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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 2005



OR



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



For the transition period from
 to



Commission file number: 000-32239



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XENOGEN CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 77-0412269                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|860 Atlantic Avenue, Alameda, California                       |  | 94501                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



(510) 291-6100

(Registrants telephone number, including area code)



---



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



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



At August 1, 2005, 15,034,090 shares of the registrants common stock, $.001 par value, were outstanding.



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##### Table of Contents

TABLE OF CONTENTS



|                               |  |                                                                                                                    |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------ |  | ----
|                               |  |                                                                                                                    |  | Page
|                               | 
|PART I  FINANCIAL INFORMATION |  | 1                                                                                                                 
|                               |  |                                                                                                                   
|Item 1.                        |  | Condensed Consolidated Financial Statements (Unaudited)                                                            |  | 1   
|                               |  | Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                                    |  | 1   
|                               |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and June 30, 2004 |  | 2   
|                               |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and June 30, 2004           |  | 3   
|                               |  | Notes to Condensed Consolidated Financial Statements                                                               |  | 4   
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 14  
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 40  
|Item 4.                        |  | Controls and Procedures                                                                                            |  | 40  
|                               | 
|PART II  OTHER INFORMATION    |  | 42                                                                                                                
|                               |  |                                                                                                                   
|Item 1.                        |  | Legal Proceedings                                                                                                  |  | 42  
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                        |  | 42  
|Item 3.                        |  | Defaults Upon Senior Securities                                                                                    |  | 43  
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                                |  | 43  
|Item 5.                        |  | Other Information                                                                                                  |  | 44  
|Item 6.                        |  | Exhibits                                                                                                           |  | 44  
|                               | 
|Signatures                     |  | 45                                                                                                                



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##### Table of Contents



PART I

FINANCIAL INFORMATION



|Item 1. | Financial Statements (Unaudited)
|------- | --------------------------------



XENOGEN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                                                          |  | June 30, 2005 |          |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                                                                    |  |               |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                                                           |  |               |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                 |  | $             | 10,315   |   |                   | $ | 19,423   |  
|Short term investments                                                                                                                                                                                                    |  |               | 2,446    |   |                   |   | 2,493    |  
|Accounts receivablenet of allowance for doubtful accounts of $672 and $738 at June 30, 2005 and December 31, 2004,
respectively                                                                                          |  |               | 6,352    |   |                   |   | 7,769    |  
|Inventory                                                                                                                                                                                                                 |  |               | 4,974    |   |                   |   | 4,175    |  
|Prepaid expenses and other current assets                                                                                                                                                                                 |  |               | 858      |   |                   |   | 1,293    |  
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                                                      |  |               | 24,945   |   |                   |   | 35,153   |  
|Property and equipmentnet                                                                                                                                                                                                |  |               | 2,513    |   |                   |   | 3,184    |  
|Purchased intangible assetsnet                                                                                                                                                                                           |  |               | 229      |   |                   |   | 531      |  
|Restricted investments                                                                                                                                                                                                    |  |               | 51       |   |                   |   | 50       |  
|Other noncurrent assets                                                                                                                                                                                                   |  |               | 1,020    |   |                   |   | 1,020    |  
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Total assets                                                                                                                                                                                                              |  | $             | 28,758   |   |                   | $ | 39,938   |  
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                      |  |               |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                                                                      |  |               |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                                                          |  | $             | 2,573    |   |                   | $ | 2,564    |  
|Accrued compensation                                                                                                                                                                                                      |  |               | 1,665    |   |                   |   | 1,998    |  
|Deferred revenue                                                                                                                                                                                                          |  |               | 7,395    |   |                   |   | 8,638    |  
|Accrued restructuring charges                                                                                                                                                                                             |  |               | 289      |   |                   |   | 281      |  
|Loans payablecurrent portion                                                                                                                                                                                             |  |               | 6,293    |   |                   |   | 6,372    |  
|Capital lease obligationscurrent portion                                                                                                                                                                                 |  |               | 6        |   |                   |   | 18       |  
|Other accrued liabilities                                                                                                                                                                                                 |  |               | 1,166    |   |                   |   | 1,211    |  
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                                                                 |  |               | 19,387   |   |                   |   | 21,082   |  
|Noncurrent liabilities:                                                                                                                                                                                                   |  |               |          |   |                   |   |          |  
|Loans payable                                                                                                                                                                                                             |  |               | 444      |   |                   |   | 1,053    |  
|Capital lease obligations                                                                                                                                                                                                 |  |               |         |   |                   |   | 1        |  
|Deferred rent                                                                                                                                                                                                             |  |               | 497      |   |                   |   | 605      |  
|Accrued restructuring charges                                                                                                                                                                                             |  |               | 1,105    |   |                   |   | 1,250    |  
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Total noncurrent liabilities                                                                                                                                                                                              |  |               | 2,046    |   |                   |   | 2,909    |  
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Commitments and contingencies (Note 9)                                                                                                                                                                                    |  |               |          |   |                   |   |          |  
|Stockholders equity:                                                                                                                                                                                                     |  |               |          |   |                   |   |          |  
|Common stock, $0.001 par value; 100,000,000 shares authorized at June 30, 2005 and December 31, 2004, respectively; 14,868,448 and 14,769,552
issued and outstanding at June 30, 2005 and December 31, 2004, respectively |  |               | 15       |   |                   |   | 15       |  
|Additional paid-in capital                                                                                                                                                                                                |  |               | 185,884  |   |                   |   | 186,110  |  
|Deferred stock-based compensation                                                                                                                                                                                         |  |               | (1,966   | ) |                   |   | (2,443   | )
|Accumulated other comprehensive loss                                                                                                                                                                                      |  |               | (10      | ) |                   |   | (21      | )
|Accumulated deficit                                                                                                                                                                                                       |  |               | (176,598 | ) |                   |   | (167,714 | )
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                                                                |  |               | 7,325    |   |                   |   | 15,947   |  
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                |  | $             | 28,758   |   |                   | $ | 39,938   |  
|                                                                                                                                                                                                                          |  |               |          |   |                   |   |          |  



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



1



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XENOGEN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(Unaudited)



|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|------------------------------------------------------ |  | --------------------------- | ---------- | - | ------------------------- | - | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                                       |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                       |  | 2005                        |            |   | 2004                      |   |         | 2005 |  |   | 2004       |  
|Revenue:                                               |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Product                                                |  | $                           | 5,041      |   |                           | $ | 3,720   |      |  | $ | 10,334     |   |  | $ | 7,202   |  
|Contract                                               |  |                             | 2,873      |   |                           |   | 2,390   |      |  |   | 5,144      |   |  |   | 4,580   |  
|License                                                |  |                             | 1,788      |   |                           |   | 1,341   |      |  |   | 3,498      |   |  |   | 2,709   |  
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Total revenue                                          |  |                             | 9,702      |   |                           |   | 7,451   |      |  |   | 18,976     |   |  |   | 14,491  |  
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Cost of revenue:                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Product                                                |  |                             | 3,127      |   |                           |   | 2,689   |      |  |   | 6,565      |   |  |   | 4,667   |  
|Contract                                               |  |                             | 2,250      |   |                           |   | 2,220   |      |  |   | 4,509      |   |  |   | 4,563   |  
|License                                                |  |                             | 252        |   |                           |   | 217     |      |  |   | 571        |   |  |   | 415     |  
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Total cost of revenue                                  |  |                             | 5,629      |   |                           |   | 5,126   |      |  |   | 11,645     |   |  |   | 9,645   |  
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Gross margin                                           |  |                             | 4,073      |   |                           |   | 2,325   |      |  |   | 7,331      |   |  |   | 4,846   |  
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Operating expenses:                                    |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Research and development                               |  |                             | 2,196      |   |                           |   | 3,190   |      |  |   | 4,530      |   |  |   | 6,735   |  
|Selling, general and administrative                    |  |                             | 4,910      |   |                           |   | 3,425   |      |  |   | 10,218     |   |  |   | 7,871   |  
|Depreciation and amortization                          |  |                             | 585        |   |                           |   | 775     |      |  |   | 1,220      |   |  |   | 1,673   |  
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Total operating expenses                               |  |                             | 7,691      |   |                           |   | 7,390   |      |  |   | 15,968     |   |  |   | 16,279  |  
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Loss from operations                                   |  |                             | (3,618     | ) |                           |   | (5,065  | )    |  |   | (8,637     | ) |  |   | (11,433 | )
|Other income (loss)net                                |  |                             | (16        | ) |                           |   | 34      |      |  |   | (31        | ) |  |   | 254     |  
|Interest income                                        |  |                             | 61         |   |                           |   | 15      |      |  |   | 118        |   |  |   | 56      |  
|Interest expense                                       |  |                             | (166       | ) |                           |   | (150    | )    |  |   | (334       | ) |  |   | (288    | )
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Net loss                                               |  | $                           | (3,739     | ) |                           | $ | (5,166  | )    |  | $ | (8,884     | ) |  | $ | (11,411 | )
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Weighted average number of common shares outstanding   |  |                             | 14,791,306 |   |                           |   | 968,244 |      |  |   | 14,776,278 |   |  |   | 960,810 |  
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Loss per share data (basic and diluted):               |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  
|Net loss per share attributable to common stockholders |  |                             | (0.25      | ) |                           | $ | (5.34   | )    |  | $ | (0.60      | ) |  | $ | (11.88  | )
|                                                       |  |                             |            |   |                           |   |         |      |  |   |            |   |  |   |         |  



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



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XENOGEN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                        |  |                           |        |   |      |   |         |  
|----------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------- | -
|                                                                        |  | Six Months Ended June 30, |       
|                                                                        |  | 2005                      |        |   | 2004 |  
|Cash flows from operating activities:                                   |  |                           |        |   |      |   |         |  
|Net loss                                                                |  | $                         | (8,884 | ) |      | $ | (11,411 | )
|Reconciliation of net loss to net cash used in operating activities:    |  |                           |        |   |      |   |         |  
|Noncash stock-based compensation expense                                |  |                           | 216    |   |      |   | 3,481   |  
|Amortization of investments                                             |  |                           | 60     |   |      |   |        |  
|Depreciation and amortization                                           |  |                           | 1,220  |   |      |   | 1,673   |  
|Loan forgiveness                                                        |  |                           |       |   |      |   | 153     |  
|Noncash interest income (expense)                                       |  |                           | (103   | ) |      |   | 63      |  
|Gain on disposal of fixed assets                                        |  |                           |       |   |      |   | (219    | )
|Changes in operating assets and liabilities:                            |  |                           |        |   |      |   |         |  
|Accounts receivable                                                     |  |                           | 1,417  |   |      |   | (790    | )
|Prepaid expenses and other assets                                       |  |                           | 435    |   |      |   | (131    | )
|Inventory                                                               |  |                           | (799   | ) |      |   | (341    | )
|Other noncurrent assets                                                 |  |                           |       |   |      |   | (746    | )
|Accounts payable                                                        |  |                           | 9      |   |      |   | 1,738   |  
|Accrued compensation and other liabilities                              |  |                           | (378   | ) |      |   | (612    | )
|Deferred revenue                                                        |  |                           | (1,243 | ) |      |   | (2,129  | )
|Accrued restructuring charges                                           |  |                           | (137   | ) |      |   | (133    | )
|Deferred rent                                                           |  |                           | (108   | ) |      |   | (25     | )
|                                                                        |  |                           |        |   |      |   |         |  
|Net cash used in operating activities                                   |  |                           | (8,295 | ) |      |   | (9,429  | )
|                                                                        |  |                           |        |   |      |   |         |  
|Cash flows from investing activities:                                   |  |                           |        |   |      |   |         |  
|Purchase of property and equipment                                      |  |                           | (287   | ) |      |   | (353    | )
|Proceeds from sale of property and equipment                            |  |                           | 40     |   |      |   | 262     |  
|Purchase of investments                                                 |  |                           |       |   |      |   | (5,340  | )
|Proceeds from maturities and sales of investments                       |  |                           |       |   |      |   | 4,460   |  
|Investment interest                                                     |  |                           | 100    |   |      |   |        |  
|                                                                        |  |                           |        |   |      |   |         |  
|Net cash used in investing activities                                   |  |                           | (147   | ) |      |   | (971    | )
|                                                                        |  |                           |        |   |      |   |         |  
|Cash flows from financing activities:                                   |  |                           |        |   |      |   |         |  
|Proceeds from issuance of common stock                                  |  |                           | 35     |   |      |   | 22      |  
|Draw down from loans                                                    |  |                           |       |   |      |   | 2,000   |  
|Repayment of loans                                                      |  |                           | (688   | ) |      |   | (1,587  | )
|Capital lease payments                                                  |  |                           | (13    | ) |      |   | (29     | )
|                                                                        |  |                           |        |   |      |   |         |  
|Net cash provided by (used in) financing activities                     |  |                           | (666   | ) |      |   | 406     |  
|                                                                        |  |                           |        |   |      |   |         |  
|Net decrease in cash and cash equivalents                               |  |                           | (9,108 | ) |      |   | (9,994  | )
|Cash and cash equivalents, beginning of year                            |  |                           | 19,423 |   |      |   | 12,519  |  
|                                                                        |  |                           |        |   |      |   |         |  
|Cash and cash equivalents, end of year                                  |  | $                         | 10,315 |   |      | $ | 2,525   |  
|                                                                        |  |                           |        |   |      |   |         |  
|Supplemental disclosure of cash flow informationcash paid for interest |  | $                         | 334    |   |      | $ | 287     |  
|                                                                        |  |                           |        |   |      |   |         |  



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



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | Basis of Presentation
|-- | ---------------------



The information presented in the Condensed Consolidated Financial Statements at June 30, 2005 and for the three and six months ended June 30, 2005 and
2004, is unaudited but includes all normal recurring adjustments, which we believe to be necessary for a fair presentation of the periods presented. The results of operations for the three and six months ended June 30, 2005 are not necessarily
indicative of the results to be expected for a full year, or any other future period.



The Condensed Consolidated Balance Sheet amounts at December 31, 2004, have been derived from audited financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with our audited
Consolidated Financial Statements as of and for the year ended December 31, 2004, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 21, 2005.



In accordance with the rules and regulations of the Securities and Exchange
Commission, unaudited condensed consolidated financial statements may omit or condense certain information and disclosures normally required for a complete set of financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and
regulations. The condensed consolidated balance sheet at December 31, 2004 was derived from audited financial statements, but does not include all disclosures required by GAAP. We believe that the notes to the condensed consolidated financial
statements contain disclosures adequate to make the information presented not misleading.



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Principles of ConsolidationThe consolidated financial statements include the accounts of Xenogen and our wholly-owned subsidiary, Xenogen
Biosciences Corporation. All significant intercompany accounts and transactions have been eliminated.



Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.



Cash and Cash EquivalentsWe consider all short-term, highly liquid investments with original maturity of three months or less to be cash
equivalents.



Recent Accounting Pronouncements In
May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 changes the
requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We expect that the adoption of SFAS No. 154 will not
have a significant effect on our financial condition or results of operations.



In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We
adopted the disclosure provisions of SFAS No. 148 at the beginning of fiscal 2002. In December 2004, the FASB issued Statement No. 123(R) Share-Based Payment This statement requires that stock-based compensation be recognized as a
cost in the financial statements and that such cost be measured based on the fair value of the stock-based compensation. Our adoption of this statement, which we expect to occur in the first quarter of 2006, will have a material, although non-cash,
impact on our condensed consolidated statements of operations.



