Table of Contents

 

 

** **

**UNITEDSTATES SECURITIES AND EXCHANGE**

**COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

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

 

**for thequarterly period ended June 30, 2008.**

 

**Or**

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

 

**for thetransition period from                 to                 .**

 

**Commissionfile # 000-28229**

 

**CALIPERLIFE SCIENCES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**              | ** ** | **33-0675808**                           |
|---------------------------|------------|------------------------------------------|
| (State of  Incorporation) |       | (I.R.S. Employer  Identification Number) |

 

**68Elm Street**

**Hopkinton,Massachusetts 01748**

(Address and zipcode of principal executive offices)

 

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

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes   x   No   o

 

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

 
| Large accelerated  filero                      |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
| Non-accelerated  filero                        |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

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

 

**NUMBEROF SHARES OF COMMON STOCK OUTSTANDING ON July 31, 2008:  48,386,705**

 

 

 

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**CALIPERLIFE SCIENCES, INC.**

 

**TABLEOF CONTENTS**

 
| ** **                                                                                                       | **Page** |
|------------------------------------------------------------------------------------------------------------------|----------|
| PART I    FINANCIAL INFORMATION                                                                        | 2        |
|                                                                                                             |     |
| Item 1.  Financial Statements (unaudited)                                                                   | 2        |
| Condensed  Consolidated Balance Sheets as of June 30, 2008 and December 31,  2007                      | 2        |
| Condensed  Consolidated Statements of Operations for the Three and Six Months Ended  June 30, 2008 and 2007 | 3        |
| Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30,  2008 and 2007           | 4        |
| Notes  to Condensed Consolidated Financial Statements                                                            | 5        |
|                                                                                                             |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations        | 12       |
|                                                                                                             |     |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                         | 17       |
|                                                                                                             |     |
| Item 4.  Controls and Procedures                                                                            | 18       |
|                                                                                                             |     |
| PART II   OTHER INFORMATION                                                                            | 19       |
|                                                                                                             |     |
| Item 1. Legal  Proceedings                                                                                       | 19       |
|                                                                                                             |     |
| Item 1A. Risk Factors                                                                                            | 19       |
|                                                                                                             |     |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                        | 19       |
|                                                                                                             |     |
| Item 3.  Defaults Upon Senior Securities                                                                    | 19       |
|                                                                                                             |     |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                | 19       |
|                                                                                                             |     |
| Item 5. Other  Information                                                                                  | 19       |
|                                                                                                             |     |
| Item 6. Exhibits                                                                                            | 20       |
|                                                                                                             |     |
| SIGNATURES                                                                                                       | 21       |
|                                                                                                             |     |
| EXHIBIT  INDEX                                                                                                   | 22       |
|  Ex-31.1  Section 302 Certification of CEO                                                             |     |
|  Ex-31.2  Section 302 Certification of CFO                                                             |     |
|  Ex-32.1  Section 906 Certification of CEO                                                             |     |
|  Ex-32.2  Section 906 Certification of CFO                                                             |     |

 

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**PART I. FINANCIAL INFORMATION**

 

**CALIPERLIFE SCIENCES, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(unaudited,in thousands)**

 

**Item1.    Financial Statements**

 
| ** **                                                                                                                                              | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                              | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                         |       |                        |       |                            |       |
| Cash and cash  equivalents                                                                                                                              |       | $                           | 7,969      |                            | $          | 15,709 |   |
| Marketable  securities                                                                                                                                  |       | 2,631                       |       | 3,246                           |       |
| Accounts  receivable, net                                                                                                                               |       | 26,865                      |       | 30,248                          |       |
| Inventories                                                                                                                                             |       | 21,660                      |       | 19,572                          |       |
| Prepaid expenses  and other current assets                                                                                                              |       | 2,733                       |       | 2,353                           |       |
| Total current  assets                                                                                                                                   |       | 61,858                      |       | 71,128                          |       |
| Property and  equipment, net                                                                                                                            |       | 11,042                      |       | 11,477                          |       |
| Intangible  assets, net                                                                                                                                 |       | 37,808                      |       | 42,862                          |       |
| Goodwill                                                                                                                                                |       | 80,590                      |       | 80,836                          |       |
| Other assets                                                                                                                                            |       | 1,054                       |       | 1,626                           |       |
| Total assets                                                                                                                                            |       | $                           | 192,352    |                            | $          | 207,929 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                           | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Current  liabilities:                                                                                                                                   |       |                        |       |                            |       |
| Accounts payable                                                                                                                                        |       | $                           | 9,183      |                            | $          | 8,371 |   |
| Accrued  compensation                                                                                                                                   |       | 5,369                       |       | 6,530                           |       |
| Other accrued  liabilities                                                                                                                              |       | 8,571                       |       | 12,825                          |       |
| Deferred revenue  and customer deposits                                                                                                                 |       | 17,702                      |       | 15,553                          |       |
| Accrued  restructuring, current portion                                                                                                                 |       | 301                         |       | 2,112                           |       |
| Borrowings under  credit facility, current portion                                                                                                      |       | 14,900                      |       | —                          |       |
| Total current  liabilities                                                                                                                              |       | 56,026                      |       | 45,391                          |       |
| Accrued  restructuring                                                                                                                                  |       | 253                         |       | 506                             |       |
| Borrowings under  credit facility                                                                                                                       |       | —                      |       | 12,900                          |       |
| Other noncurrent  liabilities                                                                                                                           |       | 7,399                       |       | 6,816                           |       |
| Deferred tax  liability                                                                                                                                 |       | 1,130                       |       | 1,130                           |       |
| Commitments and  contingencies (Note 8)                                                                                                                 |       |                        |       |                            |       |
| Stockholders’  equity:                                                                                                                             |       |                        |       |                            |       |
| Preferred stock,  $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding                                                       |       | —                      |       | —                          |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized, 48,243,749 and 47,768,611  shares issued and outstanding in 2008 and 2007, respectively |       | 48                          |       | 48                              |       |
| Additional  paid-in capital                                                                                                                             |       | 377,368                     |       | 374,629                         |       |
| Accumulated  deficit                                                                                                                                    |       | (250,738                    | )          | (234,120                        | )          |
| Accumulated  other comprehensive income                                                                                                                 |       | 866                         |       | 629                             |       |
| Total  stockholders’ equity                                                                                                                        |       | 127,544                     |       | 141,186                         |       |
| Total  liabilities and stockholders’ equity                                                                                                        |       | $                           | 192,352    |                            | $          | 207,929 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Product revenue                                                        |       | $                                               | 22,024     |                                          | $          | 21,022 |   | $ | 39,689 |   | $ | 36,283 |   |
| Service revenue                                                        |       | 9,290                                           |       | 8,942                                         |       | 18,298 |   | 17,872 |   |
| License fees and  contract revenue                                     |       | 2,717                                           |       | 5,326                                         |       | 5,331 |   | 9,575 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Total revenue                                                          |       | 34,031                                          |       | 35,290                                        |       | 63,318 |   | 63,730 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Costs and  expenses:                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Cost of product  revenue                                               |       | 13,232                                          |       | 12,555                                        |       | 24,337 |   | 22,522 |   |
| Cost of service  revenue                                               |       | 6,447                                           |       | 5,437                                         |       | 12,544 |   | 11,089 |   |
| Cost of license  revenue                                               |       | 282                                             |       | 825                                           |       | 566 |   | 1,268 |   |
| Research and  development                                              |       | 5,041                                           |       | 6,648                                         |       | 10,573 |   | 13,422 |   |
| Selling, general  and administrative                                   |       | 12,757                                          |       | 13,306                                        |       | 26,690 |   | 25,913 |   |
| Amortization of  intangible assets                                     |       | 2,490                                           |       | 2,533                                         |       | 4,979 |   | 5,070 |   |
| Restructuring  charges (credits), net                                  |       | (27                                             | )          | (18                                           | )          | (20 | ) | 7 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Total costs and  expenses                                              |       | 40,222                                          |       | 41,286                                        |       | 79,669 |   | 79,291 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Operating loss                                                         |       | (6,191                                          | )          | (5,996                                        | )          | (16,351 | ) | (15,561 | ) |
| Interest  expense, net                                                 |       | (203                                            | )          | (123                                          | )          | (358 | ) | (116 | ) |
| Other income (expense),  net                                           |       | (87                                             | )          | (93                                           | )          | 319 |   | (81 | ) |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Loss before  income taxes                                              |       | (6,481                                          | )          | (6,212                                        | )          | (16,390 | ) | (15,758 | ) |
| Provision for  income taxes                                            |       | (201                                            | )          | (108                                          | )          | (228 | ) | (159 | ) |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Net loss                                                               |       | $                                               | (6,682     | )                                             | $          | (6,320 | ) | $ | (16,618 | ) | $ | (15,917 | ) |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Net loss per  share, basic and diluted                                 |       | $                                               | (0.14      | )                                             | $          | (0.13 | ) | $ | (0.35 | ) | $ | (0.34 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 47,897                                          |       | 47,228                                        |       | 47,790 |   | 47,104 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**

