Tableof 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 September 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 the 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes   o   No   x

 

**NUMBEROF SHARES OF COMMON STOCK OUTSTANDING ON October 31, 2008: 48,432,332**

 

 

 

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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 September 30, 2008 and December 31, 2007                       | 2        |
| Condensed Consolidated Statements of Operations for  the Three and Nine Months Ended September 30, 2008 and 2007 | 3        |
| Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended September 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              | 14       |
|                                                                                                                  |     |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                              | 21       |
|                                                                                                                  |     |
| Item 4. Controls and Procedures                                                                                  | 22       |
|                                                                                                                  |     |
| PART II   OTHER INFORMATION                                                                                 | 23       |
|                                                                                                                  |     |
| Item  1. Legal Proceedings                                                                                            | 23       |
|                                                                                                                  |     |
| Item  1A. Risk Factors                                                                                                | 23       |
|                                                                                                                  |     |
| Item 2. Unregistered Sales of Equity Securities  and Use of Proceeds                                             | 23       |
|                                                                                                                  |     |
| Item 3. Defaults Upon Senior Securities                                                                          | 23       |
|                                                                                                                  |     |
| Item 4. Submission of Matters to a Vote of  Security Holders                                                     | 23       |
|                                                                                                                  |     |
| Item 5.  Other Information                                                                                       | 23       |
|                                                                                                                  |     |
| Item 6.  Exhibits                                                                                                | 24       |
|                                                                                                                  |     |
| SIGNATURES                                                                                                            | 25       |
|                                                                                                                  |     |
| EXHIBIT  INDEX                                                                                                        |     |
|  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**

 
| ** **                                                                                                                                              | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                              | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                         |       |                             |       |                            |       |
| Cash and cash  equivalents                                                                                                                              |       | $                                | 6,734      |                            | $          | 15,709 |   |
| Marketable  securities                                                                                                                                  |       | 2,163                            |       | 3,246                           |       |
| Accounts  receivable, net                                                                                                                               |       | 27,260                           |       | 30,248                          |       |
| Inventories                                                                                                                                             |       | 21,391                           |       | 19,572                          |       |
| Prepaid expenses  and other current assets                                                                                                              |       | 3,306                            |       | 2,353                           |       |
| Total current  assets                                                                                                                                   |       | 60,854                           |       | 71,128                          |       |
| Property and  equipment, net                                                                                                                            |       | 11,466                           |       | 11,477                          |       |
| Intangible  assets, net                                                                                                                                 |       | 36,029                           |       | 42,862                          |       |
| Goodwill                                                                                                                                                |       | 80,590                           |       | 80,836                          |       |
| Other assets                                                                                                                                            |       | 1,007                            |       | 1,626                           |       |
| Total assets                                                                                                                                            |       | $                                | 189,946    |                            | $          | 207,929 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current  liabilities:                                                                                                                                   |       |                             |       |                            |       |
| Accounts payable                                                                                                                                        |       | $                                | 8,657      |                            | $          | 8,371 |   |
| Accrued  compensation                                                                                                                                   |       | 4,992                            |       | 6,530                           |       |
| Other accrued  liabilities                                                                                                                              |       | 9,438                            |       | 12,825                          |       |
| Deferred revenue  and customer deposits                                                                                                                 |       | 17,047                           |       | 15,553                          |       |
| Accrued  restructuring, current portion                                                                                                                 |       | 1,792                            |       | 2,112                           |       |
| Borrowings under  credit facility, current portion                                                                                                      |       | 14,900                           |       | —                          |       |
| Total current  liabilities                                                                                                                              |       | 56,826                           |       | 45,391                          |       |
| Accrued  restructuring                                                                                                                                  |       | 1,261                            |       | 506                             |       |
| Borrowings under  credit facility                                                                                                                       |       | —                           |       | 12,900                          |       |
| Other noncurrent  liabilities                                                                                                                           |       | 8,162                            |       | 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, 48,432,332 and 47,768,611  shares issued and outstanding in 2008 and 2007, respectively |       | 48                               |       | 48                              |       |
| Additional  paid-in capital                                                                                                                             |       | 378,188                          |       | 374,629                         |       |
| Accumulated  deficit                                                                                                                                    |       | (256,133                         | )          | (234,120                        | )          |
| Accumulated  other comprehensive income                                                                                                                 |       | 464                              |       | 629                             |       |
| Total  stockholders’ equity                                                                                                                        |       | 122,567                          |       | 141,186                         |       |
| Total  liabilities and stockholders’ equity                                                                                                        |       | $                                | 189,946    |                            | $          | 207,929 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Product revenue                                                        |       | $                                                    | 19,965     |                                                | $          | 18,504 |   | $ | 59,655 |   | $ | 54,787 |   |
| Service revenue                                                        |       | 10,563                                               |       | 10,172                                              |       | 28,860 |   | 28,044 |   |
| License fees and  contract revenue                                     |       | 3,513                                                |       | 8,045                                               |       | 8,844 |   | 17,620 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total revenue                                                          |       | 34,041                                               |       | 36,721                                              |       | 97,359 |   | 100,451 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and  expenses:                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of product  revenue                                               |       | 11,983                                               |       | 11,278                                              |       | 36,321 |   | 33,800 |   |
| Cost of service  revenue                                               |       | 6,590                                                |       | 5,511                                               |       | 19,134 |   | 16,600 |   |
| Cost of license  revenue                                               |       | 588                                                  |       | 971                                                 |       | 1,154 |   | 2,238 |   |
| Research and  development                                              |       | 4,953                                                |       | 5,666                                               |       | 15,526 |   | 19,088 |   |
| Selling, general  and administrative                                   |       | 10,256                                               |       | 13,399                                              |       | 36,945 |   | 39,312 |   |
| Amortization of  intangible assets                                     |       | 1,742                                                |       | 2,522                                               |       | 6,721 |   | 7,593 |   |
| Restructuring  charges, net                                            |       | 2,686                                                |       | 22                                                  |       | 2,666 |   | 30 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total costs and  expenses                                              |       | 38,798                                               |       | 39,369                                              |       | 118,467 |   | 118,661 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Operating loss                                                         |       | (4,757                                               | )          | (2,648                                              | )          | (21,108 | ) | (18,210 | ) |
| Interest  expense, net                                                 |       | (227                                                 | )          | (205                                                | )          | (584 | ) | (321 | ) |
| Other income  (expense), net                                           |       | (411                                                 | )          | 446                                                 |       | (92 | ) | 365 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Loss before  income taxes                                              |       | (5,395                                               | )          | (2,407                                              | )          | (21,784 | ) | (18,166 | ) |
| Provision for  income taxes                                            |       | (1                                                   | )          | (21                                                 | )          | (229 | ) | (180 | ) |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                                                               |       | $                                                    | (5,396     | )                                                   | $          | (2,428 | ) | $ | (22,013 | ) | $ | (18,346 | ) |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss per  share, basic and diluted                                 |       | $                                                    | (0.11      | )                                                   | $          | (0.05 | ) | $ | (0.46 | ) | $ | (0.39 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 48,378                                               |       | 47,425                                              |       | 47,987 |   | 47,212 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**