In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, to provide additional
guidance in determining whether investment securities have an impairment which should be considered other-than-temporary. On September 15, 2004 the FASB issued proposed FSP EITF Issue 03-1-a to address the application of the EITF Issue 03-1 to debt
securities that are affected by interest rate and/or sector-spread changes only. On September 30, 2004, the FASB issued FSP EITF Issue 03-1-1, which delayed the effective date of certain paragraphs of the EITF until EITF 03-1-a is issued. We expect
that the adoption of this Issue and the related FSPs will not have a significant effect on our financial condition or results of operations.



|3. | Stock-Based Compensation
|-- | ------------------------



We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for our employee stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as
amended by SFAS No. 148, requires use of



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of our employee and director
stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.



SFAS No. 123 requires that stock option information be disclosed as if we had accounted for our employee stock options granted under the fair value method
of SFAS No. 123. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model, and was amortized using the graded vesting method over the options vesting period, with the following weighted-average
assumptions:



|                                          |  |                            |   |  |                           |   |  |      |   |  |      |  
|----------------------------------------- |  | -------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                                          |  | Three Months EndedJune 30, |   |  | Six Months Ended June 30, |  
|                                          |  | 2005                       |   |  | 2004                      |   |  | 2005 |   |  | 2004 |  
|Dividend yield                            |  |                           |   |  |                          |   |  |     |   |  |     |  
|Volatility                                |  | 92.6                       | % |  |                          |   |  | 67.2 | % |  |     |  
|Risk-free interest rate                   |  | 3.8                        | % |  | 3.5                       | % |  | 3.8  | % |  | 3.1  | %
|Weighted average expected life (in years) |  | 5                          |   |  | 5                         |   |  | 5    |   |  | 5    |  



The weighted-average
fair value of stock options granted for the three months ended June 30, 2005 and 2004 were $3.53 and $4.28, respectively, and $3.48 and $6.52, for the six months ended June 30, 2005 and 2004, respectively. The minimum value basis for pricing
options, which assumed 0% volatility, was used for all grants made prior to Xenogen becoming a publicly traded company in July 2004.



The following table summarizes relevant information as to reported results, with supplemental information as if the fair value recognition provisions of
SFAS No. 123 had been applied (in thousands, except per share data):



|                                                                                                                  |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                  |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                                                                                  |  | 2005                        |        |   | 2004                      |   |        | 2005 |  |   | 2004    |  
|Net loss:                                                                                                         |  | $                           | (3,739 | ) |                           | $ | (5,166 | )    |  | $ | (8,884  | ) |  | $ | (11,411 | )
|Add employee stock-based compensation                                                                             |  |                             | 169    |   |                           |   | 1,246  |      |  |   | 217     |   |  |   | 3,481   |  
|Deduct stock-based compensation determined under the fair value based method for all awards, net of cancellations |  |                             | (1,133 | ) |                           |   | (1,027 | )    |  |   | (2,011  | ) |  |   | (2,218  | )
|                                                                                                                  |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Pro forma                                                                                                         |  | $                           | (4,703 | ) |                           | $ | (4,947 | )    |  | $ | (10,678 | ) |  | $ | (10,148 | )
|                                                                                                                  |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share attributable to common stockholders:                                         |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                                                       |  | $                           | (0.25  | ) |                           | $ | (5.34  | )    |  | $ | (0.60   | ) |  | $ | (11.88  | )
|Pro forma                                                                                                         |  | $                           | (0.32  | ) |                           | $ | (5.11  | )    |  | $ | (0.72   | ) |  | $ | (10.56  | )



Stock compensation
expense for options granted to nonemployees has been determined in accordance with SFAS No. 123 and EITF 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or
Services, as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of options granted to nonemployees is remeasured as the underlying options vest.



Stock-based compensation expense is recorded on stock based
grants based on the intrinsic value of the options granted, which is estimated on the date of grant, and is recognized on a graduated, accelerated basis



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



over the vesting period of the grant. For the three months ended June 30, 2005 and 2004, deferred stock-based compensation expense recorded was $169,000 and
$1,246,000, respectively, and $215,000 and $3,481,000, for the six months ended June 30, 2005 and 2004, respectively. A significant portion of the stock based compensation decrease was the result of variable accounting treatment on certain stock
options granted in 2003 in connection with a stock option exchange program. The intrinsic value of those options decreased as a result of decrease in our stock price since December 31, 2004. The balance of the expense decrease for the three and six
months ended June 30, 2005 was largely due to options being granted at current market value since July 2004, resulting in no stock-based compensation expense. During the first half of 2004, on the other hand, there was a significant expense impact
from options granted at below market value during both 2003 and the first half of 2004, resulting in accelerated expense recognition. Stock-based compensation charges and (credits) included in our results of operations were as follows (in
thousands):



|                                    |  |                             |     |                           |      |   |       |  |   |      |   |  |   |      
|----------------------------------- |  | --------------------------- | --- | ------------------------- | ---- | - | ----- |  | - | ---- | - |  | - | -----
|                                    |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                    |  | 2005                        |     |                           | 2004 |   | 2005  |  |   | 2004
|Cost of revenue:                    |  |                             |     |                           |      |   |       |  |   |      |   |  |   |      
|Product                             |  | $                           |    |                           |      | $ | 149   |  | $ | (15  | ) |  | $ | 296  
|Contract                            |  |                             | 2   |                           |      |   | 94    |  |   | (2   | ) |  |   | 226  
|License                             |  |                             |    |                           |      |   | 12    |  |   | (2   | ) |  |   | 26   
|                                    |  |                             |     |                           |      |   |       |  |   |      |   |  |   |      
|Total cost of revenue               |  | $                           | 2   |                           |      | $ | 255   |  | $ | (19  | ) |  | $ | 548  
|                                    |  |                             |     |                           |      |   |       |  |   |      |   |  |   |      
|Research and development            |  | $                           | (1  | )                         |      | $ | 547   |  | $ | (78  | ) |  | $ | 1,177
|                                    |  |                             |     |                           |      |   |       |  |   |      |   |  |   |      
|Selling, general and administrative |  | $                           | 168 |                           |      | $ | 444   |  | $ | 312  |   |  | $ | 1,756
|                                    |  |                             |     |                           |      |   |       |  |   |      |   |  |   |      
|Total                               |  | $                           | 169 |                           |      | $ | 1,246 |  | $ | 215  |   |  | $ | 3,481
|                                    |  |                             |     |                           |      |   |       |  |   |      |   |  |   |      



|4. | Restructuring Charges
|-- | ---------------------



In 2002, we implemented a restructuring program (the Restructuring Plan) to bring our expenses more in line with revised revenue and cash flow
projections. This plan required the closure of the St. Louis facility, consolidation of the animal production in Cranbury, New Jersey, and elimination of personnel. Through the completion of the Restructuring Plan in December 2002, we recorded
$2,108,000 of remaining lease obligation charges as restructuring charges in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, and Staff Accounting Bulletin 100,
Restructuring and Impairment Charges.



The following table
depicts the restructuring and impairment activity for the six months ended June 30, 2005 (in thousands):



|                                  |  |                   |       |  
|--------------------------------- |  | ----------------- | ----- | -
|                                  |  | VacatedFacilities |      
|Accrued restructuring charges:    |  |                   |       |  
|Ending balance, December 31, 2004 |  | $                 | 1,531 |  
|Cash expenditures                 |  |                   | (137  | )
|                                  |  |                   |       |  
|Ending balance, June 30, 2005     |  | $                 | 1,394 |  
|                                  |  |                   |       |  



At June 30, 2005,
approximately $289,000 was recorded as current accrued restructuring charges and approximately $1,105,000 was recorded as noncurrent accrued restructuring charges on our consolidated balance sheets. We expect to pay the accrued lease obligations
over the remaining term of the lease, which terminates in 2010.



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|5. | Inventory
|-- | ---------



Inventories are stated at the lower of cost or market. Cost is based on the first in, first out method. Inventories consisted of the following (in
thousands):



|                 |  |              |       |                  |   |      
|---------------- |  | ------------ | ----- | ---------------- | - | -----
|                 |  | June 30,2005 |       | December 31,2004
|Raw materials    |  | $            | 1,959 |                  | $ | 2,274
|Finished goods   |  |              | 1,211 |                  |   | 663  
|Work in Progress |  |              | 1,804 |                  |   | 1,238
|                 |  |              |       |                  |   |      
|                 |  | $            | 4,974 |                  | $ | 4,175
|                 |  |              |       |                  |   |      



Beginning in the first
quarter of 2005, the capitalization of indirect facility costs was based on facility space use. Prior to January 1, 2005, the allocation of indirect facility costs to inventory was based on labor hours. We feel the change to facility space use more
closely approximates the actual use of space for production activity. The change in the facility cost allocation resulted in a $0.5 million and $1.0 million decrease to inventoriable costs during the three and six months ended June 30, 2005,
respectively. Of the $1.0 million, $0.6 million reduced cost of product sales for the six months ended June 30, 2005.



|6. | Product Warranty
|-- | ----------------



We warrant our IVIS Imaging Systems for a period of one year from the date of installation. We accrue for estimated warranty costs concurrent with the
recognition of revenue. The initial warranty accrual is based upon our historical experience and is included in other current liabilities in our consolidated balance sheets. The amounts charged and accrued against the warranty reserve are as follows
(in thousands):



|                                         |  |      |      |   |      |   |      |  
|---------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                         |  | 2005 |      |   | 2004 |  
|Balance, January 1                       |  | $    | 246  |   |      | $ | 131  |  
|Current period accrual                   |  |      | 194  |   |      |   | 167  |  
|Warranty expenditures charged to accrual |  |      | (190 | ) |      |   | (105 | )
|                                         |  |      |      |   |      |   |      |  
|Balance, June 30                         |  | $    | 250  |   |      | $ | 193  |  
|                                         |  |      |      |   |      |   |      |  



|7. | Property and Equipment
|-- | ----------------------



Property and equipmentnet consist of the following (in thousands):



|                                               |  |              |         |   |                  |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                               |  | June 30,2005 |         |   | December 31,2004 |  
|Furniture and office equipment                 |  | $            | 3,979   |   |                  | $ | 3,904   |  
|Laboratory equipment                           |  |              | 9,049   |   |                  |   | 9,074   |  
|Leasehold improvements                         |  |              | 4,479   |   |                  |   | 4,374   |  
|                                               |  |              |         |   |                  |   |         |  
|                                               |  |              | 17,507  |   |                  |   | 17,352  |  
|Less accumulated depreciation and amortization |  |              | (14,994 | ) |                  |   | (14,168 | )
|                                               |  |              |         |   |                  |   |         |  
|                                               |  | $            | 2,513   |   |                  | $ | 3,184   |  
|                                               |  |              |         |   |                  |   |         |  



Depreciation expense
was approximately, $434,000 and $624,000, respectively, for the three months ended June 30, 2005 and 2004 and approximately $918,000 and $1,371,000 for the six months ended June 30, 2005 and 2004, respectively.



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The cost of assets held under capital leases included in fixed assets was approximately $263,000 at
both June 30, 2005 and December 31, 2004. Accumulated depreciation of assets held under capital leases was approximately $255,000 and $243,000 at June 30, 2005 and December 31, 2004, respectively.



|8. | Loans Payable
|-- | -------------



Under the terms of the secured loan with Silicon Valley Bank, we are required to maintain at all times a certain ratio, calculated by the sum of
unrestricted cash and investment with the bank plus eligible accounts receivable, divided by outstanding loan amount. Total available borrowing under this credit facility is $7.0 million, and is secured by our assets excluding equipment financed
through other financing and intellectual property. As of June 30, 2005 and December 31, 2004, we had borrowed $5.0 million on our $7.0 million credit facility and utilized an additional $0.8 million towards certain real estate letter of credits,
leaving us $1.2 million of available facility under this agreement. See Note 13 below for a description of the restructuring of our loan arrangement with Silicon Valley Bank and a new loan arrangement with Silicon Valley Bank and Partners for
Growth.



|9. | Commitments and Contingencies
|-- | -----------------------------



Purchase CommitmentsWe had various purchase order commitments totaling approximately $4.9 million as of June 30, 2005.



Legal Proceedings On August 9, 2001, AntiCancer, Inc. filed a
lawsuit in the Superior Court of California, County of San Diego, against us and other third parties. The complaint alleges five causes of action, including trade libel, defamation, intentional interference with contract, intentional interference
with prospective economic advantage and unfair competition. These claims are based on alleged false statements made by unidentified employees and/or third parties regarding AntiCancers products. AntiCancer seeks unspecified general and
exemplary monetary damages arising from the alleged impact of the alleged false statements, as well as its costs and expenses incurred in connection with the lawsuit. Trial is scheduled to begin on October 11, 2005. We believe the complaint is
without merit and are mounting a vigorous defense.



On March 7,
2005, AntiCancer filed a lawsuit against us in the U.S. District Court for the Southern District of California alleging infringement of five patents of AntiCancer. The complaint seeks damages and injunctive relief against the alleged infringement.
On March 29, 2005, AntiCancer amended its complaint to include an additional claim seeking a judgment that one of our imaging patents, 5,650,135, is invalid. On May 10, 2005, we filed our answer to AntiCancers amended complaint. We denied all
of AntiCancers allegations and asserted various affirmative defenses, including our position that AntiCancers patents, including some of the patents cited in its complaint, and patent claims relating to in vivo imaging of
fluorescence are invalid. We are vigorously defending ourselves against AntiCancers claims and believe AntiCancers complaint is without merit. Concurrent with filing our answer to AntiCancers complaint, we filed our own
counterclaims against AntiCancer. Our counterclaims allege that AntiCancer infringes two of our U.S. patents, 5,650,135 and 6,649,143, both relating to in vivo imaging and with a priority date before AntiCancers patents cited in its
amended complaint. We intend to vigorously pursue our claims against AntiCancer.



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Even if we prevail in these lawsuits, the defense of these or similar lawsuits will be expensive and
time-consuming and may distract our management from operating our business.



From time to time we are involved in litigation arising out of claims in the normal course of business. Based on the information presently available, management believes that there are no claims or actions pending or
threatened against us, the ultimate resolution of which will have a material adverse effect on our financial position, liquidity or results of operations, although the results of litigation are inherently uncertain, and adverse outcomes are
possible.



|10. | Stockholders Equity
|--- | --------------------



Initial Public Offering - On July 21, 2004, we completed an initial public offering of 4,200,000 shares of common stock at a price of $7.00 per
share, for proceeds of $24.9 million net of underwriting commissions and offering expenses. In connection with our initial public offering, each outstanding share of convertible preferred stock was converted into one share of common stock and all
warrants exercisable for convertible preferred stock became warrants exercisable for an equivalent number of shares of common stock.



Reverse Stock Split - In April 2004, our board of directors approved a 1 for 7 reverse stock split for all common and preferred shares. Such stock
split was approved by our stockholders on May 31, 2004 and was effective on July 7, 2004. All shares and per share data in the accompanying consolidated financial statements have been restated to reflect the reverse stock split.



Note Receivable from Stockholders



During 1998, we issued 88,642 shares of common stock to officers in exchange
for full recourse notes receivable of approximately $111,000, at an interest rate of 6% per annum. The notes, initially due at the earlier of December 31, 2002 or cessation of employment, were amended to become due at December 31, 2004 or cessation
of the employment. Shares were fully vested at December 31, 2003.



On March 5, 2004, our board of directors passed a resolution to forgive outstanding notes receivable, including accrued interest contingent upon the filing of a registration statement with the Securities and Exchange Commission on Form S-1
for an initial public offering before November 1, 2004. As this filing occurred on April 2, 2004, the notes were forgiven and a variable accounting stock-based compensation charge of $0.6 million was recorded in the first quarter of 2004. For the
three and six months ending June 30, 2004, $0.8 million was recorded as part of general and administrative expense and cost of sales.



