**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM10-Q**
| x                                                                                                                                                                                                                                                       |       | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                              | ** ** | ** **                                                                                    |
| **for the quarterly period ended March 31, 2007.**                                                                                                                                                                                                      |
| ** **                                                                                                                                                                                                                                              | ** ** |
| ** **                                                                                                                                                                                                                                              | **Or**     |
| ** **                                                                                                                                                                                                                                              | ** ** |
| o                                                                                                                                                                                                                                                       |       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                              | ** ** | ** **                                                                                    |
| **for the transition 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) |

 

**68 ElmStreet**

**Hopkinton,Massachusetts 01748**

(Address and zipcode of principal executive offices)

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

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x    No   o

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

Large acceleratedfiler    o                Acceleratedfiler    x                Non-acceleratedfiler   o

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

**NUMBEROF SHARES OF COMMON STOCK OUTSTANDING ON April 30, 2007:  47,169,372**

 

----

**CALIPERLIFE SCIENCES, INC.**

**TABLEOF CONTENTS**
| PART I   FINANCIAL  INFORMATION                                                                             |   |
|------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                             |   |
| Item 1.  Financial Statements                                                                               |   |
| Condensed  Consolidated Balance Sheets as of March 31, 2007 (unaudited) and  December 31, 2006              | 2      |
| Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2007 and 2006 (unaudited) | 3      |
| Condensed Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006  (unaudited) | 4      |
| Notes to  Condensed Consolidated Financial Statements (unaudited)                                                | 5      |
|                                                                                                             |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations        | 13     |
|                                                                                                             |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                         | 17     |
|                                                                                                             |   |
| Item 4.  Controls and Procedures                                                                            | 17     |
|                                                                                                             |   |
| PART II  OTHER INFORMATION                                                                                  | 18     |
|                                                                                                             |   |
| Item 1. Legal Proceedings                                                                                        | 18     |
|                                                                                                             |   |
| Item  1A. Risk Factors                                                                                           | 19     |
|                                                                                                             |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                        | 19     |
|                                                                                                             |   |
| Item 3.  Defaults Upon Senior Securities                                                                    | 19     |
|                                                                                                             |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                | 19     |
|                                                                                                             |   |
| Item 5. Other Information                                                                                   | 19     |
|                                                                                                             |   |
| Item 6.  Exhibits                                                                                           | 20     |
|                                                                                                             |   |
| SIGNATURES                                                                                                       | 21     |
|                                                                                                             |   |
| EXHIBIT  INDEX                                                                                                   | 22     |
|  Ex-31.1 Section 302 Certification of CEO                                                                   |   |
|  Ex-31.2 Section 302 Certification of CFO                                                                   |   |
|  Ex-32.1 Section 906 Certification of CEO                                                                   |   |
|  Ex-32.2 Section 906 Certification of CFO                                                                   |   |

 

1

----

**PART I. FINANCIAL INFORMATION**

**Item1. Financial Statements**

**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(unaudited)**
| ** **                                      | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                      | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current assets:                                 |       |                         |       |                            |       |
| Cash and cash  equivalents                      |       | $                            | 9,905      |                            | $          | 11,634 |   |
| Marketable  securities                          |       | 11,655                       |       | 13,303                          |       |
| Accounts  receivable, net                       |       | 24,829                       |       | 30,822                          |       |
| Inventories                                     |       | 21,823                       |       | 18,758                          |       |
| Prepaid expenses  and other current assets      |       | 3,789                        |       | 2,273                           |       |
| Total current  assets                           |       | 72,001                       |       | 76,790                          |       |
| Property and equipment,  net                    |       | 12,587                       |       | 13,182                          |       |
| Core technologies, net                          |       | 27,904                       |       | 28,765                          |       |
| Developed and contract  technologies, net       |       | 13,071                       |       | 14,285                          |       |
| Other intangibles, net                          |       | 9,994                        |       | 9,756                           |       |
| Goodwill                                        |       | 80,776                       |       | 80,776                          |       |
| Other assets                                    |       | 1,858                        |       | 1,499                           |       |
| Total assets                                    |       | $                            | 218,191    |                            | $          | 225,053 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**  | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current liabilities:                            |       |                         |       |                            |       |
| Accounts payable                                |       | $                            | 8,811      |                            | $          | 8,740 |   |
| Accrued  compensation                           |       | 8,026                        |       | 7,417                           |       |
| Other accrued  liabilities                      |       | 11,029                       |       | 11,563                          |       |
| Deferred revenue  and customer deposits         |       | 18,520                       |       | 15,112                          |       |
| Current portion  of accrued restructuring       |       | 4,756                        |       | 7,008                           |       |
| Current portion  of long-term obligations       |       | 64                           |       | 98                              |       |
| Total current  liabilities                      |       | 51,206                       |       | 49,938                          |       |
| Noncurrent portion of  accrued restructuring    |       | 1,317                        |       | 2,152                           |       |
| Noncurrent portion of  credit facility          |       | 8,587                        |       | 8,587                           |       |
| Other noncurrent  liabilities                   |       | 5,533                        |       | 5,837                           |       |
| Deferred tax liability                          |       | 1,130                        |       | 1,130                           |       |
| Commitments and  contingencies (Note 8)         |       |                         |       |                            |       |
| Stockholders’ equity:                      |       |                         |       |                            |       |
| Preferred stock                                 |       | —                       |       | —                          |       |
| Common stock                                    |       | 47                           |       | 47                              |       |
| Additional  paid-in capital                     |       | 369,550                      |       | 366,942                         |       |
| Accumulated deficit                             |       | (219,637                     | )          | (210,040                        | )          |
| Accumulated  other comprehensive income         |       | 458                          |       | 460                             |       |
| Total  stockholders’ equity                |       | 150,418                      |       | 157,409                         |       |
| Total liabilities and stockholders’ equity |       | $                            | 218,191    |                            | $          | 225,053 |   |

 

*Seeaccompanying notes.*

2

----

**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**
| ** **                                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Revenues:                                                              |       |                                             |       |   |   |
| Product revenue                                                        |       | $                                                | 15,261     |   | $ | 14,698 |   |
| Service revenue                                                        |       | 8,930                                            |       | 5,043 |   |
| License fees and contract revenue                                      |       | 4,249                                            |       | 2,558 |   |
| Total revenue                                                          |       | 28,440                                           |       | 22,299 |   |
| Costs and  expenses:                                                   |       |                                             |       |   |   |
| Cost of product revenue                                                |       | 9,967                                            |       | 9,789 |   |
| Cost of service revenue                                                |       | 5,653                                            |       | 2,839 |   |
| Cost of license revenue                                                |       | 442                                              |       | — |   |
| Research and development                                               |       | 6,774                                            |       | 4,458 |   |
| Selling, general and administrative                                    |       | 12,607                                           |       | 8,476 |   |
| Amortization of intangible assets                                      |       | 2,537                                            |       | 1,254 |   |
| Restructuring charges, net                                             |       | 26                                               |       | 42 |   |
| Total costs and expenses                                               |       | 38,006                                           |       | 26,858 |   |
| Operating loss                                                         |       | (9,566                                           | )          | (4,559 | ) |
| Interest income,  net                                                  |       | 7                                                |       | 191 |   |
| Other income,  net                                                     |       | 13                                               |       | 53 |   |
| Loss before  income taxes                                              |       | (9,546                                           | )          | (4,315 | ) |
| Provision for  income taxes                                            |       | (51                                              | )          | (134 | ) |
| Net loss                                                               |       | $                                                | (9,597     | ) | $ | (4,449 | ) |
|                                                                   |       |                                             |       |   |   |
| Net loss per  common share, basic and diluted                          |       | $                                                | (0.20      | ) | $ | (0.13 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 46,979                                           |       | 33,518 |   |

 

*Seeaccompanying notes.*

3

----

**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(unaudited)**
| ** **                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Operating  activities**                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net loss                                                                  |       | $                                                    | (9,597     | ) | $ | (4,449 | ) |
| Adjustments to  reconcile net loss to net cash from operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                             |       | 3,503                                                |       | 2,037 |   |
| Stock-based compensation expense                                          |       | 1,353                                                |       | 1,286 |   |
| Non-cash restructuring charge, net                                        |       | 26                                                   |       | 42 |   |
| Foreign currency exchange gains                                           |       | (9                                                   | )          | (62 | ) |
| Changes in  operating assets and liabilities:                             |       |                                                 |       |   |   |
| Accounts receivable                                                       |       | 6,036                                                |       | 2,271 |   |
| Inventories                                                               |       | (3,044                                               | )          | (1,155 | ) |
| Prepaid expenses and other current assets                                 |       | (1,516                                               | )          | (405 | ) |
| Accounts payable and other accrued liabilities                            |       | (1,202                                               | )          | (94 | ) |
| Accrued compensation                                                      |       | 659                                                  |       | (1,451 | ) |
| Deferred revenue and customer deposits                                    |       | 3,387                                                |       | 294 |   |
| Other noncurrent liabilities                                              |       | (304                                                 | )          | 442 |   |
| Payments of accrued restructuring obligations, net                        |       | (3,223                                               | )          | (776 | ) |
| Net cash from  operating activities                                       |       | (3,931                                               | )          | (2,020 | ) |
| **Investing  activities**                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Purchases of  marketable securities                                       |       | (1,648                                               | )          | (7,219 | ) |
| Proceeds from  sales of marketable securities                             |       | 257                                                  |       | 364 |   |
| Proceeds from  maturities of marketable securities                        |       | 3,039                                                |       | 10,237 |   |
| Other assets                                                              |       | (358                                                 | )          | (408 | ) |
| Change in  restricted cash                                                |       | —                                               |       | 24 |   |
| Purchases of  property and equipment                                      |       | (370                                                 | )          | (2,145 | ) |
| Net cash from  investing activities                                       |       | 920                                                  |       | 853 |   |
| **Financing  activities**                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Payments of  obligations under sale-leaseback arrangements                |       | (34                                                  | )          | — |   |
| Payments of  other obligations                                            |       | —                                               |       | (37 | ) |
| Proceeds from  issuance of common stock                                   |       | 1,311                                                |       | 116 |   |
| Net cash from  financing activities                                       |       | 1,277                                                |       | 79 |   |
| Effect of  exchange rates on changes in cash and cash equivalents         |       | 5                                                    |       | 15 |   |
| Net decrease in  cash and cash equivalents                                |       | (1,729                                               | )          | (1,073 | ) |
| Cash and cash  equivalents at beginning of period                         |       | 11,634                                               |       | 8,096 |   |
| Cash and cash  equivalents at end of period                               |       | $                                                    | 9,905      |   | $ | 7,023 |   |

