**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

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

**for thequarterly period ended September 30, 2006.**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**for thetransition period from                 to                 .**

**Commissionfile # 000-28229**

**CALIPER LIFE SCIENCES, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**68 Elm Street**

**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 was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x  No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-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  oNo  x

**NUMBEROF SHARES OF COMMON STOCK OUTSTANDING ON October 31, 2006:  46,592,366**

 

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**CALIPERLIFE SCIENCES, INC.**

**TABLEOF CONTENTS**
| PART I   FINANCIAL INFORMATION                                                                               |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                              |   |
| Item 1.  Financial Statements (unaudited)                                                                    |   |
| Condensed  Consolidated Balance Sheets as of September 30, 2006 and December 31,  2005                       |   |
| Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2006 and 2005 |   |
| Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2006 and 2005           |   |
| Notes to  Unaudited Condensed Consolidated Financial Statements                                                   |   |
|                                                                                                              |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations         |   |
|                                                                                                              |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                          |   |
|                                                                                                              |   |
| Item 4.  Controls and Procedures                                                                             |   |
|                                                                                                              |   |
| PART II  OTHER INFORMATION                                                                                   |   |
|                                                                                                              |   |
| Item 1. Legal  Proceedings                                                                                        |   |
|                                                                                                              |   |
| Item 1A. Risk Factors                                                                                             |   |
|                                                                                                              |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                         |   |
|                                                                                                              |   |
| Item 3.  Defaults Upon Senior Securities                                                                     |   |
|                                                                                                              |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                 |   |
|                                                                                                              |   |
| Item 5. Other  Information                                                                                   |   |
|                                                                                                              |   |
| Item 6. Exhibits                                                                                             |   |
|                                                                                                              |   |
| SIGNATURES                                                                                                        |   |
|                                                                                                              |   |
| EXHIBIT INDEX                                                                                                     |   |
|  Ex-31.1 Section  302 Certification of CEO                                                                   |   |
|  Ex-31.2  Section 302 Certification of CFO                                                                   |   |
|  Ex-32.1  Section 906 Certification of CEO                                                                   |   |
|  Ex-32.2  Section 906 Certification of CFO                                                                   |   |

 

1

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**CALIPER LIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)(unaudited)**
| ** **                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                 |       |                         |       |                        |       |
| Cash and cash  equivalents                      |       | $                            | 22,334     |                        | $          | 8,096 |   |
| Marketable  securities                          |       | 7,436                        |       | 23,129                      |       |
| Restricted cash                                 |       | 285                          |       | 479                         |       |
| Accounts  receivable, net                       |       | 24,686                       |       | 19,532                      |       |
| Inventories                                     |       | 19,073                       |       | 11,061                      |       |
| Prepaid expenses  and other current assets      |       | 3,946                        |       | 2,657                       |       |
|                                            |       |                         |       |                        |       |
| Total current  assets                           |       | 77,760                       |       | 64,954                      |       |
|                                            |       |                         |       |                        |       |
| Restricted cash                                 |       | —                       |       | 3,145                       |       |
| Property and equipment,  net                    |       | 13,635                       |       | 12,019                      |       |
| Intangibles, net                                |       | 57,144                       |       | 16,822                      |       |
| Goodwill                                        |       | 82,011                       |       | 60,866                      |       |
| Other assets                                    |       | 1,432                        |       | 403                         |       |
|                                            |       |                         |       |                        |       |
| Total assets                                    |       | $                            | 231,982    |                        | $          | 158,209 |   |
|                                            |       |                         |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                            |       |                         |       |                        |       |
| Accounts payable                                |       | $                            | 7,487      |                        | $          | 5,318 |   |
| Accrued  compensation                           |       | 7,401                        |       | 6,774                       |       |
| Other accrued  liabilities                      |       | 13,914                       |       | 8,117                       |       |
| Deferred revenue  and customer deposits         |       | 12,968                       |       | 7,990                       |       |
| Current portion  of accrued restructuring       |       | 7,357                        |       | 2,872                       |       |
| Current portion  of long-term obligations       |       | 136                          |       | 133                         |       |
|                                            |       |                         |       |                        |       |
| Total current  liabilities                      |       | 49,263                       |       | 31,204                      |       |
|                                            |       |                         |       |                        |       |
| Credit facility and  other loans payable        |       | 8,598                        |       | 320                         |       |
| Noncurrent portion of  accrued restructuring    |       | 3,180                        |       | 4,358                       |       |
| Other noncurrent  liabilities                   |       | 5,481                        |       | 3,503                       |       |
| Deferred tax liability                          |       | 1,516                        |       | 386                         |       |
|                                            |       |                         |       |                        |       |
| Commitments and  contingencies (Note 7)         |       |                         |       |                        |       |
|                                            |       |                         |       |                        |       |
| Stockholders’ equity:                      |       |                         |       |                        |       |
| Preferred stock                                 |       | —                       |       | —                      |       |
| Common stock                                    |       | 46                           |       | 34                          |       |
| Additional  paid-in capital                     |       | 364,649                      |       | 302,412                     |       |
| Deferred  stock-based compensation              |       | —                       |       | (3,003                      | )          |
| Accumulated  deficit                            |       | (201,153                     | )          | (181,106                    | )          |
| Accumulated  other comprehensive income         |       | 402                          |       | 101                         |       |
|                                            |       |                         |       |                        |       |
| Total  stockholders’ equity                |       | 163,944                      |       | 118,438                     |       |
|                                            |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity |       | $                            | 231,982    |                        | $          | 158,209 |   |

 

*Seeaccompanying notes.*

2

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**CALIPER LIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS(In thousands, except per share data)(unaudited)**
| ** **                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                             | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                              |       |                             |       |                            |       |   |   |   |   |
| Product revenue                                                        |       | $                                | 18,501     |                            | $          | 15,813 |   | $ | 45,509 |   | $ | 41,394 |   |
| Service revenue                                                        |       | 5,934                            |       | 3,437                           |       | 16,366 |   | 10,293 |   |
| License fees and contract revenue                                      |       | 2,091                            |       | 2,082                           |       | 11,276 |   | 8,380 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Total revenue                                                          |       | 26,526                           |       | 21,332                          |       | 73,151 |   | 60,067 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Costs and  expenses:                                                   |       |                             |       |                            |       |   |   |   |   |
| Cost of product revenue                                                |       | 12,816                           |       | 10,517                          |       | 31,430 |   | 28,408 |   |
| Cost of service revenue                                                |       | 4,155                            |       | 1,665                           |       | 9,733 |   | 5,070 |   |
| Cost of license revenue                                                |       | 73                               |       | —                          |       | 73 |   | — |   |
| Research and development                                               |       | 8,663                            |       | 4,259                           |       | 18,049 |   | 12,857 |   |
| Selling, general and administrative                                    |       | 12,535                           |       | 8,033                           |       | 29,940 |   | 23,896 |   |
| Amortization of intangible assets                                      |       | 2,020                            |       | 897                             |       | 4,528 |   | 2,693 |   |
| Restructuring charges, net                                             |       | 23                               |       | 90                              |       | 97 |   | 266 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Total costs and expenses                                               |       | 40,285                           |       | 25,461                          |       | 93,850 |   | 73,190 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Operating loss                                                         |       | (13,759                          | )          | (4,129                          | )          | (20,699 | ) | (13,123 | ) |
| Interest income,  net                                                  |       | 99                               |       | 230                             |       | 470 |   | 698 |   |
| Other income  (expense), net                                           |       | 101                              |       | (50                             | )          | 379 |   | (509 | ) |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Loss before  income taxes                                              |       | (13,559                          | )          | (3,949                          | )          | (19,850 | ) | (12,934 | ) |
| Benefit  (provision) for income taxes                                  |       | 26                               |       | 97                              |       | (197 | ) | (35 | ) |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                               |       | $                                | (13,533    | )                               | $          | (3,852 | ) | $ | (20,047 | ) | $ | (12,969 | ) |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net loss per  share, basic and diluted                                 |       | $                                | (0.33      | )                               | $          | (0.13 | ) | $ | (0.56 | ) | $ | (0.42 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 40,939                           |       | 30,763                          |       | 36,078 |   | 30,602 |   |

 

*Seeaccompanying notes.*

3

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**CALIPER LIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS(In thousands)(unaudited)**
| ** **                                                                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **Operating  activities**                                                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net loss                                                                                   |       | $                                                       | (20,047    | ) | $ | (12,969 | ) |
| Adjustments to  reconcile net loss to net cash from operating activities:                  |       |                                                    |       |   |   |
| Depreciation and amortization                                                              |       | 7,119                                                   |       | 5,164 |   |
| Stock-based compensation expense, net                                                      |       | 4,090                                                   |       | 1,188 |   |
| In-process research and development                                                        |       | 2,898                                                   |       | — |   |
| Non-cash restructuring charge, net                                                         |       | 124                                                     |       | 270 |   |
| Foreign currency exchange (gains) losses                                                   |       | (282                                                    | )          | 430 |   |
| Changes in  operating assets and liabilities:                                              |       |                                                    |       |   |   |
| Accounts receivable                                                                        |       | 1,964                                                   |       | 2,840 |   |
| Inventories                                                                                |       | (2,380                                                  | )          | (2,888 | ) |
| Prepaid expenses and other current assets                                                  |       | 247                                                     |       | (365 | ) |
| Notes receivable from director                                                             |       | —                                                  |       | 151 |   |
| Accounts payable and other accrued liabilities                                             |       | 1,886                                                   |       | (492 | ) |
| Accrued compensation                                                                       |       | (1,570                                                  | )          | (913 | ) |
| Deferred revenue and customer deposits                                                     |       | (1,572                                                  | )          | (1,301 | ) |
| Other noncurrent liabilities                                                               |       | 406                                                     |       | 585 |   |
| Payments of accrued restructuring obligations, net                                         |       | (2,550                                                  | )          | (2,636 | ) |
|                                                                                       |       |                                                    |       |   |   |
| Net cash from  operating activities                                                        |       | (9,667                                                  | )          | (10,936 | ) |
|                                                                                       |       |                                                    |       |   |   |
| **Investing  activities**                                                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Purchases of  marketable securities                                                        |       | (14,450                                                 | )          | (5,927 | ) |
| Proceeds from  sales of marketable securities                                              |       | 11,157                                                  |       | 9,966 |   |
| Proceeds from  maturities of marketable securities                                         |       | 19,108                                                  |       | 10,798 |   |
| Other assets                                                                               |       | (21                                                     | )          | (519 | ) |
| Change in  restricted cash, net                                                            |       | 3,339                                                   |       | (1,273 | ) |
| Purchases of  property and equipment                                                       |       | (4,342                                                  | )          | (3,468 | ) |
| Xenogen acquisition,  cash and marketable securities acquired, net                         |       | 7,200                                                   |       | — |   |
|                                                                                       |       |                                                    |       |   |   |
| Net cash from  investing activities                                                        |       | 21,991                                                  |       | 9,577 |   |
|                                                                                       |       |                                                    |       |   |   |
| **Financing  activities**                                                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Payments of  obligations under sale-leaseback arrangements                                 |       | (100                                                    | )          | (301 | ) |
| Borrowings of  credit facility                                                             |       | 8,587                                                   |       | — |   |
| Payments of credit  facility, loans payable and other obligations                          |       | (8,680                                                  | )          | (367 | ) |
| Proceeds from  issuance of common stock                                                    |       | 1,696                                                   |       | 1,492 |   |
|                                                                                       |       |                                                    |       |   |   |
| Net cash from  financing activities                                                        |       | 1,503                                                   |       | 824 |   |
|                                                                                       |       |                                                    |       |   |   |
| Effect of exchange  rates on changes in cash and cash equivalents                          |       | 411                                                     |       | (149 | ) |
| Net increase  (decrease) in cash and cash equivalents                                      |       | 14,238                                                  |       | (684 | ) |
| Cash and cash  equivalents at beginning of period                                          |       | 8,096                                                   |       | 10,403 |   |
|                                                                                       |       |                                                    |       |   |   |
| Cash and cash  equivalents at end of period                                                |       | $                                                       | 22,334     |   | $ | 9,719 |   |
|                                                                                       |       |                                                    |       |   |   |
| **Supplemental  disclosure of cash flow information**                                      | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Stock issued for  acquisition of Xenogen                                                   |       | $                                                       | 52,149     |   |   |   |
| Warrants issued  for acquisition of Xenogen                                                |       | 5,476                                                   |       |   |   |
| Value of Xenogen  warrants assumed in acquisition                                          |       | 1,655                                                   |       |   |   |
| Total non-cash  consideration                                                              |       | 59,280                                                  |       |   |   |
| Non-cash assets  and liabilities                                                           |       | 52,080                                                  |       |   |   |
| Xenogen cash and  marketable securities acquired, net of $2.8 million in acquisition costs |       | $                                                       | 7,200      |   |   |   |
|                                                                                       |       |                                                    |       |   |   |
| Non-cash purchase of  property and equipment                                               |       | $                                                       | 400        |   |   |   |

 

*Seeaccompanying notes.*

4

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**CALIPER LIFE SCIENCES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2006(Unaudited)**

**1.Summary of Significant Accounting Principles**

***Basis of Presentation***

Caliper LifeSciences (“Caliper”) uses its core technologies of microfluidics, liquidhandling, and imaging technologies to provide life science research solutions.With its acquisitions of NovaScreen Biosciences Corporation (“NovaScreen”) inOctober 2005 and Xenogen Corporation (“Xenogen”) in August 2006, Caliper has aportfolio of products and services that span in vitro (test tube) and in vivo(in living organisms) experimentation. Caliper currently operates in onebusiness segment: the development and commercialization of life scienceinstruments and related consumables and services for use in drug discovery anddevelopment and other life sciences research.

