisition costs |       |                                             | $          | 6,991 |   |   |

 

| ** **                                                                                   | ** ** | **Year Ended  December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Stock issued for  acquisition of NovaScreen                                                  |       |                                             | $          | 17,600 |   |   |
| Non-cash assets  and liabilities                                                             |       |                                             | 22,234     |   |   |
| Cash paid for  NovaScreen, including $1.2 million in acquisition costs, net of cash acquired |       |                                             | $          | (4,634 | ) |   |

 

F-39

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**16.**   Supplemental Disclosure of Cash and Non-Cash Activities(Continued)

The following table is asummary of supplemental disclosure of significant non-cash investing andfinancing activities (in thousands):

| ** **                                                              | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Non-cash  consideration exchanged for acquired research and development |       | $                                      | —     |   |   | $ | — |   |   | $ | 810 |   |
| Purchase price  adjustment for acquisitions                             |       | $                                      | (188       | ) |   | $ | — |   |   | $ | (47 | ) |
| Non-cash purchase of  property and equipment                            |       | $                                      | 400        |   |   | $ | — |   |   | $ | — |   |

 

**17.   Litigation**

*Caliper InitialPublic Offering*

Commencing on June 7,2001, Caliper and three of its officers and directors (David V. Milligan,Daniel L. Kisner and James L. Knighton) were named as defendants in threesecurities class action lawsuits filed in the United States District Court forthe Southern District of New York. The cases have been consolidated under thecaption,*In re Caliper Technologies Corp.Initial Public Offering Securities Litigation,* 01 Civ. 5072(SAS) (GBD). Similar complaints were filed against approximately 300 otherpublic companies that conducted initial public offerings of their common stockduring the late 1990s (the “IPO Lawsuits”). On August 8, 2001, the IPOLawsuits were consolidated for pretrial purposes before United States JudgeShira Scheindlin of the Southern District of New York. Together, those casesare denominated*In re Initial PublicOffering Securities Litigation,* 21 MC 92(SAS). On April 19,2002, a Consolidated Amended Complaint was filed alleging claims against Caliperand the individual defendants under Sections 11 and 15 of the SecuritiesAct of 1933, and under Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934, as well as Rule 10b-5 promulgatedthereunder. The Consolidated Amended Complaint also names certain underwritersof Caliper’s December 1999 initial public offering of common stock asdefendants. The Complaint alleges that these underwriters charged excessive,undisclosed commissions to investors and entered into improper agreements withinvestors relating to aftermarket transactions. The Complaint seeks anunspecified amount of money damages. Caliper and the other issuers named asdefendants in the IPO Lawsuits moved on July 15, 2002, to dismiss allclaims on multiple grounds. By Stipulation and Order dated October 9,2002, the claims against Messrs. Milligan, Kisner and Knighton weredismissed without prejudice. On February 19, 2003, the Court grantedCaliper’s motion to dismiss all claims against it. Plaintiffs were not giventhe right to replead the claims against Caliper. The time to appeal thedismissal has not yet expired. In May 2003, a Memorandum of Understandingwas executed by counsel for plaintiffs, issuers and their insurers settingforth the terms of a settlement that would result in the termination of allclaims brought by plaintiffs against the issuers and individual defendantsnamed in the IPO Lawsuits. On July 7, 2003, a Special Litigation Committeeof the Caliper Board of Directors approved the settlement terms described inthat Memorandum of Understanding, which was subsequently set forth in adefinitive Settlement Agreement among the settling parties. On February 15,2005, Judge Scheindlin issued an order granting preliminary approval of thesettlement, subject to certain modifications. The parties agreed to thosemodifications and on August 31, 2005, Judge Scheindlin issued an ordergranting preliminary approval of the settlement as modified and certifyingsettlement classes. The fairness hearing for final approval of the settlementwas held on April 24, 2006. Before Judge Scheindlin issued any orderregarding the Court’s decision with respect to the final 