 
| ** **                                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **Operating  activities**                                                 |       |                                                |       |   |   |
| Net loss                                                                  |       | $                                                   | (22,013    | ) | $ | (18,346 | ) |
| Adjustments to  reconcile net loss to net cash from operating activities: |       |                                                |       |   |   |
| Depreciation and  amortization                                            |       | 9,561                                               |       | 10,462 |   |
| Stock-based  compensation expense, net                                    |       | 2,988                                               |       | 3,970 |   |
| Non-cash  restructuring charge, net                                       |       | 2,666                                               |       | 30 |   |
| Other charges                                                             |       | —                                              |       | 639 |   |
| Foreign currency  exchange losses (gains)                                 |       | 120                                                 |       | (352 | ) |
| Changes in  operating assets and liabilities:                             |       |                                                |       |   |   |
| Accounts  receivable                                                      |       | 2,843                                               |       | 2,481 |   |
| Inventories                                                               |       | (1,955                                              | )          | (2,804 | ) |
| Prepaid expenses  and other current assets                                |       | (314                                                | )          | 188 |   |
| Accounts payable  and other accrued liabilities                           |       | (2,832                                              | )          | (670 | ) |
| Accrued  compensation                                                     |       | (1,871                                              | )          | (1,765 | ) |
| Deferred revenue  and customer deposits                                   |       | 1,640                                               |       | (239 | ) |
| Other noncurrent  liabilities                                             |       | 1,346                                               |       | 1,552 |   |
| Payments of  accrued restructuring obligations, net                       |       | (2,187                                              | )          | (6,310 | ) |
|                                                                      |       |                                                |       |   |   |
| Net cash from  operating activities                                       |       | (10,008                                             | )          | (11,164 | ) |
|                                                                      |       |                                                |       |   |   |
| **Investing  activities**                                                 |       |                                                |       |   |   |
| Purchases of  marketable securities                                       |       | (1,914                                              | )          | (1,795 | ) |
| Proceeds from  sales of marketable securities                             |       | —                                              |       | 4,102 |   |
| Proceeds from  maturities of marketable securities                        |       | 2,911                                               |       | 7,246 |   |
| Other assets                                                              |       | (42                                                 | )          | (944 | ) |
| Purchases of  property and equipment                                      |       | (2,720                                              | )          | (1,278 | ) |
| Purchase of  intangible assets                                            |       | —                                              |       | (250 | ) |
|                                                                      |       |                                                |       |   |   |
| Net cash from  investing activities                                       |       | (1,765                                              | )          | 7,081 |   |
|                                                                      |       |                                                |       |   |   |
| **Financing  activities**                                                 |       |                                                |       |   |   |
| Borrowings under  credit facility                                         |       | 4,000                                               |       | 6,500 |   |
| Payments of  credit facility and other obligations                        |       | (2,000                                              | )          | (2,276 | ) |
| Proceeds from  issuance of common stock                                   |       | 928                                                 |       | 2,145 |   |
|                                                                      |       |                                                |       |   |   |
| Net cash from  financing activities                                       |       | 2,928                                               |       | 6,369 |   |
|                                                                      |       |                                                |       |   |   |
| Effect of  exchange rates on changes in cash and cash equivalents         |       | (130                                                | )          | 254 |   |
| Net (decrease)  increase in cash and cash equivalents                     |       | (8,975                                              | )          | 2,540 |   |
| Cash and cash equivalents  at beginning of period                         |       | 15,709                                              |       | 11,634 |   |
|                                                                      |       |                                                |       |   |   |
| Cash and cash  equivalents at end of period                               |       | $                                                   | 6,734      |   | $ | 14,174 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**September 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 nine months ended September 30, 2008 are not necessarilyindicative of the results that may be expected for the full fiscal year or forany future periods. For example, the Company typically experiences higherrevenue in the fourth quarter of its fiscal year due to spending patterns ofits customers, and may realize significant periodic fluctuations in license andcontract revenue depending on the timing and circumstances of underlyingindividual transactions.

 

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 accompanyingfinancial statements assume that Caliper’s cash, cash equivalents andmarketable securities balance at September 30, 2008, together withproceeds from the divestiture of two product lines which are discussed in Note11 and access to available capital under its credit facility with a bank (the “CreditFacility”), are sufficient to fund operations through at least June 30,2009. If Caliper is successful in renewing its Credit Facility which matures onJune 30, 2009 this date would extend to beyond December 31, 2009based upon its current operating plan. Caliper’s ability to fund its ongoing operations also depends onadditional 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 capitalunder its 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 October 2008,the FASB issued FSP No. FAS 157-3, *Determiningthe Fair Value of a Financial Asset When the Market for That Asset Is NotActive*, which clarifies the application of Statement No. 157 inan inactive market and illustrates how an entity would determine fair valuewhen the market for a financial asset is not active. The Staff Position iseffective immediately and applies to prior periods for which financialstatements have not been issued, including interim or annual periods ending onor before September 30, 

 

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2008. The implementationof FAS 157-3 did not have a material impact on our consolidated financialposition, results of operations and cash flows.

 

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 market dataexists, requiring companies to develop their own assumptions.  Observableinputs that do not meet the criteria of Level 1, and include quoted prices forsimilar assets or liabilities in active markets or quoted prices for identicalassets and liabilities in markets that are not active, are categorized as Level2.  Level 3 inputs are those that reflect our estimates about theassumptions market participants would use in pricing the asset or liability,based on the best information available in the circumstances.  Valuationtechniques for assets and liabilities measured using Level 3 inputs may includemethodologies such as the market approach, the income approach or the costapproach, and may use unobservable inputs such as projections, estimates andmanagement’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 September 30,2008, Caliper’s investments were valued in accordance with the fair valuehierarchy as follows (in thousands):

 
| ** **                      | ** ** | **Total Fair  Value** | ** ** | **Quoted  Prices in  Active  Markets  (Level 1)** | ** ** | **Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** |
|---------------------------------|------------|-----------------------|------------|---------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| Money market  funds             |       | $                     | 679        |                                              | $          | 679                               |       | $                                   | —     |   | $ | — |   |
| Commercial paper                |       | 199                   |       | —                                            |       | 199                               |       | —                              |       |
| U.S. corporate  notes and bonds |       | 1,806                 |       | —                                            |       | 1,806                             |       | —                              |       |
| Other                           |       | 158                   |       | —                                            |       | 158                               |       | —                              |       |
| Total                           |       | $                     | 2,842      |                                              | $          | 679                               |       | $                                   | 2,163      |   | $ | — |   |

 

Investments are generallyclassified Level 1 or Level 2 because they are valued using quoted marketprices, broker or dealer quotations, market prices received from industrystandard pricing data providers or alternative pricing sources with reasonablelevels of price transparency.  Investments in U.S. Treasury Securities andovernight Money market Mutual Funds have been classified as Level 1 becausethese securities are value based upon quoted prices in active markets orbecause the investments are actively traded.

 

As of September 30,2008, Caliper held available-for-sale securities having an aggregate value of$2.2 million. Caliper held seven positions in debt securities that were inan unrealized loss position as of September 30, 2008.  During thethree months ended September 30, 2008, a total unrealized loss of $75,000was recorded to accumulated other comprehensive income within the accompanyingbalance sheet, including an unrealized loss of $58,000 in one investment. Based on the Caliper’s evaluation of its investments, management does notbelieve any individual unrealized loss at September 30, 2008 represents another-than-temporary impairment as these unrealized losses are primarilyattributable to changes in the interest rates and the ongoing credit crisiswhich has created volatile market conditions. Caliper currently has both theintent and ability to hold the securities for a time necessary to recover theamortized cost.

 

***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 forthe recognition, measurement, and financial statement disclosure of uncertaintax positions. Unrecognized tax benefits are the differences between taxpositions taken, or expected to be taken, in tax returns, and the benefitsrecognized for accounting purposes pursuant to FIN 48. Caliper classifiesuncertain tax positions as short-term liabilities within accruedexpenses.  During the three and nine month periods in each of 2008 and2007, Caliper’s tax provisions primarily relates to foreign taxes injurisdictions where its wholly owned subsidiaries are profitable.

 

*** Goodwill***

 

In accordance with SFAS No. 141,Business Combinations, and SFAS No. 142, Goodwill and Other IntangibleAssets, goodwill and certain other intangibles are not amortized but areinstead subject to periodic impairment assessments. Caliper performs a test forthe impairment of goodwill annually following the related acquisition, or morefrequently if events or circumstances indicate that goodwill may be impaired.Because Caliper has a single operating segment which is the sole reportingunit, Caliper performs this test by comparing the fair value of Caliper withits book value, including goodwill. If the fair value exceeds the book value,goodwill is not impaired. If the book value exceeds the fair value, Caliperwould calculate the potential impairment loss by comparing the implied 

 

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fair value of goodwillwith the book value of goodwill. If the implied fair value of goodwill is lessthan the book value, an impairment charge would be recorded equal to thedifference.