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 ofRegulation S-X of the Securities and Exchange Commission (“SEC”).Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for completefinancial statements. Certain prior period amounts have been reclassified toconform to the current period presentation. In the opinion of management, alladjustments (consisting of normal recurring entries) considered necessary for afair presentation have been included. Operating results for the three and ninemonths ended September 30, 2006 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2006.  For example, Caliper typically experienceshigher revenues in the fourth quarter of its fiscal year as a result of capitalspending patterns of its customers.  Theconsolidated balance sheet as of December 31, 2005 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, 2005.

***Use of Estimates***

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

***Revenue Recognition***

*GeneralPolicy*

Caliper recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred or services have been rendered, the fee is fixed or determinable, andcollectibility is reasonably assured. Revenue is recognized on product saleswhen goods are shipped under Caliper’s standard terms of “FOB origin.” Revenueson shipments subject to customer acceptance provisions are recognized only uponcustomer acceptance, provided all other revenue recognition criteria are met.In general, sales made by Caliper do not include general return rights orprivileges.  In the limited circumstancewhere a right of return exists, Caliper recognizes revenue when the right haslapsed.  Based upon Caliper’s priorexperiences, sales returns are not significant and therefore a generalprovision for sales returns or other allowances is not recorded at the time ofsale.  Revenue from services offered byCaliper is generally recognized as the services are performed (or, asapplicable, 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 revenuearrangements may include the sale of an instrument, including software that isincidental to the instrument, consumables, software, service, technologylicenses, 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.  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 Emerging IssuesTask Force (EITF) Issue 00-21, “Revenue Arrangements with Multiple Deliverables”(EITF 00-21). The criteria applied to multiple element arrangements are whether(a) each delivered 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. Arrangement consideration 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 SAB 104,“Revenue Recognition (a replacement of SAB 101)” (SAB 104). In either case, theamount of arrangement consideration allocated to the delivered item(s) islimited to the amount that is not contingent on us delivering additionalproducts or services.

When our revenuearrangements include the sale of an instrument where the software is more thanincidental, revenue is recognized in accordance with Statement of Position97-2, “Software Revenue Recognition” and EITF 03-5, “Applicability of AICPAStatement of Position 97-2 to Non-Software Deliverables in an ArrangementContaining More-than-Incidental Software”. We allocate revenue on the arrangement between software and non-softwarerelated deliverables based on fair value as required by EITF 03-5. Revenueallocated to the software deliverable is recognized in accordance with SOP97-2.  If there is vendor-specificobjective evidence of the fair value(s) of the undelivered item(s) in anarrangement, but no such evidence for the delivered item(s), we use theresidual method to allocate the arrangement consideration associated with thesoftware deliverables.  Revenue allocated tonon-software deliverables is further allocated based on the separation criteriaestablished in EITF 00-21.   When items included in a multiple-elementarrangement represent separate units of accounting and there is objective andreliable evidence of fair value for all items included in the arrangement, weallocate the  arrangement considerationto the individual items based on their relative fair values. If there isobjective and reliable evidence of the fair value(s) of the undelivered item(s)in an arrangement, but no such evidence for the delivered item(s), we use theresidual method to allocate the arrangement consideration. In either case, theamount of arrangement consideration allocated to the delivered item(s) islimited to the amount that is not contingent on us delivering additionalproducts or services.

5

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Cash received fromcustomers as advance deposits for undelivered products and services, includingcontract research and development services, is recorded within customerdeposits until revenue is recognized.  Revenuerelated primarily to annual maintenance contracts and remaining undeliveredperformance obligations associated with product sales separately accounted forunder EITF 00-21 is deferred and recognized upon completion of the underlyingperformance criteria.

*ContractRevenue*

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

*Licenseand Royalty Fees*

Revenue fromlicense fees is recognized when the earnings process is complete and no furtherobligations exist. If further obligations exist, the license fee is recognizedratably over the obligation period. Royalties under licenses are recorded asearned in accordance with contract terms, when third-party results are reliablymeasured and collectibility is reasonably assured.

***Warranty Obligations***

Caliper providesfor estimated warranty expenses as a component of cost of revenue at the timeproduct revenue is recognized in accordance with FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, including Indirect Guarantees of Indebtedness of Others.”  Caliper offers a one-year limited warranty onmost products, which is included in the selling price. Caliper’s standardlimited warranty covers repair or replacement of defective goods, apreventative maintenance visit on certain products, and telephone-basedtechnical support.  Factors that affectCaliper’s warranty liability include the number of installed units, historicaland anticipated rates of warranty claims, and cost per claim. Caliperperiodically assesses the adequacy of its recorded warranty liabilities andadjusts amounts as necessary.

Changes in Caliper’swarranty obligation are as follows (in thousands):
|                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Balance at  beginning of period            |       | $                                                   | 1,555      |   | $ | 1,436 |   |
| Warranties  issued during the period       |       | 2,065                                               |       | 1,191 |   |
| Warranties  assumed in Xenogen acquisition |       | 548                                                 |       | — |   |
| Settlements made  during the period        |       | (1,482                                              | )          | (1,126 | ) |
|                                       |       |                                                |       |   |   |
| Balance at end of  period                  |       | $                                                   | 2,686      |   | $ | 1,501 |   |

 

***Net Loss Per Share***

Basic earnings pershare is calculated based on the weighted-average number of common sharesoutstanding during the period. Diluted earnings per share would give effect tothe dilutive effect of common stock equivalents consisting of stock options,unvested restricted stock, unvested restricted stock units, warrants andcontingently issuable shares (calculated using the treasury stock method).

Common stockequivalents equal to 13.5 and 7.2 million shares (prior to the application ofthe treasury stock method) were excluded from the computation of net loss pershare in each of the three and nine months ended September 30, 2006 and 2005,respectively, as they would have had an antidilutive effect due to Caliper’snet loss.

***Stock-Based Compensation***

On January 1,2006, Caliper adopted Statement of Financial Accounting Standard No. 123R, “Share-BasedPayment” (“SFAS 123R”), which requires all share-based payments to berecognized in the income statement as an operating expense, based on their fairvalues.   Caliper’s share-based paymentarrangements within the scope of SFAS 123R include options, restricted stockand other forms of stock bonuses, including restricted stock units, awardedunder its option plans, and its Employee Stock Purchase Plan (“ESPP”) whichenables participating employees to purchase Caliper’s stock at a discount fromfair market value.  Caliper has appliedthe modified prospective method in adopting SFAS 123R. For stock option awardsand ESPP purchases, Caliper estimates the fair value of share-based paymentsusing the Black-Scholes-Merton formula and, for all share-based payments madeafter the adoption of SFAS 123R, recognizes the resulting compensation expenseusing a straight-line recognition method over the applicable service period ofeach award.  The fair value of restricted stock awards (includingrestricted stock units) is determined based upon the fair market value ofCaliper’s stock on the date of grant. For restricted stock and restricted stockunit awards granted prior to January 1, 2006, Caliper continues to recognizethe resulting compensation expense under the accelerated expense attributionmethod.  Periods prior to adoption of SFAS 123R have not been restated.  The majority of the incentive andnonstatutory stock option grants and

6

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restricted stock awardscarry a 4-year vesting term, which is generally the requisite serviceperiod.  There is typically noacceleration provision related to the stock option grants.  The exercise price of stock option grants isequal to the fair market value of Caliper’s stock on the date of grant.  For certain restricted stock awards thatcliff vest, Caliper recognizes the resulting compensation expense using astraight-line recognition method over the applicable service period of eachaward.

Under the modifiedprospective method, compensation cost recognized in the three and nine monthsended September 30, 2006 includes (a) all share-based payments granted priorto, but not yet vested as of, January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of Statement ofFinancial Accounting Standard No. 123 (“SFAS 123”), “Accounting for Stock-BasedCompensation,” and (b) all share-based payments granted subsequent to January1, 2006, based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R. Prior to the adoption of SFAS 123R, forfeitures ofunvested awards were accounted for in the period in which they occurred.  Effective with the adoption of SFAS 123R,estimated prospective forfeitures are included in the determination ofcompensation cost to be recognized. Caliper applied an expected forfeiture rate of 12% to unvested stockoptions for which expense was recognized during the three and nine months endedSeptember 30, 2006.

Prior to adoptingSFAS 123R, Caliper accounted for its stock options and equity awards inaccordance with the intrinsic value method under the provisions of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB No. 25”), and related interpretations. Accordingly, prior to January 1, 2006, no compensation expense wasrecognized in Caliper’s financial statements for stock-based compensationgranted to employees other than for awards which had an exercise price lessthan the fair value of the underlying common stock on the date of grant.  Upon the adoption of SFAS 123R, deferredstock-based compensation of $3.0 million was reclassified to additional paid-incapital within stockholders’ equity.

Caliper accountsfor options issued to non-employees in accordance with the provisions ofSFAS 123R and EITF No. 96-18, “Accounting for Equity Instruments thatare issued to other than Employees for Acquiring, or in Conjunction withSelling Goods or Services.” For the three and nine months ended September 30,2006, compensation expense related to stock-based compensation issued tonon-employees was not material.

The adoption ofSFAS 123R on January 1, 2006 had the effects of increasing Caliper’s operatingloss, loss before income taxes and net loss for the three and nine months endedSeptember 30, 2006 by $1.1 million and $2.8 million, respectively, over theamount of share-based compensation which would have been recognized under APBNo. 25.  Basic and diluted net loss pershare for the three and nine months ended September 30, 2006 would have beenlower by $0.03 and $0.08, respectively, if Caliper had not adopted SFAS 123R. Theadoption of SFAS 123R had no impact on cash flows.

Stock-basedcompensation expense is included within costs and expenses as follows (inthousands):
| ** **                           | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cost of product  revenue             |       | $                                                   | 124        |                                               | $          | 39 |   | $ | 373 |   | $ | 121 |   |
| Cost of service  revenue             |       | 44                                                  |       | 3                                                  |       | 111 |   | 16 |   |
| Research and  development            |       | 232                                                 |       | 56                                                 |       | 723 |   | 219 |   |
| Selling, general  and administrative |       | 1,027                                               |       | 241                                                |       | 2,870 |   | 814 |   |
| Total                                |       | $                                                   | 1,427      |                                               | $          | 339 |   | $ | 4,077 |   | $ | 1,170 |   |

 

The followingtable illustrates the effect on net loss and net loss per share for the threeand nine months ended September 30, 2005 as if Caliper had applied the fairvalue-based method in each of those periods (in thousands, except per sharedata):
|                                                                                                   | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
|                                                                                              |       |                  |       |                 |       |
| Net loss:                                                                                         |       |                  |       |                 |       |
| As reported                                                                                       |       | $                     | (3,852     | )                    | $          | (12,969 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss                     |       | 339                   |       | 1,170                |       |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method |       | (697                  | )          | (5,164               | )          |
| Pro forma net loss                                                                                |       | $                     | (4,210     | )                    | $          | (16,963 | ) |
| Net loss per  share:                                                                              |       |                  |       |                 |       |
| As reported:                                                                                      |       | $                     | (0.13      | )                    | $          | (0.42 | ) |
| Basic and diluted                                                                                 |       |                  |       |                 |       |
| Pro forma:                                                                                        |       |                  |       |                 |       |
| Basic and  diluted                                                                                |       | $                     | (0.14      | )                    | $          | (0.55 | ) |

 

7

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On September 30,2006, Caliper had five share-based compensation plans (the “Plans”), which aredescribed above and within Note 14 of our audited financial statements includedin Caliper’s Annual Report on Form 10-K for the year ended December 31, 2005.