F-40

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**17.**   Litigation (Continued)

approvalof the settlement, on December 5, 2006 the Court of Appeals for the SecondCircuit issued an opinion reversing Judge Scheindlin’s prior certification ofthe plaintiff classes in several “focus” cases pending before her as part ofthe consolidated IPO lawsuits. The plaintiffs have petitioned the SecondCircuit for a rehearing on the class certification issue. Judge Scheindlin hasindicated that she will hold her consideration on the final approval of thesettlement in abeyance until the Second Circuit decides whether it will reviewthe December 5, 2006 opinion reversing Judge Scheindlin’s priorcertification of plaintiff classes in the “focus” cases. The final resolutionof this litigation is not expected to have a material impact on Caliper.

*AntiCancer*

On March 7, 2005, AntiCancer, Inc. filed alawsuit against Xenogen in the U.S. District Court for the Southern District ofCalifornia (the “Court”) alleging infringement of five patents of AntiCancer.The complaint seeks damages and injunctive relief against the allegedinfringement. On March 29, 2005, AntiCancer amended its complaint toinclude an additional claim seeking a judgment that one of our imaging patentsexclusively in-licensed from Stanford University, U.S. patent No. 5,650,135,is invalid. On May 10, 2005, Xenogen filed its answer to AntiCancer’samended complaint. Xenogen denied all of AntiCancer’s allegations and assertedvarious affirmative defenses, including its position that AntiCancer’s patentscited in its complaint, and its patent claims relating to in vivo imaging offluorescence, are invalid. Caliper is vigorously defending itself againstAntiCancer’s claims and believes AntiCancer’s complaint is without merit.Concurrent with filing Xenogen’s answer to AntiCancer’s complaint, Xenogen hadfiled its own counterclaims against AntiCancer. These counterclaims allege thatAntiCancer infringes two of Xenogen’s U.S. patents, Nos. 5,650,135 and6,649,143, both relating to in vivo imaging and with a priority date beforeeach of the AntiCancer patents alleged in its amended complaint. Both partiesseek injunctive relief and an unspecified amount of damages, including enhanceddamages for willful infringement. Caliper intends to vigorously pursue itsclaims against AntiCancer. The Court held the first three days of a Markmanhearing relating to these claims on June 13, 2006 through June 15,2006. On July 14, 2006, Xenogen filed a motion to disqualify AntiCancer’sattorneys due to numerous violations of ethical rules by such attorneys. Aftera hearing on this motion, on August 10, 2006, the Court issued an ordergranting Xenogen’s motion to disqualify AntiCancer’s attorneys. On October 18,2006, the Court issued a supplemental and clarifying order to its previous August 10,2006 order in which the Court, among other things, (i) granted Xenogen’smotion to restart the Markman hearing, (ii) granted Xenogen’s motion toprohibit the transfer of tainted files to AntiCancer’s successor counsel, (iii) continuedXenogen’s motion for sanctions against AntiCancer’s previous counsel, and (iv) grantedAntiCancer permission until November 6, 2006 to amend its complaint. On November 6,2006, AntiCancer served its Third Amended Complaint in this matter andvoluntarily dismissed Stanford University from this proceeding. The ThirdAmended Complaint adds Caliper as a defendant. In response to AntiCancer’sThird Amended Complaint, Caliper has filed both (i) a motion to strike andfor a more definite statement and (ii) a motion for sanctions includingdismissal against AntiCancer for failure to comply with Federal Rule ofCivil Procedure 11. The Court has scheduled a hearing on both of these motionsfor April 16, 2007.

Caliper currently is not able to predict the outcomeof the patent infringement lawsuit with AntiCancer. Even if Caliper prevails inthis lawsuit, the defense of the lawsuit or similar lawsuits will be expensiveand time-consuming and may distract Caliper management from operating Caliper’sbusiness.