 
| ** **                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **Operating  activities**                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net loss                                                                  |       | $                                                 | (16,618    | ) | $ | (15,917 | ) |
| Adjustments to  reconcile net loss to net cash from operating activities: |       |                                              |       |   |   |
| Depreciation and  amortization                                            |       | 6,880                                             |       | 7,016 |   |
| Stock-based  compensation expense, net                                    |       | 1,997                                             |       | 2,734 |   |
| Non-cash restructuring  (credits), net                                    |       | (20                                               | )          | 7 |   |
| Foreign currency  exchange (gains) losses                                 |       | (292                                              | )          | 98 |   |
| Changes in  operating assets and liabilities:                             |       |                                              |       |   |   |
| Accounts  receivable                                                      |       | 3,879                                             |       | 2,015 |   |
| Inventories                                                               |       | (1,864                                            | )          | (2,512 | ) |
| Prepaid expenses  and other current assets                                |       | 202                                               |       | (694 | ) |
| Accounts payable  and other accrued liabilities                           |       | (3,348                                            | )          | 565 |   |
| Accrued  compensation                                                     |       | (1,350                                            | )          | (1,822 | ) |
| Deferred revenue  and customer deposits                                   |       | 2,004                                             |       | 740 |   |
| Other noncurrent  liabilities                                             |       | 583                                               |       | (525 | ) |
| Payments of  accrued restructuring obligations, net                       |       | (2,002                                            | )          | (4,789 | ) |
|                                                                      |       |                                              |       |   |   |
| Net cash from  operating activities                                       |       | (9,949                                            | )          | (13,084 | ) |
|                                                                      |       |                                              |       |   |   |
| **Investing  activities**                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Purchases of  marketable securities                                       |       | (1,933                                            | )          | (1,648 | ) |
| Proceeds from  sales of marketable securities                             |       | —                                            |       | 4,102 |   |
| Proceeds from  maturities of marketable securities                        |       | 2,536                                             |       | 5,862 |   |
| Purchase of  intangibles                                                  |       | —                                            |       | (250 | ) |
| Other assets                                                              |       | 32                                                |       | (587 | ) |
| Purchases of  property and equipment                                      |       | (1,376                                            | )          | (848 | ) |
|                                                                      |       |                                              |       |   |   |
| Net cash from  investing activities                                       |       | (741                                              | )          | 6,631 |   |
|                                                                      |       |                                              |       |   |   |
| **Financing  activities**                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Borrowings under  credit facility                                         |       | 4,000                                             |       | 4,500 |   |
| Payments of  credit facility and other obligations                        |       | (2,000                                            | )          | (248 | ) |
| Proceeds from  issuance of common stock                                   |       | 866                                               |       | 1,994 |   |
|                                                                      |       |                                              |       |   |   |
| Net cash from  financing activities                                       |       | 2,866                                             |       | 6,246 |   |
|                                                                      |       |                                              |       |   |   |
| Effect of  exchange rates on changes in cash and cash equivalents         |       | 84                                                |       | 50 |   |
| Net decrease in  cash and cash equivalents                                |       | (7,740                                            | )          | (157 | ) |
| Cash and cash  equivalents at beginning of period                         |       | 15,709                                            |       | 11,634 |   |
|                                                                      |       |                                              |       |   |   |
| Cash and cash  equivalents at end of period                               |       | $                                                 | 7,969      |   | $ | 11,477 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**June 30,2008**

**(Unaudited)**

 

**1. Basisof Presentation and Summary of Significant Accounting Policies**

 

***Basis of Presentation***

 

The accompanyingunaudited consolidated financial statements of Caliper Life Sciences, Inc.and its wholly owned subsidiaries (collectively, the “Company” or “Caliper”)have been prepared by the Company pursuant to the rules and regulations ofthe Securities and Exchange Commission (“SEC”) and generally acceptedaccounting principles for interim financial information. Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with U.S. generally accepted accounting principles have beencondensed or omitted pursuant to such rules or regulations. The December 31,2007 consolidated balance sheet has been derived from the Company’s auditedfinancial statements as of that date, but does not include all disclosuresrequired by U.S. generally accepted accounting principles. In the opinion ofmanagement, all adjustments (consisting of normal recurring entries) considerednecessary for a fair presentation have been included. However, these unauditedconsolidated financial statements should be read in conjunction with Caliper’sAnnual Report on Form 10-K for the year ended December 31, 2007.

 

Operating results for thethree and six months ended June 30, 2008 are not necessarily indicative ofthe results that may be expected for the full fiscal year or for any futureperiods. For example, the Company typically experiences higher revenue in thefourth quarter of its fiscal year due to spending patterns of its customers,and may realize significant periodic fluctuations in license and contractrevenue depending on the timing and circumstances of underlying individualtransactions.

 

Caliper currentlyoperates in one business segment: the development and commercialization of lifescience instruments and related consumables and services for use in drugdiscovery and development and other life sciences research.

 

The accompanying financialstatements assume that Caliper’s cash, cash equivalents and marketablesecurities balance at June 30, 2008 and access to available capital underits credit facility with a bank (the “Credit Facility”) are sufficient to fundoperations through at least December 31, 2008 based upon its currentoperating plan. Caliper’s ability to fund its ongoing operations will depend onmany factors, including particularly its ability to increase product andservice sales, control margins and operating costs and maintain compliance withthe covenants of its Credit Facility. As more fully described in Note 7,certain conditions associated with its Credit Facility could have a potentiallyadverse impact on its ability to fund its operations and its access to capital underits Credit Facility.

 

***Summary of Significant Accounting Principles***

 

The accounting policiesunderlying the accompanying unaudited consolidated financial statements arethose set forth in Note 2 to the consolidated financial statementsincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2007, filed with the SEC. Those policies are not presented herein, except tothe extent that new policies have been adopted or that the description ofexisting policies has been meaningfully updated.

 

***Fair Values of Assets and Liabilities***

 

In September 2006,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 157,*Fair Value Measurements* (“SFAS No. 157”)*,* effective for financial statementsissued for fiscal years beginning after November 15, 2007.  SFAS No. 157replaces multiple existing definitions of fair value with a single definition,establishes a consistent framework for measuring fair value and expandsfinancial statement disclosures regarding fair value measurements. SFAS No. 157 applies only to fair value measurements that already arerequired or permitted by other accounting standards and does not require anynew fair value measurements.  In February 2008, the FASB issued FASBStaff Position (FSP) No. 157-2 (“FSP No. 157-2”), which delayed untilthe first quarter of 2009 the effective date of SFAS No. 157 fornonfinancial assets and liabilities that are not recognized or disclosed atfair value in the financial statements on a recurring basis.  Ournonfinancial assets and liabilities that meet the deferral criteria set forthin FSP No. 157-2 include goodwill, intangible assets and property, plantand equipment.

 

In accordance with theprovisions of SFAS No. 157, Caliper measures fair value at the price thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. The Statement prioritizes the assumption that market participants would use inpricing the asset or liability (the “inputs”) into a three-tier fair valuehierarchy.  This fair value hierarchy gives the highest priority (Level 1)to quoted prices in active markets for identical assets or liabilities and thelowest priority (Level 3) to unobservable inputs in which little or no marketdata exists, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quotedprices for similar assets or liabilities in active markets or quoted prices foridentical assets and liabilities in markets that are not active, arecategorized as Level 2.  Level 3 inputs are those that reflect ourestimates about the assumptions market participants would use in pricing theasset or liability, based on the best information available in thecircumstances.  Valuation techniques for assets and liabilities measuredusing 

 

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Level 3 inputs mayinclude methodologies such as the market approach, the income approach or thecost approach, and may use unobservable inputs such as projections, estimatesand management’s interpretation of current market data.  These unobservableinputs are only utilized to the extent that observable inputs are not availableor cost-effective to obtain.

 

On June 30, 2008,Caliper’s investments were valued in accordance with the fair value hierarchyas follows (in thousands):

 
| ** **                      | ** ** | **Total Fair   Value** | ** ** | **Quoted   Prices in   Active   Markets   (Level 1)** | ** ** | **Observable   Inputs   (Level 2)** | ** ** | **Unobservable   Inputs  (Level 3)** | ** ** |
|---------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------|------------|
| Money market  funds             |       | $                                | 261        |                                                                                | $          | 261                                                |       | $                                              | —     |   | $ | — |   |
| Commercial paper                |       | 397                              |       | —                                                                              |       | 397                                                |       | —                                         |       |
| U.S. corporate  notes and bonds |       | 2,073                            |       | —                                                                              |       | 2,073                                              |       | —                                         |       |
| Other                           |       | 162                              |       | —                                                                              |       | 162                                                |       | —                                         |       |
| Total                           |       | $                                | 2,893      |                                                                                | $          | 261                                                |       | $                                              | 2,632      |   | $ | — |   |

 

Investments are generallyclassified Level 1 or Level 2 because they are valued using quoted marketprices, broker or dealer quotations, market prices received from industry standardpricing data providers or alternative pricing sources with reasonable levels ofprice transparency.  Investments in U.S. Treasury Securities and overnightMoney market Mutual Funds have been classified as Level 1 because thesesecurities are value based upon quoted prices in active markets or because theinvestments are actively traded.

 

***Income Taxes***

 

Caliper accounts forincome taxes in accordance with FAS 109,*Accounting for Income Taxes*, and accounts for uncertainty in incometaxes recognized in financial statements in accordance with FIN 48,*Accounting for Uncertainty in Income Taxes.*  FIN 48 prescribes a comprehensive model for the recognition,measurement, and financial statement disclosure of uncertain tax positions.Unrecognized tax benefits are the differences between tax positions taken, orexpected to be taken, in tax returns, and the benefits recognized foraccounting purposes pursuant to FIN 48. Caliper classifies uncertain taxpositions as short-term liabilities within accrued expenses.  During thesix month period in each of 2008 and 2007, Caliper’s tax provision primarilyrelates to foreign taxes in jurisdictions where its wholly owned subsidiariesare profitable.