The fair value ofeach option award issued under Caliper’s equity plans is estimated on the dateof grant using a Black-Scholes-Merton based option pricing model that uses theassumptions noted in the following table. Expected volatilities are based on historical volatility of Caliper’sstock.  The expected term of the optionsis based on Caliper’s historical option exercise data taking into considerationthe exercise patterns of the option holder during the option’s life.  The risk-free interest rate is based on theU.S. Treasury yield curve in effect on the date of the grant.
|                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
|                         |       |                                                    |       |   |   |
| Expected  volatility (%)     |       | 45                                                      |       | 63 |   |
| Risk-free  interest rate (%) |       | 4.80                                                    |       | 3.96 |   |
| Expected term  (years)       |       | 4.3                                                     |       | 4.1 |   |
| Expected dividend yield  (%) |       | —                                                  |       | — |   |

 

A summary of stockoption and restricted stock activity under the Plans as of September 30, 2006,and changes during the nine months then ended as follows:
| Stock Options                 | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                                          | ** ** | **(in thousands)**             | ** ** |
|                               |       |       |       |                                   |       |                                                |       |                                |       |
| Outstanding at  December 31, 2005  |       | 6,381,195  |       | $                                      | 6.56       |                                                |       |                                |       |   |
| Granted                            |       | 641,000    |       | 6.24                                   |       |                                                |       |                                |       |
| Exercised                          |       | (420,680   | )          | 3.58                                   |       |                                                |       |                                |       |
| Canceled                           |       | (98,540    | )          | 9.99                                   |       |                                                |       |                                |       |
| Outstanding at  September 30, 2006 |       | 6,502,975  |       | $                                      | 6.67       |                                                | 5.93       |                                | $          | 3,697 |   |
| Exercisable at  September 30, 2006 |       | 4,860,262  |       | $                                      | 6.86       |                                                | 5.13       |                                | $          | 3,616 |   |
| Unvested at September  30, 2006    |       | 1,642,713  |       | $                                      | 6.10       |                                                | 8.29       |                                | $          | 82 |   |

 
| Restricted Stock and Restricted Stock Units | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                                          | ** ** | **(in thousands)**             | ** ** |
|                                                                 |       |       |       |                                   |       |                                                |       |                                |       |
| Outstanding at  December 31, 2005                                    |       | 612,226    |       | *                                      |       |                                                |       |                                |       |
| Granted                                                              |       | 165,000    |       | *                                      |       |                                                |       |                                |       |
| Vested                                                               |       | (161,424   | )          | *                                      |       |                                                |       |                                |       |
| Unvested  repurchases                                                |       | (10,994    | )          | *                                      |       |                                                |       |                                |       |
| Outstanding at  September 30, 2006                                   |       | 604,808    |       | *                                      |       | 2.71                                                |       | $                                   | 2,951      |   |
|                                                                      |            |            |            |                                        |            |                                                     |            |                                     |            |  |

 

----

*Nominal exerciseprice

During the ninemonths ended September 30, 2006, Caliper granted its employees and directors641,000 options at a weighted average grant date fair value of $2.67 per share,and 165,000 restricted stock units at a weighted average grant date fair valueof $6.40 per share. The total intrinsic value of options exercised during thenine months ended September 30, 2006 was approximately $0.7 million. The totalfair value restricted stock that vested during the nine months ended September30, 2006 was approximately $0.8 million.

As of September30, 2006, there was $7.3 million of total unrecognized compensation costrelated to unvested stock-based compensation arrangements granted under thePlans.  That cost is expected to berecognized over a weighted-average remaining service (vesting) period ofapproximately 2.4 years.

***Reclassifications***

The 2006 incomestatement presentation includes the reclassification of restructuring-relatedaccretion charges from interest expense, as previously reported, to therestructuring line item within the accompanying consolidated statement ofoperations.  In addition, foreigncurrency transaction losses (gains) have been reclassified within the statementof cash flows from effect of exchange rates to cash from operatingactivities.  Also, employee stock-basedcompensation expense, which was previously disclosed as a

8

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separate income statementline item, has been reflected within costs and expenses in accordance with SFAS123R. The 2006 balance sheet presentation reflecting the current portion ofrestricted cash has been reclassified from cash and cash equivalents to aseparate line in the consolidated balance sheet.  Amounts in the 2005 financial statements havebeen reclassified to conform to the 2006 financial statement presentation.  These reclassifications had no effect onpreviously reported net loss, total stockholders’ equity or net loss per share.

**2.Acquisitions**

***Xenogen Corporation***

On August 9, 2006,Caliper completed its acquisition of Xenogen for $62.1 million, including $52.2million in Caliper common stock, $7.1 million in warrants and $2.8 million ofestimated direct acquisition costs. Xenogen develops and markets products,technologies and services for acquiring, analyzing and managing complex imagedata from live animals. Xenogen’s invivo biophotonic imaging system combines technologies in molecularbiology and physiology to enable researchers to track and monitor the dynamicproperties associated with the mechanisms of disease and the impact of drugs onsuch mechanisms as they occur at the molecular level in live animals.  The principal goals of the acquisition wereas follows:

·                  **Improve Caliper’s strategic position in the markets it serves byallowing it to supply its customers with systems and services for use in bothin vitro and in vivo research. **Theacquisition allows Caliper to supply the fast-growing molecular imaging marketand is expected to position Caliper as one of the first life scienceinstrumentation companies able to provide an integrated package of products andservices for both in vitro and in vivo research.  Caliper believes the integration of moleculartool technologies presents a key opportunity to improve drug discoveryresearch.

·                  **Academic and commercial cross-selling opportunities. **Caliper believes that therespective market strengths of Xenogen, with its strong academic presence, andCaliper, with its strong commercial presence, complement each other,potentially resulting in sales synergies.

·                  **Improve ability to fulfill the needs of researchers.**   Caliper believes it is capable of enhancingXenogen’s existing platforms to further satisfy the needs of researchers whoare looking for increased application power and flexibility in imagingresearch.

The value of thecommon stock issued was calculated in accordance with the terms of the mergeragreement and EITF No. 99-12, “Determination of the Measurement Date forthe Market Price of Acquirer Securities Issued in a Purchase BusinessCombination.” The value of the warrants issued and assumed was estimated usingthe Black-Scholes-Merton option-pricing model. Caliper issued 12,108,877 sharesof common stock and warrants to purchase 4,701,733 shares of common stock, andassumed 1,830,581 of Xenogen warrants, in exchange for all of Xenogen’s equitysecurities outstanding at the closing. The Caliper warrants have a term of fiveyears from the closing and an exercise price of $6.79 per share. Caliperreserved 1,060,273 common shares and 411,698 warrants for issuance subject tothe future potential exercise of the Xenogen warrants assumed by Caliper.  The terms of these warrants are discussed inNote 8.

Xenogen’soperations, assumed as of the date of the acquisition, are included in theresults of operations of Caliper beginning on August 9, 2006. The acquisitionwas accounted for as a purchase business combination in accordance withSFAS No. 141, “Business Combinations,” and Caliper accordinglyallocated the estimated purchase price of Xenogen based upon the fair value ofnet assets acquired and liabilities assumed. The total purchase price wasallocated to acquired assets and assumed liabilities as follows (in thousands):
| Cash and cash equivalents                                                             |   | $       | 10,000 |   |
|---------------------------------------------------------------------------------------|--------|---------|--------|--------|
| Other current  assets                                                                 |   | 14,010  |   |
| Other assets                                                                          |   | 2,101   |   |
| Liabilities  assumed                                                                  |   | (28,560 | )      |
| Liabilities  established for employee terminations and facility closures (see Note 5) |   | (4,594  | )      |
| Identifiable  intangible assets                                                       |   | 44,849  |   |
| In-process  research and development                                                  |   | 2,898   |   |
| Goodwill                                                                              |   | 21,376  |   |
|                                                                                  |   |    |   |
|                                                                                  |   | $       | 62,080 |   |

 

The allocation ofthe purchase price is expected to be finalized within one year of theacquisition. Goodwill related to the Xenogen transaction is not taxdeductible.  Acquired intangible assetsconsisted of the following (in thousands):
| ** **                            | ** ** | **Useful Life** | ** ** | **Fair  Value** | ** ** |
|---------------------------------------|------------|----------------------|------------|-----------------|------------|
| Backlog                               |       | 1  year              |       | $               | 78         |   |
| Developed and  contract technologies  |       | 3  to 6 years        |       | 6,770           |       |
| Customer  contracts and relationships |       | 8  years             |       | 4,990           |       |
| Core  technologies                    |       | 8  to 9 years        |       | 30,113          |       |
| Trade name                            |       | Indefinite           |       | 2,898           |       |
|                                  |       |                 |       | $               | 44,849     |   |

 

9

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Fair value wasdetermined by an independent appraisal and was based upon projected futurediscounted cash flows taking into account risks related to the characteristicsand application of the technology, existing and future markets and assessmentsof life cycle stage of the technology.

The weightedaverage amortization period for acquired intangibles, excluding the trade name,is 8.1 years. Amortization expense was approximately $765,000 related toXenogen in the third quarter of 2006. Future amortization of acquiredintangible assets is estimated as follows (in thousands):
| 2006 (3 months  ended) |   | $      | 1,350  |   |
|------------------------|--------|--------|--------|--------|
| 2007                   |   | 5,372  |   |
| 2008                   |   | 5,324  |   |
| 2009                   |   | 5,301  |   |
| 2010                   |   | 5,147  |   |
| Thereafter             |   | 18,692 |   |
|                   |   | $      | 41,186 |   |

 

In-processresearch and development costs of approximately $2.9 million were expensedwithin research and development during the third quarter of 2006 within theaccompanying Statement of Operations.

***NovaScreen Biosciences Corporation***

On October 3,2005, Caliper completed the acquisition of NovaScreen for $23.3 million,including $17.6 million in Caliper common stock, $4.4 million of cashand $1.3 million of estimated direct acquisition costs.  NovaScreen’s operations, assumed as of thedate of the acquisition, are included in the results of operations of Caliperbeginning on October 3, 2005.

***Pro Forma Operating Results***

Unaudited proforma operating results for Caliper for the three and nine months endedSeptember 30, 2006 and 2005, assuming the above acquisitions were completed asof January 1, 2005, would have been as follows (in thousands, except pershare amounts):
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                    |       | $                                                    | 30,404     |                                                | $          | 31,389 |   | $ | 96,920 |   | $ | 93,502 |   |
| Operating loss                             |       | (16,950                                              | )          | (12,029                                             | )          | (35,445 | ) | (31,825 | ) |
| Net loss                                   |       | (16,750                                              | )          | (11,530                                             | )          | (34,993 | ) | (31,810 | ) |
| Basic and  diluted loss per share          |       | (0.36                                                | )          | (0.27                                               | )          | (0.76 | ) | (0.74 | ) |
| Pro forma weighted  average shares assumed |       | 46,262                                               |       | 42,872                                              |       | 45,908 |   | 42,711 |   |
|                                            |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

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

·                  Amortizationrelated to acquired intangible assets of $3.2 million and $5.1 million for thenine months ended September 30, 2006 and 2005, respectively, have been includedin the pro forma operating results.

·                  Revenueof $0.9 million that would have been included in Xenogen’s reported revenue ona continuing GAAP basis has been added back to third quarter 2006 revenue.  This adjustment resulted from a $3.5 millionpurchase accounting adjustment to record deferred revenues of Xenogen at fairvalue in accordance with SFAS No. 141 and EITF No. 01-03, “Accounting in aBusiness Combination for Deferred Revenue of an Acquiree.”

·                  Costof product revenue charges of $0.1 million related to the valuation of inventoriesat fair value as of the date of acquisition have been excluded from the proforma operating results shown above.

10

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**3.Inventories**

 Inventoriesare stated at the lower of cost (determined on a first-in, first-out basis, or “FIFO”)or market. Amounts are removed from inventory and recognized as a component ofcost of sales on a FIFO basis. Inventories consist of the following (inthousands):
| ** **      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Raw material    |       | $                      | 9,903      |                  | $          | 5,075 |   |
| Work-in-process |       | 1,031                  |       | 762                   |       |
| Finished goods  |       | 8,139                  |       | 5,224                 |       |
|            |       |                   |       |                  |       |
| Inventories     |       | $                      | 19,073     |                  | $          | 11,061 |   |

 

**4.Comprehensive Loss**

Comprehensive lossis as follows (in thousands):
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                                  |       | $                                | (13,533    | )                               | $          | (3,852 | ) | $ | (20,047 | ) | $ | (12,969 | ) |
| Unrealized gain  on marketable securities |       | 32                               |       | 46                              |       | 121 |   | 71 |   |
| Foreign currency  translation gain (loss) |       | 89                               |       | 7                               |       | 181 |   | (201 | ) |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Comprehensive loss                        |       | $                                | (13,412    | )                               | $          | (3,799 | ) | $ | (19,745 | ) | $ | (13,099 | ) |

 

**5.Restructuring Activities**

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

·                  Caliperhas identified severance and other expenses relating to the involuntarytermination of personnel performing duplicative general and administrative andmanufacturing functions and established an assumed liability of $3.5 millionrelated to this activity.  This action isexpected to reduce the total Xenogen workforce by 34 employees, orapproximately 6%. Substantially all affected employees will be terminated byOctober 31, 2006.

·                  Caliperwill not occupy one of the Xenogen facilities in Alameda, California which was intendedto be occupied for sales, general and administrative functions.  Caliper plans to sublease the facility.  As of August 9, 2006, Caliper established aliability of $1.1 million related to this lease obligation. The fair value ofthe lease obligation was determined based upon the discounted present value ofremaining lease rentals (8.25% discount rate used) for the space no longeroccupied, considering sublease income potential of the property. The lease termexpires April 30, 2011.