 

*Seeaccompanying notes.*

4

----

**CALIPERLIFE SCIENCES, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH31, 2007**

**(Unaudited)**

**1. Organization and Basis of Presentation**

Caliper Life Sciences, Inc. (Caliper) was incorporated in the stateof Delaware on July 26, 1995. Caliper provides products and servicesspanning in vitro and in vivo pre-clinical research to enable pharmaceutical andbiotechnology companies, and research institutes, to advance knowledge, gaininsights earlier in basic research and reduce costs and standardize analyticaltechniques across four key areas of the pre-clinical drug discovery anddevelopment chain: screening; pharmacokinetics/pharmacodynamics, ADME/Tox; anddrug dosage and formulation testing. Caliper’s strategy is to provide tools andservices that are relevant to and predictive of drug effects in humans. Calipercurrently operates in one business segment: the development andcommercialization of life science instruments and related consumables andservices for use in drug discovery and development and other life sciencesresearch.

***Financial Statement Presentation***

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X of the Securities and ExchangeCommission (“SEC”). Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring entries) considered necessary for afair presentation have been included. Operating results for the three monthsended March 31, 2007 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2007.  For example, Calipertypically experiences higher revenues in the fourth quarter of its fiscal yearas a result of capital spending patterns of its customers.  Theconsolidated balance sheet as of December 31, 2006 has been derived fromaudited financial statements as of that date. For further information, refer tothe financial statements and notes thereto included in Caliper’s Annual Reporton Form 10-K for the year ended December 31, 2006.

***Use of Estimates***

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

**2. Summary of Significant Accounting Principles**

***Revenue Recognition***

*GeneralPolicy*

Caliper recognizes revenue when persuasive evidence of an arrangementexists, delivery has occurred or services have been rendered, the fee is fixedor determinable, and collectibility is reasonably assured or probable, asapplicable. Revenue is recognized on product sales when goods are shipped underCaliper’s standard terms of “FOB origin.”  Revenue associated with customer productpurchases delivered under terms of “FOB destination” is deferred until productis delivered to the customer. Revenues on shipments subject to customeracceptance provisions are recognized only upon customer acceptance, providedall other revenue recognition criteria are met. In general, sales made byCaliper do not include general return rights or privileges. In the limitedcircumstance where a right of return exists, Caliper recognizes revenue whenthe right has lapsed. Based upon Caliper’s prior experiences, sales returns havenot been significant and therefore a general provision for sales returns orother allowances is not recorded at the time of sale. Revenue from servicesoffered by Caliper is generally recognized as the services are performed (or,as applicable, ratably over the contract service term in the case of annualmaintenance contracts). Provision is made at the time of sale for estimatedcosts related to Caliper’s warranty obligations to customers.

Our revenue arrangements may include the sale of an instrument,consumables, software, service, technology licenses, installation and training.Revenue arrangements may include one of these single elements, or mayincorporate one or more elements in a single transaction or combination ofrelated transactions. Caliper applies the following guidance to its variousrevenue arrangements:

Emerging Issues Task Force (EITF) Issue No.00-21,*Revenue Arrangements with MultipleDeliverables, (EITF 00-21).*  When multiplecontractual elements exist in an arrangement, and software is incidental, thecontractual elements are divided into separate units of accounting if thedeliverables in the arrangement meet certain criteria under EITF 00-21. Thecriteria applied to multiple element arrangements are whether (a) eachdelivered element has standalone value to the customer, (b) there isobjective and reliable evidence of fair value of the undelivered elements, and,if applicable, (c) delivery or performance of the undelivered elements isprobable and within the control of Caliper. Consideration for the arrangement isallocated among the separate units of accounting based on their relative fairvalues, or based upon the residual method when fair value exists only forremaining undelivered items, and the amount of revenue allocable to thedelivered item(s) is recognized in accordance with the requirements of SAB104, *Revenue Recognition (a replacement of SAB 101) (SAB104)*. In either case, the amount of arrangement considerationallocated to the delivered item(s) is limited to the amount that is notcontingent on Caliper delivering additional products or services.

Statement of Position 97-2, *Software Revenue Recognition* and EITF IssueNo.03-5, *Applicability of AICPA Statement ofPosition 97-2 to Non-Software Deliverables in an Arrangement ContainingMore-than-Incidental Software( SOP 97-2).* When Caliper’s revenue arrangements

5

----

includethe sale of an instrument in which the software is more than incidental,revenue is recognized in accordance with SOP 97-2. Caliper allocatesrevenue on the arrangement between software and non-software relateddeliverables based on fair value as required by EITF 03-5. Revenue allocated tothe software deliverable is recognized in accordance with SOP 97-2. If there isvendor-specific objective evidence of the fair value(s) of the undelivereditem(s) in an arrangement, but no such evidence for the delivered item(s),Caliper uses the residual method to allocate the arrangement considerationassociated with the software deliverables. Revenue allocated to non-softwaredeliverables is further allocated based on the separation criteria establishedin EITF 00-21. When items included in a multiple-element arrangement representseparate units of accounting and there is objective and reliable evidence offair value for all items included in the arrangement, Caliper allocatesthe arrangement consideration to the individual items based on theirrelative fair values. If there is objective and reliable evidence of the fairvalue(s) of the undelivered item(s) in an arrangement, but no suchevidence for the delivered item(s), Caliper uses the residual method toallocate the arrangement consideration. In either case, the amount ofarrangement consideration allocated to the delivered item(s) is limited tothe amount that is not contingent on Caliper delivering additional products orservices.

Cash received from customers as advance deposits for undeliveredproducts and services, including contract research and development services, isrecorded within customer deposits until revenue is recognized. Revenue relatedto annual maintenance contracts or other remaining undelivered performanceobligations is deferred and recognized upon completion of the underlyingperformance criteria.

*ProductRevenue*

Product revenue is recognized upon the shipment and transfer of title tocustomers and is recorded net of discounts andallowances. Revenues on shipments subject tocustomer acceptance provisions are recognized only upon customer acceptance,provided all other revenue recognition criteria are met. Customer productpurchases are generally delivered under standardized terms of “FOB origin” withthe customer assuming the risks and rewards of product ownership at the time ofshipping from Caliper’s warehouse. Revenue associated with customer productpurchases delivered under terms of “FOB destination” is deferred until productis delivered to the customer. In accordance with EITF 00-21 or SOP 97-2,Caliper defers the fair value of any elements that remain undelivered afterproduct shipment and/or acceptance (as applicable), such as remaining servicesto be performed.

In certain cases, customers will be charged on a datapoint pricing basisfor their usage of chips. Datapoints are the test results that Caliper’scustomers record when they use Caliper’s instruments in order to perform aparticular LabChip assay. Caliper records datapoint revenues in the period thatCaliper’s customers produce these datapoints and communicate such use toCaliper. Under minimum datapoint fee arrangements, datapoint revenues arerecorded over the period during which the minimum applies, provided Caliper hasno ongoing performance obligations with respect to these minimum fees.

*Service andAnnual Maintenance Agreements*

Service revenue is recognized as services are performed, typically usingthe proportional performance method based upon defined outputs or otherreasonable measures as applicable, or ratably over the contract service term inthe case of annual maintenance contracts. Customers may purchase optionalwarranty coverage during the initial standard warranty term and annualmaintenance contracts beyond the standard warranty expiration. These optionalservice offerings are not included in the price Caliper charges customers forthe initial product purchase. Under Caliper’s standard warranty, the customeris entitled to repair or replacement of defective goods. Software upgrades arenot included in the standard warranty.

*Licensingand Royalty*

Revenue from up-front license fees is recognized when the earningsprocess is complete and no further obligations exist. If further obligationsexist, the up-front license fee is recognized ratably over the obligationperiod. Royalties under licenses are recorded as earned in accordance withcontract terms, when third-party results are reliably measured andcollectibility is reasonably assured.

*ContractRevenue*

Revenue from contract research and development services is recognized asearned based on the performance requirements of the contract. Non-refundablecontract fees, which are neither time and materials- nor time and expense-based,nor tied to substantive milestones, are recognized using the proportionalperformance method, subject to the consideration of the guidance in SAB 104.

***Warranty Obligations***

Caliper provides for estimated warranty expenses as a component of costof revenue at the time product revenue is recognized in accordance with FAS 5,*Accounting for Contingencies* and FASB Interpretation No. 45(FIN 45),*Guarantor’s Accounting andDisclosure Requirements for Guarantees, including Indirect Guarantees ofIndebtedness of Others*. Caliper offers a one-year limited warrantyon most products, which is included in the selling price. Caliper’s standardlimited warranty covers repair or replacement of defective goods, apreventative maintenance visit on certain products, and telephone-basedtechnical support. Factors that affect Caliper’s warranty liability include thenumber of installed units, historical and anticipated rates of warranty claims,and cost per claim. Caliper periodically assesses the adequacy of its recordedwarranty liabilities and adjusts amounts as necessary.

6

----

Changes in Caliper’s warranty obligation are as follows (in thousands):
|                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Balance at  beginning of period      |       | $                                                    | 2,223      |   | $ | 1,555 |   |
| Warranties  issued during the period |       | 596                                                  |       | 702 |   |
| Settlements made  during the period  |       | (597                                                 | )          | (555 | ) |
| Balance at end of  period            |       | $                                                    | 2,222      |   | $ | 1,702 |   |

 

***Net Loss Per Share***

Basic earnings per share is calculated based on the weighted-averagenumber of common shares outstanding during the period. Diluted earnings pershare would give effect to the dilutive effect of common stock equivalentsconsisting of stock options, unvested restricted stock, unvested restrictedstock units and warrants (calculated using the treasury stock method).