Stock Option Plans



1996 Plan - In 1996, our board of directors adopted the 1996 Stock Option Plan (the 1996 Plan). On December 1, 2003, we issued options
covering 281,332 shares of our common stock pursuant to an option exchange program, initiated in May 2003. Pursuant to the terms of the option exchange program, eligible optionees were offered the opportunity to exchange outstanding options to
purchase our common stock with an exercise price of $0.70 or more for options to purchase our common stock that would be issued at least six months and one day following the cancellation date of the exchanged options with an exercise price equal to
the fair market value of such common stock on the date of grant, subject to the optionee continuing to provide services to us through the grant date of the new options. The vesting provisions of the original options would



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



carry over to the newly issued options. We have evaluated this transaction in the context of guidance in EITF 00-23, Issues Related to the Accounting
For Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44, and have concluded that the reissued options require variable accounting treatment because they were granted with an exercise price less than the fair market value
of the underlying common stock at the date of grant. For the three and six months ended June 30, 2005, we recorded a credit to stock-based compensation expense of approximately $0.2 million and $0.6 million, respectively, due to the decrease in the
intrinsic value of the variable stock options. We recorded stock-based compensation expense of approximately $0.3 million and $0.7 million, respectively, for the three and six months ended June 30, 2004.



In April 2004, the 1996 Plan was amended where by no additional shares would
be granted out of the plan upon the creation of the 2004 Equity Incentive Plan. Any shares returned to the 1996 Plan resulting from repurchase or termination of options would be reauthorized under the 2004 Equity Incentive Plan. Accordingly, there
were no authorized shares available for future grant issuance under the 1996 Plan at June 30, 2005. During the three months ended June 30, 2005, 5,328 shares were canceled and reauthorized for future grants under the 2004 Equity Incentive Plan.



2004 Equity Incentive Plan - In April 2004, our board
of directors adopted our 2004 Equity Incentive Plan (the 2004 Plan). The 2004 Plan, which was approved by our stockholders in May 2004, became effective upon the completion of our initial public offering. During the three and six months
ended June 30, 2005, options to purchase a total of 104,925 and 1,096,505 shares, respectively, were granted to various employees. Pursuant to the terms of the 2004 Plan, the Compensation Committee of our board of directors approved an increase in
the number of shares reserved for issuance under the 2004 Plan by 443,086 shares. These shares were added to the 2004 Plan during the first quarter of 2005. As of June 30, 2005, 406,113 shares were available for future issuance, including the
reauthorizations from cancellations under the 1996 Plan and the 2004 Plan. In connection with the stock options granted during the three and six months ended June 30, 2005, we recorded no deferred compensation as the exercise price of the shares
granted was equal to the market value.



2004 Director Stock
Plan - Our 2004 director stock plan was adopted by our board of directors in April 2004 and approved by our stockholders in May 2004. This plan became effective upon the completion of our initial public offering and provides for the periodic
grant of restricted stock to our directors.



During the three
and six months ended June 30, 2005, a total of 65,993 and 74,074 shares, respectively, were issued to directors and 1,428 and 3,809 shares, respectively, were forfeited. The forfeited shares were returned to the plan. Pursuant to the terms of the
2004 Director Stock Plan, the Compensation Committee of our board of directors approved an increase in the number of shares reserved for issuance under the plan by 45,720 shares. These shares were added to the plan during the first quarter of 2005.
As of June 30, 2005, 79,735 shares were available for future issuance. In connection with the stock awards issued during the three and six months ended June 30, 2005, we recorded approximately $23,000 of deferred compensation expense.



We recorded a total of $169,000 and $215,000 in stock-based compensation
expense for the three and six months ended June 30, 2005, respectively. We recorded a total of $1,246,000 and $3,481,000 in stock based compensation expense for the three and six months ended June 30, 2004, respectively,



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|11. | Loss Per Share
|--- | --------------



Basic net loss attributable to common stockholders per share is computed by dividing net loss attributable to common stockholders by the weighted average
number of common shares outstanding during the period. The following securities were not included in the computations of diluted net loss attributable to common stock per share at June 30, 2005 and 2004, as their inclusion would be antidilutive:



| |  |  | convertible preferred stock outstanding of 0 and 9,418,766 shares at June 30, 2005 and 2004, respectively;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | warrants to purchase 395,483 shares of common stock and 395,483 shares of convertible preferred stock outstanding at June 30, 2005 and 2004, respectively;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | options to purchase common stock of 2,502,160 and 1,031,356 shares at June 30, 2005 and 2004, respectively; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | common stock subject to our right to repurchase of 244,098 and 91,429 shares at June 30, 2005 and 2004, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



Basic and diluted net loss attributable to common stockholders per share was
calculated as follows (in thousands, except per share data):



|                                                                          |  |                            |            |   |                          |   |         |      |  |   |            |   |  |   |         |  
|------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------ | - | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                                                          |  | Three Months EndedJune 30, |            |   | Six Months EndedJune 30, |  
|                                                                          |  | 2005                       |            |   | 2004                     |   |         | 2005 |  |   | 2004       |  
|Net loss attributable to common stockholders                              |  | $                          | (3,739     | ) |                          | $ | (5,166  | )    |  | $ | (8,884     | ) |  | $ | (11,411 | )
|                                                                          |  |                            |            |   |                          |   |         |      |  |   |            |   |  |   |         |  
|Weighted average number of common sharesbasic and diluted                |  |                            | 14,791,306 |   |                          |   | 968,244 |      |  |   | 14,776,278 |   |  |   | 960,810 |  
|                                                                          |  |                            |            |   |                          |   |         |      |  |   |            |   |  |   |         |  
|Basic and diluted net loss attributable to common stockholders per share: |  | $                          | (0.25      | ) |                          | $ | (5.34   | )    |  | $ | (0.60      | ) |  | $ | (11.88  | )
|                                                                          |  |                            |            |   |                          |   |         |      |  |   |            |   |  |   |         |  



|12. | Comprehensive Income
|--- | --------------------



|                                                         |  |                           |        |   |                          |   |        |      |  |   |        |   |  |   |         |   
|-------------------------------------------------------- |  | ------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | --
|                                                         |  | Three Months EndedJune 30 |        |   | Six Months EndedJune 30, |  
|                                                         |  | 2005                      |        |   | 2004                     |   |        | 2005 |  |   | 2004   |  
|Net loss attributable to common stockholders             |  | $                         | (3,739 | ) |                          | $ | (5,166 | )    |  | $ | (8,884 | ) |  | $ | (11,411 | ) 
|Other comprehensive income (loss):                       |  |                           |        |   |                          |   |        |      |  |   |        |   |  |   |         |   
|Unrealized gain (loss) on available for sale investments |  |                           | 8      |   |                          |   | (29    | )    |  |   | 11     |   |  |   | (29     | ) 
|                                                         |  |                           |        |   |                          |   |        |      |  |   |        |   |  |   |         |   
|Comprehensive loss                                       |  | $                         | (3,731 | ) |                          | $ | (5,195 | )    |  | $ | (8,873 | ) |  | $ | (11,440 | ))
|                                                         |  |                           |        |   |                          |   |        |      |  |   |        |   |  |   |         |   



|13. | Subsequent Events
|--- | -----------------



Agreements with Silicon Valley Bank and Partners for Growth



On August 2, 2005, we entered into an Amended and Restated Loan and Security Agreement, dated as of August 2, 2005 (the SVB Loan Agreement), among
Xenogen, our subsidiary Xenogen Biosciences Corporation (XBC), and Silicon Valley Bank (SVB), and a Loan and Security Agreement, dated as of August 2, 2002 (the PFG Loan Agreement), among Xenogen, XBC and Partners for Growth, L.P (PFG).



The SVB Loan Agreement amends and restates a Loan and Security Agreement
entered into between Xenogen and SVB on September 10, 2003 (the Original Agreement), and provides for revolving borrowings of up to $13.0 million. Up to $2.0 million of the availability under the SVB Loan Agreement may be used for letters of credit
and cash management services. All borrowings under the Original Agreement ($5.8 million outstanding as of August 2, 2005) have been rolled into the SVB Loan Agreement and have been applied against the amount available under the SVB Loan Agreement.
Loans under the SVB Loan Agreement mature on August 2, 2007 and bear interest at a floating rate equal to the greater of SVBs prime rate plus 150 basis points or 5.5%. Through September 30, 2005, we have agreed to pay minimum interest to SVB
in the amount that would be payable on borrowings of $6.5 million even if the loans actually outstanding are less. After September 30, 2005, we have agreed to pay minimum interest of not less than the amount that would be payable on borrowings of
$8.0 million.



The SVB Loan Agreement contains restrictions on
our ability to, among other things, dispose of assets, undertake mergers or acquisitions, incur indebtedness, create liens on assets, make investments, and pay dividends or repurchase stock. It also requires us to maintain a remaining months
liquidity ratio of at least 4 to 1 until October 31, 2005 and at least 6 to 1 thereafter. The remaining months liquidity ratio consists of a ratio of our cash and cash equivalents plus 80% of eligible accounts receivable less amounts outstanding
under the SVB Loan Agreement, to net income plus depreciation and amortization for the three-month period most recently ended. The SVB Loan Agreement also provides that if our modified quick ratio drops below 2 to 1, a new form of loan agreement
attached as exhibit to the SVB Loan Agreement will become applicable and our borrowings will be limited to the lesser of $13.0 million or 80% of the amount of our eligible accounts receivable. Our modified quick ratio is defined as the ratio of our
unrestricted cash and cash equivalents plus eligible accounts plus availability under the PFG Loan Agreement, to outstanding loans and other extensions of credit under the SVB Loan Agreement. The SVB Loan Agreement contains events of default that
include, among others, non-payment of principal, interest or fees, breaches of covenants, material adverse changes, bankruptcy and insolvency events, cross-defaults, unpaid judgments, inaccuracy of representations and warranties and events
constituting a change of control.



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XENOGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The PFG Loan Agreement provides for revolving borrowings in an amount up to the lesser of $5.0
million, or 50% of our current assets minus the amount of any loans outstanding under our SVB Loan Agreement. Currently, under the borrowing formula, the entire $5 million would be available for borrowing. Any loans that are made under the PFG Loan
Agreement mature on July 28, 2007 and bear interest at a floating rate equal to the prime rate plus 400 basis points. The PFG Loan Agreement contains restrictions, that are applicable when we have requested a borrowing or when loans are outstanding
under the PFG Loan Agreement, on our ability to, among other things, dispose of assets, undertake mergers or acquisitions, incur indebtedness, create liens on assets, make investments, and pay dividends or repurchase stock. The PFG Loan Agreement
contains events of default that include, among others, non-payment of principal, interest or fees, breaches of covenants, material adverse changes, bankruptcy and insolvency events, cross-defaults, unpaid judgments, inaccuracy of representations and
warranties and events constituting a change of control.



In
connection with the PFG Loan Agreement and a cash payment of $1,800, on August 2, 2005, we entered into a Warrant Purchase Agreement under which we issued a Warrant to PFG. The Warrant was issued in a private offering in reliance on the exemption
from the registration requirements of the Securities Act of 1933 under Section 4(2) of that act. The warrant is exercisable for our common stock at an exercise price of $3.60 per share. In accordance with the price protection terms of the Warrant,
the exercise price of the Warrant was adjusted to $2.91 per share in connection with our equity financing described below. The Warrant provides for the issuance of up to 180,000 shares of our common stock upon exercise, but currently it is
exercisable for only 90,000 shares. The number of shares for which the Warrant is currently exercisable will increase by 3,750 at the end of each month during which a loan is outstanding under the PFG Loan Agreement. If no loans are outstanding at
the end of a month, the total number of shares of our common stock for which the Warrant may be exercised will be reduced by 3,750. The Warrant may be exercised by making a cash payment or through a cashless exercise by the surrender of warrant
shares having a value equal to the exercise price of the portion of the Warrant being exercised. The Warrant expires on August 1, 2012.



We filed copies of the SVB Loan Agreement, PfG Loan Agreement, the Warrant Purchase Agreement and the Warrant as exhibits to our Report on Form 8-K filed
with the SEC on August 8, 2005.



Equity Financing



On August 11, 2005, we entered into a Securities Purchase
Agreement (the SPA) with certain institutional accredited investors (the Purchasers). Pursuant to the SPA, on the closing date, the Purchasers will purchase, in the aggregate, 5,154,640 shares of our common stock, par value $0.001, at a price of
$2.91 per share. The aggregate gross consideration that we will receive for the common stock to be issued on the closing date is approximately $15,000,000. The Purchasers will also receive warrants to purchase up to an additional 1,546,392 shares of
our common stock on the closing date. The warrants have a term of five years and are exercisable beginning six months after the closing date with an exercise price equal to $3.29 per share.



We expect the closing date to be August 15, 2005 or August 16, 2005. The
financing was completed through a private placement to accredited investors and is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.



Pursuant to the SPA, we have agreed to indemnify the Purchasers, their affiliates and agents, against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. We have also agreed to register for re-sale the common stock, including the common stock issuable upon exercise of the warrants. Five of the Purchasers are entities related to
Abingworth Management Ltd. (Abingworth) and one of the Purchasers is an entity related to Harvard Private Capital Holdings, Inc. (Harvard). Abingworth and Harvard are currently stockholders of Xenogen. One member of our Board of Directors is
affiliated with Abingworth and one member of our Board of Directors is affiliated with Harvard. We retained a placement agent in connection with the financing. We will pay a fee to the placement agent based on a percentage of the gross proceeds from
the sale of the common stock and warrants.



The SPA and the
form of Warrant to be issued to the Purchasers have been filed as exhibits to our Report on Form 8-K filed with the SEC on August 15, 2005.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------



The following Managements Discussion and Analysis of our Financial Condition and Results of Operations should be
read in conjunction with the condensed consolidated financial statements and notes thereto included as part of this Quarterly Report. This report contains forward-looking statements that are based upon current expectations. We sometimes identify
forward-looking statements with such words as may, will, expect, anticipate, estimate, seek, intend, believe or similar words concerning future events.
The forward-looking statements contained herein, include, without limitation, statements concerning anticipated performance of our products, services and technologies, revenue growth, seasonality of third quarter revenue, future revenue sources and
concentration, gross profit margins, selling and marketing expenses, research and development expenses, general and administrative expenses, capital resources, additional financings or borrowings, additional losses, increasing production capacity
and capital expenditures. We assume no obligation to update any such forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. In order to comply with the
terms of the safe harbor, we note that a variety of factors, risks and uncertainties could cause actual results or experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. Such
factors, risks and uncertainties include, without limitation, those discussed below and elsewhere in this Quarterly Report, particularly in Factors That May Affect Our Results. We also urge you to carefully review the risk factors set
forth in this and other documents we file from time to time with the Securities and Exchange Commission.



All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the three and six month periods ended
June 30, 2005, are not necessarily indicative of the results that may be expected for any future period.



Overview



We sell integrated systems of instruments and equipment, software and reagents to biomedical and biopharmaceutical researchers that we believe improve the
productivity and efficiency of the drug discovery and development process. Using the detection and measurement of photons emitted from cells and animals that we genetically engineer to emit light, which we term biophotonic imaging, our
patented and proprietary biophotonic IVIS Imaging Systems, living animal models and research services collectively expedite in vivo data collection and analysis, a critical bottleneck in drug discovery and development. Our customers use in
vivo biophotonic imaging to visually display and quantify a chosen tumor, disease, pathogen, organ or biochemical reaction. Our products are also used to create predictive animal models, primarily rats and mice, for preclinical drug discovery
and development. We believe our products enable our pharmaceutical and biotechnology customers to generate higher-quality safety and efficacy data for drug candidates, to accelerate preclinical development and to reduce the development risk of
product candidates that enter human clinical development. The sources of our revenue are:



| |  |  | Instruments and related imaging accessories: sales of IVIS Imaging Systems and accessories;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Long-term service contracts: custom animal production, animal phenotyping and IVIS service contracts; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Recurring license fees: multi-year fees from our non-academic customers for our biophotonic imaging licenses and access to reagents.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



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We manufacture, market and sell our IVIS Imaging Systems, as well as the reagentspathogens and
tumor cells, or Bioware, and bioluminescent transgenic animals, or LPTA animal modelsthat allow our customers performing biopharmaceutical and biomedical research, discovery and development to collect safety, efficacy
and other relevant data on product candidates. Our reagent sales are comprised of genetically modified animals (mice and rats) and cell lines that are used to characterize the role of genes in the disease process, as well as to measure the efficacy
of potential drugs against certain sets of disease indications. We also provide a wide range of contract research services relating to the production of transgenic animals (in which foreign genes are incorporated) and knockout animals (in which
specific genes are functionally disabled). In addition, we provide custom animal production and phenotyping services to our customers for the purpose of target validation and compound screening. Our product offerings allow our customers to gather
data in living animals about biochemical pathways, the mechanism of action of drug candidates and how well these drug candidates work in living organisms.