In addition to the above liabilitiesrecognized in connection with the Xenogen acquisition, accruedrestructuring obligation as of September 30, 2006 includes remainingliabilities related to two facilities in Mountain View, California as a resultof the following restructuring activities:

·                  InNovember 2003, Caliper consolidated its instrument manufacturing andresearch and development facilities, and recognized a $7.4 millionrestructuring charge for the estimated remaining lease costs through June 2008.

·                  InJune 2004, Caliper partially consolidated its research and developmentfacilities, and recognized a $2.1 million restructuring charge forestimated remaining lease costs through June 2008.

·                  InDecember 2004, as a result of identifying additional efficiencies, Caliperwas able to achieve further consolidation of its research and developmentfacilities.  In addition, Caliper revisedits estimate of the sublease income potential of its idle facilities.  Caliper recognized an additional$3.6 million restructuring charge as a result of these activities.

·                  InDecember 2005, Caliper recognized a $1.4 million restructuring credit toreflect the net present value of future sublease rental income based upon subleasesentered into for portions of its two idle facilities.

These facilityclosures were accounted for in accordance with SFAS No. 146, “Accountingfor Costs Associated with Exit or

11

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Disposal Activities,”pursuant to which Caliper recorded a liability equal to the fair value of theremaining lease payments as of the cease-use date for each of the closedfacilities. Fair value was determined based upon the discounted present valueof remaining lease rentals (5% discount rate used) for the space no longer occupied,considering sublease income at each point in time.

Minimum monthlylease and operating expense payments under the two idle facility leases arecurrently $0.3 million, subject to escalation through expiration of the leasesin June 2008 at an average rate of 3.6%. The restructuring liability as ofSeptember 30, 2006 reflects the minimum future payment obligations related tobase lease rentals and operating charges over the remaining lease lives throughJune 30, 2008, net of anticipated sublease income, discounted at 5%.

In connection withthe acquisition of Xenogen, Caliper assumed a $1.0 million obligationrelated to Xenogen’s St. Louis, Missouri operation. The facility closure waspreviously accounted for in accordance with SFAS 146.

The following tablesummarizes the restructuring accrual activity during the nine months endedSeptember 30, 2006 (in thousands):
|                                       | ** ** | **Severance and  Related** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Balance,  December 31, 2005      |       | $                               | —     |           | $          | 7,230     |       | $ | 7,230 |   |
| Established  obligations with Xenogen |       | 3,503                           |       | 1,091          |       | 4,594     |       |
| Assumed  obligation with Xenogen      |       |    —             |       | 1,034          |       | 1,034     |       |
| Interest  accretion                   |       | —                          |       | 247            |       | 247       |       |
| Payments                              |       | (55                             | )          | (2,513         | )          | (2,568    | )          |
|                                  |       |                            |       |           |       |      |       |
| Balance as of September  30, 2006     |       | $                               | 3,448      |           | $          | 7,089     |       | $ | 10,537 |   |

 

The remainingseverance and facility obligations are as follows (in thousands):
|                                       | ** ** | **Severance and  Related** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Years ending  December 31:       |       |                            |       |           |       |      |       |
| 2006  (3 months ended)           |       | $                               | 271        |           | $          | 1,171     |       | $ | 1,442 |   |
| 2007                                  |       | 3,177                           |       | 4,200          |       | 7,377     |       |
| 2008                                  |       | —                          |       | 1,893          |       | 1,893     |       |
| 2009                                  |       | —                          |       | 289            |       | 289       |       |
| 2010                                  |       | —                          |       | 96             |       | 96        |       |
|                                  |       |                            |       |           |       |      |       |
| Total minimum  payments               |       | 3,448                           |       | 7,649          |       | 11,097    |       |
| Less: Amount  representing interest   |       | —                          |       | 560            |       | 560       |       |
|                                  |       |                            |       |           |       |      |       |
| Present value of  future payments     |       | 3,448                           |       | 7,089          |       | 10,537    |       |
| Less: Current  portion of obligations |       | 3,448                           |       | 3,909          |       | 7,357     |       |
|                                  |       |                            |       |           |       |      |       |
| Non-current portion of  obligations   |       | $                               | —     |           | $          | 3,180     |       | $ | 3,180 |   |

 

**6.  Credit Facility and Other Loans Payable**

On August 9, 2006,Caliper entered into a loan and security agreement with a bank (the “CreditFacility”) which permits Caliper to borrow up to $20.0 million in the form ofrevolving loan advances 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 Caliper’s unrestrictedcash held at the bank exceeds $20.0 million, or prime plus one-half of onepercentage point if Caliper’s unrestricted cash held at the bank is below $20.0million.   Under the Credit Facility, Caliper is permitted to borrowup to $20.0 million, provided it maintains unrestricted cash of at least $20.0million with the bank, or is 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 Caliper’s unrestricted cash maintained at the bank or$10.0 million.  The Credit Facility has a two-year initial maturity. 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 CreditFacility includes traditional lending and reporting covenants including thatcertain financial covenants applicable to liquidity and earnings are to bemaintained by Caliper and tested as of the last day of each quarter. As ofSeptember 30, 2006, 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.

In August 2006,Caliper utilized the Credit Facility to refinance Xenogen’s outstanding creditfacility with a bank (approximately $8.0 million as of August 9, 2006), andconsolidate other existing debt obligations of NovaScreen (approximately$370,000). In addition, Caliper financed certain loan fees, interest and coststhrough increased borrowings (approximately $217,000). The Credit Facility willserve as a source of capital for ongoing operations and working capital needs.  As of September 30, 2006, the Credit

12

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Facility is classified aslong term in the attached balance sheet within loans payable.

Outstandingobligations under the Credit Facility and Other Loans Payable consisted of thefollowing (in thousands): 
|                                                 | ** ** | **Interest Rates** | ** ** | **Payment Terms**    | ** ** | **Repayment  Schedule**          | ** ** | **Due Date** | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|----------------------------------|------------|-------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **              | ** ** | ** **                | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Credit Facility                                 |       | 8.25%                   |       | Interest  only            |       | Monthly,  Principal at  maturity |       | 2008              |       | $                            | 8,587      |                        | $          | — |   |
|                                            |       |                    |       |                      |       |                             |       |              |       |                         |       |                        |       |
| Capital Loans                                   |       | 9.57-9.84%              |       | Principal  & interest |       | Monthly                          |       | 2007              |       | 147                          |       | —                      |       |
|                                            |       |                    |       |                      |       |                             |       |              |       |                         |       |                        |       |
| Bank Notes  Payable                             |       | 5.90-7.75%              |       | Principal  & interest |       | Monthly                          |       | 2009              |       | —                       |       | 453                         |       |
|                                            |       |                    |       |                      |       |                             |       |              |       | 8,734                        |       | 453                         |       |
| Less:  Current portion of long-term obligations |       |                    |       |                      |       | 136                              |       | 133               |       |
| Credit Facility and  other loans payable        |       |                    |       |                      |       | $                                | 8,598      |              | $          | 320                          |       |

 

As of September30, 2006, future scheduled debt payments were as follows (in thousands):
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2006 (3 months ended)                        |       | $          | 53         |   |
| 2007                                         |       | 94         |       |
| 2008                                         |       | 8,587      |       |
| Total payments                               |       | $          | 8,734      |   |

 

At September 30,2006, Caliper had $11.4 million in available borrowings under the CreditFacility.  This amount is restricted by$3.6 million in standby letters of credit related to Caliper’s facilities.

**7.  Commitments and Contingencies**

***Leases***

As of September30, 2006, future minimum payments under operating leases (excluding idlefacilities accounted for within accrued restructuring) were as follows (inthousands):
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2006 (3 months ended)                        |       | $          | 1,807      |   |
| 2007                                         |       | 7,106      |       |
| 2008                                         |       | 6,947      |       |
| 2009                                         |       | 4,513      |       |
| 2010                                         |       | 2,576      |       |
| Thereafter                                   |       | 9,055      |       |
| Total minimum  lease payments                |       | $          | 32,004     |   |

 

Caliper’sworldwide headquarters and instrument manufacturing operations are located inHopkinton, Massachusetts. Caliper’s research and development and manufacturingoperations for LabChip devices are located in Mountain View, California.NovaScreen screening, profiling, and assay development operations are locatedin Hanover, Maryland. Caliper also has direct sales, service and applicationsupport operations in several European countries and Japan.

In connection withthe acquisition of Xenogen, Caliper acquired three facility leases in Alameda,California, a facility lease in St. Louis, Missouri and a facility lease inCranbury, New Jersey.  Cranbury is theprimary location for the in vivo imaging services business of Xenogen. Caliperwill maintain one of the facilities in Alameda which will serve as the primarylocation for research and development activities for imaging, biology andreagents.  One facility’s lease expiresin December 2006 and Caliper will not renew this obligation.  Neither the St. Louis facility nor the thirdfacility in Alameda will be occupied.

***Royalties***

On August 9, 2006, Stanford University providedXenogen with a copy of an audit report prepared by a third party consultantwhich asserted certain claims of underpayments under the license agreementbetween Stanford and Xenogen during the period from 2002 through March 31, 2006based upon the consultant’s interpretation of Xenogen’s exclusive license withStanford.  Upon review of the auditreport, Caliper determined that additional royalties of $71,000 were owed toStanford.  This underpayment was accruedas an assumed obligation as of August 9, 2006 in connection with Caliper’sacquisition of Xenogen.  Caliper iscontesting the remaining payment obligation that is claimed in the Stanfordaudit report, and as a result, has not accrued for any liability beyond

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the $71,000of royalties that have been accrued and paid. Caliper is currently discussingwith Stanford the scope of Xenogen products that are subject to the royaltyprovisions of the Stanford license agreement. As a result of thesediscussions, the parties may amend the license agreement to change the royaltiesCaliper pays to Stanford for future product sales.  An amendment may alsoinclude the payment of back royalties to Stanford for products Caliper hasalready sold. Caliper has not discussed with Stanford the specific terms andconditions of an amendment.  At any time,either party may choose binding arbitration to resolve any dispute over theamount of back royalties owed, if any. The amount of any remaining contingent obligation, if any, cannotcurrently be estimated, nor is it probable that a liability exists.  However, Caliper believes that this matterwill be resolved within the next twelve months. In accordance with SFAS 141, Caliper will account for any additionalliability related to the identified contingent obligation as of August 9, 2006as additional purchase price which will be recorded to goodwill.

***Legal Proceedings***

On March 7, 2005, AntiCancer, Inc. filed alawsuit against Xenogen in the U.S. District Court for the Southern District ofCalifornia (the “Court”) alleging infringement of five patents of AntiCancer.The complaint seeks damages and injunctive relief against the allegedinfringement. On March 29, 2005, AntiCancer amended its complaint toinclude an additional claim seeking a judgment that one of our imaging patents exclusivelyin-licensed from Stanford University, U.S. patent No. 5,650,135, is invalid. OnMay 10, 2005, Xenogen filed its answer to AntiCancer’s amended complaint.Xenogen denied all of AntiCancer’s allegations and asserted various affirmativedefenses, including its position that AntiCancer’s patents cited in itscomplaint, and its patent claims relating to in vivo imaging of fluorescence,are invalid. Caliper is vigorously defending itself against AntiCancer’s claimsand believes AntiCancer’s complaint is without merit. Concurrent with filingXenogen’s answer to AntiCancer’s complaint, Xenogen had filed its owncounterclaims against AntiCancer. These counterclaims allege that AntiCancerinfringes two of Xenogen’s U.S. patents, Nos. 5,650,135 and 6,649,143, bothrelating to in vivo imaging and with a priority date before each of theAntiCancer patents alleged in its amended complaint. Both parties seekinjunctive relief and an unspecified amount of damages, including enhanceddamages for willful infringement. Caliper intends to vigorously pursue itsclaims against AntiCancer.

The Court held the first three days of a Markmanhearing (a pre-trial hearing where the trial judge hears evidence and then continues,as a matter of law, the asserted patent claims) relating to these claims onJune 13, 2006 through June 15, 2006. On July 14, 2006, Xenogen filed a motion to disqualify AntiCancer’sattorneys due to numerous violations of ethical rules by such attorneys.  After a hearing on this motion, on August 10,2006, the Court issued an order granting Xenogen’s motion to disqualifyAntiCancer’s attorneys.  On October 18,2006, the Court issued a supplemental and clarifying order to its previousAugust 10, 2006 order in which the Court, among other things, (i) grantedXenogen’s motion to restart the Markman hearing, (ii)  granted Xenogen’s motion to prohibit thetransfer of tainted files to AntiCancer’s successor counsel, (iii) continuedXenogen’s motion for sanctions against AntiCancer’s previous counsel,  (iv) granted AntiCancer’s motion for anextension of time to file a writ to seek appellate review of the Court’s August10, 2006 order, as supplemented and clarified on October 18, 2006, (v) vacatedall pending hearing dates in the case, and (vi) granted AntiCancer permissionuntil November 6, 2006 to amend its complaint. AntiCancer may file a writseeking such appellate review. The Court has indicated that if AntiCancerobtains appellate review of the order(s), further proceedings in this case willbe stayed pending the outcome of any appellate review of the Court’s order. OnNovember 6, 2006, AntiCancer served its Third Amended Complaint in thismatter and voluntarily dismissed Stanford University from this proceeding. TheThird Amended Complaint adds Caliper as a defendant. All defendants will fileresponsive pleadings in due course with the Court.