 

**2.Inventories**

 

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

 
| ** **      | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw material    |       | $                       | 12,424     |                        | $          | 11,228 |   |
| Work-in-process |       | 825                     |       | 561                         |       |
| Finished goods  |       | 8,411                   |       | 7,783                       |       |
|            |       | $                       | 21,660     |                        | $          | 19,572 |   |

 

**3.Intangibles**

 

Intangibles, net, consistof the following assets acquired in connection with previous businesscombinations (in thousands):

 
| ** **                                   | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Core  technologies                           |       | $                       | 23,601     |                        | $          | 25,323 |   |
| Developed and  contract technologies         |       | 7,000                   |       | 9,427                       |       |
| Customer  contracts, lists and relationships |       | 4,199                   |       | 5,007                       |       |
| Trade names                                  |       | 2,898                   |       | 2,898                       |       |
| Other  intangibles                           |       | 110                     |       | 207                         |       |
|                                         |       | $                       | 37,808     |                        | $          | 42,862 |   |

 

**4. Warranty Obligations**

 

Caliper provides forestimated warranty expenses as a component of cost of revenue at the timeproduct revenue is recognized in accordance with FAS 5,*  Accountingfor Contingencies,* and FASB Interpretation No. 45 (FIN 45),*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, including Indirect Guarantees of Indebtedness of Others*.  Caliper offers a one-year limited warranty onmost products, which is included in the selling price. Caliper’s standardlimited warranty covers repair or replacement of defective goods, apreventative maintenance visit on certain products, and telephone-basedtechnical support. Factors that affect 

 

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Caliper’s warrantyliability include the number of installed units, historical and anticipatedrates of warranty claims, and cost per claim. Caliper periodically assesses theadequacy of its recorded warranty liabilities and adjusts amounts as necessary.

 

Changes in Caliper’swarranty obligation are as follows (in thousands):

 
| ** **                           | ** ** | **Six Months Ended June,** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
| Balance at  beginning of period      |       | $                                         | 1,684      |   | $ | 2,223 |   |
| Warranties issued  during the period |       | 555                                       |       | 776 |   |
| Settlements made  during the period  |       | (737                                      | )          | (930 | ) |
| Balance at end  of period            |       | $                                         | 1,502      |   | $ | 2,069 |   |

 

**5.Comprehensive Loss**

 

Comprehensive loss is asfollows (in thousands):

 
| ** **                                       | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                         | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net loss                                         |       | $                                                | (6,682     | )                                              | $          | (6,320 | ) | $ | (16,618 | ) | $ | (15,917 | ) |
| Unrealized gain  (loss) on marketable securities |       | (3                                               | )          | 9                                              |       | (11 | ) | 16 |   |
| Foreign currency  translation gain (loss)        |       | (198                                             | )          | 172                                            |       | 248 |   | 163 |   |
|                                             |       |                                             |       |                                           |       |   |   |   |   |
| Comprehensive  loss                              |       | $                                                | (6,883     | )                                              | $          | (6,139 | ) | $ | (16,381 | ) | $ | (15,738 | ) |

 

**6.Restructuring Obligations**

 

The following tablesummarizes restructuring obligations as of June 30, 2008 and relatedactivity during the six months ended June 30, 2008 (in thousands):

 
| ** **                            | ** ** | **Severance and  Related** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Balance,  December 31, 2007      |       | $                               | 9          |           | $          | 2,609     |       | $ | 2,618 |   |
| Adjustments to  estimated obligations |       | —                          |       | (210           | )          | (210      | )          |
| Interest  accretion                   |       | —                          |       | 148            |       | 148       |       |
| Payments                              |       | (9                              | )          | (1,993         | )          | (2,002    | )          |
| Balance,  June 30, 2008          |       | $                               | —     |           | $          | 554       |       | $ | 554 |   |

 

The remaining facilityobligations are payable as follows (in thousands):

 
| **Years Ended December 31:** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2008 (remainder  of fiscal year)            |       | $          | 176        |   |
| 2009                                        |       | 355        |       |
| 2010                                        |       | 119        |       |
| Total minimum  payments                     |       | 650        |       |
| Less: Amount  representing interest         |       | (96        | )          |
| Present value of  future payments           |       | 554        |       |
| Less: Current  portion of obligations       |       | 301        |       |
| Non-current  portion of obligations         |       | $          | 253        |   |

 

The restructuringobligations reflected above resulted from the following actions.

 

***Prior Facility Closures***

 

During the period from May 2003through December 2006, Caliper consolidated certain facilities, theeffects of which were originally reflected and have been subsequently adjustedthrough restructuring charges (credits) in the accompanying statement ofoperations. These facility closures were accounted for in accordance with SFAS No. 146,*Accounting for Costs Associated with Exit orDisposal Activities*, pursuant to which Caliper recorded a liabilityequal to the fair value of the remaining lease payments as of the cease-usedate for each of the closed facilities. Fair value was determined based uponthe discounted present value of remaining lease rentals (using a discount rateof 5%), for the space no longer occupied, considering sublease income at eachpoint in time. The consolidated facilities included two vacated facilities inMountain View, California.  As of June 30, 2008, there are noremaining obligations because the leases terminated on that date.

 

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***Xenogen Acquisition***

 

In connection with theacquisition of Xenogen Corporation (“Xenogen”), Caliper incurred costs thathave been accounted for in accordance with EITF No. 95-3,*Recognition of Liabilities in Connection with aPurchase Business Combination*, pursuant to which Caliper recorded aliability based on a defined exit plan equal to the fair value of the facilityobligations.

 

In 2006, Caliperconsolidated Xenogen’s West Coast operations in Alameda, California into asingle facility, leaving one facility unoccupied with the intention to subleaseany excess space. As of August 9, 2006, which was the date of theacquisition of Xenogen, Caliper established a liability of $1.0 millionrelated to this lease obligation based on its intention to sublease 100% of thefacility.  Approximately 57% of thefacility was subleased. In March 2008, in connection with the 2008consolidation actions discussed below under “2008 Consolidation Plan,” Caliperreversed its decision to sublease the remaining 43% of the second facility, andaccordingly, reversed approximately $0.2 million of the restructuring accrualwith an offsetting adjustment to goodwill.

 

In 2006, Caliper alsoassumed a $1.0 million obligation related to Xenogen’s St. Louis, Missourifacility. The facility closure was previously accounted for in accordance withEITF 94-3,*Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (IncludingCertain Costs Incurred in a Restructuring)*. The fair value of theassumed obligation was determined based upon the discounted present value ofremaining lease rentals (using a discount rate of 8.75%) for the space nolonger occupied, considering the sublease income potential of the property. Thelease term expires April 30, 2011.

 

***2008 Consolidation Plan***

 

During the first quarterof 2008, Caliper initiated the consolidation of its West Coast businessoperations to reduce overall facility costs and improve productivity andeffectiveness of its research and development spending.  The consolidationplan entails vacating approximately 37,000 square feet of currently occupiedspace in Mountain View, California during the third quarter of 2008 and movingapproximately 33 employees engaged principally in research and developmentactivities from Mountain View, California into Caliper’s facilities in Alameda,California.  The consolidation planresulted in year to date severance and retention charges of approximately $0.5million in connection with the reduction of approximately 12 positions. These charges are reflected in the accompanying statement of operations,primarily within research and development and general and administrativeexpenses.

 

**7.Revolving Credit Facility**

 

On February 15,2008, Caliper entered into an Amended and Restated Loan and Security Agreement(the “Credit Facility”) with a bank, which permits Caliper to borrow up to$25 million in the form of revolving loan advances, including up to$5 million in the form of letters of credit. The Credit Facility amendsand restates in its entirety a certain Loan and Security Agreement by and amongCaliper and the bank dated as of August 9, 2006, as amended. Principalborrowings under the Credit Facility accrue interest at a floating per annumrate equal to the prime rate if Caliper’s unrestricted cash held at the bankexceeds or is equal to $25 million, or prime plus one-half of onepercentage point if Caliper’s unrestricted cash held at the bank is below $25 million.Under the Credit Facility, Caliper is permitted to borrow up to$25 million, provided it maintains unrestricted cash of at least$25 million with the bank, or is otherwise subject to a borrowing baselimit consisting of up to (a) 80% of eligible accounts receivable, asdefined in the Credit Facility, plus (b) the lesser of 90% of Caliper’sunrestricted cash maintained at the bank or $10 million. The CreditFacility matures on June 30, 2009. The Credit Facility will serve as asource of capital for ongoing operations and working capital needs.

 

The Credit Facilityincludes traditional lending and reporting covenants including that certainfinancial covenants applicable to liquidity and earnings are to be maintainedby Caliper and tested as of the last day of each quarter. As of June 30,2008, Caliper was in compliance with the covenants.