Common stock equivalents equal to 13.9 million and 7.8 million shares(prior to the application of the treasury stock method) were excluded from thecomputation of net loss per share in each of the three months endedMarch 31, 2007 and 2006, respectively, as they would have an antidilutiveeffect due to Caliper’s net loss.

***Income Taxes***

We adopted the provisions of FIN 48, *Accounting for Uncertaintyin Income Taxes* as of January 1, 2007. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in financial statementsunder SFAS No. 109 and prescribes a comprehensive model for therecognition, measurement, and financial statement disclosure of uncertain taxpositions. Unrecognized tax benefits are the differences between tax positionstaken, or expected to be taken, in tax returns, and the benefits recognized foraccounting purposes pursuant to FIN 48. As a result of adopting the provisionsof FIN 48, we recognized no change in the amount of unrecognized tax benefitsthat are recorded in our financial statements. In connection with the adoptionof FIN 48, we have classified uncertain tax positions as short-term liabilitieswithin accrued expenses.

The total amount of unrecognized tax benefits as of January 1, 2007was approximately $333,000, all of which, if recognized, would affect oureffective tax rate, and was unchanged as of March 31, 2007. In the ordinarycourse of our business, our income tax filings are regularly under audit by taxauthorities. While we believe we have appropriately provided for all uncertaintax positions, amounts asserted by taxing authorities could be greater or lessthan our accrued position. Accordingly, additional provisions on income taxmatters, or reductions of previously accrued provisions, could be recorded inthe future as we revise our estimates due to changing facts and circumstancesor the underlying matters are settled or otherwise resolved. We are currentlyundergoing tax examinations by one state tax authority and we anticipate thatthis examination will be concluded within the next twelve months, and it ispossible that this event will affect existing tax reserves.  An estimate of the range of possible changesto existing reserves cannot be made at this time. Federal and remaining statetaxes for the years 2002 through 2006 are subject to examination, as well asforeign jurisdiction tax returns covering these same periods.

We recognize accrued interest and penalties related to unrecognized taxbenefits in income tax expense. Interest and penalties accrued as of March 31,2007 were not material.

**3. Acquisitions**

On August 9, 2006, Caliper completed its acquisition of XenogenCorporation for $62.1 million, including $52.2 million in Caliper common stock,$7.1 million in warrants and $2.8 million of estimated direct acquisitioncosts. The allocation of the purchase price is expected to be finalized withinone year of the acquisition upon resolution of assumed obligations andpotential liabilities. Xenogen’s operations assumed as of the date of acquisitionare included in the results of Caliper for all periods after August 9, 2006.

7

----

**4. Inventories**

 Inventories are stated at the lower of cost (determined on afirst-in, first-out basis, or “FIFO”) or market. Amounts are relieved frominventory and recognized as a component of cost of sales on a FIFO basis.Inventories consist of the following (in thousands):
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Raw material    |       | $                  | 12,952     |                  | $          | 9,998 |   |
| Work-in-process |       | 1,227              |       | 1,380                 |       |
| Finished goods  |       | 7,644              |       | 7,380                 |       |
|            |       | $                  | 21,823     |                  | $          | 18,758 |   |

 

**5. Comprehensive Loss**

Comprehensive loss is as follows (in thousands):
|                                                  | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **March 31,**               | ** ** |
| ** **                                       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net loss                                         |       | $                                | (9,597     | ) | $ | (4,449 | ) |
| Unrealized  (loss) gain on marketable securities |       | (2                               | )          | 65 |   |
| Foreign currency  translation gain               |       | 9                                |       | 8 |   |
| Comprehensive loss                               |       | $                                | (9,590     | ) | $ | (4,376 | ) |

 

**6. Restructuring Activities**

During the period from May 2003 through December 2006, Caliper incurredrestructuring charges and credits related to planned workforce reductions andfacility closures that were undertaken by management to control costs andimprove the focus of its operations in order to reduce losses. Certain of theseactivities took place following Caliper’s acquisition of Zymark in 2003.   The following actions were originallycharged (credited) to restructuring charges in the accompanying statement ofoperations and continue to be reflected as components of accrued restructuringcosts as of March 31, 2007:

·                  In November 2003, Caliper closed one of itsthree facilities in Mountain View, California that was used primarily forinstrument manufacturing and research and development activities, andrecognized a $7.7 million charge related to costs estimated over the remainderof the lease (which terminates in June 2008).

·                  In June 2004, Caliper vacated excess facilityspace in Mountain View, California that was primarily used for research anddevelopment activities, and recognized an additional $2.2 million chargerelated to costs estimated over the remainder of the lease (which terminates inJune 2008).

·                  In December 2004, Caliper further consolidatedresearch and development dedicated space in Mountain View, California and atthe same time reassessed its previously made restructuring costsestimates.  An additional $3.6 millioncharge was recorded to reflect the latest closure and to adjust the fair valueof its remaining lease payments as of December 31, 2004.

·                  In December 2005, Caliper recorded a $1.4million restructuring credit to reflect the net present value of futuresublease rental income based upon subleases it was able to secure in 2005.

·                  In December 2006, Caliper adjusted itsrestructuring obligations by $124,000 to reflect the anticipated increase inoperating costs for idled facilities over the remainder of the respective leaseterms.

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

The two vacated facilities in Mountain View, California each include28,800 square feet of space. Minimum annual lease and operating expensepayments remaining under these leases, which escalate at 3 to 4% annually, are approximately$2.9 million and $1.9 million in 2007 and 2008, respectively. During 2005,Caliper entered into sublease agreements for approximately 73% of its idledfacilities in Mountain View, California. The agreements extend throughJune 2008, the end of the current lease agreement for the facilities.Basic rent and operating expenses remaining under the subleases isapproximately $630,000 in 2007 and $403,000 in 2008. In connection with thesubleases, $78,000 in deposits is being held by Caliper.

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

8

----

·                  Caliperidentified severance and other expenses relating to the involuntary terminationof personnel performing general and administrative and manufacturing functionsand established an assumed liability of $3.5 million related to this activity.This action reduced the total Xenogen workforce by approximately 34 employees,or approximately 6%. Substantially all affected employees were terminated byDecember 31, 2006. All associated severance payments will be completed byJune 30, 2007.

·                  Caliperleft unoccupied one of the Xenogen facilities in Alameda, California with theintention to sublease the facility. As of August 9, 2006, Caliperestablished a liability of $1.0 million related to this lease obligation. Thefair value of the lease obligation was determined based upon the discountedpresent value of remaining lease rentals (8.75% discount rate used) for the spaceno longer occupied, considering sublease income it receives and expects toreceive. The lease term expires April 30, 2011.

Caliper also assumed a $1.0 million obligation related to Xenogen’s St.Louis, Missouri facility. The facility closure was previously accounted for inaccordance with EITF 94-3,*LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (Including Certain Costs Incurred in a Restructuring)*.The fair value of the assumed obligation was determined based upon thediscounted present value of remaining lease rentals (using a discount rate of8.75%) for the space no longer occupied, considering sublease income potentialof the property. The lease term expires April 30, 2010.

The following table summarizes the restructuring accrual activity duringthe three months ended March 31, 2007 (in thousands):
| ** **                       | ** ** | **Severance and  Related** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|----------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Balance,  December 31, 2006 |       | $                               | 3,041      |           | $          | 6,119     |       | $ | 9,160 |   |
| Interest  accretion              |       | —                          |       | 91             |       | 91        |       |
| Payments                         |       | (2,167                          | )          | (1,011         | )          | (3,178    | )          |
|                             |       |                            |       |           |       |      |       |
| Balance, March 31, 2007          |       | $                               | 874        |           | $          | 5,199     |       | $ | 6,073 |   |

 

The remainingseverance and facility obligations are payable as follows (in thousands):
| ** **                            | ** ** | **Severance and  Related** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Years ending  December 31:       |       |                            |       |           |       |      |       |
| 2007 (9 months  ended)           |       | $                               | 874        |           | $          | 3,326     |       | $ | 4,200 |   |
| 2008                                  |       | —                          |       | 1,988          |       | 1,988     |       |
| 2009                                  |       | —                          |       | 339            |       | 339       |       |
| 2010                                  |       | —                          |       | 132            |       | 132       |       |
| 2011                                  |       | —                          |       | 8              |       | 8         |       |
|                                  |       |                            |       |           |       |      |       |
| Total minimum  payments               |       | 874                             |       | 5,793          |       | 6,667     |       |
| Less: Amount  representing interest   |       | —                          |       | 594            |       | 594       |       |
|                                  |       |                            |       |           |       |      |       |
| Present value of  future payments     |       | 874                             |       | 5,199          |       | 6,073     |       |
| Less: Current  portion of obligations |       | 874                             |       | 3,882          |       | 4,756     |       |
|                                  |       |                            |       |           |       |      |       |
| Non-current portion of  obligations   |       | $                               | —     |           | $          | 1,317     |       | $ | 1,317 |   |

 

**7.  Credit Facility and Other Long-Term Obligations**

On August 9, 2006, Caliper entered into a loan and security agreementwith a bank, as modified by a First Loan Modification Amendment dated February26, 2007, (the “Credit Facility”) which permits Caliper to borrow up to $20.0 millionin the form of revolving loan advances including up to $5.0 million in the formof letters of credit.  Principal borrowings under the Credit Facilityaccrue interest at a floating per annum rate equal to the prime rate if Caliper’sunrestricted cash held at the bank exceeds $20.0 million, or prime plusone-half of one percentage point if Caliper’s unrestricted cash held at thebank is below $20.0 million.   Under the Credit Facility, Caliper ispermitted to borrow up to $20.0 million, provided it maintains unrestrictedcash of at least $20.0 million with the bank, or is otherwise subject to aborrowing base limit consisting of up to (a) 80% of eligible accountsreceivable, as defined, plus (b) the lesser of 90% of Caliper’s unrestrictedcash maintained at the bank or $10.0 million.  The Credit Facility has atwo-year initial maturity, and is considered long-term as of March 31, 2007. During the first eighteen (18) months following Caliper’s merger with Xenogen,Caliper is required to pay interest on a minimum of $8.0 million of outstandingborrowings.  The Credit Facility servesas a source of capital for ongoing operations and working capital needs.