We commenced sales of our IVIS Imaging Systems in 2000 and our animal models in 2001 and our revenues have grown each year. In the second quarter of 2005,
we recognized total revenue of $9.7 million, an increase of $2.3 million from total revenue in the second quarter of 2004 of $7.5 million. We expect our total revenues to increase for the remainder of 2005, although not necessarily at the same rate
as in prior years. The gross margins for our products and services vary. During the second quarter of 2005, gross margin for our (i) product sales was 38%, (ii) licenses associated with product sales were 85.9% and (iii) contract work for custom
animal production and phenotyping was 21.7%. We anticipate that gross margins on our instruments and accessories as well as our custom animal production and phenotyping will improve as we increase our manufacturing capacity utilization. We sell our
products and services directly to customers in the United States and several foreign countries. In Australia/New Zealand, China, Germany/Austria/Switzerland, India, Israel, Japan, South Korea and Taiwan we sell our IVIS Imaging Systems through
independent distributors.



We have incurred significant net
losses every year since our inception. We incurred losses of $62.6 million in 2002, $20.5 million in 2003, $21.8 million in 2004 and $8.9 million in the six months ended June 30, 2005. As of June 30, 2005, we had an accumulated deficit of $176.6
million. As a company in the early stage of commercialization, our limited history of operations makes prediction of future operating results difficult. We believe that period to period comparisons of our operating results should not be relied on as
predictive of our future results.



Our revenue is subject to
seasonal variations. Our customers are from the biomedical research community and the biopharmaceutical industry, and our business is closely tied to the timing of their budget cycles. In the biomedical research community, grant proposals are due in
October, February and June with funds delivered the following June, October and March, respectively. We recognize most of our revenue from sales to biomedical institutions when we install IVIS Imaging Systems, which, due to the grant cycle, usually
occur in the second and fourth quarters. In the biopharmaceutical industry, there are traditionally two decision making cycles: one in January or July when budgets are planned, and the second in November or December when appropriated funds must be
spent or returned to the general budget. As a result, agreements are commonly entered into in the second and fourth quarters, which follow the beginning of the budget cycle. Therefore, historically our revenue has been higher in the second and
fourth quarters as compared to the first and third quarters, which may or may not hold true in the future given our limited operating history. In addition, we have generally seen a decrease in the third quarter revenues due to vacation schedules in
the summer, especially with respect to our European and academic customers. Given our brief sales history and growth rates, seasonality is difficult to predict and may be variable. We believe that the seasonality patterns that have historically
affected third quarter revenues may not have the same impact on revenues for the third quarter ending September 30, 2005.



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Critical Accounting Policies and Estimates



Our critical accounting policies and estimates are disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2004 that was filed with the Securities and Exchange Commission on March 21, 2005. Our critical accounting estimates have changed since December 31, 2004 with regard to the allocation of indirect
facility costs to inventory. Prior to January 1, 2005, the allocation of indirect facility costs to inventory was based on labor hours. Beginning in the first quarter of 2005, the allocation of indirect facility costs to inventory was based on
facility space use. We feel the change to facility space use more closely approximates the actual use of space for production activity. The change in the facility cost allocation resulted in a $1.0 million decrease to inventoriable costs for the six
month period ended June 30, 2005, of which $0.6 million reduced cost of product sales for the six month period ended June 30, 2005. There were no other changes to critical accounting policies and estimates since December 31, 2004.



Results of Operations



Three Months Ended June 30, 2005 versus Three Months Ended June 30, 2004



Revenue. Revenues by source for the three months ended June 30,
2005 and 2004 were (in thousands):



|              |  |                             |       |      |   |      
|------------- |  | --------------------------- | ----- | ---- | - | -----
|              |  | Three Months Ended June 30,
|              |  | 2005                        |       | 2004
|Revenue:      |  |                             |       |      |   |      
|Product       |  | $                           | 5,041 |      | $ | 3,720
|Contract      |  |                             | 2,873 |      |   | 2,390
|License       |  |                             | 1,788 |      |   | 1,341
|              |  |                             |       |      |   |      
|Total revenue |  | $                           | 9,702 |      | $ | 7,451
|              |  |                             |       |      |   |      



Total revenue
increased to $9.7 million during the second quarter of 2005 from $7.5 million in the second quarter of 2004, or a 30.2% increase. The increase resulted primarily from increased sales of our IVIS Imaging Systems and the associated licensing fees.
While the number of IVIS System units sold during both the second quarter of 2005 and 2004 was twenty, the average selling price increased by 42% in the second quarter of 2005 over the comparable period in 2004 primarily due to a greater proportion
of total unit sales of our higher priced IVIS 200 Imaging System units during the second quarter of 2005 and a change in customer mix from a larger proportion of lower-margin academic customers in the second quarter of 2004 to an increased
proportion of sales to higher-margin commercial customers in the second quarter of 2005. Contract revenue increased in the second quarter of 2005 by $0.5 million from the comparable period of 2004 primarily due to completion of a major milestone for
a biotechnology clients project work in addition to our typical base of custom model/gene targeting and phenotyping activity. This was partially offset by decreases in animal sales and production. One of our customers individually accounted
for 11.6% and 17.8% of total revenue in the second quarter of 2005 and 2004, respectively.



Cost of revenue. Cost of revenue increased to $5.6 million during the second quarter of 2005 from $5.1 million in the second quarter of 2004, or a 9.8% increase. The increase in IVIS 200 System unit sales
resulted in the increase of cost of revenue in materials and labor costs. Unit costs on the IVIS 200 Systems are significantly higher than our other IVIS System models. Offsetting some of the higher IVIS 200 System product costs was a decrease in
facility overhead resulting from a change in how facility space was attributed to our manufacturing operations beginning in the first quarter of 2005.



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Cost of contract revenue increased approximately 1.4% in the second quarter of 2005 versus the second
quarter of 2004. This increase was limited to general inflation with no significant underlying changes to the Cranbury, New Jersey facility cost structure, where essentially all of the contract revenue activity took place. The cost of license
revenue increased in the second quarter of 2005 over the comparable period in 2004 due to royalty costs payable by us to our third-party licensors associated with the increased volume of licenses we granted to commercial customers in connection with
the sale of IVIS systems.



The overall cost of revenue increase
associated with higher sales was offset in part by lower deferred stock based compensation expense. We expensed approximately $2,000 of stock-based compensation in the second quarter of 2005 and approximately $0.3 million of deferred stock-based
compensation in the second quarter of 2004. As a percentage of total revenues, cost of revenues decreased to 58.0% for the second quarter of 2005 as compared to 68.8% for the comparable period of 2004. The lower cost of revenue as a percentage of
sales was due largely to the significant increase in the average selling price of IVIS Imaging Systems during the second quarter of 2005.



Gross margin. Gross margins by revenue source for the three months ended June 30, 2005 and 2004 were as follows (in thousands, except percentages):



|             |  |                            |       |  |      |   |  |   |       |  |      |  
|------------ |  | -------------------------- | ----- |  | ---- | - |  | - | ----- |  | ---- | -
|             |  | Three Months Ended June 30 |      
|             |  | 2005                       |       |  | 2004 |  
|Gross Margin |  |                            |       |  |      |   |  |  
|Product      |  | $                          | 1,914 |  | 38.0 | % |  | $ | 1,031 |  | 27.7 | %
|Contract     |  |                            | 623   |  | 21.7 | % |  |   | 170   |  | 7.1  | %
|License      |  |                            | 1,536 |  | 85.9 | % |  |   | 1,124 |  | 83.8 | %
|             |  |                            |       |  |      |   |  |   |       |  |      |  
|Total        |  | $                          | 4,073 |  | 42.0 | % |  | $ | 2,325 |  | 31.2 | %
|             |  |                            |       |  |      |   |  |   |       |  |      |  



The gross margin
percentage during the second quarter of 2005 increased to 42.0% from 31.2% during the second quarter of 2004. The improvement was largely the result of a higher average selling price attributed to a greater number of IVIS 200 Series in the sales
mix, a greater proportion of sales to higher-margin commercial customers and productivity improvements associated with contract work in Cranbury, New Jersey.



Product gross margin.For the second quarter of 2005, the newly developed IVIS 200 Series System made up a significantly larger share of imaging
system unit sales over the comparable period of 2004, contributing to the majority of the average unit selling price increase of 42%. In addition to the higher average selling price of the IVIS 200 Series, a greater share of IVIS System unit sales
were made to commercial sector customers in the second quarter of 2005 contributing further to the average selling price increase. Price discounting, generally associated with academic sector customers, had less of an impact to average selling price
during the second quarter of 2005. Sales to the academic sector dropped to 65% of the sales mix in the second quarter of 2005 as compared to 90% of the sales mix during the second quarter of 2004.



Higher production costs partially offset some of the margin gain attributable
to unit pricing. Average production cost increased on a per unit basis in the second quarter of 2005 over the comparable period in 2004. The increase was due largely to the higher production costs associated with the IVIS 200 Series, and to a lesser
degree, higher period costs stemming from manufacturing facility expenses previously absorbed in the research and development expenses relating to the development of the IVIS 3-D System during 2004. The change of allocating facilities overhead to
production served to offset some of the product cost



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increase above by $0.2 million resulting in an absolute dollar increase in product gross margin of $0.9 million, or 85%, over the second quarter of 2004.



Contract and licensing gross margin.Contract gross
margin for the second quarter of 2005 improved over the comparable period of 2004 as a result of productivity gains at our Cranbury, New Jersey facility. An increased amount of gene targeting and phenotyping contractual work occurred during the
second quarter of 2005 over the comparable period in 2004 with little impact to personnel or facility expense. The licensing gross margin percentage for the second quarter of 2005 increased over the comparable period in 2004. The increase was
largely the result of a decrease in royalty payments we made to third-party licensors associated with certain licenses we granted to commercial IVIS system customers.



Research and development. Research and development expenses include the development of new IVIS Imaging Systems, LPTA
models and reagents. Research and development costs decreased in the second quarter of 2005 to $2.2 million from the $3.2 million in the comparable period of last year. The decrease was due in part to an overall decrease in allocated stock based
compensation expense of $0.5 million. The balance of the research and development decrease from the second quarter of 2004 was attributed to reduced product development expenses relating to the IVIS 3-D Series Imaging System during the second
quarter of 2005, with most of the development expenditures occurring in 2004. As a percentage of total revenues, research and development expenses were 22.6% for the second quarter of 2005 as compared to 42.8% for the comparable period of 2004. The
decrease is primarily attributable to the decreased expenses described above, and to greater total revenues for the second quarter of 2005 versus the comparable period of 2004.



Selling, general and administrative. Selling, general and administrative expenses increased to $4.9 million for the
second quarter of 2005 from $3.4 million in the second quarter of 2004. General and administrative costs represented the largest component of the increase and resulted in part from increased costs associated with operating as a public company. We
closed our initial public offering in July 2004. Staffing and consulting costs increased by $0.4 million over the comparable period in 2004. Directors and officers insurance and public/investor relations costs also increased in the second quarter of
2005 over the comparable period in 2004 by $0.2 million. Legal costs and expenses, stemming in part from our litigation with AntiCancer, contributed $0.4 million of the overall cost increase from the second quarter of 2004. We expect our litigation
costs and expenses to increase in future periods relating to discovery and trial costs in our state court lawsuit with AntiCancer and discovery in our federal court lawsuit with AntiCancer. Bonus compensation and other costs in the second quarter of
2005 increased over the comparable period last year by $0.2 million, on a net basis, corresponding with the higher sales in the current period and the timing of other issues. Selling expenses increased by $0.6 million in the second quarter of 2005
over the comparable period of 2004. Expanded marketing efforts associated with promotion and sales of the new IVIS 200 Series and 3-D Series Imaging Systems contributed to the higher selling costs in 2005.



The increases in selling, general and administrative expense were partially
offset by a decrease in allocated deferred compensation expenses of $0.3 million from 2004. As a percentage of total revenues, selling, general and administrative expenses were 50.6% for the second quarter of 2005 as compared to 46.0% for the
comparable period of 2004. The increase was primarily attributable to operating as a public company during the second quarter of 2005. We were a private company during the second quarter of 2004.



Depreciation. Depreciation expense decreased by $0.2 million in the
second quarter of 2005 compared to the second quarter of 2004 largely due to the sale of a previously capitalized IVIS camera and disposal of computer and miscellaneous office equipment.



Amortization of intangibles. We amortized acquisition-related intangibles in the amount of $151,000 in both the
second quarter of 2005 and 2004 relating to our November 2000 acquisition of Xenogen Biosciences



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Corporation. There were no acquisitions or write-offs with regard to intangibles in either the second quarter of 2005 or 2004.



Interest expense. Interest expense remained $0.2 million during both
second quarter of 2005 and 2004. Increases on certain loan balances were offset by decreases on various equipment leasing obligations during the second quarter of 2005, thereby, having a minimal net impact to interest expense when compared to the
second quarter of 2004.



Income tax expense (benefit).
We recorded no income tax expense in either the second quarter of 2005 or 2004 due to our losses in each of these quarters.



Expensing of Stock Awards. Compensation expense is recorded on stock option grants based on the intrinsic value of the options granted, which is
estimated on the date of grant and it is recognized on a graduated, accelerated basis over the vesting period, generally four years from the date of grant. Deferred stock-based compensation expense recorded in the second quarter of 2005 and 2004 was
approximately $169,000 and $1.2 million, respectively. A significant portion of the stock based compensation decrease was the result of variable accounting treatment on certain stock options granted in 2003. The intrinsic value of those options
decreased as a result of stock market fluctuations since the variable grants were initially valued. The impact of the stock market value change resulted in a $0.2 million decrease to expense during the second quarter of 2005, versus a $0.3 million
expense increase in the second quarter of 2004 on those certain stock options granted in 2003. Lastly, the balance of the expense decrease in the second quarter of 2005 stemmed largely from options being granted at current market value since July
2004, resulting in no stock based compensation expense. During the second quarter of 2004, on the other hand, there was a significant expense impact from options granted at below market value during both 2003 and through the second quarter of 2004,
resulting in accelerated expense recognition.