 

The Credit Facility alsoincludes several potential events of default such as payment default, materialadverse change conditions and insolvency conditions that could cause interestto be charged at prime plus two percentage points, or in the event of anyuncured events of default (including non-compliance with liquidity and earningsfinancial covenants), could result in the bank’s right to declare alloutstanding obligations immediately due and payable. Should an event of defaultoccur, and if based on such default the bank were to decide to declare alloutstanding obligations immediately due and payable, Caliper may be required tosignificantly reduce its costs and expenses, sell additional equity or debtsecurities, or restructure portions of its business which could involve thesale of certain assets. The sale of additional equity or convertible debtsecurities may result in additional dilution to Caliper’s stockholders.Furthermore, additional capital may not be available on terms favorable toCaliper, if at all. In this circumstance, if Caliper could not significantlyreduce its costs and expenses, obtain adequate financing on acceptable termswhen such financing is required or restructure portions of its business,Caliper’s business would be adversely affected.

 

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**8.Commitments and Contingencies**

 

As of June 30, 2008,future minimum payments under operating leases (excluding idled facilitiesaccounted for within accrued restructuring in the accompanying balance sheet)were as follows (in thousands):

 
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2008 (remainder  of fiscal year)             |       | $          | 3,986      |   |
| 2009                                         |       | 8,398      |       |
| 2010                                         |       | 8,176      |       |
| 2011                                         |       | 7,623      |       |
| 2012                                         |       | 7,460      |       |
| Thereafter                                   |       | 19,510     |       |
| Total minimum  lease payments                |       | $          | 55,153     |   |

 

During March 2008,Caliper amended the lease on its LabChip manufacturing facility to extend thelease term through November 2013.  Annual payments under the leaseare approximately $1.8 million.  During May 2008,Caliper amended the lease on its Alameda, California facilities to extend thelease through March 2019.  Annualpayments under the lease are approximately $1.1 million.  During June 2008, Caliper amended thelease on its Cranbury, New Jersey facility to extend the lease through September 2014.  Annual payments under the lease areapproximately $1.7 million.

 

**9. LegalProceedings**

 

During the quarter ended June 30,2008, there were no new developments with respect to Caliper’s litigationmatter, the IPO lawsuits, as more fully described in Note 15 to theconsolidated financial statements in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007 (the “2007 Form 10-K.”)

 

On April 2, 2008,Caliper settled an outstanding litigation with Young & Partners LLC (“Young”)(as also described in Note 15 to the Company’s consolidated financialstatements in the 2007 Form 10-K). In connection with this settlement, Caliper paid approximately $1.4million to Young in full settlement and release of all claims.  This amount was accrued for in full at December 31,2007.

 

From time to time Caliperis involved in litigation arising out of claims in the normal course ofbusiness, and when a probable loss contingency arises, records a loss provisionbased upon actual or possible claims and assessments. The amount of possibleclaim recorded is determined on the basis of the amount of the actual claim,when the amount is both probable and the amount of the claim can be reasonablyestimated. If a loss is deemed probable, but the range of potential loss iswide, Caliper records a loss provision based upon the low end estimate of theprobable range and may adjust that estimate in future periods as moreinformation becomes available. Litigation loss provisions, when made, arereflected within general and administrative expenses in the Statement ofOperations and are included within accrued legal expenses in the accompanyingbalance sheet. Based on the information presently available, managementbelieves that there are no outstanding claims or actions pending or threatenedagainst Caliper, the ultimate resolution of which will have a material adverseeffect on our financial position, liquidity or results of operations, althoughthe results of litigation are inherently uncertain, and adverse outcomes arepossible.

 

**10.Stock-Based Compensation, Options and Restricted Stock Activity and Net Lossper Weighted Average Common Share Outstanding**

 

***Stock-Based Compensation***

 

Caliper accounts forstock-based compensation in accordance with Statement of Financial AccountingStandard No. 123R,*Share-Based Payment*(“SFAS 123R”), which requires all share-based payments, including grantsof stock options, to be recognized in the income statement as an operatingexpense, based on their fair values. Caliper estimates the fair value of eachoption award on the date of grant using a Black-Scholes-Merton basedoption-pricing model.

 

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

 
| ** **                           | ** ** | **Three Months Ended   June 30** | ** ** | **Six Months Ended   June 30** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                             | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cost of product  revenue             |       | $                                                    | 84         |                                               | $          | 114 |   | $ | 165 |   | $ | 242 |   |
| Cost of service  revenue             |       | 21                                                   |       | 34                                                 |       | 42 |   | 77 |   |
| Research and  development            |       | 95                                                   |       | 211                                                |       | 188 |   | 465 |   |
| Selling, general  and administrative |       | 787                                                  |       | 1,022                                              |       | 1,602 |   | 1,950 |   |
| Total                                |       | $                                                    | 987        |                                               | $          | 1,381 |   | $ | 1,997 |   | $ | 2,734 |   |

 

On June 30, 2008,Caliper had five share-based compensation plans (the “Plans”), which aredescribed within Note 13 to the consolidated financial statements includedin the 2007 Form 10-K.

 

The fair value of eachoption award issued under Caliper’s equity plans is estimated on the date ofgrant using a Black-Scholes-Merton based option pricing model that uses theassumptions noted in the following table. Expected volatilities are based onhistorical volatility of Caliper’s stock. The expected term of the options isbased on Caliper’s historical option exercise data taking into considerationthe exercise patterns of the option holders during the option’s life. Therisk-free interest rate is based on the U.S. Treasury yield curve in effect onthe date of the grant.

 
| ** **                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Expected  volatility (%)     |       | 40-43                                             |       | 40-45 |   |
| Risk-free  interest rate (%) |       | 2.20-3.20                                         |       | 4.50-5.00 |   |
| Expected term  (years)       |       | 3.4-4.2                                           |       | 3.2-4.2 |   |
| Expected  dividend yield (%) |       | —                                            |       | — |   |

 

***Options and Restricted Stock Activity***

 

A summary of stock optionand restricted stock activity under the Plans as of June 30, 2008, andchanges during the six months then ended is as follows:

 
| **Stock Options**                            | ** ** | **Shares** | ** ** | **Weighted  Average   Exercise   Price** | ** ** | **Weighted   Average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** **                                         | ** ** | ** **                                                                  | ** ** | **(in thousands)**                   | ** ** |
|                                              |       |       |       |                                               |       |                                                                        |       |                                      |       |
| Outstanding at  December 31, 2007            |       | 7,159,848  |       | $                                                  | 5.69       |                                                                        |       |                                      |       |   |
| Granted                                           |       | 1,102,758  |       | 4.02                                               |       |                                                                        |       |                                      |       |
| Exercised                                         |       | (322,505   | )          | 1.15                                               |       |                                                                        |       |                                      |       |
| Canceled                                          |       | (201,568   | )          | 7.01                                               |       |                                                                        |       |                                      |       |
| Outstanding at  June 30, 2008                |       | 7,738,533  |       | $                                                  | 5.61       |                                                                        | $          | 6.28                                      |       | $ | 336 |   |
| Exercisable at  June 30, 2008                |       | 4,839,225  |       | $                                                  | 5.87       |                                                                        | $          | 6.24                                      |       | $ | 336 |   |
| Vested or  expected to vest at June 30, 2008 |       | 7,600,262  |       | $                                                  | 5.61       |                                                                        | $          | 6.28                                      |       | $ | 325 |   |

 

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| **Restricted Stock Units**                  | ** ** | **Shares** | ** ** | **Weighted  Average   Grant Date   Fair Market   per Share  Value** | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------|------------|
| Outstanding and  non-vested at December 31, 2007 |       | 646,641    |       | $                                                                                                 | 5.99       |   |
| Granted                                               |       | 320,298    |       | 3.96                                                                                              |       |
| Vested                                                |       | (125,099   | )          | 5.19                                                                                              |       |
| Cancelled  restricted stock awards                    |       | (14,621    | )          | 5.28                                                                                              |       |
| Outstanding and  non-vested at June 30, 2008     |       | 827,219    |       | 5.23                                                                                              |       |
|                                                       |            |            |            |                                                                                                   |            |  |

 

During the six monthsended June 30, 2008, Caliper granted its employees 1,102,758 options at aweighted average grant date fair value of $1.47 per share using aBlack-Scholes-Merton based option pricing model. The total intrinsic value ofoptions exercised during the six months ended June 30, 2008 wasapproximately $683,000. The total fair value of restricted stock that vestedduring the six months ended June 30, 2008 was approximately $649,000.

 

As of June 30, 2008,there was $7.4 million of total unrecognized compensation cost related tounvested stock-based compensation arrangements granted under the Plans. Thatcost is expected to be recognized over a weighted-average remaining service(vesting) period of approximately 2.6 years.

 

***Common Shares Outstanding***

 

During the six monthsended June 30, 2008, Caliper issued 580,138 shares of common stock as aresult of stock purchases under Caliper’s employee stock purchase plan, stockoption exercises and vesting of restricted stock.

 

***Net Loss per Weighted Average Common Share Outstanding***

 

Basic net loss per shareis calculated based upon net loss divided by the weighted-average number ofcommon shares outstanding during the period. The calculation of diluted netloss per share excludes common stock equivalents consisting of stock options,unvested restricted stock, unvested restricted stock units and warrants(calculated using the treasury stock method) which would have an anti-dilutiveeffect.