F-41

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**17.**   Litigation (Continued)

From time to time Caliperis involved in litigation arising out of claims in the normal course ofbusiness. Based on the information presently available, management believesthat there are no other claims or actions pending or threatened againstCaliper, the ultimate resolution of which will have a material adverse effecton our financial position, liquidity or results of operations, although theresults of litigation are inherently uncertain, and adverse outcomes arepossible.

**18.   Geographic Data**

Thetable below presents Caliper’s activities by geographical location (inthousands). Caliper attributes revenue to geographic locations based uponcustomer service and business development activities.

| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenue:                      |       |     |       |     |       |     |       |
| United States                 |       | $        | 67,614     |     | $          | 58,587   |       | $ | 50,154 |   |
| Europe                        |       | 28,244   |       | 20,224   |       | 20,029   |       |
| Asia                          |       | 9,516    |       | 5,963    |       | 8,233    |       |
| Other                         |       | 2,497    |       | 2,235    |       | 1,711    |       |
|                          |       | $        | 107,871    |     | $          | 87,009   |       | $ | 80,127 |   |
| Net loss:                     |       |     |       |     |       |     |       |
| United States                 |       | $        | (33,484    | )        | $          | (14,738  | )          | $ | (34,199 | ) |
| Europe                        |       | 2,263    |       | 273      |       | 1,211    |       |
| Asia                          |       | 1,971    |       | 61       |       | 1,095    |       |
| Other                         |       | 316      |       | (53      | )          | 337      |       |
|                          |       | $        | (28,934    | )        | $          | (14,457  | )          | $ | (31,556 | ) |
| Property and equipment,  net: |       |     |       |     |       |     |       |
| United States                 |       | $        | 12,973     |     | $          | 11,844   |       | $ | 5,946 |   |
| Europe                        |       | 204      |       | 167      |       | 227      |       |
| Asia                          |       | 5        |       | 8        |       | 13       |       |
|                          |       | $        | 13,182     |     | $          | 12,019   |       | $ | 6,186 |   |
| Net Assets:                   |       |     |       |     |       |     |       |
| United States                 |       | $        | 155,486    |     | $          | 116,730  |       | $ | 107,292 |   |
| Europe                        |       | 2,985    |       | 2,465    |       | 4,392    |       |
| Asia                          |       | (1,522   | )          | (1,173   | )          | (631     | )          |
| Other                         |       | 460      |       | 416      |       | 526      |       |
|                          |       | $        | 157,409    |     | $          | 118,438  |       | $ | 111,579 |   |

 

For all periods presented,no individual country within Europe, Asia or other exceeded 10% of theconsolidated totals for revenue, net loss, property and equipment and netassets. Caliper’s other long-lived assets include restricted cash, goodwill,intangible assets and other assets which are primarily located in the UnitedStates.

F-42

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**CALIPER LIFE SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**19.   QuarterlyFinancial Data (Unaudited)**

Thefollowing table sets forth a summary of our unaudited quarterly operatingresults for each of the eight quarters up through the year ended December 31,2006. This data has been derived from our unaudited consolidated interimfinancial statements which, in our opinion, have been prepared in substantiallythe same basis as the audited consolidated financial statements containedelsewhere in this Annual Report on Form 10-K and include all normalrecurring adjustments necessary for a fair presentation of the financialinformation for the periods presented. These unaudited quarterly results shouldbe read in conjunction with our consolidated financial statements and notesthereto included in this Form 10-K. The operating results in anyquarter are not necessarily indicative of the results that may be expected forany future period.