 

As of September 30,2008, Caliper analyzed its goodwill and noted that its fair value exceeded itsbook value and that there were no indicators of impairment.  Subsequent toquarter end, there has been a significant decrease in Caliper’s stock price andtwo divestitures described in Note 11.   Management is in the process ofcompleting its October 31, 2008 annual test for impairment in accordancewith SFAS No. 142.  In performing the impairment test, Caliper isconsidering its market capitalization and other indicators of fair value of theentity which include, but are not limited to, a discounted cash flow modelincorporating Caliper’s current operating plan and forecasts. As a result ofthe fact that as of October 31, 2008 Caliper’s market capitalization was belowits book value, Caliper will need to evaluate whether an impairment has arisensubsequent to September 30, 2008 taking into consideration any relevantfactors or events including, but not limited to, the divestitures discussed inNote 11 and any changes to Caliper’s financial projections as discussed withinManagements Discussion and Analysis within Item 2 of this Form 10-Q.  Based upon the results of this assessment,Caliper may reach the conclusion that its goodwill is impaired. Such aconclusion could have a material impact on its results or operations in thefourth quarter.

 

The Company will alsoevaluate the provisions of SFAS No. 144 *Accountingfor the Impairment or Disposal of Long-Lived Assets,*during whichCaliper will need to consider the outcome of its annual goodwill impairmenttest, the divestitures described in Note 11, and other market and businessdevelopments. Similarly, Caliper may reach the conclusion that certain of itslong-lived tangible and intangible assets are impaired. Such a conclusion couldalso have a material impact on its results or operations in the fourth quarter.

 

**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):

 
| ** **      | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw material    |       | $                            | 11,849     |                        | $          | 11,228 |   |
| Work-in-process |       | 940                          |       | 561                         |       |
| Finished goods  |       | 8,602                        |       | 7,783                       |       |
|            |       | $                            | 21,391     |                        | $          | 19,572 |   |

 

**3.Intangibles**

 

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

 
| ** **                                   | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Core  technologies                           |       | $                            | 22,741     |                        | $          | 25,323 |   |
| Developed and  contract technologies         |       | 6,383                        |       | 9,427                       |       |
| Customer  contracts, lists and relationships |       | 3,946                        |       | 5,007                       |       |
| Trade names                                  |       | 2,898                        |       | 2,898                       |       |
| Other  intangibles                           |       | 61                           |       | 207                         |       |
|                                         |       | $                            | 36,029     |                        | $          | 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, *Accounting for Contingencies,* and FASBInterpretation No. 45 (FIN 45), *Guarantor’sAccounting and Disclosure Requirements for Guarantees, including IndirectGuarantees of Indebtedness of Others*.  Caliper offers aone-year limited warranty on most products, which is included in the sellingprice. Caliper’s standard limited warranty covers repair or replacement ofdefective goods, a preventative maintenance visit on certain products, andtelephone-based technical support. Factors that affect Caliper’s warrantyliability include the number of installed units, historical and anticipatedrates of warranty claims, and cost per claim. Caliper periodically assesses theadequacy of its recorded warranty liabilities and adjusts amounts as necessary.

 

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

 
| ** **                           | ** ** | **Nine Months Ended September,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| Balance at  beginning of period      |       | $                                               | 1,684      |   | $ | 2,223 |   |
| Warranties  issued during the period |       | 1,177                                           |       | 957 |   |
| Settlements made  during the period  |       | (1,224                                          | )          | (1,309 | ) |
| Balance at end  of period            |       | $                                               | 1,637      |   | $ | 1,871 |   |

 

**5.Comprehensive Loss**

 

Comprehensive loss is asfollows (in thousands):

 
| ** **                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net loss                                         |       | $                                                    | (5,396     | )                                                   | $          | (2,428 | ) | $ | (22,013 | ) | $ | (18,346 | ) |
| Unrealized gain  (loss) on marketable securities |       | (74                                                  | )          | 3                                                   |       | (86 | ) | 19 |   |
| Foreign currency  translation gain (loss)        |       | (327                                                 | )          | 65                                                  |       | (79 | ) | 227 |   |
|                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Comprehensive  loss                              |       | $                                                    | (5,797     | )                                                   | $          | (2,360 | ) | $ | (22,178 | ) | $ | (18,100 | ) |

 

**6.Restructuring Obligations**

 

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

 
| ** **                            | ** ** | **Severance and  Related** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Balance,  December 31, 2007      |       | $                               | 9          |           | $          | 2,609     |       | $ | 2,618 |   |
| Restructuring  charge                 |       | —                          |       | 2,683          |       | 2,683     |       |
| Adjustments to  estimated obligations |       | —                          |       | (213           | )          | (213      | )          |
| Interest  accretion                   |       | —                          |       | 152            |       | 152       |       |
| Payments                              |       | (9                              | )          | (2,178         | )          | (2,187    | )          |
| Balance,  September 30, 2008     |       | $                               | —     |           | $          | 3,053     |       | $ | 3,053 |   |

 

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

 
| **Years Ended December 31:** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2008 (remainder  of fiscal year)            |       | $          | 512        |   |
| 2009                                        |       | 1,543      |       |
| 2010                                        |       | 415        |       |
| 2011                                        |       | 304        |       |
| 2012                                        |       | 314        |       |
| 2013                                        |       | 293        |       |
| Total minimum  payments                     |       | 3,381      |       |
| Less: Amount  representing interest         |       | (328       | )          |
| Present value of  future payments           |       | 3,053      |       |
| Less: Current  portion of obligations       |       | 1,792      |       |
| Non-current  portion of obligations         |       | $          | 1,261      |   |

 

The restructuringobligations reflected above resulted from the following actions.

 

***Prior Facility Closures***

 

During the period from May 2003through December 2006, Caliper consolidated certain facilities in MountainView, California, the effects of which were originally reflected and have beensubsequently adjusted through restructuring charges (credits) in theaccompanying statement of operations. These facility closures were accountedfor in accordance with SFAS 146,*Accountingfor Costs Associated with Exit or Disposal Activities*, pursuant towhich Caliper recorded a liability equal to the fair value of the remaininglease 

 

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payments as of thecease-use date for each of the closed facilities. Fair value was determinedbased upon the discounted present value of remaining lease rentals (using adiscount rate of 5%), for the space no longer occupied, considering subleaseincome at each point in time. As of June 30, 2008, there were no remainingobligations as the leases for these facilities lapsed.

 

***Xenogen Acquisition***

 

In connection with theacquisition of Xenogen Corporation (“Xenogen”), in August 2006, Caliperincurred costs that have 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, Caliper consolidatedXenogen’s West Coast operations in Alameda, California into a single facility,leaving one facility unoccupied with the intention to sublease any excessspace. As of August 9, 2006, which was the date of the acquisition ofXenogen, Caliper established a liability of $1.0 million related to thislease obligation based on its intention to sublease 100% of the facility. Approximately 57% of the facility was subleased. In March 2008, inconnection with the 2008 consolidation actions discussed below under “2008Consolidation Plan,” Caliper revised its intention to sublease the remaining43% of the second facility, and accordingly, reversed approximately $0.2million of the restructuring accrual with 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***

 

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 entailed vacating approximately 37,000 square feet of currently occupiedspace in Mountain View, California, which was completed in September 2008.  This facility closure was accounted for inaccordance with SFAS 146, pursuant to which Caliper recorded a liability equalto the fair value of the remaining lease payments as of the cease-use date.Fair value was determined based upon the discounted present value of remaininglease rentals (using a discount rate of 5.5%) for the space no longer occupied,considering future estimated sublease income, estimated broker fees andrequired tenant improvements. Caliper calculated the fair value as $2.7 millionand recorded this amount within restructuring charges, net in the quarter endedSeptember 30, 2008, within the accompanying consolidated income statement.Refer to Note 8 for further discussion regarding Caliper’s lease obligations inMountain View, California.