The Credit Facility includes traditional lending and reporting covenantsincluding that certain financial covenants applicable to liquidity and earningsare to be maintained by Caliper and tested as of the last day of each quarter.As of March 31, 2007, Caliper was in compliance with these covenants. 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, could result in the bank’s rightto declare all outstanding obligations immediately due and payable.

At March 31, 2007, there was approximately $8.6 million outstandingunder the credit facility and approximately $11.4 million was available forfuture borrowings under the Credit Facility.  This amount is restricted by$3.3 million in standby letters of credit related to Caliper’s facilities.

9

----

**8.  Commitments and Contingencies**

***In-License Obligations***

On March 30, 2007, Caliper entered into an exclusive license agreementwith Monogram Biosciences, Inc. (“Monogram”) to license substantial portions ofMonogram’s microfluidic patent portfolio. Under the license agreement, Caliperis obligated to pay ongoing royalties related to product and service revenuesthat encompass the use of the Monogram patents, and royalty sharing for anysublicense revenue generated by Caliper. A portion of the initial license feemay be credited against royalties due to Monogram in 2007.  Over the term of the patents, Caliper owesminimum royalties of not more than $100,000 per year for calendar years 2007through 2024.

On August 9, 2006, Stanford University provided Xenogen with a copy ofan audit report prepared by a third party consultant which asserted certainclaims of underpayments under the license agreement between Stanford andXenogen during the period from 2002 through March 31, 2006 based upon theconsultant’s interpretation of Xenogen’s exclusive license with Stanford. Upon review of the audit report, Caliper determined that additional royaltiesof $71,000 were owed to Stanford, and recorded such amount as an assumedobligation as of August 9, 2006 in connection with Caliper’s acquisition ofXenogen.  Caliper is contesting the remaining payment obligation that isclaimed in the Stanford audit report, and as a result, has not accrued for anyadditional liability beyond the $71,000 of royalties that have been accrued andpaid.  At any time, either party may choose binding arbitration to resolveany dispute over the amount of back royalties owed, if any.  The amount ofany remaining contingent obligation, if any, cannot currently be estimated, nordoes Caliper believe that it is probable that a liability exists. However, Caliper believes that this matter will be resolved within the nexttwelve months.  In accordance with SFAS 141, Caliper will account for anyadditional liability related to the identified contingent obligation as ofAugust 9, 2006 as additional purchase price which will be recorded to goodwill.

***Legal Proceedings***

Commencing on June 7, 2001, Caliper and three of its officers anddirectors (David V. Milligan, Daniel L. Kisner and James L. Knighton) werenamed as defendants in three securities class action lawsuits filed in theUnited States District Court for the Southern District of New York. The caseshave 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 approximately 300 other public companiesthat conducted initial public offerings of their common stock during the late1990s (the “IPO Lawsuits”). On August 8, 2001, the IPO Lawsuits wereconsolidated for pretrial purposes before United States Judge Shira Scheindlinof the Southern District of New York. Together, those cases are denominated Inre Initial Public Offering Securities Litigation, 21 MC 92(SAS). OnApril 19, 2002, a Consolidated Amended Complaint was filed alleging claimsagainst Caliper and the individual defendants under Sections 11 and 15 ofthe Securities Act of 1933, and under Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934, as well as Rule 10b-5 promulgatedthereunder. The Consolidated Amended Complaint also names certain underwritersof Caliper’s December 1999 initial public offering of common stock asdefendants. The Complaint alleges that these underwriters charged excessive,undisclosed commissions to investors and entered into improper agreements withinvestors relating to aftermarket transactions. The Complaint seeks anunspecified amount of money damages. Caliper and the other issuers named asdefendants in the IPO Lawsuits moved on July 15, 2002, to dismiss allclaims on multiple grounds. By Stipulation and Order dated October 9,2002, the claims against Messrs. Milligan, Kisner and Knighton weredismissed without prejudice. On February 19, 2003, the Court grantedCaliper’s motion to dismiss all claims against it. Plaintiffs were not giventhe right to replead the claims against Caliper. The time to appeal thedismissal has not yet expired. In May 2003, a Memorandum of Understandingwas executed by counsel for plaintiffs, issuers and their insurers settingforth the terms of a settlement that would result in the termination of allclaims brought by plaintiffs against the issuers and individual defendantsnamed in the IPO Lawsuits. On July 7, 2003, a Special Litigation Committeeof the Caliper Board of Directors approved the settlement terms described inthat Memorandum of Understanding, which was subsequently set forth in adefinitive Settlement Agreement among the settling parties. OnFebruary 15, 2005, Judge Scheindlin issued an order granting preliminaryapproval of the settlement, subject to certain modifications. The partiesagreed to those modifications and on August 31, 2005, Judge Scheindlinissued an order granting preliminary approval of the settlement as modified andcertifying settlement classes. The fairness hearing for final approval of thesettlement was held on April 24, 2006. Before Judge Scheindlin issued anyorder regarding the Court’s decision with respect to the final approval of thesettlement, on December 5, 2006 the Court of Appeals for the SecondCircuit issued an opinion reversing Judge Scheindlin’s prior certification ofthe plaintiff classes in several “focus” cases pending before her as part ofthe consolidated IPO lawsuits. The plaintiffs petitioned the Second Circuit fora rehearing on the class certification issue, which was denied by the SecondCircuit on April 6, 2007. Judge Scheindlin has not yet issued any opinionregarding the impact of the Second Circuit’s decision reversing her priorcertification of plaintiff classes in the “focus” cases on the settlement. Thefinal resolution of this litigation is not expected to have a material impacton Caliper.

On March 7, 2005, AntiCancer, Inc. filed a lawsuit againstXenogen in the U.S. District Court for the Southern District of California (the“Court”) alleging infringement of five patents of AntiCancer. The complaintseeks damages and injunctive relief against the alleged infringement. OnMarch 29, 2005, AntiCancer amended its complaint to include an additionalclaim seeking a judgment that one of Xenogen’s imaging patents exclusivelyin-licensed from Stanford University, U.S. patent No. 5,650,135, isinvalid. On May 10, 2005, Xenogen filed its answer to AntiCancer’s amendedcomplaint. Xenogen denied all of AntiCancer’s allegations and asserted variousaffirmative defenses, including its position that AntiCancer’s patents cited inits complaint, and its patent claims relating to in vivo imaging offluorescence, are invalid, unenforceable, and not infringed by Xenogen.Caliper, as successor-in-interest to Xenogen, continues to vigorously defendagainst AntiCancer’s claims and believes AntiCancer’s complaint is withoutmerit. Concurrent with filing Xenogen’s answer to AntiCancer’s originalcomplaint, Xenogen had filed its own counterclaims against AntiCancer. Xenogen’scounterclaims allege that AntiCancer infringes four of Xenogen’s U.S. patents,Nos. 5,650,135, 6,649,143, 6,939,533, and 6,916,462, all of which relate to invivo imaging and have earlier priority dates than each of the patents assertedby AntiCancer in its amended complaint. Both parties seek injunctive relief andan unspecified amount of damages, including enhanced damages for willfulinfringement. Caliper intends to vigorously pursue its claims againstAntiCancer. The Court completed only the first three days of a Markman hearingrelating to these claims, from June 13, 2006 through June 15, 2006.The Court then stopped the Markman hearing in order to permit Xenogen to pursuea motion to disqualify counsel for AntiCancer based on information discoveredby Xenogen on the first day of the Markman hearing. On July 14, 2006,Xenogen filed its motion to disqualify AntiCancer’s attorneys due to numerousviolations of ethical rules by such attorneys. After a 

10

----

hearingon this motion, on August 10, 2006, the Court issued detailed findings offact which found several violations of applicable ethical rules by counsel forAntiCancer. As a result, the Court issued an Order which granted Xenogen’smotion to disqualify AntiCancer’s attorneys. On October 18, 2006, theCourt issued a supplemental and clarifying Order to its previousAugust 10, 2006 Order in which the Court, among other things,(i) granted Xenogen’s motion to nullify all results of the previouslysuspended Markman hearing, (ii) ordered the Markman papers and hearing to berestarted without the use of any materials prepared by AntiCancer’sdisqualified counsel, (iii) granted Xenogen’s motion to prohibit thetransfer of tainted files to AntiCancer’s successor counsel, and(iv) granted AntiCancer permission until November 6, 2006 to amendits complaint. On November 6, 2006, AntiCancer filed its third amendedcomplaint in this matter and voluntarily dismissed Stanford University fromthis proceeding. The third amended complaint purported to add Caliper as adefendant, though Caliper has yet to be served with the third amendedcomplaint. In response to AntiCancer’s third amended complaint, Xenogen filedboth (i) a motion to strike and for a more definite statement and(ii) a motion for sanctions including dismissal against AntiCancer forfailure to comply with Federal Rule of Civil Procedure 11. On April 12,2007, the Court issued an Order which noted that all of Xenogen’s objections setforth in its motion to strike and for a more definite statement had merit, andordered AntiCancer to file a fourth amended complaint. AntiCancer has until May14, 2007 to file its fourth amended complaint, after which Xenogen will fileits responsive papers to this complaint. On April 18, 2007, the Court issued anorder denying Xenogen’s motion for sanctions for failure to comply with FederalRule of Civil Procedure 11. On April 30, 2007, following a case managementconference held on April 27, 2007, the U.S. Magistrate Judge for this caseissued an Order which noted the Court’s concern that AntiCancer may bedelinquent in responding to Xenogen’s requests that AntiCancer identify anaccused device or practice for at least one claim of each patent asserted byAntiCancer, and ordered compliance with the disclosure provisions of the localrules for patent litigation. Another case management conference has beenscheduled for June 1, 2007 to discuss the scheduling of the disclosuresrequired by the patent local rules and the dates for a new Markman hearing.