| ** **                             | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|----------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **Year ended December 31,  2006** |       |               |       |                |       |               |       |                |       |
| Total revenue                          |       | $                  | 22,299     |                | $          | 24,326             |       | $                   | 26,526     |   | $ | 34,720 |   |
| Gross profit(1)                        |       | 9,671              |       | 12,761              |       | 9,482              |       | 15,362              |       |
| Operating loss                         |       | (4,559             | )          | (2,382              | )          | (13,759            | )          | (9,285              | )          |
| Net loss                               |       | (4,449             | )          | (2,065              | )          | (13,533            | )          | (8,887              | )          |
| Basic and diluted  loss per share      |       | $                  | (0.13      | )                   | $          | (0.06              | )          | $                   | (0.33      | ) | $ | (0.23 | ) |
| **Year ended December 31,  2005** |       |               |       |                |       |               |       |                |       |
| Total revenue                          |       | $                  | 18,402     |                | $          | 20,333             |       | $                   | 21,332     |   | $ | 26,942 |   |
| Gross profit(1)                        |       | 7,910              |       | 9,529               |       | 9,150              |       | 11,982              |       |
| Operating loss                         |       | (4,866             | )          | (4,129              | )          | (4,129             | )          | (1,425              | )          |
| Net loss                               |       | (4,930             | )          | (4,186              | )          | (3,852             | )          | (1,489              | )          |
| Basic and diluted loss  per share      |       | $                  | (0.16      | )                   | $          | (0.14              | )          | $                   | (0.13      | ) | $ | (0.03 | ) |

----

(1)          Gross profit refers tototal product and service revenue, less costs associated with those revenues.Costs related to contract revenues are included within research and developmentexpenses in the accompanying statements of operations.

The quarterly financial data presented above includesa reclassification of SFAS 123R related compensation charges from stock-basedcompensation, as previously reported, to the individual expense line itemswithin the accompanying statement of operations.

F-43

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**Caliper LifeSciences, Inc.**

**ScheduleII — VALUATION AND QUALIFYING ACCOUNTS**

| ** **                                   | ** ** | **Balance  at  Beginning  Period** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | **(In thousands)**            | ** ** |
| Year ended  December 31, 2006:          |       |                               |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts             |       |                               | $          | 482                                                      |       |           |       | $                                        | 148        |   |   |   | $ | 48 |   |   | $ | 582 |   |
| Valuation  allowance for deferred tax assets |       |                               | 64,148     |                                                     |       |           | 42,377     |                                     |       |   | — |   |   | 106,525 |   |
|                                         |       |                               | $          | 64,630                                                   |       |           |       | $                                        | 42,525     |   |   |   | $ | 48 |   |   | $ | 107,107 |   |
| Year ended  December 31, 2005:          |       |                               |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts             |       |                               | $          | 475                                                      |       |           |       | $                                        | 121        |   |   |   | $ | 114 |   |   | $ | 482 |   |
| Valuation  allowance for deferred tax assets |       |                               | 62,687     |                                                     |       |           | 1,461      |                                     |       |   | — |   |   | 64,148 |   |
|                                         |       |                               | $          | 63,162                                                   |       |           |       | $                                        | 1,582      |   |   |   | $ | 114 |   |   | $ | 64,630 |   |
| Year ended  December 31, 2004:          |       |                               |       |                                                     |       |           |       |                                     |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts             |       |                               | $          | 252                                                      |       |           |       | $                                        | 244        |   |   |   | $ | 21 |   |   | $ | 475 |   |
| Valuation  allowance for deferred tax assets |       |                               | 47,057     |                                                     |       |           | 15,630     |                                     |       |   | — |   |   | 62,687 |   |
|                                         |       |                               | $          | 47,309                                                   |       |           |       | $                                        | 15,874     |   |   |   | $ | 21 |   |   | $ | 63,162 |   |

 