 

The weighted average numberof shares used to compute both basic and diluted net loss per share consists ofthe following (in thousands):

 
| ** **                                                                                                                                               | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                                               | ** ** | **2008**                                         | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Basic and  diluted                                                                                                                                       |       | 47,897                                           |       | 47,228                                         |       | 47,790 |   | 47,104 |   |
| Anti-dilutive  common stock equivalents excluded from calculation of diluted net loss per  share (prior to the application of the treasury stock method) |       | 14,740                                           |       | 14,052                                         |       | 14,740 |   | 14,052 |   |

 

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**Item 2.****                     Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations as of June 30, 2008 and for the three and six months ended June 30,2008 should be read in conjunction with our financial statements included inthis Quarterly Report on Form 10-Q and Management’s Discussion andAnalysis of Financial Condition and Results of Operations and our financialstatements included in our Annual Report on Form 10-K for the year ended December 31,2007.*

 

*Thediscussion in this report contains forward-looking statements that involverisks and uncertainties, such as statements of our plans, objectives,expectations and intentions. Our actual results could differ materially fromthose discussed here. Factors that could cause or contribute to thesedifferences include those discussed under the caption “Risk Factors” below, aswell as those discussed elsewhere. The cautionary statements made in thisreport should be read as applying to all related forward-looking statementswherever they appear in this report.*

 

**ExecutiveSummary**

 

***Business***

 

Caliper develops andsells innovative and enabling products and services to the life sciencesresearch community, a customer base that includes pharmaceutical andbiotechnology companies, and government and other not-for-profit researchinstitutions. We believe our integrated systems, consisting of instruments,software and reagents, our laboratory automation technologies and our assay anddiscovery services enable researchers to better understand the basis fordisease and more effectively discover safe and effective drugs. Our strategy isto transform drug discovery and development by offering technologies andservices that ultimately enhance the ability to predict the effects that newdrug candidates will have on humans. Our offerings leverage our extensiveportfolio of molecular imaging, microfluidics, automation and liquid handlingtechnologies, and scientific applications expertise to address key limitationsin the drug discovery and development process—namely, the complex and costlyprocess to conceive of and bring a new drug to market across the in vitro andin vivo testing landscape.

 

Our imaging product andservice offerings, which are comprised of optical imaging instruments andassociated services and reagents, allow researchers visibility into molecularlevel biological processes inside living animal models.  Our in vitro products and service offeringsincorporate microfluidics and automation technology to provide tools, servicesand complete integrated systems to perform assays.  Additionally, through our Caliper Discovery Alliancesand Services (CDAS), comprised of our NovaScreen and Xenogen Biosciencessubsidiaries, we offer a wide range of drug discovery services spanning invitro and in vivo testing including primary and secondary screening, profilingand assay development services, in vitro ADME/TOX analysis, and pharmacologicaltesting and database development.

 

We have multiple channelsof distribution for our products: direct to customers, indirect through ourinternational network of distributors, through partnership channels under ourCaliper Driven program and through joint marketing agreements. Through ourdirect and indirect channels, we sell products, services and complete systemsolutions, developed by us, to end customers. Our Caliper Driven program iscore to our business strategy and complementary to our direct sales anddistribution network activities, as it enables us to extend the commercialpotential of our LabChip and advanced liquid handling technologies into newindustries and new applications with experienced commercial partners. We alsoutilize joint marketing agreements to enable others to market and distributeour products. By using direct and indirect distribution, and out-licensing ourtechnology under our Caliper Driven program, we seek to maximize penetration ofour products and technologies into the marketplace and position Caliper as aleader in the life sciences tools market.

 

***General Overview***

 

During the three monthsended June 30, 2008, we achieved total revenues of $34.0 million, withinour projected range of $33.0 to $36.0 million. Our second quarter projection anticipated a license and contract revenuedecline during the second quarter of $3.5 million from 2007 as a result of $3.0million of non-recurring microfluidic license revenue and $0.6 million ofcontract revenue from microfluidic research collaborations that were concludedduring the second quarter of 2007.  Ouroverall combined product and service revenues grew by approximately $1.3million, or 4.5% versus the second quarter of 2007.  This included product growth of 5% andservice growth of 4%.

 

Second quarter productrevenue growth was driven primarily by strong discovery instrument sales ofworkflow productivity solutions led by Staccato Automated Workstations andZephyr liquid handling instruments. Overall discovery instrument product revenues increased by $1.7 million,or approximately 14% compared to the second quarter of 2007.  Within the discovery product family, weexperienced a modest decline in microfluidic product revenues during the secondquarter primarily as a result of the loss of a customer that ceasedoperations.  We are expecting steadyimprovement in microfluidic product sales in the second half of 2008 as weovercome the loss of revenue from this customer account, and as sales of thenew LabChip GX and LabChip GXII microfluidic benchtop instruments begin toincrease.  In addition, we recentlylaunched the LabChip GX instrument series in response to strong market demandfor fast, automated, 1-D electrophoretic separations of protein, DNA, and RNAsamples.  Imaging product sales

 

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decreased byapproximately $0.7 million, or 8%, compared to the second quarter of 2007,despite a 9% increase in IVIS instrument placements.  The revenue decrease was due primarily to anincrease in sales in the second quarter of 2008 toward Lumina instruments whichcarry a lower average selling price. Periodic variations in product mix such as this are not unusual, and maycause temporary fluctuations in revenue performance when comparing results of agiven quarter to another quarter.  We areanticipating robust growth in imaging product sales over the remainder of 2008as a result of backlog carried into the third quarter as well as our continuedstrong pipeline opportunities.

 

Total service revenuesincreased by approximately 4% during the quarter, and resulted primarily fromservice contracts and billable services related to the expansion of our installedbase of IVIS instruments.  Revenues fromour CDAS unit were lower than anticipated by approximately $1.3 million for thesecond quarter, and $1.5 million on a year-to-date basis as a result of customercontract delays involving two major contracts.

 

Our operating loss was$6.2 million compared to $6.0 million in the second quarter of 2007 primarilyreflecting the margin effects of the change on the license fee and contractrevenue line, partially offset by an aggregate operating expense (R&D andSG&A) savings of $2.2 million achieved in the second quarter of 2008compared to the second quarter of 2007.

 

Our revenue outlook forthe third quarter of 2008 is $33 to $36 million, and for the full year remains$142 to $148 million.

 

**CriticalAccounting Estimates**

 

The critical accountingpolicies that we believe impact significant judgments and estimates used in thepreparation of our consolidated financial statements presented in this reportare described in our Management’s Discussion and Analysis of FinancialCondition and Results of Operations, and in the Notes to the ConsolidatedFinancial Statements, each included in our Annual Report on Form 10-K forthe fiscal year ended December 31, 2007.

 

**Resultsof Operations for the Three and Six Months Ended June 30, 2008**

 

Operating results for thesix months ended June 30, 2008 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2008. Forexample, we typically experience higher revenues in the fourth quarter of ourfiscal year as a result of the capital spending patterns of ourcustomers.  During the three and six months ended June 30, 2008, theeffect on revenues related to foreign exchange resulted in a 3% favorableimpact for both periods as compared to the prior year, respectively.  During the three and six months ended June 30,2008, the effect on net loss related to foreign exchange was less than 1% ineach period, as compared to the prior year.

 

***Revenue***

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In thousands)**            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** |
| Product revenue                    |       | $                                | 22,024     |                           | $          | 21,022 |   | $ | 1,002 |   | 5 | % | $ | 39,689 |   | $ | 36,283 |   | $ | 3,406 |   | 9 | % |
| Service revenue                    |       | 9,290                            |       | 8,942                          |       | 348 |   | 4 | % | 18,298 |   | 17,872 |   | 426 |   | 2 | % |
| License fees and  contract revenue |       | 2,717                            |       | 5,326                          |       | (2,609 | ) | (49 | )% | 5,331 |   | 9,575 |   | (4,244 | ) | (44 | )% |
|                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenues                     |       | $                                | 34,031     |                           | $          | 35,290 |   | $ | (1,259 | ) | (4 | )% | $ | 63,318 |   | $ | 63,730 |   | $ | (412 | ) | (1 | )% |

 

*ProductRevenue.    *Product revenue increasedduring the three months ended June 30, 2008 compared to the same period in2007 due primarily to strong overall discovery product line sales whichincreased by an overall $1.7 million, or approximately 14%, compared to thesecond quarter of 2007, due to increased sales of workflow productivitysolutions led by sales of Staccato Automated Workstations and Zephyr liquidhandling instruments.  Within discovery productline sales we experienced a modest decline in microfluidic product revenuesduring the second quarter as a result of the loss of chip and datapointrevenues from a customer that ceased operations.  We are expecting steady improvement inmicrofluidic product sales in the second half of 2008 as we overcome the lossof revenue from this customer account, and as sales of the new LabChip GX andLabChip GXII microfluidic benchtop instruments begin to increase.  The LabChip GX instrument series was recentlylaunched on July 15, 2008, in response to strong market demand for fast,automated, 1-D electrophoretic separations of protein, DNA, and RNAsamples.  Imaging product line salesdecreased by approximately $0.7 million, or 8%, compared to the second quarterof 2007, despite a 9% increase in IVIS instrument placements.  The revenue decrease was due primarily to anincrease in sales within the second quarter of 2008 toward Lumina instrumentswhich carry a lower average selling price.

 

Product revenue increasedduring the six months ended June 30, 2008 compared to the same period in2007 due primarily to strong discovery product line sales which increased $2.8million, or 12%, led by sales of liquid handling and automation products. Theincrease in liquid handling and automation product sales similarly reflectedthe strong market interest in workflow productivity solutions as discussedabove.  Imaging product line salesincreased by $0.7 million, or 5%, driven by overall IVIS instrument growth,including a 9% increase in instrument placements.