 

In connection with thefacility consolidation above, Caliper eliminated 12 positions and recognizedcharges of approximately $0.8 million for severance and retention costs duringthe nine-months ended September 30, 2008. The majority of these charges were recognized during the first quarter,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 serves as a source of capital forongoing operations and working capital. The Credit Facility, which matures on June 30, 2009, permitsCaliper 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 CreditFacility amends and restates in its entirety a certain Loan and SecurityAgreement by and among Caliper and the bank dated as of August 9, 2006, asamended. Principal borrowings under the Credit Facility accrue interest at afloating per annum rate equal to the prime rate if Caliper’s unrestricted cashheld at the bank exceeds or is equal to $25 million, or prime plusone-half of one percentage point if Caliper’s unrestricted cash held at thebank is below $25 million. Under the Credit Facility, Caliper is permittedto borrow up to $25 million, provided it maintains unrestricted cash of atleast $25 million with the bank, or is otherwise subject to a borrowingbase limit 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. At September 30,2008, Caliper had $5.9 million in available borrowings under the CreditFacility after taking into consideration the outstanding borrowings and $1.6million restricted for standby letters of credit related under variousoperating leases.

 

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 September 30,2008, Caliper was in compliance with the covenants.

 

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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.

 

**8.Commitments and Contingencies**

 

As of September 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)             |       | $          | 1,618      |   |
| 2009                                         |       | 6,966      |       |
| 2010                                         |       | 6,751      |       |
| 2011                                         |       | 6,306      |       |
| 2012                                         |       | 6,245      |       |
| Thereafter                                   |       | 18,055     |       |
| Total minimum  lease payments                |       | $          | 45,941     |   |

 

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

 

**9. LegalProceedings**

 

During the quarter ended September 30,2008, there were no new developments with respect to Caliper’s litigationmatter, the *IPO lawsuits*, as more fully described inNote 15 to the consolidated financial statements in the Company’s Annual Reporton Form 10-K for the fiscal year ended 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 allshare-based payments, including grants of stock options, to be recognized inthe income statement as an operating expense, based on their fair values.Caliper estimates the fair value of each option award on the date of grantusing a Black-Scholes-Merton based option-pricing model.

 

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Stock-based compensationexpense is included within costs and expenses as follows (in thousands):

 
| ** **                           | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cost of product  revenue             |       | $                                                   | 77         |                                               | $          | 87 |   | $ | 242 |   | $ | 329 |   |
| Cost of service  revenue             |       | 21                                                  |       | 22                                                 |       | 63 |   | 99 |   |
| Research and  development            |       | 116                                                 |       | 159                                                |       | 304 |   | 623 |   |
| Selling, general  and administrative |       | 777                                                 |       | 968                                                |       | 2,379 |   | 2,919 |   |
| Total                                |       | $                                                   | 991        |                                               | $          | 1,236 |   | $ | 2,988 |   | $ | 3,970 |   |

 

On September 30,2008, Caliper had five share-based compensation plans (the “Plans”), which aredescribed within Note 13 to the consolidated financial statements includedin the Company’s Annual Report on Form 10-K for the year ended December 31,2007.

 

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.

 
| ** **                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| Expected  volatility (%)     |       | 40-46.5                                            |       | 39-45 |   |
| Risk-free  interest rate (%) |       | 2.24-3.53                                          |       | 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 September 30, 2008,and changes during the nine 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                                                 |       | 1,602,258  |       | 3.60                                   |       |                                                |       |                           |       |
| Exercised                                               |       | (342,238   | )          | 1.26                                   |       |                                                |       |                           |       |
| Canceled                                                |       | (511,948   | )          | 5.79                                   |       |                                                |       |                           |       |
| Outstanding at  September 30, 2008                 |       | 7,907,920  |       | $                                      | 5.45       |                                                | $          | 6.18                           |       | $ | 454 |   |
| Exercisable at  September 30, 2008                 |       | 5,009,456  |       | $                                      | 5.88       |                                                | $          | 6.25                           |       | $ | 372 |   |
| Vested and  expected to vest at September 30, 2008 |       | 7,769,434  |       | $                                      | 5.46       |                                                | $          | 5.46                           |       | $ | 560 |   |

 
| **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                                                |       | 325,298    |       | 3.94                                                             |       |
| Vested                                                 |       | (244,841   | )          | 5.58                                                             |       |
| Cancelled                                              |       | (56,098    | )          | 4.83                                                             |       |
| Outstanding and  non-vested at September 30, 2008 |       | 671,000    |       | 5.11                                                             |       |
|                                                        |            |            |            |                                                                  |            |  |

 

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During the nine monthsended September 30, 2008, Caliper granted its employees 1,602,258options.  Such options were valued usinga Black-Scholes-Merton based option pricing model employing the assumptionsreflected above which resulted in a weighted average grant date fair value of$1.27 per share. The total intrinsic value of options exercised during the ninemonths ended September 30, 2008 was approximately $694,000. The total fairvalue of restricted stock that vested during the nine months ended September 30,2008 was approximately $1,365,000.

 

As of September 30,2008, there was $6.6 million of total unrecognized compensation costrelated to unvested stock-based compensation arrangements granted under thePlans. That cost is expected to be recognized over a weighted-average remainingservice (vesting) period of approximately 2.5 years.

 

***Common Shares Outstanding***

 

During the nine monthsended September 30, 2008, Caliper issued 768,721 shares of common stock asa result 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 averagenumber of shares used to compute both basic and diluted net loss per shareconsists of the following (in thousands):

 
| ** **                                                                                                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                               | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Basic and  diluted                                                                                                                                       |       | 48,378                                               |       | 47,425                                              |       | 47,987 |   | 47,212 |   |
| Anti-dilutive  common stock equivalents excluded from calculation of diluted net loss per  share (prior to the application of the treasury stock method) |       | 14,753                                               |       | 14,086                                              |       | 14,753 |   | 14,086 |   |

 

**11.Subsequent Event**

 

***PDQ Product Line Divestiture***

 

OnOctober 29, 2008, Caliper entered into an Asset Sale and PurchaseAgreement (the “Purchase Agreement”) with Sotax Corporation, a Virginiacorporation (“Sotax”) a privately owned subsidiary of SOTAX Holding A.G.based in Switzerland.  The Purchase Agreement provides for the saleof Caliper’s Pharmaceutical Development and Quality (“PDQ”) product line toSotax for a purchase price of approximately $15.8 million, including anestimated $13.8 million in cash together with certain  assumed liabilities upon closing which areestimated to be approximately $2.0 million (the “Purchase Price”).  Caliper’s PDQ product line is comprised ofTPW3TM – Tablet Processing Workstation, APW3TM – Active Ingredient ProcessingWorkstation, MultiDose® G3 – Dissolution Workstation, and other relatedproducts used for drug contentuniformity and dissolution rate testing and related services.Approximately 20-25 employees were offered positions with Sotax. Caliper andSotax have also expressed their intent to enter into a long-term leaseagreement, pursuant to which Caliper will sublease approximately 10,000 squarefeet of manufacturing and office space to Sotax on a market-rate basis.

 

The Purchase Price issubject to adjustment for certain assets purchased and liabilities assumed asdetermined on the date of closing.  Inaddition, $1.0 million of the Purchase Price will be placed into an escrowaccount until the first anniversary of the closing date, which is November 10,2008.  The escrow will secure Caliper’sindemnification obligations to Sotax, if any, under the PurchaseAgreement.  The Purchase Agreement alsocontains representations, warranties and indemnities that are customary inasset sale transactions.  Caliperestimates that it will realize approximately $12.6 million in net cash proceedsfrom the sale of its PDQ product line upon closing, after the escrow account depositand cash transaction expenses.

 

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As part of thistransaction, Caliper will sell approximately $0.5 million in net assets, whichconsists primarily of inventory net of deferred revenue and accruedexpenses.  The net assets excludeapproximately $1.5 million in accounts receivables that Caliper will retain.  Caliper expects to record a gain on the saleof the PDQ product line of approximately $12 million, subject toadjustment.  Caliper’s revenue attributable to the PDQproduct line was $12.3 million in the fiscal year ended December 31, 2007and $7.4 million in the nine months ended September 30, 2008.