Six Months Ended June 30,
2005 versus Six Months Ended June 30, 2004



Revenue. Revenues by source for the six months ended June 30, 2005 and 2004 were (in thousands):



|              |  |                           |        |      |   |       
|------------- |  | ------------------------- | ------ | ---- | - | ------
|              |  | Six Months Ended June 30,
|              |  | 2005                      |        | 2004
|Revenue:      |  |                           |        |      |   |       
|Product       |  | $                         | 10,334 |      | $ | 7,202 
|Contract      |  |                           | 5,144  |      |   | 4,580 
|License       |  |                           | 3.498  |      |   | 2,709 
|              |  |                           |        |      |   |       
|Total revenue |  | $                         | 18,976 |      | $ | 14,491
|              |  |                           |        |      |   |       



Total revenue
increased to $19.0 million for the six months ended June 30, 2005 from $14.5 million for the six months ended June 30, 2004, or a 31% increase. The increase resulted primarily from increased sales of our IVIS Imaging Systems and the associated
licensing fees. The number of IVIS Imaging Systems sold during the six months ended June 30, 2005 was 45 as compared to 39 units sold for the comparable period during 2004. In addition to the increase of IVIS System unit sales, the average selling
price for IVIS Systems for the six months ended June 30, 2005 increased by 30.7% over the comparable period in 2004 given changes in product and distribution channel mix. Contract revenue increased by $0.6 million for the six months ended June 30,
2005 from the comparable period of 2004 primarily due to completion of a major milestone for a biotechnology clients project work in addition to our typical base of custom model/gene targeting and phenotyping activity, offset in part by
decreases in animal production. One of our customers



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individually accounted for 12.0% and 18.5% of total revenue during the six month period ending June 30, 2005 and 2004, respectively.



Cost of revenue. Cost of revenue increased to $11.6 million for the
six months ended June 30, 2005 from $9.6 million for the comparable period in 2004, or a 20.7% increase. The increase in IVIS Imaging System unit sales and associated licensing fees resulted in an increase in cost of product and licensing revenue.
In addition, the product sales mix included a greater number of higher cost IVIS 200 Systems and one IVIS 3-D Series Imaging System during the six months ended June 30, 2005 versus the comparable period of 2004. The IVIS 200 Series and IVIS 3-D
Series Systems have higher component material and labor costs compared to our other IVIS Imaging Systems. The cost of revenue increase was offset in part by lower deferred stock based compensation expense. We credited expense for approximately
$19,000 of stock-based compensation expense for the six months ending June 30, 2005, while expensing approximately $0.5 million of deferred stock-based compensation for the comparable period in 2004. The cost of contract revenue, on the other hand,
decreased slightly given the reduction in deferred compensation charges as discussed above, offset in part by a slight increase in gene targeting and phenotyping activity during 2005. As a percentage of total revenues, cost of revenues was 61.4% for
the six months ended June 30, 2005 as compared to 66.6% for the comparable period of 2004 stemming largely from an increase in average selling price on IVIS Systems and productivity improvements with regard to contract service work.



Gross Margin. Gross margins by revenue source for the six months ended
June 30, 2005 and 2004 were as follows (in thousands, except percentages):



|             |  |                          |       |  |      |   |  |   |       |  |      |  
|------------ |  | ------------------------ | ----- |  | ---- | - |  | - | ----- |  | ---- | -
|             |  | Six Months Ended June 30 |      
|             |  | 2005                     |       |  | 2004 |  
|Gross Margin |  |                          |       |  |      |   |  |  
|Product      |  | $                        | 3,769 |  | 36.5 | % |  | $ | 2,535 |  | 35.2 | %
|Contract     |  |                          | 635   |  | 12.3 | % |  |   | 17    |  | 0.4  | %
|License      |  |                          | 2,927 |  | 83.7 | % |  |   | 2,294 |  | 84.7 | %
|             |  |                          |       |  |      |   |  |   |       |  |      |  
|Total        |  | $                        | 7,331 |  | 38.6 | % |  | $ | 4,846 |  | 33.4 | %
|             |  |                          |       |  |      |   |  |   |       |  |      |  



The gross margin
percentage for the six months ended June 30, 2005 increased to 38.6% from 33.4% during the comparable period of 2004. The significant increase in the average selling price of our IVIS Systems due primarily to the shift in product mix towards our
higher priced IVIS 200 Systems, offset in part by increased unit production costs associated with IVIS 3-D Series and IVIS 200 Series Systems, had the greatest impact on gross margin performance. From a historical perspective, gross margins on
products (sales of our IVIS Imaging Systems and accessories) averaged 38% over the three years ended December 31, 2004 and gross margins on licensing fees averaged 86% during the same period. Historical gross margins for our custom animal production
and phenotyping services have varied significantly over the three years ended December 31, 2004 and have ranged from a negative to breakeven gross margin.



Product gross margin.For the six months ended June 30, 2005, the IVIS 200 Series and 3-D Series Imaging Systems made up a significantly larger
share of imaging system unit sales over the comparable period of 2004, increasing the average selling price per unit by 30.7% and overall product revenues by 43.5%. In addition, a customer mix shift of IVIS System sales to commercial versus academic
sector customers, where pricing tends to be discounted, also served to increase our average selling price for the six month period ended June 30, 2005 over the comparable period in 2004. A sales channel shift toward the utilization of more
international distributors during the six month period ended June 30, 2005 versus the



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comparable period of 2004 offset some of the unit price increase given distributors sales margin requirements.



The increased production costs associated mostly with the higher
manufacturing costs of the IVIS 200 and 3-D Systems, however, offset a sizable portion of the product revenue growth during the six month period ended June 30, 2005 over the comparable period in 2004. The balance of the manufacturing unit cost
increase from 2004 was due to additional overhead being absorbed by production resulting from changes in research and development activity. During 2004, our manufacturing organization performed research and development services relating to our IVIS
3-D Series Imaging System. Accordingly, a portion of our manufacturing organization expenses was recorded as research and development expenses throughout most of 2004. Since our manufacturing organization has not performed research and development
services since December 31, 2004, $0.3 million in additional overhead cost was absorbed into IVIS System production during the six month period ending June 30, 2005. A change for allocating facilities overhead to production, however, served to
reduce product cost by $0.6 million during the six month period ending June 30, 2005. Despite the overall manufacturing unit cost increase, there was an overall product margin improvement. In absolute dollars, the product margin improved by $1.2
million when compared to the same period in 2004, and the product margin percentage increased to 36.5% for the six months ended June 30, 2005 as compared to 35.2% over the same period in 2004.



Contract and Licensing Gross Margins.Contract gross margin for the
six months ended June 30, 2005 improved over the comparable period of 2004. The productivity gains at our Cranbury, New Jersey facility, stemming from increased amounts of gene targeting and phenotyping contractual work, improved the overall
contract gross margin. The additional contractual activity had little impact to personnel and facility expenses. The licensing gross margin percentage for the first six months of 2005 decreased over the comparable period of 2004. The decrease was
largely the result of discounting license fees associated with multiple unit sales, offset in part by lower royalty payments we made to our third-party licensors associated with certain IVIS commercial customer licenses. The number of repeat
customers for the six months ended June 30, 2005, or those purchasing multiple units, increased over the comparable period in 2004, resulting in lower licensing fees on a per unit basis.



Research and development. Research and development expenses include
the development of our new IVIS Imaging Systems, LPTA models and reagents. Research and development costs decreased during the six month period ended June 30, 2005 to $4.5 million from $6.7 million in the comparable period of last year. The decrease
was due in part to an overall decrease in allocated stock based compensation expense of $1.3 million. The balance of the research and development decrease from the comparable period in 2004 was attributed to reduced product development expenses
relating to the IVIS 3-D Series Imaging System, with most of the development expenditures occurring in 2004. As a percentage of total revenues, research and development expenses were 23.9% for the six months ended June 30, 2005 as compared to 46.5%
for the comparable period of 2004. The decrease was primarily attributable to the decreased expenses described above and greater total revenues for the six months ended June 30, 2005 versus the comparable period of 2004.



Selling, general and administrative. Selling, general and
administrative expenses increased to $10.2 million for the six months ended June 30, 2005 from $7.9 million during the comparable period of 2004. General and administrative costs represented the largest component of the increase and resulted largely
from operating as a public company. We closed our initial public offering in July 2004. Staffing and consulting costs increased by $1.0 million and accounting and auditing fees increased by $0.2 million over the comparable six month period in 2004.
Directors and officers insurance and public/investor relations costs also increased during the six months ended June 30, 2005 over the comparable period in by $0.3 million. Legal costs and



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expenses, stemming in part from our litigation with AntiCancer, contributed $0.9 million of the overall cost increase. Bonus compensation and other costs for
the six months ended June 30, 2005 increased over the comparable period last year by $0.2 million, on a net basis, corresponding with the increased sales in the current period and other activity timing issues. Selling expenses increased by $1.1
million during the six month period ended June 30, 2005 over the comparable period of 2004. Expanded marketing efforts associated with promotion and sales of the new IVIS 200 System and promotion of our IVIS 3-D System contributed to the higher
marketing and selling costs in 2005.



The increases in selling,
general and administrative expenses were partially offset by a decrease in allocated deferred compensation expenses of $1.4 million from 2004. As a percentage of total revenues, selling, general and administrative expenses were 53.8% for the six
months ending June 30, 2005 as compared to 54.3% for the comparable period of 2004. The slight decrease was attributable to greater revenues during the six month period ended June 30, 2005 over the comparable period in 2004, offsetting the impact of
operating as a public company during 2005 versus being privately held in 2004.



Depreciation.Depreciation expense decreased $0.5 million in the six months ended June 30, 2005 from the comparable period of 2004. The decrease was the result of tenant improvement disposal adjustments in 2004
associated with the St. Louis restructuring, and due to the sale of a previously capitalized IVIS camera and the disposal of computer and miscellaneous office equipment.



Amortization of intangibles. We amortized acquisition-related intangibles in the amount of $0.3 million during each
of the six month periods ending June 30, 2005 and 2004 relating to our November 2000 acquisition of Xenogen Biosciences Corporation. There were no acquisitions or write-offs with regard to intangibles for the six month period ending June 30, 2005 or
2004.



Interest expense. Interest expense was $334,000
during the six month period ending June 30, 2005 as compared to $288,000 during the comparable period in 2004. The increase was the result of a higher outstanding debt balance during the period ended June 30, 2005 associated with our credit line
with Silicon Valley Bank. Payments on various equipment leasing obligations during the six month period ending June 30, 2005, however, served to offset some of the interest expense increase.



Income tax expense (benefit). We recorded no income tax expense in
either the six month period ending June 30, 2005 or 2004 due to our losses in each of these periods.



Expensing of Stock Awards. Compensation expense is recorded on stock option grants based on the intrinsic value of the options granted, which is
estimated on the date of grant and it is recognized on a graduated, accelerated basis over the vesting period, generally four years from the date of grant. Deferred stock-based compensation expense recorded for the six months ended June 30, 2005 and
2004 was approximately $0.2 million and $3.5 million, respectively. A significant portion of the stock based compensation decrease was the result of variable accounting treatment on certain stock options issued in 2003. The intrinsic value of those
options decreased as a result of stock market fluctuations since the variable grants were initially valued. The impact of the stock market value change resulted in a $0.6 million credit to expense for the six months ended June 30, 2005, versus a
$0.7 million expense increase for the six months ended June 30, 2004 on those same options. Lastly, the balance of the expense decrease for the six months ended June 30, 2005 from the comparable period in 2004 stemmed largely from options being
granted at current market value since July 2004, resulting in no stock based compensation expense. For the six months ended June 30, 2004, on the other hand, there was a significant expense impact from options granted at below market value during
both 2003 and through the second quarter of 2004, resulting in accelerated expense recognition. The remaining deferred compensation balance of approximately $2.0 million will be amortized



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through 2008. We expect to record amortization expense based on the intrinsic value of the options granted for employee deferred stock-based compensation as
follows.



|                                                |  |        |            
|----------------------------------------------- |  | ------ | -----------
|Deferred Compensation Amortization For the Year |  | Amount
|July 1, 2005  December 31, 2005                |  | $      | 0.9 million
|2006                                            |  | $      | 0.9 million
|2007 and future years                           |  | $      | 0.2 million



The above amortization
does not incorporate the estimated impact of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which will be effective for fiscal year 2006. We are currently evaluating the impact of the new
standard, including the method of implementation. We expect that there will be a material change to the amount of amortization expense recorded for deferred compensation under SFAS 123R. See Recently Issued Accounting Pronouncements in
our notes to our consolidated financial statements.



Liquidity and Capital
Resources



As of June 30, 2005, we had cash, cash
equivalents and investment balances of $12.8 million. We have not achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our research and development expenses and selling, general
and administrative expenses will increase, and as a result, we will need to generate significantly greater revenue than we have to date to achieve profitability.



Until our initial public offering, our operations were funded through the proceeds from the sale of preferred stock, revenue
generation, and to a lesser extent, through equipment lease lines and bank lines of credit. As of June 30, 2005, we had outstanding balances under loan and lease agreements of $6.7 million, $5.0 million pursuant to a bank loan and $1.7 million
pursuant to an equipment financing. During the first quarter of 2004, we repaid all principal and interest on a $1.0 million bank loan. In March 2004, we entered into an amendment to a 2003 loan and security agreement with our primary lender,
increasing our borrowing capacity from $3.0 million to $7.0 million, of which $1.2 million was available as of June 30, 2005. This credit facility is secured by all our assets, excluding our intellectual property and equipment financed through our
equipment financing arrangement. As of June 30, 2005, we were in compliance with the covenants under this loan agreement. On August 2, 2005, we restructured our loan and entered into an amended and restated loan facility with our lender and entered
into a new loan facility with a another lender that collectively provides us with access to borrowings of up to $18 million, subject to borrowing base calculations and other terms and conditions. The new loan facility with our existing lender has a
maturity date of August 2, 2007, and the amounts borrowed under the original credit agreement have been rolled into the new facility. These loan arrangements are described in more detail in Note 13 in the Notes to the Condensed Consolidated
Financial Statements in this Quarterly Report and the loan agreements and other transaction agreements with the lenders have been filed as exhibits to our Report on Form 8-K that we filed with the SEC on August 8, 2005.



On August 11, 2005, we entered into a Securities Purchase Agreement (the SPA)
with certain institutional accredited investors (the Purchasers), pursuant to which the Purchasers will purchase on the closing date, in the aggregate, 5,154,640 shares of our common stock, par value $0.001, at a price of $2.91 per share. The
aggregate gross consideration that we will receive on the closing date for the common stock to be issued is approximately $15,000,000. The Purchasers will also receive warrants to purchase up to an additional 1,546,392 shares of our common stock on
the closing date. The warrants have a term of five years and are exercisable beginning six months after the closing date with an exercise price equal to $3.29 per share. We expect the closing date to be August 15, 2005 or August 16, 2005. The
financing is described in more detail in Note 13 in the Notes to the Condensed Consolidated Financial Statements in the Quarterly Report, and the SPA and the form of warrant to be issued to the Purchasers have been filed as exhibits to our Report on
Form 8-K filed with the SEC on August 15, 2005.



Operating
activities. Net cash used in operating activities for the six months ended June 30, 2005 and 2004 was $8.3 million and $9.4 million, respectively. The primary use of cash was to fund our net loss, adjusted for non cash expenses and changes in
operating assets and liabilities. During the six months ended June 30, 2005, net cash used in operating activities resulted primarily from our net loss adjusted for non-cash expenses of depreciation, amortization, and stock-based compensation. Net
cash used was also the result of an increase in inventory and decreases in deferred revenue, offset by increased accounts receivable collections. Deferred revenue results primarily from invoicing customers for contracts and licenses for which
revenue will be recognized over future periods. During the six months ended June 30, 2004, net cash



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used in operating activities resulted primarily from our net loss adjusted for non cash expenses of depreciation, amortization, stock-based compensation. In
addition, net cash used in operating activities resulted from an increase in accounts receivable, decrease in deferred revenue collections, and purchases of inventory stock.



Investing activities. Net cash used in investing activities for the six month period ending June 30, 2005 and 2004
was $0.1 million and $1.0 million, respectively. During the six month period ending June 30, 2005, small capital purchases, offset in part by proceeds from investment interest and transfers of IVIS System capital equipment for sale, comprised the
net cash use. During the six month period ending June 30, 2004, net cash used related largely to the purchase of corporate debt securities and to a much lesser extent small capital acquisitions.