 

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*ServiceRevenue.*   Service revenue increased duringthe three and six months ended June 30, 2008 compared to the same periodsin 2007 primarily from service contract and billable revenue associated withthe increase in the installed base of IVIS imaging instruments.  All other instrument services grew modestly,while revenues from CDAS remained substantially unchanged in comparison to thesecond quarter of 2007 and were down approximately $0.5 million in comparisonto the six months ended June 30, 2007. The decreases were a result of a large in vivo compound profilingcontract in 2007 that did not recur in 2008, and customer contract delaysrelated to two major contracts.  WithinCDAS, our in-vivo services business experienced a $0.7 million and $1.5 milliondecrease, for the three and six month periods, respectively, in compoundprofiling revenue related to a single customer contract in 2007 that did notrecur in 2008.  Additionally, our in-vivoservices business has experienced customer contractual delays over the firsthalf of 2008 with respect to a large phenotyping contract that resulted in arevenue decrease of $0.6 million and $1.2 million on a three- and six-monthbasis compared to similar project revenues with this same customer in2007.  Notwithstanding these unfavorabledifferences, offsetting increases from growth in revenue from other CDASplatforms including animal imaging studies, transgenic animal productionservices, and in vitro government projects resulted in substantially unchangedtotal CDAS revenues during the second quarter and a decline of approximately$0.5 million on a six month basis compared to the same period in 2007.

 

*LicenseFees and Contract Revenue.*    Licensefees and contract revenue decreased during the three and six months ended June 30,2008 compared to the same periods in 2007 primarily as a result of anticipateddeclines in both non-recurring microfluidic license revenues of $2.9 millionand $4.2 million, respectively, and contract research collaboration revenue ofapproximately $0.6 million and $1.8 million, respectively, due to projectscompleted in 2007 within our collaboration business channel.  Thesedecreases were partially offset by increases in imaging license revenues of$0.5 million and $1.5 million, respectively, during the three and six monthsended June 30, 2008 compared to the same period in 2007 including purchaseaccounting effects of $0.3 million and $0.9 million, respectively, in the threeand six months ended June 30, 2008, caused by the elimination of suchrevenues in the corresponding periods of 2007 as a result of fair valuepurchase accounting.

 

***Costs of Revenue***

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In thousands)** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Product                 |       | $                                | 13,232     |                           | $          | 12,555 |   | $ | 677 |   | 5 | % | $ | 24,337 |   | $ | 22,522 |   | $ | 1,815 |   | 8 | % |
| Service                 |       | 6,447                            |       | 5,437                          |       | 1,010 |   | 19 | % | 12,544 |   | 11,089 |   | 1,455 |   | 13 | % |
| License                 |       | 282                              |       | 825                            |       | (543 | ) | (66 | )% | 566 |   | 1,268 |   | (702 | ) | (55 | )% |
| Total Costs             |       | $                                | 19,961     |                           | $          | 18,817 |   | $ | 1,144 |   | 6 | % | $ | 37,447 |   | $ | 34,879 |   | $ | 2,568 |   | 7 | % |

 

*Costof Product Revenue.*    Cost of productrevenue increased during the three months ended June 30, 2008 primarily asa result of the overall increase in product sales together with increases inwarranty parts costs, freight and obsolescence reserve charges which increasedby approximately 3% of product sales. Offsetting these increases was a $0.7 million decrease in overallmanufacturing spending comprised primarily of reduced labor costs incurred withrespect to warranty and installation activities.

 

Cost of product revenueincreased during the six months ended June 30, 2008 primarily as a resultof the overall increase in product sales, and to a lesser extent due to therevenue shift involving Staccato sales which incorporate a higher cost ofmaterials as a result of third party material content, especially in the firstquarter of 2008.  For the six months ended June 30, 2008, weexperienced a decrease in labor costs associated with warranty and installationactivities compared to the first six months of 2007.

 

*Costof Service Revenue.*    The cost ofservice revenue increase during the three and six months ended June 30,2008 was primarily a result of greater resources dedicated to the more complexinstallation and start up training for our IVIS imaging products.  The increase also relates to increases inCDAS expenses of $0.4 and $0.6 million for the three- and six-months ended June 30,2008, respectively.  The CDAS costincrease occurred primarily within our in vitro operations due primarily toexpansion of facility needs and to a lesser extent as a result of variablespending on project materials associated with higher in vitro drug discoveryrevenues in comparison to 2007.

 

*Costof License Revenue.*    Cost of licenserevenue decreased during the three and six months ended June 30, 2008compared to the same periods in 2007 due to the overall decrease in licenserevenues described above.

 

*GrossMargins.*    Gross margin on productrevenue was 40% for the three months ended June 30, 2008 which wasunchanged compared to the same period in 2007, reflecting the effect of incrementalmargin contribution associated with increased sales volumes, offset by highermaterial and other variable costs incurred. For the six months ended June 30, 2008, product gross marginsimproved to 39%, from 38% for the six months ended June 30, 2007. The six month improvement was primarily a volume-driven increase, offset byhigher material and other variable costs resulting from sales of Staccatoautomated workstations as described above. Gross margin on service revenue was31% for the three months ended June 30, 2008 as compared to 39% for thesame period in 2007. Gross margin on service revenue was 31% for the six monthsended June 30, 2008 and 38% for 2007. These decreased service margins resulted from an increase in the servicecosts, primarily headcount related, of the instrument services business,including material costs, the increased fixed cost base from the in vitrofacility and the delay in timing of work within our in vivo services business.

 

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***Expenses***

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                             | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** |
| ** **                             | ** ** | **(In thousands)**          | ** ** |
| Research and  development              |       | $                                | 5,041      |                           | $          | 6,648 |   | $ | (1,607 | ) | (24 | )% | $ | 10,573 |   | $ | 13,422 |   | $ | (2,849 | ) | (21 | )% |
| Selling, general  and administrative   |       | 12,757                           |       | 13,306                         |       | (549 | ) | (4 | )% | 26,690 |   | 25,913 |   | 777 |   | 3 | % |
| Amortization of  intangible assets     |       | 2,490                            |       | 2,533                          |       | (43 | ) | (2 | )% | 4,979 |   | 5,070 |   | (91 | ) | (2 | )% |
| Restructuring  charges, (credits), net |       | (27                              | )          | (18                            | )          | (9 | ) | (50 | )% | (20 | ) | 7 |   | (27 | ) | (386 | )% |
|                                        |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 *Research and Development Expenses.*    Researchand development spending decreased during the three months ended June 30,2008 compared to the same period in 2007 primarily as a result of actions takenin the second quarter of 2007 to consolidate research and development spendingin the area of automation, and more recently as a result of actions begun inthe first quarter of 2008 to consolidate research and development costs in ourWest Coast operations.  The net decreasewas comprised of a $1.1 million reduction in payroll and employee relatedcosts due to an average reduction of 14 employees compared to the prior year, $0.2 millionin reduced material and operating supplies, $0.2 million in reduced facilitycosts, and a $0.1 million reduction in all other costs.

 

Research and developmentspending decreased by $2.8 million during the six months ended June 30,2008 compared to the same period in 2007.  This overall decrease was dueprimarily to reduced spending related to microfluidic collaboration projectsthat ended in 2007 as well as the reduction in spending on automation projectsfollowing cost reduction actions in the second quarter of 2007.  The netdecrease was comprised of a $1.8 million reduction in payroll and employeerelated costs, $0.3 million of severance charges in the first quarter of 2008associated with our plan to consolidate West Coast operations, $0.6 millionin reduced material and operating supplies, a $0.6 million decrease in facilityand information technology costs that are driven based on headcount and squarefootage, and a $0.1 million reduction in all other costs.

 

In the six months ended June 30,2008, we recorded a severance charge of $0.5 million within research anddevelopment costs.  We estimate totaladditional costs associated with the West Coast consolidation to beapproximately $3.4 million.  The following are the major categories of theadditional costs expected to be incurred:  (1) approximately $0.9million in employee severance and retention costs of which $0.5 million hasbeen incurred to date and $0.4 million will be incurred over the remainder ofthe fiscal year; and (2) approximately $2.5 million in facilityabandonment charges in the third quarter with the abandonment of approximately36,000 square feet of space in Mountain View, California.  We estimatethat ongoing facility cash outflow, primarily rent payments net of sublease income,will be spread over the 5.4 years remaining on our Mountain View, Californialease.  This facility closure will be accounted for in accordance withSFAS No. 146, pursuant to which we will record a liability equal to thefair value of the remaining lease payments, net of expected sublease payments,as of the cease-use date.

 

Based on preliminaryfinancial data, we expect this initiative to result in annual cost savings ofapproximately $2.6 million, including annual facility costs of $1.4 million andheadcount savings of $1.2 million once fully implemented, and we expect toincur total costs of approximately $3.4 million in fiscal year 2008 to achievethese savings.  The major elements of this consolidation plan are expectedto be completed on or prior to September 30, 2008.

 

*Selling,General and Administrative Expenses.*    Selling,general and administrative expenses decreased by $0.5 million during thethree months ended June 30, 2008 compared to the same period in 2007primarily due to a decrease in general and administrative expenses whichincluded a $0.2 million reduction in office and operating supplies,$0.2 million in reduced FAS 123R stock compensation expense and$0.1 million reduction in all other costs.