 

***AutoTrace Product Line Divestiture***

 

OnNovember 10, 2008, Caliper entered into an Asset Purchase Agreement (the “AssetPurchase Agreement”) with Dionex Corporation, a publicly owned, Delawarecorporation (“Dionex”).  The AssetPurchase Agreement provides for the sale of Caliper’s AutoTrace product line toDionex for a purchase price of approximately $5.0 million.  Caliper’s AutoTrace product line is comprisedof a workstation dedicated specifically for automating solid phase extractionfor environmental water analysis.

 

As part of thistransaction, Caliper will sell approximately $0.3 million in net assets, whichconsists primarily of inventory net of deferred revenue and accruedexpenses.  Caliper expects to record again on the sale of the AutoTrace product line of approximately $4.7 million,subject to adjustment.

 

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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 September 30, 2008 and for the three and nine monthsended September 30, 2008 should be read in conjunction with our financialstatements included in this Quarterly Report on Form 10-Q and Management’sDiscussion and Analysis of Financial Condition and Results of Operations andour financial statements included in our Annual Report on Form 10-K forthe 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 and biotechnologycompanies, and government and other not-for-profit research institutions. Webelieve our integrated systems, consisting of instruments, software andreagents, our laboratory automation technologies and our assay and discoveryservices enable researchers to better understand the basis for disease and moreeffectively discover safe and effective drugs. Our strategy is to transformdrug discovery and development by offering technologies and services thatultimately enhance the ability to predict the effects that new drug candidateswill have on humans. Our offerings leverage our extensive portfolio ofmolecular imaging, microfluidics, automation and liquid handling technologies,and scientific applications expertise to address key limitations in the drugdiscovery and development process—namely, the complex and costly process toconceive of and bring a new drug to market across the in vitro and in vivotesting 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 vitroproducts and service offerings incorporate microfluidics and automationtechnology to provide tools, services and complete integrated systems toperform assays.  Additionally, through our Caliper Discovery Alliances andServices (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.

 

***Third Quarter Overview***

 

Our revenues during thethree months ended September 30, 2008 were $34.0 million compared to $36.7million for the three months ended September 30, 2007.  Our overall revenue performance featuredgrowth among product lines comprising our core ongoing strategic business areasas discussed below, and was negatively impacted by a $4.8 million decrease inlicense and contract revenues compared to the third quarter of 2007, theexpectation of which was previously communicated.

 

Total product and servicerevenues was $30.5 million during the quarter, up $1.9 million, from the thirdquarter of 2007 and was comprised of product revenue growth of 8% and servicerevenue growth of 4%.  The overall netchange was driven predominantly by continued growth of the Company’s opticalmolecular imaging product line which grew 54%. Overall gross margins declined 800 basis points primarily due to thelicense and contract revenue decline discussed above.   Operating expenses declined by $3.9 million,or 20%, compared to the third quarter of 2007. This decline included, among other changes, the cumulative impact ofcost saving initiatives implemented over the previous twelve months, loweraccrued compensation costs, and a recovery of prior-incurred legal expenses asa result of a mediation settlement. Our operating loss was $4.8 million in thethird quarter of 2008, as compared to $2.6 million in the same period of 2007,primarily reflecting the decrease of an estimated $4.5 million of contributionmargin related to the reduced license fees 

 

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and contract revenues andthe $2.7 million restructuring charge related to the partial closure of ourMountain View, California facility as described in Note 6 to our consolidatedfinancial statements.

 

Notable events occurringwithin and subsequent to quarter end were as follows:

 

·                  Duringthe third quarter, Caliper reorganized along its three core business areas —Discovery Research (Research), Optical Molecular Imaging (Imaging), and CaliperDiscovery Alliances and Services (CDAS) — with the goal of creating a morescalable infrastructure while putting increased focus on growth andprofitability.  We continue to report asa single operating segment because detailed financial information beyondrevenues is not routinely available.

 

·                  Research is responsible for utilizingthe core automation and microfluidic technologies, to address an expandingarray of opportunities in the drug discovery and life science research markets,including growth opportunities in nucleic acid and protein sample preparationmarkets such as next generation sequencing sample preparation, bio-analyticalanalysis, and forensics.  Researchrevenues were $17.7 million and $23.9 million during the three months ended September 30,2008 and 2007, respectively, and $50.9 million and $60.2 million during thenine months ended September 30, 2008 and 2007, respectively.  On a three and nine month basis, the overallrevenue decline is mainly attributable to license and contract revenues frompast collaboration arrangements and to a lesser extent declines in our PDQ,pharmaceutical, development and quality control products.

 

·                  Imaging is responsible for expandingCaliper’s global leadership position in the high growth optical molecularimaging market through expansion of therapeutic area applications of the IVISimaging platform, addressing critical discovery workflows and facilitatingadditional imaging modalities. Imaging revenues were $10.6 million and $6.9million during the three months ended September 30, 2008 and 2007, respectively,and $31.4 million and $24.4 million during the nine months ended September 30,2008 and 2007, respectively.  On a threeand nine month basis, the overall revenue increase is mainly attributable toincreased unit sales of the higher priced IVIS Spectrum instrument, as well asan increase in imaging license revenue.

 

·                  CDAS is responsible for expandingdrug discovery collaborations and alliances and increasing sales of drugdiscovery services.  CDAS providesvaluable services such as compound screening and profiling and side effectsstudies, both in vitro and in vivo, which aid the development of targeted andeffective drug compounds to several of the world’s largest pharmaceuticalcompanies as well as government agencies including the Environmental ProtectionAgency.  CDAS revenues were $5.8 millionand $5.9 million during the three months ended September 30, 2008 and2007, respectively, and $15.1 million and $15.9 million during the nine monthsended September 30, 2008 and 2007, respectively.  The relatively flat quarter and year-to-dateperformance is primarily related to reduced revenue from two large contractualrelationships, Pfizer and EPA, which have been substantially offset byincreased revenues from all other CDAS customers.  We do expect revenue from the Pfizer contractto increase again in the fourth quarter of 2008 and revenue from the EPAcontract to increase again in the first half of 2009.

 

·                  Inconnection with the business realignment described above, we reduced ourcurrent workforce including several senior management positions, and eliminatedother open positions to achieve future savings with an objective to increasecustomer focus.  This initiative isexpected to achieve approximately $2.6 million of annualized savings relativeto current spending levels and will begin to benefit operations in the fourthquarter of 2008.  Severance costs ofapproximately $0.3 million were incorporated in third quarter results withinoperating expenses.  The allocation ofthe future anticipated cost savings within our statement of operations isapproximately 35% within cost of revenue, 6% within research and developmentand 60% within selling, general and administrative costs.

 

·                  Asnoted in Note 11 to our accompanying consolidated financial statements,subsequent to the end of the third quarter of 2008, we completed the sale ofour PDQ product line to Sotax Corporation in a transaction valued atapproximately $15.8 million. Our revenue attributable to the PDQ product linewas $12.3 million in the fiscal year ended December 31, 2007 and $7.4million in the nine months ended September 30, 2008.  We are anticipating only modest revenue fromthe PDQ products in the fiscal fourth quarter of 2008 as the vast majority ofrevenue historically occurs in the last month of the quarter, which is afterthe expected completion of the transaction. The parties have also expressed intent to enter into a long-term leaseagreement, pursuant to which we will sublease approximately 10,000 square feetof manufacturing and office space to Sotax Corporation on a market-rate basis.We expect that sublease income under the anticipated long-term lease betweenthe parties will reduce our ongoing facility costs by approximately $1.3million over the term of the lease.

 

·                  Alsonoted in Note 11 to our accompanying consolidated financial statements,subsequent to the end of the third quarter of 2008, we completed the sale ofour AutoTrace product line to Dionex Corporation in a transaction valued atapproximately 

 

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$5.0 million.

 

Our revenue outlook forthe fourth quarter of 2008 is $34 to $37 million and reflects (i) therecently announced sale of the PDQ and Autotrace product lines, (ii) delaysreceiving the next task order pursuant to our five-year contract with the EPA intothe second quarter of 2009, and (iii) unfavorable foreign currency movementsimpacting sales.  As a result, we haverevised our full year revenue estimate to a range of $131.5 to $135.5 million.