Caliper currently is notable to determine the outcome of the patent infringement lawsuit withAntiCancer. Even if Caliper prevails in this lawsuit, the defense of thelawsuit or similar lawsuits will be expensive and time-consuming and maydistract Caliper management from operating Caliper’s business.

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

**8.Stockholders’ Equity**

During 2006, Caliperhas issued 12,791,741 shares of common stock, increasing the total sharesoutstanding as of September 30, 2006 to 46,577,533. Included in this overallshare increase were 12,108,877 shares issued in connection with the Xenogenacquisition (see Note 2).  The remainingincrease in shares relates to shares issued as a result of stock purchasesunder the employee stock purchase plan, stock option exercises and vesting ofrestricted stock awards.

Also in connectionwith Caliper’s acquisition of Xenogen, Caliper granted Xenogen stockholders anaggregate of 4,701,733 warrants, and reserved an additional 411,814 warrantsfor potential issuance upon the exercise of Xenogen warrants (see below) whichwere assumed by Caliper.  Each suchwarrant permits the holder to acquire one Caliper common share at an exerciseprice of $6.79 per share through August 9, 2011.   Caliper valued the warrants using theBlack-Scholes-Merton formula at $1.16 per warrant, or approximately $5.5 millionin total for all issued and outstanding warrants.  This value is included in additional paid-incapital as of September 30, 2006.  Keyassumptions used to value the warrants were as follows:
| Fair market value at  issuance |   | $       | 4.25   |   |
|--------------------------------|--------|---------|--------|--------|
| Exercise price                 |   | $       | 6.79   |   |
| Contractual term               |   | 5 years |   |
| Volatility                     |   | 40      | %      |
| Risk free rate of  return      |   | 4.87    | %      |

 

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As discussed above, Caliper also assumed certainoutstanding Xenogen warrants.  As ofAugust 9, 2006, there were 1,830,581 Xenogen warrants outstanding, which wereexercisable at $2.91 to $40.75 per warrant. Upon the potential exercise of these warrants, the holders are entitledto receive the number of Caliper shares and warrants that such holder wouldhave been entitled to receive as a Xenogen stockholder as of the acquisitiondate.  The termination date of theCaliper warrants that are to be issued upon the eventual exercise of theXenogen warrants may not be extended beyond the 5 year expiration date (August9, 2011).  Caliper estimated the value ofthe Xenogen warrants at approximately $1.6 million, which represents the valueof both the Caliper shares and warrants to be issued upon exercise of theXenogen warrants. The value of the Xenogen warrants assumed was calculatedusing the Black-Scholes-Merton option-pricing model.  The key assumptions used to value thewarrants assumed were as follows:

| Implied fair market value at  issuance |   | $2.72                    |
|----------------------------------------|--------|--------------------------|
| Exercise price                         |   | Based on actual  warrant |
| Contractual term                       |   | Based on actual  warrant |
| Volatility                             |   | 40%                      |
| Risk free rate  of return              |   | 4.86-4.88%               |

 

The implied fair market value at the date of issuancerepresents the share-exchange ratio-adjusted fair value of the common stock issuableupon exercise, plus the warrant-exchange ratio-adjusted fair value of thewarrant issuable upon exercise.

**9. Recent Accounting Pronouncements**

In June 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48clarifies the accounting for uncertainties in income taxes recognized in anenterprise’s financial statements. The interpretation requires that Caliper determinewhether it is more likely than not that a tax position will be sustained uponexamination by the appropriate taxing authority.  If a tax position meetsthe more likely than not recognition criteria, FIN 48 requires the tax positionbe measured at the largest amount of benefit greater than 50 percent likely tobe realized upon ultimate settlement.  This accounting standard iseffective for fiscal years beginning after December 15, 2006.  The effect,if any, of adopting FIN 48 on the Caliper’s financial position and results ofoperations has not been determined.

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

**10.Subsequent Event**

Upon the anniversary of the NovaScreen acquisition,October 3, 2006, Caliper released the remaining 318,734 shares that were beingheld in escrow subject to the terms of the purchase agreement between Caliperand NovaScreen.

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

*ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations as of September**30,2006 and for the three and nine months ended September 30, 2006 and September30, 2005 should be read in conjunction with our financial statements includedin this Quarterly Report on Form 10-Q and Management’s Discussion and Analysisof Financial Condition and Results of Operations and our financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2005.*

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

**ExecutiveSummary**

***Business***

Caliper LifeSciences uses its core technologies of microfluidics, optical imaging, and liquidhandling to provide life sciences research solutions. Our strategy is tofurther enhance the value of our company to the pharmaceutical industry byimproving the correlation between in vitro and in vivo experimentation. A largemajority of drug candidates that seem promising in early in vitro studies failduring animal trials. By tracking this drug attrition, understanding its rootcauses, and pursuing solutions, we believe we can improve the clinicalrelevance of early drug discovery and development. Our recent acquisition ofXenogen Corporation is key to this strategy since it adds in vivo imagingtechnologies, products, and services to our existing portfolio of in vitromicrofluidics and automation technologies, products and services.

The initial focusof our strategic effort is to pursue oncology applications, and we arecurrently seeking new experimental models, techniques and tools that bridge invitro and in vivo experimentation in this major therapeutic area. Future areasof interest include solutions for cardiovascular and inflammation therapeuticprograms.

Our products andservices currently address some of the key challenges that face thepharmaceutical and biotechnology industry, including product pipelines,late-stage drug failures, and side effect issues. Using our products andservices, researchers are able to increase the speed and efficiency of theirhigh-throughput 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 pursuingdiagnostic market potential for our technology and believe that our LabChip® technologies may help reduce the high cost ofmany diagnostic tests, particularly molecular diagnostic tests, throughintegration, automation and miniaturization of the various steps required tocarry out these tests. We are presently working with collaboration partners inthis area, although these projects are still in the feasibility or earlydevelopment stages.

We have threechannels of distribution for our products: direct to customers, indirectthrough our international network of distributors, and through partnershipchannels under our Caliper DrivenÔprogram. Through our direct and indirect channels, we sell complete systemsolutions, developed by us, to end customers. Our Caliper Driven program iscore to our business strategy and complementary to our direct sales anddistribution network activities, as it enables us to extend the commercialpotential of our LabChip and advanced liquid handling technologies into newindustries and new applications with experienced commercial partners. Underthis program, we supply liquid handling products, microfluidics chips, andother products on an OEM basis, and when requested, provide product developmentexpertise to our commercial partners, who then typically integrate anapplication solution and market it to their end customers. In addition, as partof our Caliper Driven program we provide licenses to our extensive patentestate to other companies. We view out-licensing under our Caliper Drivenprogram as a way for us to extend our technologies into certain applicationareas that we do not have a present strategic intent to address directly, or thatmay require the greater technical, marketing or financial resources of ourlicensing partner, in order to obtain more rapid adoption of our technology inthe particular application area. 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.

On August 9, 2006,we acquired Xenogen Corporation, a maker of advanced imaging systems includinginstruments and biological solutions designed to accelerate drug discovery anddevelopment for approximately $62.1 million, including $52.2 million in Calipercommon stock, $7.1 million in warrants and $2.8 million of estimated directacquisition costs. Under the terms of the acquisition agreement, we issuedapproximately 12.1 million common shares and approximately 4.7 million warrantsto purchase Caliper common shares, and reserved approximately 1.1 millionadditional shares and 0.4 million warrants related to Xenogen warrantsassumed at the date of acquisition, in exchange for all of Xenogen’s equitysecurities outstanding at the closing.

The acquisition ofXenogen remains subject to substantial risks and uncertainties, as follows:

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·             the expectedbenefits, including revenue growth, from combining the two companies may not berealized;

·             integrationof the companies and their product portfolios following closing could provemore difficult and costly than expected, and planned synergies may nottranspire;

·             Xenogenemployees who are key to maintaining the revenue growth of Xenogen’s productsmay leave Xenogen due to the uncertainties created by the merger;

·             thehistoric growth rate of Xenogen’s products may not continue as expected due tomarket saturation or to the failure to convince large pharmaceutical companiesas to the value of Xenogen’s imaging technology;

·             unanticipateddifficulties may be encountered in connection with consolidating the operationsof the two companies; and

·             otherfactors that involve known and unknown risks and uncertainties may cause actualfinancial results, performance or achievements to differ materially fromanticipated results.

***Overview of Third Quarter 2006***

During the thirdquarter of 2006, we achieved total revenue of $26.5 million, which representeda 24% net increase compared to revenue in the third quarter of 2005. Highlightsof the quarter included our overall improved revenue performance due to strongacquisition growth, the completion of substantial integration activitiesinvolving Xenogen, and several new product launches.

The acquisitionsof Xenogen in the quarter and of NovaScreen in October 2005 were the principaldrivers of overall revenue growth.  These operations generated thirdquarter 2006 revenues of approximately $9.4 million including $5.6 million ofproduct revenue from sales of IVIS imaging systems, $2.4 million of drugdiscovery services, and $1.1 million of license and contract revenue.  Other areas of our business, especiallyincluding OEM sales to Affymetrix and contract revenue related to collaborativeresearch projects, partially offset this revenue improvement.  We experienced no additional GCAS systemsales to Affymetrix in comparison with $2.0 million in third quarter of2005.  Affymetrix has experienceddifficulties with its products that are used in conjunction with the GCASsystem, and we are unsure when sales of such systems will resume. In addition,we experienced a $1.0 million decrease in contract revenue versus the thirdquarter of 2005 as a result of certain collaborative research projectsconcluded since last year. When a particular project concludes, we commonlyexperience a decline in revenue and time lag until such time that a collaborationpartner begins to generate substantial commercial sales which produce benefitto Caliper.  Sales of chips and reagentsand drug development and specialty instruments were also off during the quarterin comparison to the third quarter of 2005.

We completed ourmerger with Xenogen Corporation on August 9, 2006 and have completed majorfacets of the integration of the manufacturing operations and general andadministrative functions.  Approximately three-fourths of the IVIS Imagingsystems shipped during the third quarter were manufactured in our Hopkinton,Massachusetts manufacturing headquarters.  We believe the acquisition ofXenogen will significantly advance our capabilities as a leading provider oftools and services that increase the productivity and clinical relevance oflife sciences research, and is expected to accelerate our revenue growth andprofitability. The integration of molecular tool technologies could present akey opportunity to improve drug discovery research. As highlighted in the FDA CriticalPath Initiative, biomarker research and better experimentation models areessential to improve predictability and efficiency along the critical path fromlaboratory to commercial drug. The combination of our proprietary microfluidictechnology and automation expertise with Xenogen’s proprietary imagingtechnology addresses these key research needs by creating molecular levelsolutions that encompass in vitro (test tube) to in vivo (livingorganism).  These technologies offer exceptional data quality andproductivity advantages, and we believe that combining them to offer a highlycorrelated suite of products and services should result in earlier, clinicallyrelevant insights in the drug discovery process.  We refer to thecontinuum of these solutions as “the I-I Bridge” which stands for in vitro—invivo.  During the third quarter, including the period from July 1 toAugust 9 which preceded the acquisition, the Xenogen business operation shipped33 IVIS imaging systems compared to 21 systems in the third quarter of 2005.

In connection withour integration of Xenogen, we have taken steps, including staffing reductionsand facilities consolidation, to reduce Xenogen planned annual spending by over$11.0 million.  We expect to begin benefitingat this rate of fully combined savings starting in the first quarter of2007.  The majority of cost synergies related to existing and or openemployment positions that were eliminated due to redundancy.  Reductionsoccurred mainly in manufacturing and general and administrative functions.

Five new productswere launched during the third quarter of 2006:

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·      IVIS Spectrum — in vivo imaging systemwith bioluminescence and fluorescence imaging capabilities;

·      Zephyr automated liquid handling system —a compact liquid handling system with the advanced capabilities of our Scicloneliquid handler;

·      Maestro — new application software forliquid handling;

·      LabChip Desktop Profiler — a microfluidicplatform for the rapid profiling of kinases; and

·      ProfilerPro — a suite of reagent kits foruse with Desktop Profiler.

Subsequent to thequarter, Canon U.S. Life Sciences announced that it has licensed Caliper’smicrofluidics technology as the basis of development of Canon’s platform forgenetic diagnostics and screening.  Thisannouncement and license agreement results from a prior collaboration projectwith Canon under our Caliper Driven program. The license agreement, which wasentered into during the second quarter of 2006, grants Canon non-exclusiveaccess to Caliper’s microfluidics intellectual property.