Financing activities. Net cash used for financing activities for the
six months ended June 30, 2005 was $0.7 million as opposed to net cash provided of $0.4 million for the six months ended June 30, 2004. During the six months ended June 30, 2005, principal payments were made on equipment financings. During the six
months ended June 30, 2004, we made borrowings under our line of credit facility. The proceeds from the borrowings exceeded the amount of principal and interest payments made of $1.0 million on our bank loan and $0.5 million on our capital equipment
financings.



We believe that the net proceeds from our sale of
common stock to the Purchasers described above together with our current cash and cash equivalents, short-term investments, revenue expected to be generated from operations and our ability to draw-down on our recently completed loan facilities
described above will be sufficient to meet our currently planned operating requirements for at least the next 12 months. However, we may choose to modify our planned operations due to market conditions, competitive or other factors which could
substantially increase our expenses or impact our revenues, in which case our liquidity would be negatively impacted. Our liquidity would also be negatively impacted by a decrease in demand for our products and services. We expect material capital
expenditures of $3.0 million to be incurred over the remainder of 2005 to support our sales growth and increase our imaging system manufacturing capacity.



If the net proceeds from our sale of common stock to the Purchasers described above together with existing cash, short-term securities, revenue generated
from operations and access to our loan facilities are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain an additional loan arrangement. The sale of additional equity or convertible
debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants
that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this additional financing, we may have to delay development or commercialization of our
products and services, defer the acquisition of complimentary products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer
support or other resources devoted to our products and services. Any of these results could harm our financial condition.



Our contractual payment obligations have increased since December 31, 2004. The increase relates to new real property leases and lease amendments we
signed during the first quarter of 2005 and to new purchase commitments for inventory parts made during the second quarter of 2005. There were no material changes with regard to amounts owed on our loan obligations during the six month period ended
June 30, 2005. Contractual payment obligations that were fixed and determinable as of June 30, 2005 were:



|                                  |  |                |        |      |   |       |  |      |       |                 |   |       |  |   |      
|--------------------------------- |  | -------------- | ------ | ---- | - | ----- |  | ---- | ----- | --------------- | - | ----- |  | - | -----
|Payments due by Period            |  | Remaining 2005 |        | 2006 |   | 2007  |  | 2008 |       | 2009 and Beyond
|Operating Leases (1)              |  | $              | 2,704  |      | $ | 3,070 |  | $    | 2,897 |                 | $ | 2,911 |  | $ | 3,879
|Loans (2)                         |  |                | 5,895  |      |   | 1,005 |  |      | 102   |                 |   |      |  |   |     
|Other Contractual Obligations (3) |  |                | 4,870  |      |   |      |  |      |      |                 |   |      |  |   |     
|                                  |  |                |        |      |   |       |  |      |       |                 |   |       |  |   |      
|                                  |  | $              | 13,469 |      | $ | 4,075 |  | $    | 2,999 |                 | $ | 2,911 |  | $ | 3,879
|                                  |  |                |        |      |   |       |  |      |       |                 |   |       |  |   |      



|(1) | Operating Leases represent rental commitments under real property leases.
|--- | -------------------------------------------------------------------------



|(2) | Loans for financing capital and leasehold purchases.
|--- | ----------------------------------------------------



|(3) | Other Contractual Obligations represent purchase commitments from our key suppliers.
|--- | ------------------------------------------------------------------------------------



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Risk Factors that May Affect Our Results



In addition to the forward-looking statements discussed in this report, we also provide the following cautionary discussion
of risks, uncertainties and other factors relevant to our business. These items are factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors also could adversely affect us.



We have a history of losses and an accumulated deficit of
$176.6 million as of June 30, 2005, and we may never achieve profitability.



We have incurred significant net losses every year since our inception. We incurred losses of $62.6 million in 2002, $20.5 million in 2003, $21.8 million in 2004 and $8.9 million in the six months ended June 30, 2005.
As of June 30, 2005, we had an accumulated deficit of $176.6 million. To achieve profitability, we will need to generate and sustain substantially higher revenue than we have to date, while achieving reasonable costs and expense levels. We may not
be able to generate enough revenue to achieve profitability. We may not achieve or maintain reasonable costs and expense levels. Even if we become profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. If
we fail to achieve profitability within the timeframe expected by securities analysts or investors, the market price of our common stock will likely decline.



If our products and services do not become widely used by pharmaceutical, biotechnology, biomedical and chemical researchers, it is unlikely that we
will ever become profitable.



Pharmaceutical,
biotechnology, biomedical and chemical researchers have historically conducted in vivo biological assessment using a variety of technologies, including a variety of animal models. Compared to these technologies, our technology is relatively
new, and the number of companies and institutions using our technology is relatively limited. The commercial success of our products will depend upon the widespread adoption of our technology as a preferred method to perform in vivo
biological assessment. In order to be



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successful, our products must meet the technical and cost requirements for in vivo biological assessment within the life sciences industry. Widespread
market acceptance will depend on many factors, including:



| |  |  | the willingness and ability of researchers and prospective customers to adopt new technologies;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | our ability to convince prospective strategic partners and customers that our technology is an attractive alternative to other methods of in vivo biological assessment;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our customers perception that our products can help accelerate efforts and reduce costs in drug development; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | our ability to sell and service sufficient quantities of our products.
| | - |  | ----------------------------------------------------------------------



Additionally, to our knowledge, only one of our drug development customers has used our imaging technology to submit an investigational new drug
application, or IND, to the Food and Drug Administration, or FDA, and no drugs have been approved to date using our imaging technology. As a result, our ability to assist the drug development process in leading to the approval of drugs with
commercial potential has yet to be fully proven. If commercial advantages are not realized from the use of in vivo biophotonic imaging, our existing customers could stop using our products, and we could have difficulty attracting new
customers. Because of these and other factors, our products may not gain widespread market acceptance or become the industry standard for in vivo biological assessment.



As a company in the early stage of commercialization, our limited history of operations makes evaluation of our business
and future growth prospects difficult.



We have had a
limited operating history and are at an early stage of commercialization. While we sold our first IVIS®Imaging Systems and entered into our first commercial license in 2000, we did not begin to sell our products and services in commercial quantities until 2002. Our in vivo biophotonic imaging technology is a relatively new
technology that has not yet achieved widespread adoption. To date, we have generated revenues of $16.0 million in 2002, $20.1 million in 2003, $30.9 million in 2004 and $19.0 million in the six months ended June 30, 2005.



We do not have enough experience in selling our products at a level
consistent with broad market acceptance and to know whether we can do so and generate a profit. As a result of these factors, it is difficult to evaluate our prospects, and our future success is more uncertain than if we had a longer or more proven
history of operations.



Our future revenue is unpredictable
and could cause our operating results to fluctuate significantly from quarter to quarter.



Our quarterly and annual operating results have fluctuated in the past and are likely to do so in the future. In particular, our operating results in the first and third quarters have historically been lower than
those in the second and fourth quarters due to the decision-making process of our customer base. The sale of many of our products, including our IVIS Imaging Systems and related Bioware, typically involve a significant scientific evaluation and
commitment of capital by customers. Accordingly, the initial sales cycles of many of our products are lengthy and subject to a number of significant risks that are beyond our control, including customers budgetary constraints and internal
acceptance reviews. As a result of this lengthy and unpredictable sales cycle, our operating results have historically fluctuated significantly from quarter to quarter, and we expect this trend to continue. In addition, a large portion of our
expenses, including expenses



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for our Alameda, California and Cranbury, New Jersey facilities, equipment and personnel, are relatively fixed. Historically, customer buying patterns and
our revenue growth have caused a substantial portion of our revenues to occur in the last month of the quarter. Delays in the receipt of orders, our recognition of product or service revenue or the manufacture of product near the end of the quarter
could cause quarterly revenues to fall short of anticipated levels. Because our operating expenses are based on anticipated revenue levels and a high percentage of our expenses are relatively fixed, less than anticipated revenues for a quarter could
have a significant adverse impact on our operating results. Accordingly, if our revenue declines or does not increase as we anticipate, we might not be able to correspondingly reduce our operating expenses in a timely enough manner to avoid
incurring additional losses. Our failure to achieve our anticipated level of revenue could significantly harm our operating results for a particular fiscal period.



The following are among additional factors that could cause our operating results to fluctuate significantly from period to
period:



| |  |  | changes in the demand for, and pricing of, our products and services;
| | - |  | ---------------------------------------------------------------------



| |  |  | the length of our sales cycles and buying patterns of our customers, which may cause a decrease in our operating results for a quarterly period;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the nature, pricing and timing of other products and services provided by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | changes in our long term custom animal production contracts and other renewable contracts, including licenses;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain key components for our imaging systems and manufacture and install them on a timely basis to meet demand;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the research and development budgets of our customers;
| | - |  | -----------------------------------------------------------------



| |  |  | acquisition, licensing and other costs related to the expansion of our operations;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the timing of milestones, licensing and other payments under the terms of our license agreements, commercial agreements and agreements pursuant to which others license technology to
us;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expenses related to our commercial and patent infringement litigation with AntiCancer and other litigation in which we may become involved; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expenses related to, and the results of, patent filings and other proceedings relating to intellectual property rights.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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



The termination or non-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 generally sell our products and
often provide our services pursuant to agreements that are renewable on an annual basis. Failure to renew or the cancellation of these agreements by any one of our significant customers, which include Pfizer Inc., the National Institute for
Environmental Health Sciences and affiliates



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of Novartis, could result in a significant loss of revenue. We currently derive, and we expect to continue to derive, a large percentage of our total revenue
from a relatively small number of customers. If any of these customers terminates or substantially diminishes its relationship with us, our revenue could decline significantly. Revenue concentration among our largest customers is as follows:



| |  |  | our ten largest customers accounted for approximately 36%, 41% and 53% of our revenue for the six months ended June 30, 2005 and the years ended December 31, 2004 and 2003,
respectively; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our largest and second largest customers during the six months ended June 30, 2005 accounted for approximately 12% and 5% of our revenue for the six months ended June 30, 2005, 16%
and 7% of our revenue for the year ended December 31, 2004, and 21% and 11% of our revenue for the year ended December 31, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The loss of significant revenue from any of our significant customers could negatively impact our results of operations or limit our ability to execute
our strategy.



We may not fully realize our revenue under
long-term contracts, which could harm our business and result in higher losses than anticipated.



We have long-term contracts for custom animal production and/or phenotyping services with two customers that are renewed annually and are expected to
generate future revenues. These two long-term contracts may not be renewed annually and may be terminated at any time during their terms. In addition, we may not be able to maintain our sublicensed rights under certain patents relating to these
contracts.



If we are unable to meet customer demand, it
would adversely impact our financial results and restrict our sales growth.



To be successful, we must manufacture our IVIS Imaging Systems in substantial quantities at acceptable costs. If we do not succeed in manufacturing sufficient quantities of our imaging systems to meet customer demand,
we could lose customers and fail to acquire new customers, if they choose a competitors product because our imaging system is not available. Increasing demand since the launch of our IVIS Imaging System has necessitated an increase in our
manufacturing capacity. In response, we are expanding our manufacturing capacity at our facilities in Alameda, California. We have also experienced a shift in customer demand towards our IVIS 200 systems, and we have altered our planned
manufacturing to increase IVIS 200 system output. Certain components of our IVIS 200 systems are specially manufactured by our single-source suppliers and supply of these parts to us requires adequate lead time that can result in production delays.
If we experience unexpected shifts in customer demand that requires alterations to planned manufacturing, we may experience production delays that could restrict our sales growth. If we are unable to meet customer demand for IVIS Imaging Systems, it
would adversely affect our financial results and restrict our sales growth.



We depend on a limited number of suppliers, and we will be unable to manufacture or deliver our products if shipments from these suppliers are interrupted or are not supplied on a timely basis.



We use original equipment manufacturers, or OEMs, for various parts of our
IVIS Imaging Systems, including the cameras, boxes, certain subassemblies, filters and lenses. We obtain these key components from a small number of sources. For example, the lens for our IVIS 200 system is obtained from a single source on a
purchase order basis from Coastal Optical Systems Inc., and the CCD cameras for all of our IVIS Imaging Systems are obtained from two sources, Spectral Instruments, Inc. and Andor Technology Limited. We have



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binding supply agreements with Spectral and Andor. From time to time, we have experienced delays in obtaining components from certain of our suppliers, which
have had an impact on our production schedule for imaging systems. We believe that alternative sources for these components in the event of a disruption or discontinuation in supply would not be available on a timely basis, which would disrupt our
operations and impair our ability to manufacture and sell our products.



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



| |  |  | the possibility that one or more of our suppliers could terminate their services at any time;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the potential inability of our suppliers to obtain required components or products;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | reduced control over pricing, quality and timely delivery, due to the difficulties in switching to alternative suppliers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential delays and expense of seeking alternative suppliers; and
| | - |  | ----------------------------------------------------------------------



| |  |  | increases in prices of raw materials, products and key components.
| | - |  | ------------------------------------------------------------------



Because we receive revenue principally from biomedical research institutions and pharmaceutical, biotechnology and chemical companies, the industry
conditions faced by those companies and their capital spending 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, and the capital spending policies of
these entities can have a significant effect on the demand for our products. These policies vary significantly between different customers and are based on a wide variety of factors, including the resources available for purchasing research
equipment, the spending priorities among various types of research companies and the policies regarding capital expenditures. In particular, the volatility of the public stock market for biotechnology companies has at certain times significantly
impacted the ability of these companies to raise capital, which has directly affected their capital spending budgets. In addition, continued consolidation within the pharmaceutical industry will likely delay and may potentially reduce capital
spending by pharmaceutical companies involved in such consolidations. During the past several years, many of our customers and potential customers, particularly in the biopharmaceutical industry, have reduced their capital spending budgets because
of these generally adverse prevailing economic conditions, consolidation in the industry and increased pressure on the profitability of such companies, due in part to competition from generic drugs. If our customers and potential customers do not
increase their capital spending budgets, because of continuing adverse economic conditions or further consolidation in the industry, we could face weak demand for our products. Similarly, changes in availability of grant moneys may impact our sales
to academic customers. Recent developments regarding safety issues for widely used drugs, including actual and/or threatened litigation, also may affect capital spending by pharmaceutical companies. Any decrease or delay in capital spending by life
sciences or chemical companies or biomedical researchers could cause our revenue to decline and harm our profitability.



In addition, consolidation within the pharmaceutical industry may not only affect demand for our products, but also existing business relationships. If
two or more of our present or future customers merge, we may not receive the same fees under agreements with the combined entities that we received under agreements with these customers prior to their merger. Moreover, if one of our customers merges
with an entity that is not a customer, the new combined entity may prematurely terminate our agreement. Any of these developments could materially harm our business or financial condition.



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If we fail to properly manage our growth, our business could be adversely affected.



We have substantially increased the scale of our operations and, with
available resources, expect to continue doing so for the foreseeable future as compared with prior years when we pursued a fiscally conservative growth plan and deliberately limited the growth of our management and operations during the national
economic downturn. If we are unable to manage our growth effectively, our losses could increase. The management of our growth will depend, among other things, upon our ability to improve our operational, financial and management controls, reporting
systems and procedures. In addition, we will have to invest in additional customer support resources. We are also increasing our manufacturing capacity for our imaging systems to meet continued and growing demand for these products. To provide this
additional capacity and services, we are expanding our facility space dedicated to instrument manufacturing in our Alameda, California facility, and we will need to, hire and train additional personnel for manufacturing, installation and field
support, and expand our inventory of instrumentation parts and components, which will result in additional burdens on our systems and resources and require additional capital expenditures.



We have a limited sales and marketing organization, and although we intend
to increase our sales and marketing organization, we may be unable to build an organization to meet demand for our products and services.