 

**CriticalAccounting Policies and 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 Nine Months Ended September 30, 2008**

 

Operating results for thenine months ended September 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.  Furthermore, as noted above, the sale of our PDQ and Autotraceproduct lines in November 2008 will have considerable impact on our fourthquarter 2008 results.  During the threeand nine months ended September 30, 2008, the effect on revenues relatedto foreign exchange resulted in a 1% and 2% favorable impact as compared to theprior year, respectively.  During the three and nine months ended September 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** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**            | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Product revenue                    |       | $                                | 19,965     |                            | $          | 18,504 |   | $ | 1,461 |   | 8 | % | $ | 59,655 |   | $ | 54,787 |   | $ | 4,868 |   | 9 | % |
| Service revenue                    |       | 10,563                           |       | 10,172                          |       | 391 |   | 4 | % | 28,860 |   | 28,044 |   | 816 |   | 3 | % |
| License fees and  contract revenue |       | 3,513                            |       | 8,045                           |       | (4,532 | ) | (56 | )% | 8,844 |   | 17,620 |   | (8,776 | ) | (50 | )% |
|                               |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenues                     |       | $                                | 34,041     |                            | $          | 36,721 |   | $ | (2,680 | ) | (7 | )% | $ | 97,359 |   | $ | 100,451 |   | $ | (3,092 | ) | (3 | )% |

 

*ProductRevenue.    *Product revenue increasedduring the three months ended September 30, 2008 compared to the sameperiod in 2007 due primarily to strong overall Imaging product line sales whichincreased by $3.1 million, or approximately 75%, compared to the third quarterof 2007.  This increase was due to a 29%increase in IVIS instrument placements which emphasized a product mix that wasmore heavily influenced by placements of higher-priced IVIS Spectrums ascompared to the third quarter of 2007. Research  product salesexperienced a decline of $1.7 million, or 12%, during the third quarter ascompared to the same quarter in 2007, primarily as a result of (i) salesdecreases caused by (a) LabChip 3000 system sales having experiencedincreased competition from Kinase screening outsourcing as well ascannibalization of revenues due to our lower-priced EZ reader instrument whichwas introduced in August 2007, (b) weaker than anticipated sales ofPDQ products, MultiDoseG3 and TPW3, and AutoTrace, due in part to diminishedselling activities in connection with the PDQ and AutoTrace product lines whichwe sold subsequent to the end of the third quarter of 2008 (see Note 11), and (c) theloss of datapoint revenues from a customer that is no longer in business;partially offset by (ii) sales increases driven by (a) adoption ournew LabChip GX and LabChip GXII microfluidic benchtop instruments (LabChip GXseries) which were launched in July 2008 in response to strong marketdemand for fast, automated, 1-D electrophoretic separations of protein, DNA,and RNA samples, (b) continued growth in revenues from EZ Reader and (c) strongsales in our workflow productivity solutions led by sales of Staccato AutomatedWorkstations and Zephyr liquid handling instruments.

 

Product revenue increasedduring the nine months ended September 30, 2008 compared to the sameperiod in 2007 due primarily to strong Imaging product line sales whichincreased by $3.7 million, or 21%, driven by overall IVIS instrument growth,including an 15% increase in instrument placements.  Research product sales increased $1.1 million, or 3%, during the nine months in2008 as compared to the same period in 2007, primarily as a result of (i) salesincreases driven by (a) strong sales in our workflow productivitysolutions led by sales of Staccato Automated Workstations and Zephyr liquidhandling instruments, (b) adoption our new LabChip GX series as describedabove, and (c) continued growth in revenues from EZ Reader; partiallyoffset by (ii) sales decreases caused by (a) LabChip 3000 systemsales as described above, (b) weaker than anticipated sales of PDQproducts, MultiDoseG3 and TPW3, and 

 

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AutoTrace, due in part toselling distraction in connection with the PDQ and AutoTrace product lineswhich we sold subsequent to the end of the third quarter in 2008 (see Note 11),and (c) the loss of datapoint revenues from a customer that is no longerin business.

 

*ServiceRevenue.*   Service revenue increased duringthe three months ended September 30, 2008 compared to the same period in2007 primarily from service contract and billable revenue associated with theincrease in the installed base of IVIS imaging instruments.  All other instrument services grewmodestly.  CDAS service revenues weredown approximately $0.1 million on a net basis in comparison to the threemonths ended September 30, 2007. Within this minor net change were comparable quarter decreases of $0.2million related to animal phenotyping and $0.8 million under the EPA ToxCastScreening contract awarded to us in 2007, partially offset by revenue increasesfrom other CDAS service platforms including imaging studies, transgenic animalproduction, and in vitro screening projects.

 

Service revenue increasedduring the nine months ended September 30, 2008 compared to the sameperiod in 2007 primarily from service contract, installation and trainingrevenue associated with the increase in the installed base of IVIS imaginginstruments.  All other instrument services grew modestly.  CDAS service revenues were down approximately$0.6 million on a net basis in comparison to the nine months ended September 30,2007.  Within this net change werecomparable decreases of $1.7 million in compound profiling revenue related to asingle customer contract in 2007 that did not recur in 2008, a $1.3 milliondecrease  within our in vivo servicesbusiness related to contractual delays over the first half of 2008 with respectto a single large phenotyping contract and a $0.7 million decrease under theEPA ToxCast Screening contract awarded to us in 2007, partially offset byrevenue increases from other CDAS service platforms including imaging studies,transgenic animal production, and in vitro screening projects.

 

*LicenseFees and Contract Revenue.*    Licensefees and contract revenue decreased during the three and nine months ended September 30,2008 compared to the same periods in 2007 primarily as a result of anticipateddeclines in both non-recurring microfluidic license revenues of $4.2 millionand $8.7 million, respectively, and contract research collaboration revenue ofapproximately $0.6 million and $2.3 million, respectively, due tocollaboration arrangements completed in 2007, including related licenserevenues stemming from these arrangements.  These decreases were partiallyoffset by increases in imaging license revenues of $0.4 million and $2.2 million,respectively, during the three and nine months ended September 30, 2008compared to the same periods in 2007. The imaging license revenue increases were due in part to favorablepurchase accounting effects of $0.1 million and $1.0 million, respectively, inthe three and nine months ended September 30, 2008 as compared to the sameperiods in 2007, as contract renewals at full value more than offset the lowerrecorded value of such contracts as initially accounted for at the date ofCaliper’s acquisition of Xenogen in 2006, which was a result of fair valuepurchase accounting.

 

***Costs of Revenue***

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Product                 |       | $                                | 11,983     |                            | $          | 11,278 |   | $ | 705 |   | 6 | % | $ | 36,321 |   | $ | 33,800 |   | $ | 2,521 |   | 7 | % |
| Service                 |       | 6,590                            |       | 5,511                           |       | 1,079 |   | 20 | % | 19,134 |   | 16,600 |   | 2,534 |   | 15 | % |
| License and  contract   |       | 588                              |       | 971                             |       | (383 | ) | (39 | )% | 1,154 |   | 2,238 |   | (1,084 | ) | (48 | )% |
| Total Costs             |       | $                                | 19,161     |                            | $          | 17,760 |   | $ | 1,401 |   | 8 | % | $ | 56,609 |   | $ | 52,638 |   | $ | 3,971 |   | 8 | % |

 

*Costof Product Revenue.*    Cost of productrevenue increased during the three months ended September 30, 2008primarily as a result of the overall increase in product sales together withincreases in warranty parts costs and obsolescence reserve charges whichincreased, as a percentage of sales, by approximately 100 basis points, or $0.4million.  Offsetting these increases was a $0.2 million decrease inoverall manufacturing spending comprised primarily of reduced labor costsincurred with respect to warranty and installation activities.

 

Cost of product revenueincreased during the nine months ended September 30, 2008 primarily as aresult of the overall increase in product sales, and to a lesser extent due tothe higher proportion of year-to-date Staccato system sales which incorporatehigher-cost  third party materialcontent, in contrast to the overall dollar value of revenue derived fromStaccato systems during the nine months ended September 30, 2007. For the nine months ended September 30, 2008, we experienced a $1.0million decrease in labor costs associated with warranty and installationactivities compared to the first nine months of 2007, which partially offsetthe higher material costs of the Staccato system sales.