Caliper currently is not able to predict the outcome of the patentinfringement lawsuit with AntiCancer. Even if Caliper prevails in this lawsuit,the defense of the lawsuit or similar lawsuits will be expensive andtime-consuming and may distract Caliper management from operating Caliper’sbusiness.

From time to time Caliper is involved in litigation arising out ofclaims in the normal course of business. Based on the information presentlyavailable, management believes that there are no other claims or actionspending or threatened against Caliper, the ultimate resolution of which willhave a material adverse effect on our financial position, liquidity or resultsof operations, although the results of litigation are inherently uncertain, andadverse outcomes are possible.

**9. Stockholders’ Equity**

***Common Stock***

During the three months ended March 31, 2007, Caliper issued 353,530shares of common stock, increasing the total shares outstanding as of March 31,2007 to 47,165,845.  The increase in shares relates to shares issued as aresult of stock option exercises and vesting of restricted stock.

***Stock-Based Compensation***

Caliper accounts for stock-based compensation in accordance withStatement of Financial Accounting Standard No. 123R,*Share-Based Payment* (“SFAS 123R”), whichrequires all share-based payments, including grants of stock options, to berecognized in the income statement as an operating expense, based on their fairvalues. Caliper estimates the fair value of each option award on the date ofgrant using the Black-Scholes-Merton based option-pricing model.

Stock-based compensation expense is included within costs and expensesas follows (in thousands):
|                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Cost of product  revenue             |       | $                                                | 128        |   | $ | 127 |   |
| Cost of service  revenue             |       | 43                                               |       | 25 |   |
| Research and  development            |       | 254                                              |       | 240 |   |
| Selling, general  and administrative |       | 928                                              |       | 894 |   |
| Total                                |       | $                                                | 1,353      |   | $ | 1,286 |   |

 

On March 31, 2007, Caliper had five share-based compensation plans (the “Plans”),which are described within Note 13 of our audited financial statements includedin Caliper’s Annual Report on Form 10-K for the year ended December 31, 2006.

The fair value of each option award issued under Caliper’s equity plansis estimated on the date of grant using a Black-Scholes-Merton based optionpricing model that uses the assumptions noted in the followingtable. Expected volatilities are based on historical volatility of Caliper’sstock. The expected term of the options is based on Caliper’s historicaloption exercise data taking into consideration the exercise patterns of theoption holders during the option’s life. The risk-free interest rate isbased on the U.S. Treasury yield curve in effect on the date of the grant.

11

----

 
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                         |       |                                                 |       |   |   |
| Expected  volatility (%)     |       | 40                                                   |       | 45 |   |
| Risk-free  interest rate (%) |       | 4.50                                                 |       | 4.80 |   |
| Expected term  (years)       |       | 4.2                                                  |       | 4.3 |   |
| Expected dividend yield  (%) |       | —                                               |       | — |   |

 

A summary of stock option and restricted stock activity under the Plansas of March 31, 2007, and changes during the three months then ended is asfollows:
| **Stock Options**            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                                          | ** ** | **(in thousands)**             | ** ** |
|                              |       |       |       |                                   |       |                                                |       |                                |       |
| Outstanding at  December 31, 2006 |       | 6,713,292  |       | $                                      | 6.31       |                                                |       |                                |       |   |
| Granted                           |       | 973,000    |       | 5.93                                   |       |                                                |       |                                |       |
| Exercised                         |       | (335,977   | )          | 5.97                                   |       |                                                |       |                                |       |
| Canceled                          |       | (431,476   | )          | 11.37                                  |       |                                                |       |                                |       |
| Outstanding at  March 31, 2007    |       | 6,918,839  |       | $                                      | 6.05       |                                                | 6.9        |                                | $          | 4,756 |   |
| Exercisable at  March 31, 2007    |       | 4,356,547  |       | $                                      | 6.11       |                                                | 5.8        |                                | $          | 4,503 |   |
| Unvested at March 31,  2007       |       | 2,562,292  |       | $                                      | 5.95       |                                                |       |                                | $          | 253 |   |

 
| Restricted Stock Units                 | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------------------------------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** **                                              | ** ** |
| Outstanding and  non-vested at December 31, 2006 |       | 567,090    |       | $                                                       | 6.30       |   |
| Granted                                          |       | 241,664    |       | 5.81                                                    |       |
| Vested                                           |       | (42,313    | )          | 6.51                                                    |       |
| Unvested  repurchases                            |       | (2,343     | )          | 5.91                                                    |       |
| Outstanding and  non-vested at March 31, 2007    |       | 764,098    |       | $                                                       | 6.13       |   |

 

During the quarter ended March 31, 2007, Caliper granted its employeesand directors 973,000 options at a weighted average grant date fair value of $2.23per share. The total intrinsic value of options exercised during the quarterended March 31, 2007 was approximately $0.7 million. The total fair value of restrictedstock that vested during the quarter ended March 31, 2007 was approximately $0.3million.

As of March 31, 2007, there was $9.1 million of total unrecognizedcompensation cost related to unvested stock-based compensation arrangementsgranted under the Plans.  That cost is expected to be recognized over aweighted-average remaining service (vesting) period of approximately 2.9 years.

12

----

**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations as of March 31, 2007 and for the threemonths ended March 31, 2007 and March 31, 2006 should be read in conjunctionwith our financial statements included in this Quarterly Report on Form 10-Qand Management’s Discussion and Analysis of Financial Condition and Results ofOperations and our financial statements included in our Annual Report on Form10-K for the year ended December 31, 2006.*

*The discussion in this report contains forward-lookingstatements that involve risks and uncertainties, such as statements of ourplans, objectives, expectations and intentions. Our actual results could differmaterially from those discussed here. Factors that could cause or contribute tothese differences include those discussed under the caption “Risk Factors”below, as well as those discussed elsewhere. The cautionary statements made inthis report should be read as applying to all related forward-lookingstatements wherever they appear in this report.*

**Executive Summary**

***Business***

Caliper Life Sciences sells products, services and integrated systemscomposed of instruments, software and reagents to life sciences biomedical andpharmaceutical researchers. We believe our offerings enable our customers toaccelerate drug discovery, enhance the diagnosis of disease and facilitatescientific research. Our strategy is to transform drug discovery anddevelopment through technologies and services that are relevant to andpredictive of drug effects in humans. Our products and services, assembled fromour leading portfolio of microfluidics, automation, liquid handling, andmolecular imaging technologies, address key issues related to research and thecritical path of pre-clinical drug discovery and development, and moleculardiagnostics.

On August 9, 2006, we completed our acquisition of XenogenCorporation. Xenogen developed and marketed products, technologies and servicesfor acquiring, analyzing and managing complex image data from live animals. Ouracquisition of Xenogen provides us entry into the fast-growing molecularimaging market, and positions us as one of the first life scienceinstrumentation companies able to provide an integrated portfolio of productsand services for both in vitro (referring to tests or reactions taking placeoutside a living organism) and in vivo (referring to tests or reactions takingplace inside a living organism) research.

Our products and services currently address some of the key challengesthat face the pharmaceutical and biotechnology industry, including shrinkingdrug candidate pipelines, late-stage drug failures, and unforeseen side effectscoming to light late in the development process, or post-commercialization.Using our products and services, researchers are able to increase the speed andefficiency of their screening efforts, make better choices earlier in the drugdiscovery and development process, and conduct profiling experiments thatidentify drug side effects well before the human clinical trial stage.

We are pursuing the application of our LabChip technology tothe diagnostics market and believe that our LabChip technologiesmay be able to provide ease of use, cost and data quality benefits forcertain diagnostic tests. These benefits are the anticipated result ofchip-based integration, automation and miniaturization of thevarious workflow steps required to perform these tests. We arepresently working with collaboration partners in this area through our CaliperDriven program. Although most of these projects are still in the feasibility orearly development stages, we believe that one of our Caliper Driven partners,Agilent, expects to commercialize its first diagnostic test based on ourLabChip technology in 2007.

We have multiple channels of distribution for our products: direct tocustomers, indirect through our international network of distributors, throughpartnership channels under our Caliper Driven program and through jointmarketing agreements. Through our direct and indirect channels, we sellproducts, services and complete system solutions, developed by us, to endcustomers. Our Caliper Driven program is core to our business strategy andcomplementary to our direct sales and distribution network activities, as itenables us to extend the commercial potential of our LabChip and advanced liquidhandling technologies into new industries and new applications with commercialpartners. We also utilize joint marketing agreements to enable others to marketand distribute our products. By using direct and indirect distribution, andout-licensing our technology under our Caliper Driven program, we seek tomaximize penetration of our products and technologies into the marketplace andposition Caliper as a leader in the life sciences tools market.

***Overview of First Quarter 2007***

During the first quarter of 2007, we achieved total revenue of $28.4million, which represented a 28% net increase compared to revenue in the firstquarter of 2006. All of the growth in the quarter was attributed to ouracquisition of Xenogen. Product revenue from our in vitro automation andmicrofluidic product families was down by 25% in comparison to the firstquarter of 2006 including the following key factors:

·                  Affymetrixand Agilent (OEM) sales reductions. Related to Affymetrix, the decline was due to the absence of any GCAS systemsales during the quarter.  In the case ofAgilent, in comparison to the first quarter of 2006, we no longer provide toAgilent either reagents or chips for Agilent’s discontinued ALP 5100instrument platform.

·                  Invitro drug discovery instruments.  Theprincipal causes for the decline in our in vitro drug discovery instrumentssales included fewer completed Staccato installations due to an especiallystrong quarter one year ago in Europe; a decrease in LabChip 3000 placements; lowerOEM product sales such as Twister microplate handling instruments and budgetaryspending delays at certain customers.