We currently have a limited number of people in our sales force engaged in the direct sale of our products, many of whom were added in 2004. Because our
products are technical in nature, we believe that our sales and marketing staff must have scientific or technical expertise and experience and require they be trained in the instrumentation and reagents that they sell. Although we expanded our sales
and marketing organization in 2004 and continue our expansion efforts in 2005, the number of employees with these skills is relatively small. Competition is intense and we may not be able to continue to attract and retain sufficient qualified people
or grow and maintain an efficient and effective sales and marketing department. In several foreign countries and regions outside the U.S., including several countries in Europe and Asia, we sell our products and services primarily through
third-party distributors. We are dependent upon the sales and marketing efforts of our third-party distributors in these international markets. These distributors may not commit the necessary resources to effectively market and sell our products and
services. Further, they may not be successful in selling our products and services. Our financial condition would be harmed if we fail to build an adequate direct and indirect sales and marketing organization and our marketing and sales efforts are
unsuccessful.



We depend on key employees in a competitive
market for skilled personnel, and without additional employees, we cannot grow or achieve profitability.



We are highly dependent on the principal members of our management team, including David W. Carter, chairman of our board and chief executive officer, and
Pamela R. Contag, Ph.D., our president. With the exception of Mr. Carter and Dr. Contag, none of the principal members of our management team and scientific staff have entered into employment agreements with us, nor, with the exception of Mr. Carter
and Dr. Contag, do we have any key person life insurance on such individuals. Additionally, as a practical matter, any employment agreement we may enter into will not ensure the employees retention.



Our future success also will depend in part on the continued service of our
key scientific, consulting and management personnel and our ability to identify hire and retain additional personnel. Vice Presidents in our finance, legal and operations departments



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have recently joined our management team, and it will take time for them to become fully integrated into our company. We are also currently recruiting
additional senior management personnel to enhance our management team and to support our continued growth in 2006 and beyond. We experience intense competition for qualified personnel. We may be unable to attract and retain personnel necessary for
the development of our business. Moreover, a significant portion of our work force is located in the San Francisco Bay Area of California, where demand for personnel with the scientific and technical skills we seek is extremely high and is likely to
remain high.



Our intellectual property rights, including
one patent that is due to expire in 2006, may not provide meaningful commercial protection for our products, which could enable third parties to use our technology, or very similar technology, and could reduce our ability to compete in the market.



We rely on patent, copyright, trade secret and trademark
laws to limit the ability of others to compete with us using the same or similar technology in the U.S. and other countries. However, these laws afford only limited protection and may not adequately protect our rights to the extent necessary to
sustain any competitive advantage we may have. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting their proprietary
rights abroad. These problems can be caused by the absence of adequate rules and methods for defending and enforcing intellectual property rights.



We will be able to protect our technology from unauthorized use by third parties only to the extent that they are covered by valid 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 patent position, generally are uncertain and involve complex
legal and factual questions, particularly as to questions concerning the enforceability of such patents against alleged infringement. The biotechnology patent situation outside the U.S. is even more uncertain, particularly with respect to the
patentability of transgenic animals. Changes in either the patent laws or in interpretations of patent laws in the U.S. and other countries may therefore diminish the value of our intellectual property. Moreover, our patents and patent applications
may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. We also face the risk that others may independently develop similar or alternative technologies or design around our patented
technologies.



We own, or control through licenses, a variety
of issued patents and pending patent applications. However, the patents on which we rely may be challenged and invalidated, and our patent applications may not result in issued patents. AntiCancer, a party with whom we have been engaged in ongoing
commercial litigation, filed a lawsuit against us alleging infringement of five patents and requesting that the court declare invalid one of our primary patents covering methods of in vivo biophotonic imaging. For a description of our
litigation with AntiCancer, see Part II, Item 1. Legal Proceedings.



We have taken measures to protect our proprietary information, especially proprietary information that is not covered by patents or patent applications. These measures, however, may not provide adequate protection of
our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with 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 we lose employees, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade
secrets by those former employees despite the existence of nondisclosure and confidentiality agreements and other contractual



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restrictions to protect our proprietary technology. In addition, others may independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to our trade secrets.



U.S.
Patent No. 4,873,191, claiming the use of certain widely accepted microinjection techniques to create transgenic animals and licensed exclusively to our subsidiary, Xenogen Biosciences Corp., is due to expire in October 2006. Upon its expiration, we
will not be able to prevent others from practicing those methods for commercial purposes and we may face competition from third parties seeking to provide those services on a commercial basis.



We may need to initiate lawsuits to protect or enforce 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 stock price to decline.



We rely on patents to protect a large part of our intellectual property and
competitive position. Our patents, which have been or may be issued, may not afford meaningful protection for our technologies and products. In addition, our current and future patent applications may not result in the issuance of patents in the
U.S. or foreign countries. Our competitors may develop technologies and products similar to our technologies and products which do not infringe our patents. In order to protect or enforce our patent rights, we may initiate patent litigation against
third parties, such as infringement suits or interference proceedings. This risk is exacerbated by the fact that those third parties may have access to substantially greater financial resources than we have to conduct such litigation.



These lawsuits could be expensive, take significant time and could divert
managements attention from other business concerns. These lawsuits would put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may suffer reduced
instrumentation sales and/or license revenue as a result of pending lawsuits or following final resolution of lawsuits. Further, these lawsuits may also provoke these third parties to assert claims against us. Attempts to enforce our patents may
trigger third party claims that our patents are invalid. We may not prevail in any of these suits and any damage or other remedies awarded to us, if any, may not be commercially valuable. During the course of these suits, there may be public
announcements of results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or others perceive any of these results to be negative, it could cause our stock price to decline.



We recently filed with the court our response to the AntiCancer patent
infringement lawsuit. With our response, we filed counterclaims against AntiCancer alleging that it infringes two of our U.S. patents. For a description of our litigation with AntiCancer, see Part II, Item 1. Legal Proceedings.



Our success will depend partly on our ability to operate
without infringing or misappropriating the proprietary rights of others.



We may be exposed to future litigation by third parties based on claims that our products infringe the intellectual property rights of others. This risk is exacerbated because there are numerous issued and pending
patents in the life sciences industry and, as described above, the validity and breadth of life sciences patents involve complex legal and factual questions. Our competitors may assert that their U.S. or foreign patents may cover our products and
the methods we employ. For example, one of our principal competitors, Lexicon Genetics Incorporated, had been involved in litigation regarding intellectual property claims relating to the creation of transgenic animals. In addition, we are involved
in patent litigation with AntiCancer, Inc., in which it has alleged that we have infringed certain of its patents. We have counterclaimed with allegations that AntiCancer infringes our imaging patents, as well as allegations that certain
AntiCancers patents are



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invalid. For a more detailed description of our litigation with AntiCancer, see Part II, Item 1. Legal Proceedings. Also, because patent
applications can take many years to issue, there may be currently pending applications, of which we are unaware, which may later result in issued patents that our products may infringe. There could also be existing patents of which we are not aware
that one or more of our products may inadvertently infringe.



From time to time, we have received, and may receive in the future, letters asking us to license certain technologies the signing party believes we may be using or would like us to use. In 2004 and 2005, we received letters from counsel for
Lexicon Genetics Incorporated asking us to review with them one of our methods for genetically modified animal production in relation to two patents which they exclusively license. Although we declined to do so, we are in the process of determining
whether their patents may offer a more cost effective approach to certain methods of animal production.



If we do not accept a license, we may be subject to claims of infringement, or may receive letters alleging infringement. Infringement and other
intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and can divert managements attention from our core business.



If we lose a patent infringement lawsuit, we could be prevented from selling our products unless we can obtain a license to
use technology or ideas covered by such patent or are able to redesign the products to avoid infringement. A license may not be available at all or on terms acceptable to us, 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, we may be unable to sell our products and our business could suffer.



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



We rely on licenses to use various technologies that are material to our business, including licenses to the use of certain biologicals, and licenses to engineer and commercialize transgenic animals. We do not own the
patents that underlie these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to the negotiation of, continuation of and compliance with the terms of those licenses and the continued
validity of these patents. In some cases, we do not control the prosecution or filing of the patents to which we hold licenses. Instead, we rely upon our licensors to prevent infringement of those patents. Under the GenPharm International, Inc.
sublicense for certain gene targeting patents we use, GenPharm retains the sole right to enforce those patent rights against infringers. Under the Promega Corporation and The Regents of the University of California licenses for a patented form of
firefly luciferase used in our LPTA animal models and certain of our Bioware, we do not have the right to enforce the patent, and neither licensor is obligated to do so on our behalf. Some of the licenses under which we have rights, such as our
licenses from Stanford University and Ohio University, provide us with exclusive rights in specified fields, including the right to enforce the patents licensed to us from these two universities, but the scope of our rights under these and other
licenses may become subject to dispute by our licensors or third parties. Certain of our other licenses contain diligence obligations, as well as provisions that allow the licensor to terminate the license upon specific conditions.



We occasionally may become subject to commercial disputes that could harm
our business.



We are currently the subject of, and may
from time to time become engaged in, commercial disputes such as claims by customers, suppliers or other third parties. These disputes could result in monetary damages or other remedies that could adversely impact our financial position or
operations. For example, on August 9, 2001,



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AntiCancer, Inc. filed a lawsuit in the Superior Court of California, County of San Diego, against us and other third parties. The complaint alleges five
causes of action, including trade libel, defamation, intentional interference with contract, intentional interference with prospective economic advantage and unfair competition. These claims are based on alleged false statements made by unidentified
employees and/or third parties regarding AntiCancers products. AntiCancer seeks unspecified general and exemplary monetary damages arising from the alleged impact of the alleged false statements, as well as its costs and expenses incurred in
connection with the lawsuit. The trial is scheduled to begin on October 11, 2005.



On March 7, 2005, AntiCancer filed a lawsuit against us in the U.S. District Court for the Southern District of California alleging infringement of five of its patents. The complaint seeks damages and injunctive
relief against the alleged infringement as well as a judgment that one of our imaging patents, 5,650,135, is invalid. We are vigorously defending ourselves against AntiCancers infringement claims and vigorously defending the validity of our
5,650,135 patent. In addition, we filed our own counterclaims against AntiCancer, alleging that its activities infringe three of our U.S. patents, 5,650,135, 6,217,847 and 6,649,143, all relating to in vivo imaging and with a priority date
earlier than AntiCancers patents cited against us.



Even
if we prevail in these lawsuits, the defense of these or similar lawsuits will be expensive and time-consuming and may distract our management from operating our business.



We face competition from companies with established technologies forin vivobiological assessment, which
may prevent us from achieving significant market share for our products.



We compete with a variety of established and accepted technologies for in vivo biological assessment that several competitors and customers may be using to analyze animal models. The most basic of these
technologies have remained relatively unchanged for the past 40 years, are well established and are routinely used by researchers. We believe it may take several years for all researchers to become fully educated about our in vivo biophotonic
imaging technology.



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



| |  |  | established distribution networks;
| | - |  | ----------------------------------



| |  |  | established relationships with life science, pharmaceutical, biotechnology and chemical companies as well as with biomedical researchers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | greater resources for technology and product development, sales and marketing and patent litigation.
| | - |  | ----------------------------------------------------------------------------------------------------



Our principal competitors that use established technologies for in vivo biological assessment include Exelixis, Inc.
and Lexicon Genetics Incorporated. Each of these companies uses animal models in the area of target validation in drug discovery and utilizes methods of assessment based upon knockout mice as well as



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other organisms such as fruit flies, worms and yeast. We face competition from several companies including Eastman Kodak Company, Berthold Detection Systems
GmbH, Hamamatsu Photonics, K.K. and Roper Scientific, Inc., that have recently begun to market systems that may be used to perform biophotonic imaging with the appropriate licenses. These companies are larger and have greater resources than Xenogen.
At any time, other companies may develop additional directly competitive products that could achieve greater market acceptance or render our products obsolete.



Failure to raise additional capital or generate the significant capital necessary to expand our operations and develop new products could reduce our
ability to compete.



We believe that the net proceeds from
our sale of common stock to certain institutional accredited investors described above in this Quarterly Report together with our current cash and cash equivalents, short-term investments, revenue expected to be generated from operations and our
ability to draw-down on our recently completed loan facilities described above in this Quarterly Report will be sufficient to meet our currently planned operating requirements for at least the next 12 months. However, our expectations are based on
our current operating plan, which may change as a result of many factors, including:



| |  |  | revenues generated from sales of our current and future products and services, which is in part reliant on our success in ramping up our sales and marketing organization and our
ability match our manufacturing capacity to customer demand;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the termination or non-renewal of material contracts or loss of significant customers;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | expenses we incur in developing and selling our products and services;
| | - |  | ----------------------------------------------------------------------



| |  |  | developments or disputes concerning patents, proprietary rights or other commercial disputes; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | changes in our growth rates.
| | - |  | ----------------------------



Consequently, we may seek additional funds from public and private stock offerings, borrowings under lease lines of credit or other sources. This
additional financing may not be available on a timely basis on terms acceptable to us, or at all. Moreover, additional equity financing, if available, would likely be dilutive to the holders of our common stock, and debt financing, if available,
would likely involve restrictive covenants and a security interest in our assets.



If adequate funds are not available, we may have to delay development or commercialization of our products and services, defer the acquisition of complimentary products or license to third parties the rights to
commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products and services. Any of these results could harm our financial
condition.



In addition, we may choose to raise additional
capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt
securities, the issuance of these securities could result in dilution to our then-existing stockholders.



We may engage in future acquisitions, which could be expensive and time consuming, and such acquisitions could adversely affect your investment in us
as we may never realize any benefits from such acquisitions.



We currently have no commitments or agreements with respect to any material acquisitions. If we do undertake any transactions of this sort, the process of integrating an acquired business, technology, service or product may result in
operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. Future
acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to other intangible assets or the impairment of goodwill, which could adversely
affect our results of operations and financial condition.



Contamination in our animal populations could damage our inventory, harm our reputation and result in decreased sales.



We offer a portfolio of transgenic animals and LPTA animal models for use by researchers in a wide range of research and drug discovery programs and also
perform breeding and model validation. We maintain animal facilities in Alameda, California and Cranbury, New Jersey. These animals and facilities must be free of contaminants, viruses or bacteria, or pathogens that would compromise the quality of
research results. Contamination of our isolated breeding rooms could disrupt our models, delay delivery to customers of data generated from phenotyping and result in decreased sales. Contamination would result in inventory loss, clean-up and
start-up costs and reduced sales as a result of lost customer orders.



In 2003, one of our animal facilities in Alameda was contaminated by a mouse virus introduced through one of our animal vendors. We closed that facility for decontamination, and transferred our most valuable strains to third party breeders
for rederivation so that we could continue to provide animals to our customers. The decontamination process took approximately three months. We have moved all of these operations to a new barrier facility to reduce the contamination risk. Similar
contamination occurred again in 2005. Neither event represented a loss of revenue, but did affect our operational costs by increasing our animal support costs.



If a natural or man-made disaster strikes our manufacturing facility, we would be unable to manufacture our products for a substantial amount of
time and we would experience lost revenue.



We have relied
to date principally on our manufacturing facility in Alameda, California to produce the IVIS Imaging Systems, our Bioware cells and microorganisms and LPTA animal models. We have also established a back-up facility for producing our LPTA animal
models in Cranbury, New Jersey and have produced some of our LPTA animal models there. Both of these facilities and some pieces of manufacturing equipment would be difficult to replace and could require substantial replacement lead-time. Our
facilities may be affected by natural disasters such as earthquakes and floods. Earthquakes are of particular significance to our Alameda facility, as it is located in an earthquake-prone area. In the event our Alameda



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facility or equipment was affected by man-made or natural disasters, we would be forced to shift production of the IVIS Imaging Systems and many of our
Bioware cells and microorganisms and LPTA animal models to our Cranbury facility. We believe that this production shift would result in a disruption in our operations of approximately 90 to 180 days, which could harm our business. Although we
currently maintain global property insurance for damage to our property and the disruption of our business from fire and other casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available
to us on acceptable terms, or at all.