 

*Costof Service Revenue.*    Cost of servicerevenue increased during the three months ended September 30, 2008 ascompared to the same period in 2007 primarily as a result of greater resourcesdedicated to the installation and start up training for our IVIS imagingproducts which have shown strong growth for the three and nine months ended September 30,2008.  The increase also relates to increases in CDAS expenses of $0.7million for the three months ended September 30, 2008 as compared to thesame period in 2007.  The CDAS cost increase primarily related to our invivo operations, driven primarily by our extension of the lease on our facilityat the current market rate and other increases in headcount and materials tosupport the existing projects.

 

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Cost of service revenueincreased during the nine months ended September 30, 2008 as compared tothe same period in 2007 primarily as a result of greater resources dedicated tothe more complex installation and start up training for our IVIS imagingproducts.  The increase also relates to increases in CDAS expenses of $1.3million for the nine months ended September 30, 2008 as compared to thesame period in 2007.  The CDAS cost increase occurred primarily as aresult of the extension of the in vivo operations facility described above aswell as within our in vitro operations due to expansion of facility needs andto a lesser extent as a result of variable spending on project materialsassociated with higher in vitro drug discovery revenues in comparison to 2007.

 

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

 

*GrossMargins.*    Gross margin on productrevenue was 40% for the three months ended September 30, 2008 which was anincrease of 1% compared to the same period in 2007, reflecting the effect ofincremental margin contribution associated with increased sales volumes,partially offset by higher material and other variable costs incurred. Gross margin on service revenue was 38% for the three months ended September 30,2008 as compared to 46% for the same period in 2007. These decreased servicemargins resulted from an increase in the service costs, primarily headcountrelated, of the instrument services business, including material costs, theincreased fixed cost base from the in vitro and in vivo facilities and thedelay in timing of work within our in vivo services business.

 

For the nine months endedSeptember 30, 2008, product gross margins improved to 39%, from 38% forthe nine months ended September 30, 2007.  The improvement wasprimarily due to increased volume, offset by higher material and other variablecosts resulting from sales of Staccato automated workstations as describedabove. Gross margin on service revenue was 34% for the nine months ended September 30,2008 and 41% for the same period in 2007.  This decreased service marginresulted from an increase in the service costs, primarily headcount related, ofthe instrument services business, including material costs, the increased fixedcost base from the in vitro and in vivo facilities and the delay in timing ofwork within our in vivo services business.

 

***Expenses***

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                           | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                           | ** ** | **(In thousands)**          | ** ** |
| Research and  development            |       | $                                | 4,953      |                            | $          | 5,666 |   | $ | (713 | ) | (13 | )% | $ | 15,526 |   | $ | 19,088 |   | $ | (3,562 | ) | (19 | )% |
| Selling, general  and administrative |       | 10,256                           |       | 13,399                          |       | (3,143 | ) | (23 | )% | 36,945 |   | 39,312 |   | (2,367 | ) | (6 | )% |
| Amortization of  intangible assets   |       | 1,742                            |       | 2,522                           |       | (780 | ) | (31 | )% | 6,721 |   | 7,593 |   | (872 | ) | (11 | )% |
| Restructuring  charges, net          |       | 2,686                            |       | 22                              |       | 2,664 |   | nm |   | 2,666 |   | 30 |   | 2,636 |   | nm |   |
|                                      |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Researchand Development Expenses.*    Research anddevelopment spending decreased by $0.7 million during the three months ended September 30,2008 compared to the same period in 2007 primarily as a result of actions takenin the first quarter of 2008 to consolidate research and development costs inour West Coast operations.  The net decrease was comprised of a reductionin personnel-related costs of $0.6 million, including the combined effects oflower headcount and a reduction in variable incentive compensation expected tobe earned in 2008 on the basis of the Company’s overall performance,$0.2 million in reduced material and operating supplies, offset by a$0.1 million increase in consulting costs.

 

Research and developmentspending decreased by $3.6 million during the nine months ended September 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, reduced spending from the consolidation of research anddevelopment costs in our West Coast operations that was initiated during thefirst quarter of 2008, as well as the effects of reduced project spendingimplemented in the second quarter of 2007.  The overall net decrease wascomprised of a $2.4 million reduction in personnel related costs, $0.7 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 $0.2 million reduction in all other costs, partially offsetby $0.3 million of severance charges in the first quarter of 2008 associatedwith our plan to consolidate West Coast operations.

 

*Selling,General and Administrative Expenses.*    Selling,general and administrative expenses decreased by $3.1 million during thethree months ended September 30, 2008 compared to the same period in 2007primarily due to a $2.7 million decrease in general and administrative expenseswhich included a one time settlement of prior litigation matters resulting froma mediated settlement of 

 

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approximately $1.0million, a $0.6 million reduction related to legal and advisory servicesrelated to merger and acquisition activities in 2007, a $0.5 millionreduction in payroll and employee related costs due primarily to a reduction invariable incentive compensation and reduced headcount, a $0.1 millionreduction in FAS 123R stock compensation expense and a decrease in all othergeneral and administrative costs of $0.5 million.  Selling and marketing expenses decreased by$0.4 million during the three months ended September 30, 2008 primarilydue to a $0.3 million reduction in relocation and other related employee costs.

 

Selling, general andadministrative expenses decreased by $2.4 million during the nine monthsended September 30, 2008 compared to the same period in 2007 primarily dueto a $2.8 million decrease in general and administrative expenses whichincluded a $0.9 million reduction in legal costs primarily related to a onetime settlement of prior litigation matters that occurred in the third quarteras discussed above, a $0.6 million reduction related to legal and advisoryservices related to merger and acquisition activities in 2007, a$0.5 million reduction in personnel-related costs comprised of reducedheadcount and lower variable incentive compensation expense provision, a$0.3 million reduction in FAS 123R stock compensation expense, and adecrease in all other general and administrative costs of $0.3 million.  Selling and marketing expenses increased by$0.4 million during the nine months ended September 30, 2008 primarily dueto increased sales commissions of $0.7 million and all other costs of $0.1million, offset by a decrease of $0.2 million in FAS 123R stock compensationexpense and a decrease of $0.2 million in severance charges.

 

*Amortizationof Intangible Assets.*  The amortization ofintangible assets for the three and nine months ended September 30, 2008relates to assets acquired in our previous business combinations. Amortizationis computed based upon the estimated timing of the undiscounted cash flows usedto value each respective asset over the estimated useful life of the particularintangible asset, or using the straight-line method over the estimated usefullife of the intangible asset when the pattern of cash flows is not necessarilyreflective of the true consumption rate of the particular intangibleasset.  The decrease in amortizationduring the three and nine months ended September 30, 2008 is the result ofcertain intangibles from the Zymark acquisition that had a five year life andtherefore were fully amortized within the period.

 

*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.  During the three monthsended September 30, 2008, we recorded a restructuring charge of $2.7million related to the West Coast consolidation and the related abandonment ofapproximately 36,000 square feet of space in Mountain View, California. We estimate that ongoing facility cash outflow, primarily rent payments net ofsublease income, will be spread over the 5.1 years remaining on our MountainView, California lease.  This facility closure has been accounted for inaccordance with SFAS No. 146, pursuant to which we have recorded aliability equal to the fair value of the remaining lease payments, net ofexpected sublease payments, as of the cease-use date.  We expect this initiative to result in annualcost savings of approximately $1.4 million.

 

Other restructuringcharges during the three and nine month periods ending September 30, 2008and 2007 relate to accretion of interest related to idle facility rentobligations.