F-44

----

**EXHIBIT INDEX**

***Exhibits:***
|              | **Exhibit  Number** | ** **                                                                                                                                                                       | ** ** | ** ** | **Description of Document** | ** ** |
|--------------|---------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------------------|------------|
| 2.1(15)      |                | Stock Purchase  Agreement, by and among Caliper, Berwind Corporation and The Berwind Company  LLC, dated June 9, 2003.                                                      |
| 2.2(15)      |                | Amendment  No. 1 to the Stock Purchase Agreement, by and among Caliper, Berwind  Corporation and The Berwind Company LLC, dated July 10, 2003.                         |
| 2.3(18)      |                | Amendment  No. 2 to the Stock Purchase Agreement, by and among Caliper, Berwind  Corporation and The Berwind Company LLC, dated April 1, 2004.                         |
| 2.4(19)      |                | Agreement and  Plan of Merger, among Caliper Life Sciences, Inc., Caliper  Services, Inc. and NovaScreen Biosciences Corporation, dated as of  September 7, 2005. |
| 2.5(26)      |                | Agreement and  Plan of Merger, among Caliper Life Sciences, Inc., Caliper  Holdings, Inc. and Xenogen Corporation, dated as of February 10,  2006.                |
| 3.1(18)      |                | Amended and  Restated Certificate of Incorporation of Caliper.                                                                                                                   |
| 3.2(8)       |                | Certificate of  Designation Of Series A Junior Participating Preferred Stock.                                                                                               |
| 3.3(21)      |                | Amended and  Restated Bylaws of Caliper.                                                                                                                                         |
| 3.4(18)      |                | Amendment  No. 1 to Bylaws of Caliper.                                                                                                                                      |
| 4.1          |                | Reference is made  to Exhibits 3.1, 3.2, 3.3 and 3.4.                                                                                                                            |
| 4.2(20)      |                | Specimen Stock  Certificate.                                                                                                                                                     |
| 4.3(9)       |                | Rights Agreement,  dated as of December 18, 2001, between Caliper and Wells Fargo Bank  Minnesota, N.A., as Rights Agent.                                                   |
| 10.1(2)      |                | Lease Agreement,  dated December 1, 1998, between Caliper and 605 East Fairchild  Associates, L.P.                                                                          |
| 10.2(2)(3)   |                | 1996 Equity  Incentive Plan.                                                                                                                                                     |
| 10.3(2)(3)   |                | 1999 Equity  Incentive Plan.                                                                                                                                                     |
| 10.4(2)(3)   |                | 1999 Employee  Stock Purchase Plan.                                                                                                                                              |
| 10.5(2)(3)   |                | 1999 Non-Employee  Directors’ Stock Option Plan.                                                                                                                            |
| 10.6(3)(20)  |                | Form of  Grant Agreement for 1999 Equity Incentive Plan—Option Awards.                                                                                                 |
| 10.7(3)(20)  |                | Form of  Grant Agreement for 1999 Equity Incentive Plan—Restricted Stock Unit Awards.                                                                                  |
| 10.8(3)(20)  |                | Form of  Grant Agreement for 1999 Non-Employee Directors’ Stock Option Plan.                                                                                           |
| 10.9(2)(3)   |                | Form of  Indemnification Agreement entered into between Caliper and its directors and  executive officers.                                                                  |
| 10.10(2)(4)  |                | Collaboration  Agreement, dated May 2, 1998, between Caliper and Hewlett-Packard  Company (now Agilent Technologies, Inc.).                                            |
| 10.11(3)(20) |                | Form of  Stock Option Grant Agreement for Acquisition Equity Incentive Plan.                                                                                                |
| 10.12(3)(20) |                | Form of  Stock Award Agreement for Acquisition Equity Incentive Plan (pro rata  vesting).                                                                                   |
| 10.13(3)(20) |                | Form of  Stock Award Agreement for Acquisition Equity Incentive Plan (5 year cliff  vesting).                                                                               |
| 10.17(3)(20) |                | Non-Employee  Directors’ Cash Compensation Plan.                                                                                                                            |
| 10.18(3)(11) |                | Caliper  Performance Bonus Plan.                                                                                                                                                 |