 

Selling, general andadministrative expenses increased by $0.8 million during the six monthsended June 30, 2008 compared to the same period in 2007 primarily due toincreased investment in selling and marketing personnel of $0.6 million andincreased sales commissions of $0.4 million, offset by a decrease in all othercosts of $0.2 million.

 

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*Amortizationof Intangible Assets.*  The amortization of intangibleassets for the three and six months ended June 30, 2008 relates to assetsacquired in our previous business combinations. Amortization is computed basedupon the estimated timing of the undiscounted cash flows used to value eachrespective asset over the estimated useful life of the particular intangibleasset, or using the straight-line method over the estimated useful life of theintangible asset when the pattern of cash flows is not necessarily reflectiveof the true consumption rate of the particular intangible asset.

 

*RestructuringCharges.*    We incurred restructuringcharges in 2008 and 2007 related to acquisition and integration activities thatare more fully discussed in Note 6 to the accompanying financialstatements. Restructuring charges during the six month periods ending June 30,2008 and 2007 relate to accretion of interest related to idle facility rentobligations.

 

***Interest and Other Income (Expense), Net***

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In thousands)**      | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest  expense, net       |       | $                                | (203       | )                              | $          | (123 | ) | $ | (80 | ) | (65 | )% | $ | (358 | ) | $ | (116 | ) | $ | (242 | ) | (209 | )% |
| Other income  (expense), net |       | (87                              | )          | (93                            | )          | 6 |   | 6 | % | 319 |   | (81 | ) | 400 |   | 494 | % |
|                              |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*InterestExpense, Net.*    Interest expense, net,increased during the three and six months ended June 30, 2008 compared tothe same periods in 2007, primarily due the $0.1 million and $0.2 milliondecrease, respectively, in interest income which resulted in lower investedcash and marketable securities, and to a lesser extent, the effect of interestcosts on average outstanding borrowing as compared to 2007.

 

*OtherIncome (Expense), Net.*    Other income(expense), net, was relatively unchanged for the three months ended June 30,2008 as compared to 2007.  Other income(expense), net, increased on a six month basis compared to 2007 due totransaction gains on foreign denominated accounts receivable due to weakeningof the U.S. dollar in comparison primarily to the Euro and the Yen. During thesix months ended June 30, 2008, we incurred foreign currency transactiongains of approximately $0.3 million, compared to losses of approximately$0.1 million for the same period in 2007.

 

**Liquidityand Capital Resources**

 

As of June 30, 2008,we had $10.6 million in cash, cash equivalents and marketable securities,as compared to $19.0 million as of December 31, 2007.

 

As noted in Note 7of the accompanying Notes to Consolidated Financial Statements, on February 15,2008, we entered into an Amended and Restated Loan and Security Agreement(Credit Facility) with a bank, which permits us to borrow up to$25 million in the form of revolving loan advances, including up to$5 million in the form of letters of credit. The Credit Facility amendsand restates in its entirety a previous Loan and Security Agreement between usand the bank dated as of August 9, 2006, as amended. Principal borrowingsunder the Credit Facility accrue interest at a floating per annum rate equal tothe prime rate if our unrestricted cash held at the bank exceeds or is equal to$25 million, or prime plus one-half of one percentage point if ourunrestricted cash held at the bank is below $25 million. Under the CreditFacility, we are permitted to borrow up to $25 million, provided we maintainunrestricted cash of at least $25 million with the bank. Otherwise ourability to borrow under the Credit Facility is subject to a borrowing baselimit consisting of up to (a) 80% of eligible accounts receivable, asdefined in the Credit Facility, plus (b) the lesser of 90% of ourunrestricted cash maintained at the bank or $10 million. The CreditFacility matures on June 30, 2009. The Credit Facility will serve as asource of capital for ongoing operations and working capital needs.

 

The Credit Facilityincludes traditional lending and reporting covenants including that certainfinancial covenants applicable to liquidity and earnings are to be maintainedby us and tested as of the last day of each quarter.  The CreditFacility also includes several potential events of default such as paymentdefault, material adverse change conditions and insolvency conditions thatcould cause interest to be charged at prime plus two percentage points, or inthe event of any uncured events of default (including non-compliance withliquidity and earnings financial covenants), could result in the bank’s rightto declare all outstanding obligations immediately due and payable. Should anevent of default occur, and if based on such default the bank were to decide todeclare all outstanding obligations immediately due and payable, we may berequired to significantly reduce our costs and expenses, sell additional equityor debt securities, or restructure portions of our business which could involvethe sale of certain assets. The sale of additional equity or convertible debtsecurities may result in additional dilution to our stockholders. Furthermore,additional capital may not be available on terms favorable to us, if at all. Inthis circumstance, if we could not significantly reduce our costs and expenses,obtain adequate financing on acceptable terms when such financing is requiredor restructure portions of our business, our business would be adverselyaffected.

 

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***Cash Flows***

 
| ** **                  | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **$ Change** | ** ** |
| ** **                  | ** ** | **(In thousands)**                           | ** ** |
| Cash provided by  (used in) |       |                                              |       |   |   |   |   |
| Operating  Activities       |       | $                                                 | (9,949     | ) | $ | (13,084 | ) | $ | 3,135 |   |
| Investing  Activities       |       | (741                                              | )          | 6,631 |   | (7,372 | ) |
| Financing  Activities       |       | 2,866                                             |       | 6,246 |   | (3,380 | ) |
|                             |            |                                                   |            |  |  |  |  |  |  |  |

 

 *Operating Activities.*    Duringthe six months ended June 30, 2008, we used $9.9 million of cash foroperating activities which included approximately $2.0 million related toour idle facilities and $1.4 million related to our settlement of the Young &Partners LLC claim discussed further in Note 9 to the accompanying ConsolidatedFinancial Statements.  We usedapproximately $6.5 million of cash to fund operations and working capitalneeds, which primarily related to fiscal 2007 employee annual performancebonuses of $2.0 million, a $1.9 million increase in inventory within theperiod, offset by an increase in customer deposits of approximately $1.8 million,and a $4.4 million increase in cash flow from all other working capitalactivities.

 

*InvestingActivities.*    During the six monthsended June 30, 2008, net proceeds from purchases, sales and maturities ofmarketable securities generated $0.6 million of cash which we usedprimarily for operations. Our primary investing activities were the purchase ofproperty and equipment of $1.4 million primarily related to facilityimprovements and information systems.

 

*FinancingActivities.*    During the six monthsended June 30, 2008, financing cash proceeds were related to $2.0 millionin incremental borrowing under our credit facility as well as proceeds fromoption exercises and the employee stock purchase plan.

 

**ContractualObligations**

 

Our commitments under leasesand other obligations are described in our Management’s Discussion and Analysisof Financial Condition and Results of Operations and in the Notes to theConsolidated Financial Statements included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007. Other than the amended leaseagreements described in Note 8 to the accompanying Consolidated FinancialStatements,  there has been no materialchange during the six months ended June 30, 2008 in the contractualobligations disclosed at December 31, 2007.

 

***Capital Requirements***

 

Our capital requirementsdepend on numerous factors, including market acceptance of our products, theresources we devote to developing and supporting our products, andacquisitions. We expect to devote substantial capital resources to continuingour research and development efforts, expanding our support and productdevelopment activities, and for other general corporate activities. Our futurecapital requirements will depend on many factors, including:

 

·                    continued market acceptance of ourin vivo imaging, microfluidic and lab automation products and services;

·                    the magnitude and scope of ourresearch and product development programs;

·                    our ability to maintain existing,and establish additional, corporate partnerships;

·                    the time and costs involved inexpanding and maintaining our manufacturing facilities;

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

·                    other factors not within ourcontrol.

 

Basedupon our currentfinancial projections, we expect that revenue from operations, our current cashbalances and borrowing availability under our credit facility will besufficient to fund our operations through December 31, 2008.  Additionally, our ability to fund ongoingoperations beyond December 31, 2008 will depend on many factors, includingparticularly our ability to increase revenues, control margins and operatingcosts and maintain compliance with the covenants of our credit facility.  Our credit facility currently matures on June30, 2009, and we anticipate that we will be able to renew the credit facilityin order to ensure that we have sufficient long-term capital resources to meetthe needs of ongoing operations.

 

If,however, our actualresults do not meet our current projections, we fail to meet required bankcovenants, or we are unable to renew the credit facility beyond its currentmaturity, we may be required to reduce our costs and expenses,sell additional equity or debt securities, or restructure portions of our business.

 

Under any circumstance,the sale of additional equity or convertible debt securities may result inadditional dilution to our stockholders. Furthermore, additional capital maynot be available on terms favorable to us, if at all. If we could notsignificantly reduce our costs and expenses, obtain adequate financing onacceptable terms when such financing is required or restructure portions of ourbusiness, our business would be adversely affected.

 

**Item 3.****                     Quantitativeand Qualitative Disclosures About Market Risk**

 

***Interest Rate Sensitivity***

 

Our primary market riskexposures are foreign currency fluctuation and interest rate sensitivity. Therehave been no material changes to the information included under Item 7A, “Quantitativeand Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007.

 

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**Item 4.****                     Controls andProcedures**

 

*Evaluationof disclosure controls and procedures.  *  Wehave established disclosure controls and procedures (as defined in Exchange ActRules 13a-15 (e) and 15d-15(e)) that are designed to providereasonable assurance that information required to be disclosed in our reportsfiled under the Securities Exchange Act of 1934, such as this Quarterly Reporton Form 10-Q, is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms. Disclosure controlsare also designed to provide reasonable assurance that such information isaccumulated and communicated to our management, including the principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure.