**CriticalAccounting Estimates**

The criticalaccounting policies used in the preparation of our financial statements that webelieve affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements presented in this reportare described in our Management’s Discussion and Analysis of FinancialCondition and Results of Operations, and in the Notes to the ConsolidatedFinancial Statements included in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2005. There have been no material changes to the criticalaccounting policies, other than the adoption of SFAS 123R, revenue recognitionand restructuring charges established within the Xenogen acquisition.

***SFAS123R***

On January 1,2006, the Company adopted SFAS 123R, which requires all share-based payments,including grants of stock options, to be recognized in the income statement asan operating expense, based on their fair values.

The Companyestimates the fair value of each option award on the date of grant using aBlack-Scholes-Merton based option-pricing model.  Various assumptions are used in theseestimations, including:

·                  expectedvolatility, which is based on historical volatility of the Company’s stock;

·                  expected optionterm, which is based on the Company’s historical option exercise data takinginto consideration the exercise patterns of the option holders during theoption’s life;

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

A 10% unfavorablechange in expected volatility and option term, which represent the mostsensitive and judgmental assumptions, would not have a material effect on ourfinancial statements.

Prior to adoptingSFAS 123R, the Company accounted for stock-based compensation under APB No. 25,as permitted by SFAS 123.  The Companyhas applied the modified prospective method in adopting SFAS 123R.  Accordingly, periods prior to adoption havenot been restated.  As of September 30,2006, there was $7.3 million of total unrecognized compensation costs relatedto unvested stock-based compensation arrangements granted under the Plans.  That cost is expected to be recognized over aweighted-average remaining service (vesting) period of approximately 2.4 years.

The implementationof SFAS 123R has had no adverse effect on our balance sheet or total cashflows, but it does impact our operating expenses, net loss and net loss pershare.  Because we are not restatingperiods prior to adoption, comparability between periods has beenaffected.  Additionally, management usesestimates of and assumptions about forfeiture rates, volatility and interestrates to calculate stock-based compensation. Changing these estimates could materially affect our operating results.

***RevenueRecognition***

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Our revenuerecognition policy requires that we determine “fair value” of undelivered itemsbased upon our historic selling prices, or where no historic informationexists, based upon management’s estimate of the probable selling prices forsuch undelivered items. The amount of our product revenue is affected by ourjudgments as to whether an arrangement includes multiple elements, and if so,whether there is objective evidence of fair value for those elements. Changesto the elements in an arrangement and the ability to establish objectiveevidence of fair value for those elements could affect the timing of revenuerecognition. These conditions are sometimes subjective and actual results couldvary from the estimated outcome, requiring future adjustments to revenue. Werecognize certain service and contract revenue for certain arrangements basedupon proportional performance which requires that we estimate resourcesrequired to perform the work. The extent to which our resource estimates proveto be inaccurate could affect the timing of the revenue recognition for aparticular contract arrangement.

***RestructuringCharge***

During the thirdquarter of 2006, in connection with the Xenogen acquisition, we established liabilitiesfor certain employee terminations of $3.5 million and facility closures of $1.1million.  We established exit plans foractivities which took place and accounted for these plans in accordance withEmerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities inConnection with a Purchase Business Combination” and Statement of FinancialAccounting Standards (SFAS) No. 141, “Business Combinations.” Inaccordance with such standards, management makes certain judgmental estimatesrelated to these established liabilities. For example, the closure offacilities required us to make estimates with respect to contractual rentalcommitments or lease buy-outs for office space being vacated and related costs,offset by estimated sublease income. We review on at least a quarterly basisour sublease assumptions. These estimates include anticipated rates to becharged to a sub-tenant and the timing of the sublease arrangement. If therental markets change, our sublease assumptions may not be accurate and changesin these estimates might be necessary and could materially affect our financialcondition and results of operations.

**Resultsof Operations for the Three and Nine Months Ended September****30, 2006 and 2005**

***Revenue***
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Product revenue                    |       | $                                | 18,501     |                            | $          | 15,813 |   | $ | 2,688 |   | 17 | % | $ | 45,509 |   | $ | 41,394 |   | $ | 4,115 |   | 10 | % |
|                               |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service revenue                    |       | 5,934                            |       | 3,437                           |       | 2,497 |   | 73 | % | 16,366 |   | 10,293 |   | 6,073 |   | 59 | % |
|                               |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| License fees and  contract revenue |       | 2,091                            |       | 2,082                           |       | 9 |   | — | % | 11,276 |   | 8,380 |   | 2,896 |   | 35 | % |
|                               |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenues                     |       | $                                | 26,526     |                            | $          | 21,332 |   | $ | 5,194 |   | 24 | % | $ | 73,151 |   | $ | 60,067 |   | $ | 13,084 |   | 22 | % |

 

*TotalRevenue.* Our total revenue increase on both a three and ninemonth basis over 2005 resulted primarily from growth driven by our acquisitionsof NovaScreen in October of 2005 and Xenogen in August of 2006.  Sales of Xenogen IVIS imaging systems duringthe third quarter offset lower product sales caused mainly by a $2.0 milliondecrease in GCAS systems sold to Affymetrix on an OEM basis. The same is truefor the nine months ended September 30, 2006 over which time GCAS system saleswere lower by $3.4 million than in the 2005 period. We have experienced noadditional GCAS system sales to Affymetrix during the first nine months of 2006and remain unsure of when such sales will resume.  In vivo and in vitro**drugdiscovery services provided by our Xenogen and NovaScreen service groups,respectively, were the principal drivers of service growth during both the threeand nine months ended September 30, 2006 in comparison to the same periods in2005.  In addition, success inout-licensing our intellectual property, which now includes imagingintellectual property as a major contributor within our Caliper Driven licensingprogram portfolio, contributed to improved license revenues a year-to-datebasis.

*ProductRevenue*.  Productrevenue increased during the third quarter of 2006 compared to the thirdquarter of 2005 primarily as a result of growth from Xenogen IVIS imagingsystems which generated $5.6 million of revenue in the quarter.  The total number of IVIS instruments soldduring the quarter was 33, a 57% increase over 21 units sold by Xenogen in thethird quarter of 2005 while Xenogen was a stand alone reporting entity.  Twenty-seven (27) units were soldpost-acquisition and included in Caliper’s

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product revenues.  Other product sales declined $2.9 millionduring the third quarter of 2006 compared to the third quarter of 2005 with themajority of the decrease, $2.0 million, resulting from the decline in GCASsystem sales. Our development and specialty instrument product lines accountedfor $0.8 million of the remaining decrease in product sales while microfluidicinstruments and chips and all other drug discovery instrument sales wererelatively unchanged during the quarter. During the third quarter of 2006 weplaced a total of 14 new LabChip systems with customers versus 15 systems inthe third quarter of 2005. A decrease in MultiDose dissolution workstationsales accounted for most of the decline in development and specialty instrumentsales.

Product revenueincreased during the nine months ended September 30, 2006 compared to 2005 alsoas a result of growth from Xenogen IVIS imaging systems as discussedabove.  GCAS system sales were lower by$3.4 million in comparison to the nine months ended September 30, 2005.  Sales of microfluidic instruments and chipsincreased approximately $1.3 million during the nine month period compared to2005 due primarily to increased instrument placements while all other productsales increased approximately $0.5 million due primarily to increased sales ofdiscovery liquid handling and automation products.  During the nine months ended September 30,2006, we placed a total of 39 LabChip systems with customers, in comparison toa total of 26 systems during the nine months ended September 30, 2005, a 50%increase in placements.

*ServiceRevenue*. Service revenue increased during the three and ninemonths ended September 30, 2006 in comparison to the same periods in 2005primarily as a result of growth relating to our NovaScreen and Xenogenoperations.  During the three and ninemonths ended September 30, 2006, equipment related services decreased by 4% and2%, respectively, over the same periods in 2005.  The majority of these decreases resulted fromdecreased billable services from Affymetrix and our development products.

*LicenseFees and Contract Revenue.* License fees and contract revenue increased during the three monthsended September 30, 2006 primarily as a result of SBIR grant research projectsconducted at NovaScreen and in vivo imaging license revenue generated byXenogen.  Combined, these new sources ofrevenue generated approximately $1.1 million of revenue to offset a comparabledecrease in collaborative funding project revenue due to projects that werefinalized between the last quarter of 2005 and the third quarter of 2006.  Overall license fees and contract revenuesincreased during the nine months ended September 30, 2006 in comparison to thesame period in 2005 due to increased license revenue under Caliper Drivenout-licensing program and also as a result of growth from SBIR grant researchprojects conducted at NovaScreen and**in vivoimaging license revenue generated by Xenogen. Combined, these new sources of revenue contributed approximately $2.0million during the nine months ended September 30, 2006.

***Costs of Revenue***
| ** **              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)** | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Product                 |       | $                                | 12,816     |                            | $          | 10,517 |   | $ | 2,299 |   | 22 | % | $ | 31,430 |   | $ | 28,408 |   | $ | 3,022 |   | 11 | % |
|                    |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service                 |       | 4,155                            |       | 1,665                           |       | 2,490 |   | 150 | % | 9,733 |   | 5,070 |   | 4,663 |   | 92 | % |
|                    |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Contract                |       | 73                               |       | —                          |       | 73 |   | — | % | 73 |   | — |   | 73 |   | — | % |
|                    |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Costs             |       | $                                | 17,044     |                            | $          | 12,182 |   | $ | 4,862 |   | 40 | % | $ | 41,236 |   | $ | 33,478 |   | $ | 7,758 |   | 23 | % |

 

*Cost ofProduct Revenue.*  Costof product revenue increased during the three months ended September 30, 2006in comparison to the same period of 2005 primarily as a result of the increasein overall product sales which accounted for approximately $1.4 million ofhigher material costs and incremental absorption of manufacturing costs.  The remaining increase resulted fromunabsorbed manufacturing costs of approximately $0.4 million occurring in ourchip production plant due to reduced chip sales to Agilent,  increased freight and other miscellaneousspending of approximately $0.2 million due to manufacturing scale-up of theIVIS imaging system product line, $0.1 million of stock-based compensation dueto the adoption of SFAS 123R and $0.1 million of purchase accounting effectsrelated to the valuation of acquired Xenogen inventories.

Cost of productrevenue increased during the nine months ended September 30, 2006 in comparisonto the same period of 2005, primarily as a result of the increase in overallproduct sales which accounted for approximately $1.9 million of higher materialcosts and incremental absorption of manufacturing costs.  Other increases to cost of product revenueduring the nine months ended September 30, 2006 in comparison to 2005 includedapproximately $0.3 million in stock-based compensation due to the adoption ofSFAS 123R, $0.3 million of increased freight costs, $0.2 million of unfavorablematerial spending variances due to higher costs and $0.3 million of all otherspending effects.

*Cost ofService Revenue.*  Costof service revenue increased during the three and nine months ended September30, 2006 primarily due

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to service related costsof NovaScreen and Xenogen which were new to Caliper in 2006 in comparison to2005.  On a combined basis, costs relatedto our drug discovery service operations were $2.4 million during the quarterand $4.5 million on a nine month basis during 2006.

*GrossMargins.*  Gross marginon product revenue was 30.7% and 30.9%, respectively, for the three and ninemonths ended September 30, 2006, as compared to 33.5% and 31.4%, respectively,in the same periods during 2005.

During the threemonths ended September 30, 2006, unabsorbed manufacturing costs resulting fromreduced chip production and slightly higher manufacturing spending overallaccounted for approximately 1.9 percentage points of the overall 2.8 percentagepoint decrease. The increase in manufacturing spending included incrementalcosts of approximately $0.1 million associated with our strategic outsourcinginitiative aimed to reduce the costs of certain key purchased components, Xenogen-relatedretention costs of approximately $0.1 million and purchase accounting relatedexpenses of approximately $0.1 million. We completed the integration of our manufacturing operations andsuccessfully transferred the manufacturing of IVIS imaging systems fromAlameda, California to Hopkinton, Massachusetts.  Approximately three-fourths of the IVISImaging systems shipped during the third quarter were manufactured in ourHopkinton, Massachusetts manufacturing headquarters.  The outsourcing initiative is expected toresult in lower material cost of goods beginning in the fourth quarter of2006.  In addition to the forgoing, theadoption of SFAS 123R had a 0.4 percentage point unfavorable impact on productgross margins in comparison to the third quarter of 2005.  All other changes resulted in the remaining0.5 percentage point of change including the effects of product mix.

During the ninemonths ended September 30, 2006, product margins decreased by 0.5 percentagepoints.  This decrease was caused by increasedfreight, warranty and unfavorable purchase price variances which combined hadan unfavorable impact of approximately 2 percentage points.  These unfavorable effects were partiallyoffset by the favorable impact of increased leverage of manufacturing spendingover higher product revenues.