Within our Caliper Discovery and Alliances Services (CDAS) business wesecured significant new contracts with both Pfizer and the EPA.  Under the Pfizer agreement, we will use ouradvanced in vivo profiling capabilities to help Pfizer explore drug candidatepotential beyond the initial

13

----

diseaseindications.  Often a drug only has only4 to 6 years of patent life left by the time it reaches commercialmarkets.  As a result, exploringopportunities for label expansion can be a critical aspect of pharma strategyto leverage research and development investment.  The EPA contract which we won in acompetitive process is an important validation of the quality and relevance ofour in vitro services. The contract award range is $1.4 million to $69million over two to five years providing considerable future revenue potential forCDAS depending on EPA’s ultimate scope of work. CDAS’ role is to assist the EPAin developing new approaches to identify toxic environmental chemicals.

In our microfluidics business we acquired exclusive rights from MonogramBiosciences to the majority of the former ACLARA microfluidics patentportfolio. This solidifies our position of controlling the most comprehensiveIP estate in the industry with more than 335 issued US patents. This moveexpands the overall breadth and versatility of our IP which we can license topartners under our Caliper Driven licensing program or use for in-housedevelopment.

Shortly after the Monogram deal, we signed a new development licensewith Wako Pure Chemical, a subsidiary of Takeda and a long-time collaborator inmicrofluidics. Wako is working with our IP estate to explore development of newdiagnostic systems targeted at decentralized testing in hospitals and clinics.

**Critical Accounting Estimates**

The critical accounting policies used in the preparation of ourfinancial statements that we believe affect our significant judgments andestimates used in the preparation of our consolidated financial statementspresented in this report are described in our Management’s Discussion andAnalysis of Financial Condition and Results of Operations, and in the Notes tothe Consolidated Financial Statements, each included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2006. There have been nomaterial changes to the critical accounting policies since the filing of thatreport.

**Resultsof Operations for the Three Months Ended March 31, 2007 and 2006**

Operating results for the three months ended march 31, 2007 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2007.  For example, Calipertypically experiences higher revenues in the fourth quarter of its fiscal yearas s result of capital spending patters of its customers.

***Revenue***
|                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**            | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Product revenue                    |       | $                                                    | 15,261     |   | $ | 14,698 |   | $ | 563 |   | 4 | % |
|                               |       |                                                 |       |   |   |   |   |   |   |
| Service revenue                    |       | 8,930                                                |       | 5,043 |   | 3,887 |   | 77 | % |
|                               |       |                                                 |       |   |   |   |   |   |   |
| License fees and  contract revenue |       | 4,249                                                |       | 2,558 |   | 1,691 |   | 66 | % |
|                               |       |                                                 |       |   |   |   |   |   |   |
| Total Revenues                     |       | $                                                    | 28,440     |   | $ | 22,299 |   | $ | 6,141 |   | 28 | % |

 

*Total Revenue*.  Our total revenue increase duringthe first quarter of 2007 compared to the first quarter of 2006 resultedprimarily from $10.2 million of revenues generated from our acquisition ofXenogen in August of 2006 and incremental out-license revenues of $1.0 millionunder our Caliper Driven program.  Weexperienced offsetting declines in certain in vitro drug discovery productsales.  These declines were primarilyrelated to delayed purchases by a few of our largest customers, a significantdecrease in Staccato system sales in comparison to an unusually strong firstquarter of 2006 within our European operations, and decreases in Affymetrix andAgilent OEM sales.  Based on developingtrends, we expect to see certain of these conditions reverse over the remainderof 2007 resulting in positive growth.

*Product Revenue*.  Product revenue increased during the first quarter of 2007compared to the first quarter of 2006 primarily as a result of our Xenogenacquisition. The Xenogen IVIS imaging systems generated $5.2 million of revenuein the quarter.  A total of 25 IVIS instruments were sold during the quarter,representing a 39% increase over 18 units sold by Xenogen in the first quarterof 2006, prior to the acquisition when it operated as a stand alone reportingentity.  Other product sales declined $4.7 million during the firstquarter of 2007 compared to the first quarter of 2006.  The key elements of this decline included: $1.7million of lower Staccato system sales in 2007 which compared unfavorablyto a larger number of completed installations in the first quarter of 2006;$1.0 million of lower LabChip 3000 instrument sales, offset by $0.5 million ofhigher revenue from LabChip 90 and Desktop Profiler instrument sales; $0.7million of lower sales to Agilent as a result of no sales of ALP chips for thediscontinued ALP 5100 instrument platform and reduced first quarter demand fromAgilent for planar chips and reagents marketed by Agilent on an OEM basis; andno GCAS sales to Affymetrix during the first quarter, compared to $0.6 millionof GCAS software upgrades sold to Affymetrix in the first quarter of 2006.  A total of 11 LabChip instruments were placedin the first quarter of 2007 versus 13 systems in the first quarter of 2006.  The remaining $1.2 million decrease waswidespread among our remaining drug discovery product sales and is largelyattributable to lower OEM product sales such as sales of our Twister microplatehandling instrument and a general decrease in direct channel customer spendingin the first quarter of 2007.

*Service Revenue*. Service revenue increased during the three months ended March 31, 2007in comparison to the same period in 2006 primarily as a result of acquiredrevenues of Xenogen Biosciences (now part of Caliper Discovery and AlliancesServices, or CDAS).  During the three months ended March 31, 2007 maintenanceservices increased by $0.4 million over the same period in 2006, offset by adecrease of $0.3 million within our in-vitro drug discovery services business.

14

----

*License Fees and Contract Revenue.*  License fees and contract revenueincreased during the three months ended March 31, 2007 primarily as a result ofbio-photonic imaging license revenue generated by Xenogen and new licensesunder our Caliper Driven out-licensing program.  Combined, these sourcesof revenue generated approximately $2.0 million of revenue to offset a decrease of $0.2 millionfrom SBIR grant research projects conducted at NovaScreen and a $0.1 milliondecrease in other sources of revenue.

***Costs of Revenue***
|                         | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|-------------------------|------------|----------------------------------------------------------------|------------|
| **(In thousands)** | ** ** | **2007**                                                       | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Product                 |       | $                                                              | 9,967      |   | $ | 9,789 |   | $ | 178 |   | 2 | % |
|                    |       |                                                           |       |   |   |   |   |   |   |
| Service                 |       | 5,653                                                          |       | 2,839 |   | 2,814 |   | 99 | % |
|                    |       |                                                           |       |   |   |   |   |   |   |
| License                 |       | 442                                                            |       | — |   | 442 |   | — |   |
|                    |       |                                                           |       |   |   |   |   |   |   |
| Total costs of revenues |       | $                                                              | 16,062     |   | $ | 12,628 |   | $ | 3,434 |   | 27 | % |

 

*Cost of Product Revenue.*  Cost of product revenue increasedduring the three months ended March 31, 2007 due to increased product revenues,including Xenogen IVIS imaging systems which are now manufactured by us.  Manufacturing spending decreased byapproximately $0.5 million during the first quarter of 2007 in comparison tothe first quarter of 2006 due to personnel resources that were reassigned inthe second quarter of 2006.  Thesedecreases were partially offset by slightly higher variable spending on freightand other miscellaneous costs.

*Cost of Service Revenue.*  Cost of service revenue increasedduring the first quarter of 2007 primarily due to Xenogen Biosciences in vivodiscovery services which were new to Caliper in 2007 in comparison to 2006.

*Gross Margins.*  Gross margin on product revenue was 35% for the three monthsended March 31, 2007, as compared to 33% in the same period during 2006.  The increase in margin was primarily drivenby lower personnel costs incurred by Caliper’s manufacturing and higher productsales in relation to spending levels.  Grossmargin on service revenue was 37% for the three months ended March 31, 2007, ascompared to 44% in comparison to the same period in 2006.  The decrease in2007 in comparison to 2006 resulted from lower gross margins associated withXenogen Biosciences in vivo drug discovery service revenues.  Xenogen Biosciencescontributed approximately one-third of total service revenue during the firstquarter of 2007 at an approximate 25% gross margin resulting in a 700 basis pointdecrease in services gross margins.

***Expenses***
|                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**              | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Research and  development            |       | $                                                    | 6,774      |   | $ | 4,458 |   | $ | 2,316 |   | 52 | % |
|                                 |       |                                                 |       |   |   |   |   |   |   |
| Selling, general  and administrative |       | 12,607                                               |       | 8,476 |   | 4,131 |   | 49 | % |
|                                 |       |                                                 |       |   |   |   |   |   |   |
| Amortization of  intangible assets   |       | 2,537                                                |       | 1,254 |   | 1,283 |   | 102 | % |
|                                 |       |                                                 |       |   |   |   |   |   |   |
| Restructuring  charges               |       | 26                                                   |       | 42 |   | (16 | ) | (38 | )% |
|                                 |       |                                                 |       |   |   |   |   |   |   |
|                                      |            |                                                      |            |  |  |  |  |  |  |  |  |  |

 

*Research and Development Expenses.*  The net increase in research anddevelopment expenses during the quarter ended March 31, 2007 in comparison tothe same period in 2006 is related primarily to $1.8 million of bio-imagingresearch and development spending we assumed as a result of acquiring Xenogen. Other research and development expenses increased by approximately $0.5 millionduring the quarter in comparison to the same period in 2006, primarily relatedto an increase in personnel costs and an increase in project materials tosupport funded projects.

As a percentage of revenues, we expect research and development spendingto generally decrease in the future, to the extent our revenues grow, and as wecontinue to closely manage discretionary spending on research programs withattractive commercial potential.  As partof our Caliper Driven program, we may potentially undertake projects that couldcause our research and development costs to increase as a percentage ofrevenue, although such increased spending may be fully or partially funded byour commercial partners.

*Selling, General and Administrative Expenses.*  The net increase in selling, generaland administrative expenses during the quarter ended March 31, 2007 in comparisonto the same period in 2006 was primarily the result of incremental spending weassumed as a result of acquiring Xenogen.  As a result of restructuringefforts completed in 2006, we were able to achieve substantial savings byeliminating functions.  The increase inexpenses compared to 2006 relates primarily to $1.9 million of additionalpersonnel costs related to Xenogen, including approximately 20 additional salesand marketing employees that were added, $0.5 million in increased legalexpenses, $0.8 million in sales and marketing related expenses and $0.8 millionof all other expenses.  As noted underPart II, Item 1 “Legal Proceedings”, we are presently involved in certain legalmatters, and we are currently unable to predict the level of ongoing legalcosts that we will have to incur with respect to these matters.