 

Based on their evaluationas of June 30, 2008, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and proceduresare effective to provide reasonable assurance that information we are requiredto disclose in reports that we file or submit under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in SEC rules and forms.

 

*Limitationson the Effectiveness of Disclosure Controls and Procedures.*    Ourmanagement, including our principal executive officer and principal financialofficer, does not expect that our disclosure controls and procedures willprevent all error and all fraud. A control system can provide only reasonable,not absolute, assurance that the objectives of the control system are met.Further, the design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within Caliper have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people or by management override ofthe control. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

 

*Changesin internal controls.*    There were nochanges in our internal control over financial reporting, identified inconnection with the evaluation of such internal control that occurred duringthe second quarter of 2008 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**Part II—OTHER INFORMATION**

 

**Item 1.****                     LegalProceedings**

 

Commencing on June 7,2001, Caliper and three of its officers and directors (David V. Milligan,Daniel L. Kisner and James L. Knighton) were named as defendants in threesecurities class action lawsuits filed in the United States District Court forthe Southern District of New York. The cases have been consolidated under thecaption, In re Caliper Technologies Corp. Initial Public Offering SecuritiesLitigation, 01 Civ. 5072 (SAS) (GBD). Similar complaints were filed againstapproximately 300 other public companies that conducted initial public offeringsof their common stock during the late 1990s (the “IPO Lawsuits”). On August 8,2001, the IPO Lawsuits were consolidated for pretrial purposes before UnitedStates Judge Shira Scheindlin of the Southern District of New York. Together,those cases are denominated In re Initial Public Offering SecuritiesLitigation, 21 MC 92(SAS). On April 19, 2002, a Consolidated AmendedComplaint was filed alleging claims against Caliper and the individualdefendants under Sections 11 and 15 of the Securities Act of 1933, andunder Sections 10(b) and 20(a) of the Securities Exchange Act of1934, as well as Rule 10b-5 promulgated thereunder. The ConsolidatedAmended Complaint also names certain underwriters of Caliper’s December 1999initial public offering of common stock as defendants. The Complaint allegesthat these underwriters charged excessive, undisclosed commissions to investorsand entered into improper agreements with investors relating to aftermarkettransactions. The Complaint seeks an unspecified amount of money damages.Caliper and the other issuers named as defendants in the IPO Lawsuits moved on July 15,2002, to dismiss all claims on multiple grounds. By Stipulation and Order datedOctober 9, 2002, the claims against Messrs. Milligan, Kisner andKnighton were dismissed without prejudice. On February 19, 2003, the Courtgranted Caliper’s motion to dismiss all claims against it. Plaintiffs were notgiven the right to replead the claims against Caliper. The time to appeal thedismissal has not yet expired. On December 5, 2006 the Court of Appealsfor the Second Circuit issued an opinion reversing Judge Scheindlin’s priorcertification of the plaintiff classes in several “focus” cases pending beforeher as part of the consolidated IPO Lawsuits. As a result of this ruling, on June 25,2007, Judge Scheindlin issued an order terminating the settlement that hadpreviously been agreed to among the plaintiffs, the issuers and their insurers.The parties in the “focus” cases have briefed plaintiffs’ motion seekingcertification of a new class of plaintiffs. The final resolution of thislitigation is not expected to have a material impact on Caliper.

 

From time to time Caliperis involved in litigation arising out of claims in the normal course ofbusiness.  Based on the information presently available, managementbelieves that there are no outstanding claims or actions pending or threatenedagainst Caliper, the ultimate resolution of which will have a material adverseeffect on our financial position, liquidity or results of operations, althoughthe results of litigation are inherently uncertain, and adverse outcomes arepossible.

 

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

 

Our risk factors aredescribed in Part I, Item 1A of our Annual Report on Form 10-K filedwith the Securities and Exchange Commission for the year ended December 31,2007. There have been no material changes in the risks affecting Caliper sincethe filing of our Annual Report on Form 10-K.

 

**Item 2.****                     UnregisteredSales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3.****                     Defaults UponSenior Securities**

 

None.

 

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

 

Our 2008 Annual Meetingof Shareholders was held on June 3, 2008. There were present at themeeting, in person or represented by proxy, the holders of 33,631,833 shares ofcommon stock. The matters voted on at the meeting and the votes cast are asfollows:

 

(1) AllanC. Comstock was elected to serve as a director of the company to hold officeuntil our 2011 Annual Meeting of Stockholders or until his successor is chosenand qualified. There were 33,245,159 shares of common stock voting in favor,and 386,403 shares of common stock for which votes were withheld.

 

 (2) The appointment of Ernst &Young LLP as our independent registered public accounting firm for the fiscalyear ending December 31, 2008 was ratified. There were 33,217,605 sharesof common stock voting in favor, 399,944 shares of common stock voting against,and 14,284 shares of common stock abstaining with zero broker non-votes.

 

In addition to the foregoingmatters, Dr. Robert Bishop was elected Chairman of the Board of Directorseffective June 3, 2008 by unanimous decision of the board ofdirectors.  Following the meeting, ourboard of directors consisted of Dr. Bishop, Van Billet, David W. Carter, Mr. Comstock,E. Kevin Hrusovsky, David Milligan, Ph.D. and Kathryn Tunstall.

 

**Item 5.****                     OtherInformation**

 

None.

 

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**Item 6.****                     Exhibits**

 

**EXHIBITINDEX**

 
| **Exhibit****Number** | ** ** | **Description of document**                                                                                                                                                                                                   |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                    |
| 10.1                  |       | Amendment to Lease  Agreement dated as of June 27, 2008, by and between Cedar Brook 5  Corporate Center, L.P., as landlord and Caliper Life Sciences, Inc., as  tenant.                                                       |
|                  |       |                                                                                                                                                                                                                                    |
| 10.2                  |       | Amended and Restated  Loan and Security Agreement, dated as of February 15, 2008, by and among  Caliper, Silicon Valley Bank, Xenogen Corporation, Xenogen Biosciences  Corporation and NovaScreen Biosciences Corporation.        |
|                  |       |                                                                                                                                                                                                                                    |
| 31.1                  |       | Certification of Chief  Executive Officer Required Under Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,  and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                  |       |                                                                                                                                                                                                                                    |
| 31.2                  |       | Certification of Chief  Financial Officer Required Under Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,  and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                  |       |                                                                                                                                                                                                                                    |
| 32.1*                 |       | Certification of Chief  Executive Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of  the Securities Exchange Act of 1934, as amended, and 18 U.S.C.  Section 1350.                                    |
|                  |       |                                                                                                                                                                                                                                    |
| 32.2*                 |       | Certification of Chief  Financial Officer Required Under Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,  and 18 U.S.C. Section 1350.                                    |

 

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** *Thecertifications attached as Exhibits 32.1 and 32.2 accompany this QuarterlyReport on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Actof 2002 and shall not be deemed “filed” by Caliper for purposes of Section 18of the Securities Exchange Act of 1934, as amended.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                                  | CALIPER LIFE SCIENCES,  INC. |
|----------------------------------|------------------------------|
|                             |                         |   |
| Date: August 8,  2008       |                         |   |
|                             | By:                          | /s/  E. KEVIN  HRUSOVSKY |
|                             |                         | E. Kevin Hrusovsky |
|                             |                         | Chief Executive Officer  and President |
|                             |                         |   |
|  Date:  August 8, 2008 |                         |   |
|                             | By:                          | /s/  PETER F.  MCAREE |
|                             |                         | Peter F. McAree |
|                             |                         | Senior Vice President  and Chief Financial Officer |

 

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Tableof Contents

 

**EXHIBIT INDEX**

 
| **Exhibit****Number** | ** ** | **Description of document**                                                                                                                                                                                                   |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                    |
| 10.1                  |       | Amendment to Lease  Agreement dated as of June 27, 2008, by and between Cedar Brook 5  Corporate Center, L.P., as landlord and Caliper Life Sciences, Inc., as  tenant.                                                       |
|                  |       |                                                                                                                                                                                                                                    |
| 10.2                  |       | Amended and Restated  Loan and Security Agreement, dated as of February 15, 2008, by and among  Caliper, Silicon Valley Bank, Xenogen Corporation, Xenogen Biosciences  Corporation and NovaScreen Biosciences Corporation.        |
|                  |       |                                                                                                                                                                                                                                    |
| 31.1                  |       | Certification of Chief  Executive Officer Required Under Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,  and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                  |       |                                                                                                                                                                                                                                    |
| 31.2                  |       | Certification of Chief  Financial Officer Required Under Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,  and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                  |       |                                                                                                                                                                                                                                    |
| 32.1*                 |       | Certification of Chief  Executive Officer Required Under Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,  and 18 U.S.C. Section 1350.                                    |
|                  |       |                                                                                                                                                                                                                                    |
| 32.2*                 |       | Certification of Chief  Financial Officer Required Under Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,  and 18 U.S.C. Section 1350.                                    |

 

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** *Thecertifications attached as Exhibits 32.1 and 32.2 accompany this QuarterlyReport on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Actof 2002 and shall not be deemed “filed” by Caliper for purposes of Section 18of the Securities Exchange Act of 1934, as amended.

 

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