Gross margin onservice revenue was 30.0% and 40.5%, respectively, for the three and ninemonths ended September 30, 2006, as compared to 51.6% and 50.7%, respectively,in comparison to the same periods in 2005. The decreases in 2006 in comparison to 2005 resulted from lower grossmargins associated with NovaScreen’s and Xenogen’s drug discovery servicerevenues.  Xenogen contributedapproximately $1.1 million of animal production and collaborative researchrevenue at a negative gross margin, while NovaScreen’s overall gross marginswere approximately 18% for the quarter and 37% for the nine month period, ineach case lower than our historical service business margin of approximately50%.  NovaScreen’s service margins arecurrently influenced by a more significant proportion of government contractrevenue than is typical of NovaScreen’s historic business.  As service revenues expand, both forNovaScreen and Xenogen, we expect to see increased gross margin on servicerevenues.

***Expenses***
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**              | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Research and  development            |       | $                                | 8,663      |                            | $          | 4,259 |   | $ | 4,404 |   | 103 | % | $ | 18,049 |   | $ | 12,857 |   | $ | 5,192 |   | 40 | % |
|                                 |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative |       | 12,535                           |       | 8,033                           |       | 4,502 |   | 56 | % | 29,940 |   | 23,896 |   | 6,044 |   | 25 | % |
|                                 |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization of  intangible assets   |       | 2,020                            |       | 897                             |       | 1,123 |   | 125 | % | 4,528 |   | 2,693 |   | 1,835 |   | 68 | % |
|                                 |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Restructuring charges                |       | 23                               |       | 90                              |       | (67 | ) | (74 | )% | 97 |   | 266 |   | (169 | ) | (64 | )% |
|                                      |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Researchand Development Expenses.* The net increase in research and development expenses during the threemonths ended September 30, 2006 in comparison to the same period in 2005comprised $2.9 million of in-process research and development (see Note 2) and$1.5 million of new spending, including $1.0 million of imaging biology andphysics research performed by Xenogen, and $0.5 million of grant-relatedresearch and assay development research performed by NovaScreen.  Xenogen’s research and development spendingcomprised approximately $0.5 million in labor-related costs, $0.3 million infacilities-related costs and $0.2 million of all other costs.  NovaScreen’s research and development spendingcomprised approximately $0.2 million in labor-related costs, $0.1 million infacilities-related costs and $0.2 million of all other costs.  In addition, the adoption of SFAS 123Rresulted in additional stock-based compensation expense of $0.2 million. Allother research and development expenses decreased by approximately $0.2 millionduring the quarter in comparison to the same period in 2005.

The net increasein research and development expenses during the nine months ended September 30,2006 in comparison to the same period in 2005 comprised $2.9 million ofin-process research and development (see discussion above) and $2.5 million ofnew spending, including $1.0 million of Xenogen-related expenses as discussedabove, and $1.5 million of grant-related research and assay developmentresearch performed by NovaScreen. NovaScreen’s research and development spending comprised approximately$0.7 million in labor-related costs, $0.4 million of materials cost, $0.2million in facilities-related costs and $0.2 million of all other costs.  In addition, the adoption of SFAS 123Rresulted in additional stock-based compensation expense $0.5 million.   All other research and

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development expensesdecreased by approximately $0.7 million during the quarter in comparison to thesame period in 2005 including materials expenses, which accounted for themajority of the decrease.

As part of ourCaliper Driven program, we may undertake potential projects that could causeour research and development costs to increase as a percentage of revenue,although such increased spending may be fully or partially funded by ourcommercial partners.

*Selling,General and Administrative Expenses.*  The net increase in selling, general andadministrative expenses during the three months ended September 30, 2006 incomparison to the same period in 2005 comprised $2.6 million of new spendingincluding $2.2 million of Xenogen expenses and $0.4 million of NovaScreenexpenses.  In addition, stock-basedcompensation expense in the third quarter increased by approximately $0.8million related to the adoption of SFAS 123R.  The remaining increase in expense of $0.9 million during the thirdquarter included increased accounting, audit fees and consulting fees of approximately$0.7 million which were largely related to Xenogen integration relatedactivities, $0.3 million of increased legal expenses related to patent work,$0.2 million of labor-related expenses and reductions in all other expenses ofapproximately $0.3 million.  Xenogen-related expenses included approximately $1.3 million oflabor-related expenses, $0.4 million of legal expenses consisting primarily ofAntiCancer litigation costs, and $0.5 million of spending across otherareas.  We anticipate that Xenogen-relatedgeneral and administrative costs will decrease in subsequent periods, althoughit is difficult to predict the level of ongoing litigation related legal coststhat we will incur relating to the matters described in Part II, Item 1 (“LegalProceedings”).  The majority ofNovaScreen-related expenses in this area were labor-related costs.

The net increasein selling, general and administrative expenses during the nine months endedSeptember 30, 2006 in comparison to the same period of 2005 was comprised of$3.4 million of new spending including $2.2 million of Xenogen expenses, asdiscussed above, and $1.2 million of NovaScreen-related expenses.   Stock-based compensation expense increasedby approximately $2.1 million related to the adoption of SFAS 123R. All otherselling, general and administrative expenses increased on a net basis byapproximately $0.5 million including the increase in AntiCancer legal costs of$0.4 million and an increase of $0.4 million related to integration costs,offset by a $0.3 million decrease in all other selling, general andadministrative costs during the third quarter of 2006.

*Amortizationof Intangible Assets.* The increase in amortization ofintangible assets for the three months ended September 30, 2006 relates to theintangible assets acquired in the NovaScreen acquisition in October 2005 andXenogen in August 2006. The three and nine month expense increase includesamortization related to Xenogen intangible assets only during the thirdquarter.

*RestructuringCharges.* We incurred restructuring charges in 2006 and 2005related to acquisition and integration activities that are more fully discussedin Note 5 to the accompanying financial statements.  Restructuring charges during the three andnine month period relate to accretion of interest on facilities, net ofsub-lease income.

***Interest and Other Expense, Net***
|                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**      | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest income,  net        |       | $                                | 99         |                            | 230        |   | (131 | ) | (57 | )% | 470 |   | 698 |   | (228 | ) | (33 | )% |
| Other income (expense),  net |       | 101                              |       | (50                             | )          | 151 |   | 302 | % | 379 |   | (509 | ) | 888 |   | 174 | % |
|                              |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*InterestIncome, Net.*  Interestincome in 2006 decreased on both a three and nine month basis compared to 2005primarily due to lower cash, cash equivalents and marketable securitiesbalances, on average, over the previous period due to cash used in operatingand investing activities.  In addition,interest income, net, decreased due to interest expense incurred during the thirdquarter of 2006 related to the new Credit Facility with a bank.

*OtherIncome, Net.*  Otherincome, net increased on a three month basis compared to 2005 primarily fromgains and losses associated with sales and maturities of available for salesecurities. During the three months ended September 30, 2006, we realized gainsof approximately $0.1 million compared to losses of $0.1 million in 2005. Otherincome, net increased on a nine month basis compared to 2005 primarily fromgains and losses associated with recording account balances denominated innon-U.S. currencies at fair market value. During the nine months ended September 30, 2006, we incurred foreigncurrency transaction gains of approximately $0.3 million compared to transactionlosses of $0.4 million in 2005.

**Liquidityand Capital Resources**

As of September30, 2006, we had $30.1 million in cash, cash equivalents, marketable securitiesand short-term restricted cash, as compared to $31.7 million as of December 31,2005.

As noted in Note 6of the Notes to Condensed Consolidated Financial Statements, on August 9, 2006,Caliper entered into a Credit Facility with a bank which permits Caliper toborrow up to $20.0 million in the form of revolving loan advances including upto $5.0 million in the form of letters of credit.  Principal borrowings under the CreditFacility accrue interest at a floating per annum rate equal to the prime rateif Caliper’s unrestricted cash held at the bank exceeds $20.0 million, or primeplus one-half of one percentage

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point if Caliper’sunrestricted cash held at the bank 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 a two-year initial maturity.  During the first 18 months following Caliper’smerger with Xenogen, Caliper is subject to pay interest on a minimum of $8.0million of outstanding borrowings.

The CreditFacility includes traditional lending and reporting covenants including thatcertain financial covenants applicable to liquidity and earnings are to bemaintained by Caliper and tested as of the last day of each quarter.  The Credit Facility also includes several potentialevents of default such as payment default, material adverse change conditionsand insolvency conditions that could cause interest to be charged at prime plustwo percentage points, or, in the event of any uncured events of default, couldresult in the bank’s right to declare all outstanding obligations immediatelydue and payable.

In August 2006,Caliper utilized the Credit Facility to refinance Xenogen’s outstanding creditfacility with a bank (approximately $8.0 million as of August 9, 2006), andconsolidate other existing debt obligations of NovaScreen (approximately$370,000). In addition, Caliper financed certain loan fees, interest and coststhrough increased borrowings (approximately $217,000). The Credit Facility willserve as a source of capital for ongoing operations and working capitalneeds.  As of September 30, 2006, theCredit Facility is classified as long term in the attached balance sheet withinloans payable.

***Cash Flows***
| ** **                  | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                  | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| **(In thousands)**     | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **$ Change** | ** ** |
| Cash provided by  (used in) |       |                            |       |       |       |   |   |
| Operating  Activities       |       | $                               | (9,667     | )          | $          | (10,936 | ) | $ | (1,269 | ) |
| Investing  Activities       |       | 21,991                          |       | 9,577      |       | 12,414 |   |
| Financing Activities        |       | 1,503                           |       | 824        |       | 679 |   |
|                             |            |                                 |            |            |            |  |  |  |  |  |

 

*OperatingActivities.*  During thenine months ended September 30, 2006 we used $9.7 million of cash foroperating activities which included approximately $2.6 million of restructuringaccrual lease payments, net of sublease income, primarily related to our idlefacilities in Mountain View, California. Net operating results and all otherworking capital changes consumed approximately $7.1 million of cash.  Primary cash sources comprised $1.5 millionof cash provided by tenant reimbursement funding from our Hopkinton,Massachusetts landlord.  Primary cashuses included inventory purchases of approximately $2.4 million associated withnewer products and 2005 bonus payments of approximately $2.5 million.  All other working capital changes consumedcash of approximately $3.7 million, consisting primarily of increased outflowsfor salary related costs and facilities.

*InvestingActivities.*  During thenine months ended September 30, 2006, net proceeds from purchases, sales andmaturities of marketable securities and unrestricted cash generated $19.2 millionof cash which we used for operations and property and equipment purchases.  Our primary investing activities includedpurchases of property and equipment of $4.3 million, of which the majorityrelated to facility improvements made to our Hopkinton, Massachusetts headquarters.As noted above, we received tenant improvement funding from our landlordreflected in operating activities which partially offset this investment.  In addition, we acquired $7.2 million, net ofacquisition costs, in cash and marketable equity securities.

*FinancingActivities.*  During thenine months ended September 30, 2006, financing cash proceeds were principallycomprised of proceeds from option exercises and employee stock purchase planpurchases.

**ContractualObligations**

The commitmentsunder leases and other obligations are described in our Management’s Discussionand Analysis of Financial Condition and Results of Operations and in the Notesto the Consolidated Financial Statements included in our Annual Report on Form10-K for the fiscal year ended December 31, 2005.  In connection with the Xenogen acquisition,Caliper assumed certain contractual obligations which include a Credit Facilityand certain lease obligations.

***CreditFacility***

On August 9, 2006,Caliper entered into a loan and security agreement with a bank (“the “CreditFacility”) which permits Caliper to borrow up to $20.0 million in the form ofrevolving loan advances 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 Caliper’s unrestrictedcash held at the bank exceeds $20.0 million, or prime plus one-half of onepercentage point if Caliper’s unrestricted cash held at the bank is below $20.0million.   Under the Credit Facility, Caliper is permitted to borrowup to $20.0 million, provided it maintains unrestricted cash of at least $20million with the bank, or is 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 Caliper’s unrestricted cash maintained at the bank or$10.0 million.  The Credit Facility has a two-year initial maturity. During the first eighteen (18) months following Caliper’s merger with Xenogen,Caliper is subject to pay interest on a minimum of $8.0 million of outstandingborrowings.

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The CreditFacility includes traditional lending and reporting covenants including thatcertain financial covenants applicable to liquidity and earnings are to bemaintained by Caliper and tested as of the last day of each quarter.  TheCredit Facility also includes several potential events of default such aspayment default, material adverse change conditions and insolvency conditionsthat could cause interest to be charged at prime plus two percentage points, orfor any uncured events of default result in the bank’s right to declare alloutstanding obligations immediately due and payable.

In August, Caliperutilized the Credit Facility to refinance Xenogen’s outstanding credit facilitywith the bank (approximately $8.0 million as of August 9, 2006), andconsolidate other existing debt obligations of NovaScreen (approximately$370,000). In addition, Caliper financed certain loan fees, interest and coststhrough increased borrowings (approximately $217,000). The Credit Facility willserve as a source of capital for ongoing operations and working capitalneeds.  As of September 30, 2006, Caliper’sCredit Facility is classified as long term in the attached balance sheet withinloans payable.