*Amortization of Intangible Assets.* The increase in amortization of intangibleassets for the three months ended March 31, 2007 relates to the intangible assets acquired in the Xenogen acquisition inAugust 2006.

15

----

*Restructuring Charges.* We incurred restructuring charges in 2007 and2006 related to acquisition and integration activities that are more fullydiscussed in Note 6 to the accompanying financial statements. Restructuring charges during the three month periods relate to accretion ofinterest on facilities, net of sub-lease income.

***Interest and Other Expense, Net***
|                         | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)** | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest income, net    |       | $                                                    | 7          |   | $ | 191 |   | $ | (184 | ) | (96 | )% |
| Other income, net       |       | 13                                                   |       | 53 |   | (40 | ) | (75 | )% |
|                         |            |                                                      |            |  |  |  |  |  |  |  |  |  |

 

*Interest Income, Net.*  Interest income, net, decreased due tointerest expense of $150,000 incurred on outstanding borrowing under our creditfacility, which was put in place during the third quarter of 2006. In addition,interest income decreased during the first quarter ended March 31, 2007,compared to 2006 primarily due to lower cash, cash equivalents and marketablesecurities balances.

*Other Income, Net.*  Other income, net, decreased slightly on a three month basiscompared to 2006 due to decreased net gains associated with sales andmaturities of marketable securities.

**Liquidity and Capital Resources**

As of March 31, 2007, we had $21.6 million in cash, cash equivalents andmarketable securities, as compared to $24.9 million as of December 31, 2006.

As noted in Note 7 of the Notes to Condensed Consolidated FinancialStatements, on August 9, 2006, we entered into a credit facility with a bankwhich permits us to borrow up to $20.0 million in the form of revolving loanadvances including up to $5.0 million in the form of letters ofcredit.  Principal borrowings under the Credit Facility accrue interest ata floating per annum rate equal to the prime rate if our unrestricted cash heldat the bank exceeds $20.0 million, or prime plus one-half of one percentage pointif Caliper’s unrestricted cash held at the bank is below $20.0million.   Under the Credit Facility, we are permitted to borrow upto $20.0 million, provided we maintain unrestricted cash of at least $20.0million with the bank, or are otherwise subject to a borrowing base limitconsisting of up to (a) 80% of eligible accounts receivable, as defined, plus(b) the lesser of 90% of our unrestricted cash maintained at the bank or $10.0million.  The Credit Facility has a two-year initial maturity. During the first 18 months following our merger with Xenogen, we are requiredto pay interest on a minimum of $8.0 million of outstanding borrowings.

The credit facility includes traditional lending and reporting covenantsincluding that certain financial covenants applicable to liquidity and earningsare to be maintained by us and tested as of the last day of each quarter. As of March 31, 2007, Caliper was in compliance with these covenants.  The credit facility also includes severalpotential events of default that could cause interest to be charged at primeplus two percentage points, or, in the event of any uncured events of default,could result in the bank’s right to declare all outstanding obligations immediatelydue and payable.  The credit facility willserve as a source of capital for ongoing operations and working capitalneeds.  As of March 31, 2007, the credit facility is classified as longterm in the accompanying balance sheet.

***Cash Flows***
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**     | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **$ Change** | ** ** |
| Cash provided by (used  in) |       |                                                 |       |   |   |   |   |
| Operating Activities        |       | $                                                    | (3,931     | ) | $ | (2,020 | ) | $ | (1,911 | ) |
| Investing Activities        |       | 920                                                  |       | 853 |   | 67 |   |
| Financing Activities        |       | 1,277                                                |       | 79 |   | 1,198 |   |
|                             |            |                                                      |            |  |  |  |  |  |  |  |

 

*Operating Activities.*  During the quarter ended March 31, 2007we used $3.9 million of cash for operating activities which includedapproximately $3.2 million of restructuring payments, including $2.2 millionrelated to severance payments made to former officers of Xenogen and payments of$1.0 million related to our idle facilities. Net operating results and allother working capital changes consumed approximately $1.0 million of cash.

*Investing Activities.*  During the three months ended March 31,2007, net proceeds from purchases, sales and maturities of marketablesecurities generated $1.6 million of cash which we used primarily foroperations.  Our primary investing activity was the purchase of propertyand equipment of $0.4 million.

*Financing Activities.*  During the three months ended March 31,2007, financing cash proceeds were principally comprised of proceeds fromoption exercises, offset slightly by payment of lease obligations.

**Contractual Obligations**

The commitments under leases and other obligations are described in ourManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and in the Notes to the Consolidated Financial Statements includedin our Annual Report on Form 10-K for the fiscal year ended December 31,2006.  There has been no material change during the three months endedMarch 31, 2007 in the contractual obligations

16

----

disclosedat December 31, 2006.

***Capital Requirements***

Our capital requirements depend on numerous factors, including marketacceptance of our products, the resources we devote to developing andsupporting our products, and acquisitions. We expect to devote substantialcapital resources to continuing our research and development efforts, expandingour support and product development activities, and for other general corporateactivities. Our future capital requirements will depend on many factors,including:

·                  continuedmarket acceptance of our microfluidic and lab automation products;

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

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

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

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

·                  otherfactors not within our control.

Based on current plans, we expect that our current cash balancestogether with borrowing availability under the Credit Facility will besufficient to fund our operations at least through the end of 2008.

**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

***Interest Rate Sensitivity***

Our primary market risk exposures are foreign currency fluctuation andinterest rate sensitivity. There have been no material changes to theinformation included under Item 7A, “Quantitative and QualitativeDisclosures About Market Risk,” in our Annual Report on Form 10-K for thefiscal year ended December 31, 2006.

**Item 4. Controls and Procedures**

We evaluated our “disclosure controls and procedures” as defined byExchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2007.This evaluation was done under the supervision and with the participation ofCaliper’s management, including our chief executive officer and our chieffinancial officer.

**Evaluation of Disclosure Controls and Procedures.** We have established disclosure controls andprocedures that are designed to provide reasonable assurance that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934, such as this Quarterly Report on Form 10-Q, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms. Disclosure controls are also designed to provide reasonableassurance that such information is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate to allow timely decisions regarding required disclosure.

Based on their evaluation as of March 31, 2007, the chief executiveofficer and the chief financial officer have concluded that our disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation we are required to disclose in reports that we file or submit underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms.

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

**Changes in Internal Controls.**   No changes in our internalcontrol over financial reporting identified in connection with the evaluationof such internal control occurred during the first quarter of 2007, that materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

17

----

**Part II — OTHER INFORMATION**

**Item 1.Legal Proceedings**

Commencing on June 7, 2001, Caliper and three of its officers anddirectors (David V. Milligan, Daniel L. Kisner and James L. Knighton) werenamed as defendants in three securities class action lawsuits filed in theUnited States District Court for the Southern District of New York. The caseshave 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 approximately 300 other public companiesthat conducted initial public offerings of their common stock during the late1990s (the “IPO Lawsuits”). On August 8, 2001, the IPO Lawsuits wereconsolidated for pretrial purposes before United States Judge Shira Scheindlinof the Southern District of New York. Together, those cases are denominated Inre Initial Public Offering Securities Litigation, 21 MC 92(SAS). OnApril 19, 2002, a Consolidated Amended Complaint was filed alleging claimsagainst Caliper and the individual defendants under Sections 11 and 15 ofthe Securities Act of 1933, and under Sections 10(b) and20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5promulgated thereunder. The Consolidated Amended Complaint also names certainunderwriters of Caliper’s December 1999 initial public offering of commonstock as defendants. The Complaint alleges that these underwriters chargedexcessive, undisclosed commissions to investors and entered into improperagreements with investors relating to aftermarket transactions. The Complaintseeks an unspecified amount of money damages. Caliper and the other issuers namedas defendants in the IPO Lawsuits moved on July 15, 2002, to dismiss allclaims on multiple grounds. By Stipulation and Order dated October 9,2002, the claims against Messrs. Milligan, Kisner and Knighton weredismissed without prejudice. On February 19, 2003, the Court grantedCaliper’s motion to dismiss all claims against it. Plaintiffs were not giventhe right to replead the claims against Caliper. The time to appeal thedismissal has not yet expired. In May 2003, a Memorandum of Understandingwas executed by counsel for plaintiffs, issuers and their insurers settingforth the terms of a settlement that would result in the termination of allclaims brought by plaintiffs against the issuers and individual defendantsnamed in the IPO Lawsuits. On July 7, 2003, a Special Litigation Committeeof the Caliper Board of Directors approved the settlement terms described inthat Memorandum of Understanding, which was subsequently set forth in adefinitive Settlement Agreement among the settling parties. On February 15,2005, Judge Scheindlin issued an order granting preliminary approval of thesettlement, subject to certain modifications. The parties agreed to thosemodifications and on August 31, 2005, Judge Scheindlin issued an ordergranting preliminary approval of the settlement as modified and certifyingsettlement classes. The fairness hearing for final approval of the settlementwas held on April 24, 2006. Before Judge Scheindlin issued any orderregarding the Court’s decision with respect to the final approval of thesettlement, on December 5, 2006 the Court of Appeals for the SecondCircuit issued an opinion reversing Judge Scheindlin’s prior certification ofthe plaintiff classes in several “focus” cases pending before her as part ofthe consolidated IPO lawsuits. The plaintiffs petitioned the Second Circuit fora rehearing on the class certification issue, which was denied by the SecondCircuit on April 6, 2007. Judge Scheindlin has not yet issued any opinionregarding the impact of the Second Circuit’s decision reversing her priorcertification of plaintiff classes in the “focus” cases on the settlement. Thefinal resolution of this litigation is not expected to have a material impacton Caliper.