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| 10.19(3)(20)  |   | Employment Offer Letter  dated November 30, 2004 between Caliper and Mr. Thomas T. Higgins.                                                                                                                    |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20(3)(11)  |   | Summary Cash  Compensation Sheet.                                                                                                                                                                                        |
| 10.23(2)(3)   |   | The Corporate  Plan for Retirement Select Plan Adoption Agreement and related Basic Plan  Document.                                                                                                                      |
| 10.27(6)      |   | Lease Agreement,  dated June 23, 2000 and effective July 5, 2000, between Caliper and  Martin CBP Associates, L.P.                                                                                             |
| 10.29(3)(20)  |   | Key Employee  Change of Control and Severance Benefit Plan.                                                                                                                                                              |
| 10.30(5)(8)   |   | Cross-License  Agreement, dated March 12, 2001 between Aclara Biosciences, Inc.  and Caliper.                                                                                                                  |
| 10.32(4)(7)   |   | Settlement  Agreement and Mutual General Release, dated March 12, 2001 between  Aclara Biosciences, Inc. and Caliper.                                                                                          |
| 10.39(3)(9)   |   | 2001 Non-Statutory  Stock Option Plan.                                                                                                                                                                                   |
| 10.46(3)(20)  |   | Form of  Grant Agreement for 2001 Non-Statutory Stock Option Plan.                                                                                                                                                  |
| 10.48(3)(10)  |   | Key Employee  Agreement, dated July 1, 2002, between Caliper and Dr. Daniel  Kisner.                                                                                                                           |
| 10.52(4)(16)  |   | Sole Commercial  Patent License Agreement, effective September 1, 1995, between UT-Battelle,  LLC, the successor to Lockheed Martin Energy Research Corporation, and  Caliper, as amended on November 1, 2002. |
| 10.55(4)(12)  |   | Collaboration  Agreement, dated June 4, 2003, between Caliper and Bio-Rad  Laboratories, Inc.                                                                                                                  |
| 10.56(3)(13)  |   | Key Employee  Agreement, dated July 14, 2003, between Caliper and E. Kevin Hrusovsky.                                                                                                                               |
| 10.62(3)(14)  |   | Acquisition  Equity Incentive Plan.                                                                                                                                                                                      |
| 10.63(3)(17)  |   | Key Employee  Agreement Amendment, dated December 24, 2003, between Caliper and  Dr. Daniel L. Kisner.                                                                                                         |
| 10.64(3)(17)  |   | Consulting  Agreement, dated January 1, 2004, between Caliper and Dr. David V.  Milligan.                                                                                                                      |
| 10.66(4)(17)  |   | Collaboration and  Supply Agreement, dated January 9, 2004, among Caliper, Zymark  Corporation and Affymetrix, Inc.                                                                                            |
| 10.67(3)      |   | Offer Letter  dated September 7, 2005 between Caliper Life Sciences, Inc. and  David M. Manyak, Ph.D.                                                                                                          |
| 10.68(21)     |   | Loan and Security  Agreement, dated as of August 9, 2006, by and among Caliper, Silicon  Valley Bank and NovaScreen Biosciences Corporation.                                                                        |
| 10.69(22)     |   | Joinder  Agreement, dated as of September 28, 2006, by and among Caliper, Silicon  Valley Bank, Xenogen Corporation, Xenogen Biosciences Corporation, and  NovaScreen Biosciences Corporation.                      |
| 10.70(23)     |   | First Loan  Modification Agreement dated as of February 26, 2007, by and among  Caliper, Silicon Valley Bank, NovaScreen Biosciences Corporation, Xenogen  Corporation, and Xenogen Biosciences Corporation.        |
| 10.71(24)(25) |   | Agreement, dated  as of May 5, 2000, between the Board of Trustees of the Leland Stanford  Junior University and Xenogen Corporation.                                                                               |
| 10.72(3)      |   | Consulting  Agreement, dated as of October 17, 2006, between Caliper and Pamela  Contag.                                                                                                                            |
| 21.1          |   | Subsidiaries of the  Registrant.                                                                                                                                                                                         |

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| 23.1 |   | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm.                                              |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
| 24.1 |   | Power of Attorney  (reference is made to the signature page of this report).                                                   |
| 31.1 |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a).                                       |
| 31.2 |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a).                                       |
| 32.1 |   | Certification  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 |   | Certification Pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

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(1)          Previously filed as Exhibit 3.4to our Registration Statement on Form S-1, as amended, File No. 333-88827,filed on October 12, 1999 and incorporated by reference herein.