 

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

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**      | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest  expense, net       |       | $                                | (227       | )                               | $          | (205 | ) | $ | (22 | ) | (11 | )% | $ | (584 | ) | $ | (321 | ) | $ | (263 | ) | (82 | )% |
| Other income  (expense), net |       | (411                             | )          | 446                             |       | (857 | ) | (192 | )% | (92 | ) | 365 |   | (457 | ) | (125 | )% |
|                              |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*InterestExpense, Net.*    Net interest expenseincreased during the three and nine months ended September 30, 2008compared to the same periods in 2007 as a result of lower interest income as anoffset to interest expense.  For thethree- and nine-month periods ended September 30 2008, interest incomedeclined by approximately $0.1 million and $0.3 million, respectively, as aresult of lower invested cash and marketable securities.  In addition, interest expense modestlydeclined on both a three- and nine-month basis as a result of lower interestrates applied to outstanding borrowing as compared to the same periods in 2007due to reduced interest rates.

 

*OtherIncome (Expense), Net.*    Other income(expense), net, decreased on a three- and nine-month basis compared to 2007 dueto transaction gains on foreign denominated accounts receivable resulting froma weaker U.S. dollar in comparison to primarily the Euro and the Yen. Duringthe three months ended September 30, 2008, we incurred foreign currencytransaction losses of approximately $0.4 million, compared to gains ofapproximately $0.4 million for the same period in 2007.  During the nine months ended September 30,2008, we incurred foreign currency transaction losses of approximately$0.1 million, compared to gains of approximately $0.4 million for the sameperiod in 2007.

 

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**Liquidityand Capital Resources**

 

As of September 30,2008, we had $8.9 million in cash, cash equivalents and marketablesecurities, as compared to $19.0 million as of December 31, 2007.

 

As noted inNote 7 of 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. The CreditFacility, which matures on June 30, 2009, permits us to borrow up to$25 million, provided we maintain unrestricted cash of at least$25 million with the bank. Otherwise our ability to borrow under theCredit Facility is subject to a borrowing base limit consisting of up to (a) 80%of eligible accounts receivable, as defined in the Credit Facility, plus (b) thelesser of 90% of our unrestricted cash maintained at the bank or $10 million.At September 30, 2008, Caliper had $5.9 million in available borrowingsunder the Credit Facility after taking into consideration the outstandingborrowings and $1.6 million restricted for standby letters of credit relatedunder various operating leases.  TheCredit Facility will serve as a source of capital for ongoing operations andworking capital needs. We intend to renew the Credit Facility on comparableterms through 2010 and anticipate completing this renewal during the fiscalfourth quarter of 2008.

 

The CreditFacility includes traditional lending and reporting covenants including thatcertain financial covenants applicable to liquidity and earnings are to bemaintained by us and tested as of the last day of each quarter.  TheCredit Facility also includes several potential events of default such aspayment default, material adverse change conditions and insolvency conditionsthat could cause interest to be charged at prime plus two percentage points, orin the 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.

 

***Cash Flows***

 
| ** **                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                                | ** ** | **2007** | ** ** | **$ Change** | ** ** |
| ** **                  | ** ** | **(In thousands)**                                 | ** ** |
| Cash  provided by (used in) |       |                                                    |       |   |   |   |   |
| Operating  Activities       |       | $                                                       | (10,008    | ) | $ | (11,164 | ) | $ | 1,156 |   |
| Investing  Activities       |       | (1,765                                                  | )          | 7,081 |   | (8,846 | ) |
| Financing  Activities       |       | 2,928                                                   |       | 6,369 |   | (3,441 | ) |
|                             |            |                                                         |            |  |  |  |  |  |  |  |

 

 *Operating Activities.*    Duringthe nine months ended September 30, 2008, we used $10.0 million ofcash for operating activities which included approximately $2.2 million relatedto our idle facilities and $1.4 million related to our settlement of the Young &Partners LLC claim discussed further in Note 15 to the consolidated financialstatements in our Annual Report on Form 10-K for the fiscal year ended December 31,2007.  We used approximately $6.4 million of cash to fund operationsand working capital needs, which primarily related to fiscal 2007 employeeincentive compensation payments of $2.0 million, a $2.0 million increasein inventory within the period, offset by an increase in customer deposits ofapproximately $1.1 million from our in vivo services business, a one timesettlement of prior litigation matters resulting from a mediated settlement ofapproximately $1.0 million, and a $4.5 million increase in cash flow from allother operations and working capital activities.

 

*InvestingActivities.*    During the nine monthsended September 30, 2008, net proceeds from purchases, sales andmaturities of marketable securities generated $1.0 million of cash whichwe used primarily for operations. Our primary investing activities were thepurchase of property and equipment of $2.7 million primarily related tofacility improvements and information systems.

 

*FinancingActivities.*    During the nine monthsended September 30, 2008, financing cash proceeds were related to $2.0million in incremental borrowing under our credit facility as well as proceedsfrom option exercises and the employee stock purchase plan.

 

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**ContractualObligations**

 

Our commitmentsunder leases and other obligations are described in our Management’s Discussionand Analysis of Financial Condition and Results of Operations and in the Notesto the Consolidated 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 material change during the nine months endedSeptember 30, 2008 in the contractual obligations disclosed at December 31,2007.

 

***Capital Requirements***

 

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

 

·                      continuedmarket acceptance of our in vivo imaging, microfluidic and lab automationproducts and services;

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

·                      our abilityto maintain existing, and establish additional, corporate partnerships;

·                      the time andcosts involved in expanding and maintaining our manufacturing facilities;

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

·                      otherfactors not within our control.

 

Based upon ourcurrent financial projections, including proceeds from the PDQ and Autotracedivestitures more fully described in Note 11 to our consolidated financialstatements, we expect that revenue from operations, our current cash balancesand borrowing availability under our credit facility, which we intend to renew,will be sufficient to fund our operations through December 31, 2009. Additionally, our ability to fund ongoing operations beyond December 31,2009 will depend on many factors, including particularly our ability toincrease revenues, control margins and operating costs and maintain compliancewith the covenants of our credit facility.  Our credit facility currentlymatures on June 30, 2009, and we anticipate that we will be able to renewthe credit facility into the year 2010 during the fourth quarter of 2008 inorder to ensure that we have sufficient long-term capital resources to meet theneeds of ongoing operations. If we are unable to renew the Credit Facility, webelieve our current cash balances and borrowing availability under our facilitywill be sufficient to fund operations through June 30, 2009.

 

If, however, ouractual results do not meet our current projections, we fail to meet requiredbank covenants, or we are unable to renew the credit facility beyond itscurrent maturity, we may be required to reduce our costs and expenses, selladditional equity or debt securities, divest some of our product lines, orrestructure 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.****                                   Quantitative andQualitative Disclosures About Market Risk**

 

***Interest Rate Sensitivity***

 

Our primary marketrisk exposures are foreign currency fluctuation and interest rate sensitivity.There have 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.****            Controlsand Procedures**

 

*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 theirevaluation as of September 30, 2008, our principal executive officer andprincipal financial officer have concluded that our disclosure controls andprocedures are effective to provide reasonable assurance that information weare required to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified 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 of thecontrol. 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 third 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 the caption,In re Caliper Technologies Corp. Initial Public Offering Securities Litigation,01 Civ. 5072 (SAS) (GBD). Similar complaints were filed against approximately300 other public companies that conducted initial public offerings of theircommon 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 subsequently briefed plaintiffs’ motionseeking certification of a new class of plaintiffs; that motion was withdrawnwithout prejudice on October 10, 2008. The final resolution of thislitigation is not expected to have a material impact on Caliper.

 

From time to timeCaliper is 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.****         RiskFactors**

 

Our risk factorsare described in Part I, Item 1A of our Annual Report on Form 10-Kfiled with 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.****            DefaultsUpon Senior Securities**

 

None.

 

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

 

None.

 

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

 

None.

 

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

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description of document**                                                                                                                                                                                                   |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                    |
| 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: November 10,  2008       |                         |   |
|                                | By:                          | /s/  E. KEVIN  HRUSOVSKY |
|                                |                         | E. Kevin Hrusovsky |
|                                |                         | Chief Executive Officer  and President |
|                                |                         |   |
|  Date:  November 10, 2008 |                         |   |
|                                | By:                          | /s/  PETER F.  MCAREE |
|                                |                         | Peter F. McAree |
|                                |                         | Senior Vice President  and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description of document**                                                                                                                                                                                                   |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                    |
| 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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