On March 7, 2005, AntiCancer, Inc. filed a lawsuit against Xenogenin the U.S. District Court for the Southern District of California (the “Court”)alleging infringement of five patents of AntiCancer. The complaint seeksdamages and injunctive relief against the alleged infringement. OnMarch 29, 2005, AntiCancer amended its complaint to include an additionalclaim seeking a judgment that one of Xenogen’s imaging patents exclusivelyin-licensed from Stanford University, U.S. patent No. 5,650,135, isinvalid. On May 10, 2005, Xenogen filed its answer to AntiCancer’s amendedcomplaint. Xenogen denied all of AntiCancer’s allegations and asserted variousaffirmative defenses, including its position that AntiCancer’s patents cited inits complaint, and its patent claims relating to in vivo imaging offluorescence, are invalid, unenforceable, and not infringed by Xenogen.Caliper, as successor-in-interest to Xenogen, continues to vigorously defendagainst AntiCancer’s claims and believes AntiCancer’s complaint is withoutmerit. Concurrent with filing Xenogen’s answer to AntiCancer’s originalcomplaint, Xenogen had filed its own counterclaims against AntiCancer. Xenogen’scounterclaims allege that AntiCancer infringes four of Xenogen’s U.S. patents,Nos. 5,650,135, 6,649,143, 6,939,533, and 6,916,462, all of which relate to invivo imaging and have earlier priority dates than each of the patents assertedby AntiCancer in its amended complaint. Both parties seek injunctive relief andan unspecified amount of damages, including enhanced damages for willfulinfringement. Caliper intends to vigorously pursue its claims againstAntiCancer. The Court completed only the first three days of a Markman hearingrelating to these claims, from June 13, 2006 through June 15, 2006.The Court then stopped the Markman hearing in order to permit Xenogen to pursuea motion to disqualify counsel for AntiCancer based on information discoveredby Xenogen on the first day of the Markman hearing. On July 14, 2006,Xenogen filed its motion to disqualify AntiCancer’s attorneys due to numerousviolations of ethical rules by such attorneys. After a hearing on thismotion, on August 10, 2006, the Court issued detailed findings of factwhich found several violations of applicable ethical rules by counsel forAntiCancer.  As a result, the Courtissued an Order which granted Xenogen’s motion to disqualify AntiCancer’sattorneys. On October 18, 2006, the Court issued a supplemental andclarifying Order to its previous August 10, 2006 Order in which the Court,among other things, (i) granted Xenogen’s motion to nullify all results ofthe previously suspended Markman hearing, (ii) ordered the Markman papers andhearing to be restarted without the use of any materials prepared by AntiCancer’sdisqualified counsel, (iii) granted Xenogen’s motion to prohibit thetransfer of tainted files to AntiCancer’s successor counsel, and(iv) granted AntiCancer permission until November 6, 2006 to amendits complaint. On November 6, 2006, AntiCancer filed its third amendedcomplaint in this matter and voluntarily dismissed Stanford University fromthis proceeding. The third amended complaint purported to add Caliper as adefendant, though Caliper has yet to be served with the third amendedcomplaint. In response to AntiCancer’s third amended complaint, Xenogen filedboth (i) a motion to strike and for a more definite statement and(ii) a motion for sanctions including dismissal against AntiCancer forfailure to comply with Federal Rule of Civil Procedure 11. On April 12,2007, the Court issued an Order which noted that all of Xenogen’s objectionsset forth in its motion to strike and for a more definite statement had merit,and ordered AntiCancer to file a fourth amended complaint. AntiCancer has untilMay 14, 2007 to file its fourth amended complaint, after which Xenogen willfile its responsive papers to this complaint. On April 18, 2007, the Courtissued an order denying Xenogen’s motion for sanctions for failure to complywith Federal Rule of Civil Procedure 11. On April 30, 2007, following a casemanagement conference held on April 27, 2007, the U.S. Magistrate Judge forthis case issued an Order which noted the Court’s concern that AntiCancer maybe delinquent in responding to Xenogen’s requests that AntiCancer identify anaccused device or practice for at least one claim of each patent asserted byAntiCancer, and ordered compliance with the disclosure provisions of the localrules for patent litigation. Another case management conference has beenscheduled for June 1, 2007 to discuss the scheduling of the disclosuresrequired by the patent local rules and the dates for a new Markman hearing.

Caliper currently is not able to predict the outcome of the patentinfringement lawsuit with AntiCancer. Even if Caliper prevails in this lawsuit,

18

----

thedefense of the lawsuit or similar lawsuits will be expensive and time-consumingand may distract Caliper management from operating Caliper’s business.

From time to time Caliper is involved in litigation arising out ofclaims in the normal course of business. Based on the information presently available,management believes that there are no other claims or actions pending orthreatened against Caliper, the ultimate resolution of which will have amaterial adverse effect on our financial position, liquidity or results ofoperations, although the results of litigation are inherently uncertain, andadverse outcomes are possible.

**Item 1A. Risk Factors**

Our risk factors are described in Part I, Item 1A ofour annual Report on Form 10-K filed with the Securities and ExchangeCommission for the year ended December 31, 2006.

**Item 2. Unregistered Sales of Equity Securitiesand Use of Proceeds**

None.

**Item 3. Defaults Upon Senior Securities**

None.

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

None.

**Item 5. Other Information**

None.

19

----

**EXHIBITINDEX**

**Item 6. Exhibits**
| Exhibit  Number | ** ** | **Description of document**                                                                                                                                                                                                                                              |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)          |       | Amended and Restated Certificate of Incorporation of  Caliper.                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                               |
| 3.2(2)          |       | Certificate of Designation Of Series A Junior  Participating Preferred Stock.                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                               |
| 3.3(3)          |       | Restated Bylaws of Caliper.                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                               |
| 4.2(5)          |       | Specimen Stock Certificate.                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                               |
| 4.3(6)          |       | Rights Agreement, dated as of December 18,  2001, between Caliper and Wells Fargo Bank Minnesota, N.A., as Rights Agent.                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                               |
| 10.1            |       | First Loan Modification Agreement, dated as of February 26,  2007, among Silicon Valley Bank, Caliper Life Sciences, Inc., NovaScreen  Biosciences Corporation, Xenogen Corporation and Xenogen Biosciences  Corporation filed as exhibit to 8-K filed on March 2, 2007. |
|            |       |                                                                                                                                                                                                                                                                               |
| 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.                                                                                          |

 

----

| (1)    | Previously filed as the like-numbered Exhibit to  Form 10-Q for the quarterly period ended March 31, 2004 and incorporated  by reference herein.                                                                                                                                                          |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                           |
| (2)    | Previously filed as Exhibit 4.1 to Current  Report on Form 8-K filed December 19, 2001 and incorporated by reference  herein.                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                           |
| (3)    | Previously filed as Exhibit 3.1 to Current Report on  Form 8-K filed March 2, 2007.                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                           |
| (4)    | Previously filed as the like-numbered Exhibit to  Form 10-K for the year ended December 31, 2002 and incorporated by  reference herein.                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                           |
| (5)    | Previously filed as the like-numbered Exhibit to  Annual Report on Form 10-K for the annual period ended December 31, 2004 and  incorporated by reference herein.                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                           |
| (6)    | Previously filed as Exhibit 99.2 to Current Report  on Form 8-K filed December 19, 2001 and incorporated by reference herein.                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                           |
| *      | The certifications attached as Exhibits 32.1 and  32.2 accompany this Quarterly Report on Form 10-Q pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  “filed” by Caliper for purposes of Section 18 of the Securities Exchange  Act of 1934, as amended. |

 

20

----

**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:  May 10, 2007 | By:                                                  | /s/ E. Kevin Hrusovsky |   |
|                          | E. Kevin Hrusovsky                                   |
|                          | Chief Executive Officer and President                |
|                          |                                                 |
|                          | By:                                                  | /s/ Thomas T. Higgins |   |
|                          | Thomas T. Higgins                                    |
|                          | Executive Vice President and Chief Financial Officer |

 

21

----

**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description of document**                                                                                                                                                                                                                                              |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)          |       | Amended and Restated Certificate of Incorporation of  Caliper.                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                               |
| 3.2(2)          |       | Certificate of Designation Of Series A Junior  Participating Preferred Stock.                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                               |
| 3.3(3)          |       | Restated Bylaws of Caliper.                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                               |
| 4.2(5)          |       | Specimen Stock Certificate.                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                               |
| 4.3(6)          |       | Rights Agreement, dated as of December 18,  2001, between Caliper and Wells Fargo Bank Minnesota, N.A., as Rights Agent.                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                               |
| 10.1            |       | First Loan Modification Agreement, dated as of February 26,  2007, among Silicon Valley Bank, Caliper Life Sciences, Inc., NovaScreen  Biosciences Corporation, Xenogen Corporation and Xenogen Biosciences  Corporation filed as exhibit to 8-K filed on March 2, 2007. |
|            |       |                                                                                                                                                                                                                                                                               |
| 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.                                                                                          |

 

----

| (1)    | Previously filed as the like-numbered Exhibit to  Form 10-Q for the quarterly period ended March 31, 2004 and incorporated  by reference herein.                                                                                                                                                          |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                           |
| (2)    | Previously filed as Exhibit 4.1 to Current  Report on Form 8-K filed December 19, 2001 and incorporated by reference  herein.                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                           |
| (3)    | Previously filed as Exhibit 3.1 to Current Report on  Form 8-K filed March 2, 2007.                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                           |
| (4)    | Previously filed as the like-numbered Exhibit to  Form 10-K for the year ended December 31, 2002 and incorporated by  reference herein.                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                           |
| (5)    | Previously filed as the like-numbered Exhibit to  Annual Report on Form 10-K for the annual period ended December 31, 2004 and  incorporated by reference herein.                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                           |
| (6)    | Previously filed as Exhibit 99.2 to Current Report  on Form 8-K filed December 19, 2001 and incorporated by reference herein.                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                           |
| *      | The certifications attached as Exhibits 32.1 and  32.2 accompany this Quarterly Report on Form 10-Q pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  “filed” by Caliper for purposes of Section 18 of the Securities Exchange  Act of 1934, as amended. |

 

22

----