(2)          Previously filed as thelike-numbered Exhibit to our Registration Statement on Form S-1,as amended, File No. 333-88827, filed on October 12, 1999 andincorporated by reference herein.

(3)          Management contract orcompensatory plan or arrangement.

(4)          Confidential treatmenthas been granted for a portion of this exhibit.

(5)          Previously filed as thelike-numbered exhibit to Annual Report of Form 10-K for the yearended December 31, 1999 and incorporated by reference herein.

(6)          Previously filed as thelike-numbered Exhibit to our Registration Statement on Form S-1,as amended, File No. 333-45942, filed on September 15, 2000,and incorporated by reference herein.

(7)          Previously filed as thelike-numbered Exhibit to Form 10-Q for the quarterly periodended March 31, 2001 and incorporated by reference herein.

(8)          Previously filed as Exhibit 99.1to Current Report on Form 8-K filed December 19, 2001 andincorporated by reference herein.

(9)          Previously filed as Exhibit 99.1to our Registration Statement on Form S-8, File No. 333-76636,filed January 11, 2002 and incorporated by reference herein.

(10) Previously filed as the like-numbered Exhibit to Form 10-Qfor the quarterly period ended September 30, 2002 and incorporated byreference herein.

(11) Previously filed as the like-numbered Exhibit to Current Reporton Form 8-K filed March 16, 2005 and incorporated by referenceherein.

(12) Previously filed as the like-numbered Exhibit to Form 10-Qfor the quarterly period ended June 30, 2003 and incorporated by referenceherein.

(13) Previously filed as the like-numbered Exhibit to Form 10-Qfor the quarterly period ended September 30, 2003 and incorporated byreference herein.

(14) Previously filed as Exhibit 99.1 to our Registration Statementon Form S-8, File No. 333-106946, filed June 10,2003 and incorporated by reference herein.

(15) Previously filed as the like-numbered Exhibit to Form 8-Kfiled July 25, 2003 and incorporated by reference herein.

(16) Previously filed as the like-numbered Exhibit to Form 10-Kfor the year ended December 31, 2002 and incorporated by reference herein.

(17) Previously filed as the like-numbered Exhibit to Form 10-Kfor the year ended December 31, 2003 and incorporated by reference herein.

(18) Previously filed as the like-numbered Exhibit to Form 10-Qfor the quarterly period ended March 31, 2004 and incorporated byreference herein.

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(19) Previously filed as Exhibit 2.1 to our Registration Statementon Form S-3, File No. 333-129-192, filed October 21,2005 and incorporated by reference herein.

(20) Previously filed as the like-numbered Exhibit to Form 10-Kfor the year ended December 31, 2004 and incorporated by reference herein.

(21) Previously filed as Exhibit 10.1 to Form 10-Q forthe quarterly period ended September 30, 2006 and incorporated byreference herein.

(22) Previously filed as Exhibit 10.2 to Form 10-Q forthe quarterly period ended September 30, 2006 and incorporated byreference herein.

(23) Previously filed as the like numbered Exhibit to Form 8-Kfiled March 2, 2007 and incorporated by reference herein.

(24) Previously filed as Exhibit 10.3 to Form 10-Q forthe quarterly period ended September 30, 2006 and incorporated byreference herein.

(25) Confidential treatment has been requested for a portion of thisexhibit.

(26) Previously filed as the like numbered Exhibit to Form 10-K for theyear ended December 31, 2005 and incorporated by reference herein.

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