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



Terrorist acts, acts of war and natural disasters (wherever located around the world) may cause damage or disruption to us, our employees, facilities,
partners, suppliers, distributors and customers, any and all of which could significantly impact our revenues, expenses and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented
events that have created many economic and political uncertainties. The potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility have created many economic and political
uncertainties that could adversely affect our business and results of operations that cannot presently be predicted. The tsunami in Asia on December 26, 2004 was unpredictable and caused devastation of tremendous proportions and its effects are
still being realized. The unpredictability of such a disaster inevitably causes uncertainty that could adversely affect our business and results of operations. We are largely uninsured for losses and interruptions caused by terrorist acts, acts of
war and natural disasters.



We use hazardous materials in
our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.



Our research and development processes, our anesthesia systems used with our IVIS Imaging Systems to anesthetize the animals being imaged and our general
biology operations involve the controlled storage, use and disposal of hazardous materials including, but not limited to, biological hazardous materials and radioactive compounds. We are subject to federal, state and local regulations governing the
use, manufacture, storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and
regulation, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall
outside the coverage of our insurance. We currently maintain a limited pollution cleanup insurance policy in the amount of $1.0 million. We may not be able to maintain insurance on acceptable terms, or at all. We could be required to incur
significant costs to comply with current or future environmental laws and regulations.



Compliance with governmental regulations could increase our operating costs, which would adversely affect the commercialization of our technology.



The Animal Welfare Act, or AWA, is the federal law that covers the treatment of certain animals used in research. The AWA
currently does not cover rats 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 this law.



Currently, the AWA imposes a wide variety of specific regulations that govern the humane handling, care, treatment and
transportation of certain animals by producers and users of research animals, most notably personnel, facilities, sanitation, cage size, feeding, watering and shipping conditions. If in the future the



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AWA is amended to include mice or rats bred for use in research in the scope of regulated animals, we will become subject to registration, inspections and
reporting requirements. We believe compliance with such regulations would require us to modify our current practices and procedures, which could require significant financial and management resources.



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



Since we develop animals containing changes in their genetic make-up, we may become subject to a variety of laws, guidelines, regulations and treaties
specifically directed at genetically modified organisms. The area of environmental releases of genetically modified organisms is rapidly evolving and is currently subject to intense regulatory scrutiny, particularly overseas. If we become subject to
these laws, we could incur substantial compliance costs. For example, the Biosafety Protocol, an international treaty adopted in 2000 to which the U.S. is not a party, regulates the transit of living modified organisms, a category that includes our
transgenic mice, into countries party to the treaty. As our mice are not intended for release into the environment or for use for food, feed or processing, the treaty imposes only identification, handling, packaging and transport requirements for
shipments into signatory countries. However, additional requirements may be imposed on such shipments in the future.



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



Public
perception of ethical and social issues may limit or discourage the use of mice for scientific experimentation, which could reduce our revenues and adversely affect our business.



Governmental authorities could, for social or other purposes, limit the use of genetic modifications or prohibit the
practice of our technology. Public attitudes may be influenced by claims that genetically engineered products are unsafe for use in research or pose a danger to the environment. The subject of genetically modified organisms, like genetically altered
mice and rats, has received negative publicity and aroused significant public debate. In addition, animal rights activists could protest or make threats against our facilities, which may result in property damage. Ethical and other concerns about
our methods, particularly our use of genetically altered mice and rats, could adversely affect our market acceptance.



Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees, and proposed changes in accounting
for equity compensation could adversely affect earnings.



We have historically used stock options and other forms of equity-related compensation as key components of our total employee compensation program in order to align employees interests with the interests of our stockholders,
encourage employee retention, and provide competitive compensation packages. The Financial Accounting Standards Board and other agencies have finalized changes to U.S. generally



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accepted accounting principles that will require us and other companies to record a charge to earnings for employee stock option grants and other equity
incentives. Moreover, applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant options to employees in the future. As a result, we
may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, any of which could materially adversely affect our business.



We expect that our stock price will fluctuate significantly, and you may
not be able to resell your shares at or above your investment price.



The stock market has experienced extreme price and volume fluctuations. The market prices of the securities of biotechnology companies, particularly companies like ours with short operating histories and without
consistent product revenues and earnings, have been highly volatile and may continue to be highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. Factors that could cause this
volatility in the market price of our common stock include:



| |  |  | announcements of technological innovations or new products by our competitors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | developments or disputes concerning patents or proprietary rights, or of infringement, interference or other litigation against us or our licensors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and development of our products and services;
| | - |  | --------------------------------------------------------



| |  |  | changes in our revenue due to contracts which are not renewed;
| | - |  | --------------------------------------------------------------



| |  |  | changes in pharmaceutical and biotechnology companies research and development expenditures;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | announcements concerning our competitors, or the biotechnology or pharmaceutical industry in general;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | new regulatory pronouncements and changes in regulatory guidelines;
| | - |  | -------------------------------------------------------------------



| |  |  | general and industry-specific economic conditions and issuance of new or changed research, reports or recommendations by industry or financial analysts about us or our business;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | actual or anticipated fluctuations in our operating results;
| | - |  | ------------------------------------------------------------



| |  |  | changes in financial estimates or recommendations by securities analysts, or termination of research coverage;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | changes in accounting principles; and
| | - |  | -------------------------------------



| |  |  | the loss of any of our key scientific or management personnel.
| | - |  | --------------------------------------------------------------



These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent
investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In the past, securities class action litigation has often been brought against companies that experience volatility in
the market price of



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their securities. Whether or not meritorious, litigation brought against us could result in substantial costs, divert managements attention and
resources and harm our financial condition and results of operations.



We have recently begun a more extensive assessment of the adequacy of our internal control system, which will be costly and could result in the identification of deficiencies in our system of internal controls.



Section 404 of the Sarbanes-Oxley Act of 2002 requires management to include
an annual report regarding our evaluation of our internal controls in our annual report for the year ending December 31, 2006. In preparation for that management report, we will need to assess the adequacy of our internal controls, remediate any
weaknesses that may be identified, validate that controls are functioning as documented and implement a continuous reporting and improvement process for internal controls. We expect to utilize outside consultants to assist with this project, which
will increase our selling, general and administrative costs in 2005 and 2006. We may also discover deficiencies that require us to improve our procedures, processes and systems in order to ensure that our internal controls are adequate and
effective, and that we are in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. If the deficiencies are not adequately addressed, or if we are unable to complete all of our testing and any remediation in time for compliance
with the requirements of Section 404 of the Sarbanes-Oxley Act and the SEC rules under it, we would be unable to conclude that our internal controls over financial reporting are designed and operating effectively, which could adversely affect our
investor confidence in our internal controls over financial reporting.



If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price
to decline.



Our executive officers, directors and holders
of 10% or more of our common stock beneficially own or control approximately 38 percent of the outstanding shares of our common stock as of June 30, 2005. This significant concentration of share ownership may adversely affect the trading price for
our common stock because investors may perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, acting together, will have the ability to exert substantial influence over all matters requiring approval
by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs. This
concentration of ownership could have the affect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination that could be favorable to you.



Future sales of common stock by our existing stockholders may cause our
stock price to fall.



The market price of our common stock
could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and
price that we deem appropriate. Most of our shares are freely tradable without restriction or further regulation, other than shares purchased by our officers, directors or other affiliates within the meaning of Rule 144 under the
Securities Act. Also, many of our employees and consultants may exercise their stock options in order to sell the stock underlying their options in the market under a registration statement we have filed with the SEC.



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Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and
could also limit the market price of investors stock.



Our certificate of incorporation and bylaws contain provisions that could also delay or prevent a change in control of our company. Among these provisions are the following:



| |  |  | authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, commonly referred to as blank
check preferred stock, with rights senior to those of common stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibit stockholder actions by written consent; and
| | - |  | ----------------------------------------------------



| |  |  | provide for a classified board of directors.
| | - |  | --------------------------------------------



In addition, we are governed by the provisions of Section 203 of Delaware General Corporate Law. These provisions may prohibit stockholders owning 15% or
more of our outstanding voting stock from merging or combining with us. Section 203 of Delaware General Corporate Law and other provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could reduce the
price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and foreign interest rates and changes in foreign currency exchange rates as measured against the United States dollar. These exposures are
directly related to our normal operating and funding activities.



We have limited exposure to financial market risks, including changes in interest rates and foreign currency exchange rates. Our exposure to interest rate risk at June 30, 2005 was related to our investment portfolio and our borrowings.
Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates. Floating rate investments may produce less income than expected if interest rates fall, and floating rate borrowings will lead
to additional interest expense if interest rates increase. Due in part to these factors, our future investment income may fall short of expectations due to changes in U.S. interest rates.



We invest our excess cash in debt instruments of the U.S. government and its agencies and in high quality corporate issuers.
Due to the short-term nature of these investments, we concluded that there was no material exposure to interest rate risk arising from our investments as of June 30, 2005.



|Item 4. | Controls and Procedures.
|------- | ------------------------



(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and our chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15 of the Securities and Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on
this evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we



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file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SECs rules and forms and
that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.



(b) Changes in Internal Control over Financial Reporting.There was no
change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



At June 30, 2005, we did not meet the definition of
accelerated filer, as defined by Rule 12b-2 of the Exchange Act. Accordingly, we will not be required by the Sarbanes-Oxley Act of 2002 to include an assessment of our internal control over financial reporting and attestation from an
independent registered public accounting firm until our Annual Report on Form 10-K for our fiscal year ending December 31, 2006.



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PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



On August 9, 2001, AntiCancer, Inc. filed a lawsuit in the Superior Court of California, County of San Diego, against us and other third parties. The
complaint alleges five causes of action, including trade libel, defamation, intentional interference with contract, intentional interference with prospective economic advantage and unfair competition. These claims are based on alleged false
statements made by unidentified employees and/or third parties regarding AntiCancers products. AntiCancer seeks unspecified general and exemplary monetary damages arising from the alleged impact of the alleged false statements, as well as its
costs and expenses incurred in connection with the lawsuit. The Court recently denied our motion for summary judgment of the case, and trial is scheduled to begin on October 11, 2005. We believe the complaint is without merit and are mounting a
vigorous defense.



On March 7, 2005, AntiCancer filed a lawsuit
against us in the U.S. District Court for the Southern District of California alleging infringement of five patents of AntiCancer. The complaint seeks damages and injunctive relief against the alleged infringement. On March 29, 2005, AntiCancer
amended its complaint to include an additional claim seeking a judgment that one of our imaging patents, 5,650,135, is invalid. On May 10, 2005, we filed our answer to AntiCancers amended complaint. We denied all of AntiCancers
allegations and asserted various affirmative defenses, including our position that AntiCancers patents, including some of the patents cited in its complaint, and patent claims relating to in vivo imaging of fluorescence are invalid. We
are vigorously defending ourselves against AntiCancers claims and believe AntiCancers complaint is without merit. Concurrent with filing our answer to AntiCancers complaint, we filed our own counterclaims against AntiCancer. Our
counterclaims allege that AntiCancer infringes two of our U.S. patents, 5,650,135 and 6,649,143, both relating to in vivo imaging and with a priority date before AntiCancers patents cited in its amended complaint. We intend to
vigorously pursue our claims against AntiCancer.



From time to
time we are involved in litigation arising out of claims in the normal course of business. Based on the information presently available, management believes that there are no claims or actions pending or threatened against us, the ultimate
resolution of which will have a material adverse effect on our financial position, liquidity or results of operations, although the results of litigation are inherently uncertain, and adverse outcomes are possible.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds .
|------- | -------------------------------------------------------------



(a) Sale of Unregistered Shares



Not applicable.



(b) Use of Proceeds



On July 21, 2004, we completed our initial public offering of 4.2 million shares of our common stock at a price of $7.00 per share. The
offering was made pursuant to our Registration Statement on Form S-1 (File No. 333-114152), which was declared effective by the Securities and Exchange Commission on July 15, 2004, and pursuant to which shares were offered on July 16, 2004. The
offering provided net proceeds to us of approximately $24.9 million, which is net of underwriters discounts and



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commissions of approximately $2.1 million, and related legal, accounting, printing and other expenses totaling approximately $2.4 million.



We have used and intend to continue to use the proceeds from
the offering for use in the operation and expansion of our business. Since July 16, 2004 until June 30, 2005, we used the following net proceeds from the offering: we used $4.7 million for inventory purchases, $6.4 million for employee payroll, $2.1
million for IPO related expenses (the balance of $0.3 million for IPO related expenses was paid prior to July 16, 2004) and $7.0 million for other corporate related expenses, including debt, facility costs, insurance premiums and supplies.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------



None



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------



At our Annual Meeting of Stockholders held on June 7, 2005, the following proposals were adopted by the margins indicated below. There were 14,852,477 shares of Common
Stock entitled to vote at the Annual Meeting of Stockholders and a total of 12,904,273 shares were represented at the Annual Meeting of Stockholders.



| | 1. | To elect William A. Halter, E. Kevin Hrusovsky and Chris Jones as our Class II directors, each to serve until the 2008 Annual Meeting of Stockholders or until their respective
successors have been elected or appointed.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                   |  |                  |  |              
|------------------ |  | ---------------- |  | -------------
|                   |  | Number of Shares
|Name of Director   |  | Votes For        |  | VotesWithheld
|William A. Halter  |  | 12,367,856       |  | 536,417      
|E. Kevin Hrusovsky |  | 12,891,556       |  | 12,717       
|Chris Jones        |  | 12,367,856       |  | 536,417      



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| | 2. | To ratify the appointment of Deloitte & Touche LLP as our independent accountants for the fiscal year ending December 31, 2005.
| | -- | -------------------------------------------------------------------------------------------------------------------------------



|                |  |                
|--------------- |  | ---------------
|                |  | Number ofShares
|Yes             |  | 12,634,259     
|No              |  | 270,014        
|Abstain         |  |               
|Broker Non-Vote |  |               



|Item 5. | Other Information.
|------- | ------------------



Not applicable.



|Item 6. | Exhibits.
|------- | ---------



| | (a) | Exhibits.
| | --- | ---------



|              |  |                                                                                                                                                                               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                   
|              | 
|10.1         |  | Amendment No. 1 to D-Luciferin Supply Agreement between Xenogen and Biosynth International, Inc. dated May 20, 2005.                                                          
|              | 
|10.2          |  | First Amendment to Amended and Restated Investors Rights Agreement dated August 2, 2005 among Xenogen and certain holders of Xenogen securities                              
|              | 
|31.1          |  | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                        
|              | 
|31.2          |  | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                        
|              | 
|32            |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

| | Confidential treatment requested for portions of this exhibit.
|- | --------------------------------------------------------------



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 15, 2005.



XENOGEN CORPORATIONBy:

/s/ DAVID W. CARTERDavid W. CarterChairman of the Board and Chief Executive OfficerBy:

/s/ WILLIAM A. ALBRIGHT, JR.William A. Albright, Jr.Senior Vice President, Finance and Chief Financial Officer




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EXHIBIT INDEX



|              |  |                                                                                                                                                                               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                   
|              | 
|10.1         |  | Amendment No. 1 to D-Luciferin Supply Agreement between Xenogen and Biosynth International, Inc. dated May 20, 2005.                                                          
|              | 
|10.2          |  | First Amendment to Amended and Restated Investors Rights Agreement dated August 2, 2005 among Xenogen and certain holders of Xenogen securities                              
|              | 
|31.1          |  | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                        
|              | 
|31.2          |  | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                        
|              | 
|32            |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

| | Confidential treatment requested for portions of this exhibit.
|- | --------------------------------------------------------------



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