***Leases***

As of September30, 2006, future minimum payments under operating leases (excluding idlefacilities accounted for within accrued restructuring) were as follows (inthousands):
| Years ending December 31: | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2006 (3 months ended)                    |       | $          | 1,807      |   |
| 2007                                     |       | 7,106      |       |
| 2008                                     |       | 6,947      |       |
| 2009                                     |       | 4,513      |       |
| 2010                                     |       | 2,576      |       |
| Thereafter                               |       | 9,055      |       |
| Total minimum  lease payments            |       | $          | 32,004     |   |

 

Caliper’sworldwide headquarters and instrument manufacturing operations are located inHopkinton, Massachusetts. Caliper’s research and development and manufacturingoperations for LabChip devices are located in Mountain View, California.NovaScreen screening, profiling, and assay development operations are locatedin Hanover, Maryland. Caliper also has direct sales, service and applicationsupport operations in several European countries and Japan.

In connection withthe acquisition of Xenogen, Caliper acquired three facility leases in Alameda,California, a facility lease in St. Louis, Missouri and a facility lease inCranbury, New Jersey.  Cranbury is theprimary location for the in-vivo imaging services business of XenogenBioSciences. Caliper will maintain one of the facilities in Alameda which willserve as the primary location for research and development activities forimaging, biology and reagents.  Onefacility’s lease expires in December 2006 and Caliper will not renew thisobligation.  Neither the St. Louisfacility nor the third facility in Alameda will be occupied.

***CapitalRequirements***

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

·      continued market acceptance of ourmicrofluidic and lab automation products;

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

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

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

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

·      other factors not within ourcontrol.

Based on current plans,we expect that our current cash balances together with borrowing availabilityunder the SVB Credit Facility will be sufficient to fund our operations atleast through the end of 2007.

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

***Interest Rate Sensitivity***

Our primary marketrisk exposures are foreign currency fluctuation and interest rate sensitivity.There have been no material changes to the information included underItem 7A in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005.

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**Item 4.Controls and Procedures**

We evaluated our “disclosurecontrols and procedures” as defined by Exchange Act Rules 13a-15(e) and15d-15(e), as of September 30, 2006. This evaluation was done under thesupervision and with the participation of Caliper’s management, including ourchief executive officer and our chief financial officer.

**Evaluationof Disclosure Controls and Procedures.** We have establisheddisclosure controls and procedures that are designed to provide reasonableassurance that information required to be disclosed in our reports filed underthe Securities Exchange Act of 1934, such as this Quarterly Report on Form10-Q, is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls are also designedto provide reasonable assurance that such information is accumulated andcommunicated to our management, including the chief executive officer and chieffinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

Based on theirevaluation as of September 30, 2006, the chief executive officer and the chieffinancial officer have concluded that our disclosure controls and proceduresare effective to provide reasonable assurance that information we are requiredto disclose in reports that we file or submit under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in SEC rules and forms.

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

**Changesin Internal Controls.**  No changes in our internal control over financial reporting identifiedin connection with the evaluation of such internal control occurred during thethird quarter of 2006, that materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**Part II — OTHER INFORMATION**

**Item 1.Legal Proceedings**

Commencing onJune 7, 2001, Caliper and three of its officers and directors (David V.Milligan, Daniel L. Kisner and James L. Knighton) were named as defendantsin three securities class action lawsuits filed in the United States DistrictCourt for the Southern District of New York. The cases have been consolidatedunder the caption*In re Caliper TechnologiesCorp. Initial Public Offering Securities Litigation,* 01Civ. 5072 (SAS) (GBD). Similar complaints were filed against approximately300 other public companies that conducted initial public offerings of theircommon stock during the late 1990s (the “IPO Lawsuits”). On August 8,2001, the IPO Lawsuits were consolidated for pretrial purposes before UnitedStates Judge Shira Scheindlin of the Southern District of New York. Together,those cases are denominated*In re InitialPublic 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) of theSecurities Exchange Act of 1934, as well as Rule 10b-5 promulgatedthereunder. The Consolidated Amended Complaint also names certain underwritersof Caliper’s December 1999 initial public offering of common stock asdefendants. The Complaint alleges that these underwriters charged excessive,undisclosed commissions to investors and entered into improper agreements withinvestors relating to aftermarket transactions. The Complaint seeks anunspecified amount of money damages. Caliper and the other issuers named asdefendants in the IPO Lawsuits moved on July 15, 2002, to dismiss allclaims on multiple grounds. By Stipulation and Order dated October 9,2002, the claims against Messrs. Milligan, Kisner and Knighton weredismissed without prejudice. On February 19, 2003, the Court grantedCaliper’s motion to dismiss all claims against it. Plaintiffs were not giventhe right to replead the claims against Caliper. The time to appeal thedismissal has not yet expired. In May 2003, a Memorandum of Understanding wasexecuted by counsel for plaintiffs, issuers and their insurers setting forththe terms of a settlement that would result in the termination of all claimsbrought by plaintiffs against the issuers and individual defendants named inthe IPO Lawsuits. On July 7, 2003, a Special Litigation Committee of theCaliper Board of Directors approved the settlement terms described in thatMemorandum of Understanding, which was subsequently set forth in a definitiveSettlement 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. As of November 8, 2006, Judge Scheindlinhad not issued any order regarding the Court’s decision with respect to thefinal approval of the settlement. The final resolution of this litigation isnot expected to have a material impact on Caliper.

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

The Court held the first three days of a Markmanhearing relating to these claims on June 13, 2006 through June 15, 2006.  On July 14, 2006, Xenogen filed a motion todisqualify AntiCancer’s attorneys due to numerous violations of ethical rulesby such attorneys.  After a hearing onthis motion, on August 10, 2006, the Court issued an order granting Xenogen’smotion to disqualify AntiCancer’s attorneys. On October 18, 2006, the Court issued a supplemental and clarifyingorder to its previous August 10, 2006 order in which the Court, among otherthings, (i) granted Xenogen’s motion to restart the Markman hearing, (ii)  granted Xenogen’s motion to prohibit thetransfer of tainted files to AntiCancer’s successor counsel, (iii) continuedXenogen’s motion for sanctions against AntiCancer’s previous counsel,  (iv) granted AntiCancer’s motion for anextension of time to file a writ to seek appellate review of the Court’s August10, 2006 order as supplemented and clarified on October 18, 2006, (v) vacatedall pending hearing dates in the case, and (vi) granted AntiCancer permissionuntil November 6, 2006 to amend its complaint. AntiCancer may file a writseeking such appellate review. The Court has indicated that if AntiCancerobtains appellate review of the order(s), further proceedings in this case willbe stayed pending the outcome of any appellate review of the Court’s order. OnNovember 6, 2006, AntiCancer served its Third Amended Complaint in thismatter and voluntarily dismissed Stanford University from this proceeding. TheThird Amended Complaint adds Caliper as a defendant. All defendants will fileresponsive pleadings in due course with the Court.

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

From time to time Caliper is involved in litigationarising out of claims in the normal course of business. Based on theinformation presently available, management believes that there are no otherclaims or actions pending or threatened against Caliper,

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theultimate resolution of which will have a material adverse effect on ourfinancial position, liquidity or results of operations, although the results oflitigation are inherently uncertain, and adverse outcomes are possible.

**Item 1A.Risk Factors**

***Risks Related ToOur Business***

*Our LabChip products may not achievewidespread market acceptance, which could cause our revenue to grow slowly ordecline and make it more difficult for us to achieve or maintain profitability.*

The commercialsuccess of our LabChip products depends upon market acceptance of the merits ofour drug discovery and automated electrophoresis separations systems bypharmaceutical and biotechnology companies, academic research centers and othercompanies that rely upon laboratory experimentation. However, because ourmicrofluidic drug discovery and automated electrophoresis systems have been inoperation for only a limited period of time, their accuracy, reliability,ease-of-use and commercial value have not yet gained widespread commercialacceptance. If these systems do not continue to gain further market acceptance,our revenue may grow more slowly than expected or decline.

In addition, ourstrategy for the LabChip 3000 system, our microfluidic-based high throughputscreening product, depends upon the early users of these systems buyingadditional units as they spread the adoption of this technology throughouttheir organizations worldwide. New customers for our drug discovery systems maywait for indications from our initial drug discovery system customers that ourdrug discovery systems work effectively and generate substantial benefits. Ifthe early users of our LabChip 3000 systems do not endorse the further adoptionof these systems because they fail to generate the expected quantities andquality of data, are too difficult or costly to use, or are otherwise deficientin meeting the screening needs of these customers, further sales of thesesystems to these early users may be limited, and sales to new users will bemore difficult.

Because drugscreening systems represent substantial capital expenditures, it is importantthat these systems be capable of performing a wide variety of different typesof assays and experiments in order to justify the cost of the systems. Weintend to continue to lower the cost of these systems and to develop newversions of our microfluidic-based drug discovery systems with enhancedfeatures that address existing and emerging customer needs, such as offering abroad range of standardized, easy-to-use assays. In this regard, we are in theprocess of launching a new LabChip system, the Desktop Profiler, designedspecifically to facilitate secondary kinase screening by providing a morehighly automated system and making available our ProfilerPro reaction readyplates already loaded with required reagents. If the commercial adoption of our other existing LabChip products andthis new LabChip system is slower than we presently expect, we may experience adecline in revenue or slow revenue growth and may not achieve or maintainprofitability.

For all of theforegoing reasons, we cannot assure you that our efforts to increase theadoption of our LabChip-based high-throughput drug screening and automatedelectrophoresis systems, by both existing and new users, will be expeditious oreffective.

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

·                  our ability todemonstrate the advantages and potential economic value of our LabChip drugdiscovery systems over alternative, well-established technologies;

·                  our ability todevelop a broader range of standard assays and applications that enablecustomers and potential customers to perform many different types ofexperiments on a single LabChip instrument system;

·                  our ability topenetrate the market for secondary kinase screening with our new DeskTop Profilerand ProfilerPro products; and

·                  our ability tomarket and sell our drug discovery systems and related consumable productsthrough our marketing and sales organization without the involvement of oursenior management.

*If our Xenogen in vivo biophotonic imaging products andservices do not become widely used by pharmaceutical, biotechnology, biomedicaland chemical researchers, our revenue will grow more slowly than expected ordecline and make it more difficult for us to achieve or maintain profitability.*

We acquired Xenogen Corporationon August 9, 2006 in order to add its suite of in vivo biophotonic imagingproducts and other drug discovery and development services to our existingsuite of in vitro products and services. Pharmaceutical, biotechnology,biomedical and chemical researchers have historically conducted in vivobiological assessment using a variety of technologies, including a variety ofanimal models. Compared to these technologies, Xenogen in vivobiophotonic imaging technology is relatively new, and the number ofcompanies and institutions using our technology is relatively limited. Thecommercial success of these products will depend upon the widespread adoptionof our technology as a preferred method to perform in vivo biological assessment.In order to be successful, these products must meet the technical and costrequirements for in vivo biological assessment within the life sciencesindustry. Widespread market acceptance will depend on many factors, including:

·                  the willingness andability of researchers and prospective customers to adopt new technologies;

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·                  our ability toconvince prospective strategic partners and customers that our technology is anattractive alternative to other methods of in vivo biological assessment;

·                  our customers’perception that our products can help accelerate efforts and reduce costs indrug development; and

·                  our ability to selland service sufficient quantities of our products.

Additionally, to our knowledge,only one drug development customer has used Xenogen imaging technology tosubmit an investigational new drug application, or IND, to the Food and DrugAdministration, or FDA, and no drugs have been approved to date using ourimaging technology. As a result, our ability to assist the drug developmentprocess in leading to the approval of drugs with commercial potential has yetto be fully proven. If commercial advantages are not realized from the use ofin vivo biophotonic imaging, our existing customers could stop using ourproducts, and we could have difficulty attracting new customers. Because ofthese and other factors, our biophotonic imaging products may not gainwidespread market acceptance or become the industry standard for in vivobiological assessment.

*We haveexperienced no GCAS system sales to Affymetrix during the nine months endedSeptember 30, 2006, and our future revenue growth depends to a significantextent on sales by Affymetrix of the GCAS automated target preparation system,which is based on the Caliper Sciclone liquid handling instrument. If end-userdemand for this product is not as strong as anticipated by Affymetrix, ourrevenue targets may not be achieved.*

In collaboration with Affymetrix,we have developed a new automated system for the preparation of nucleic acidtarget material to be applied to Affymetrix’s GeneChip® devices, which systemis based on our Sciclone liquid handling instrument. Affymetrix began to shipthe commercial version of the GCAS system during the third quarter of 2005.Under the terms of the collaboration agreement, Affymetrix will market and sellthe GCAS system. Affymetrix announced in 2005 that low initial-productionyields of its commercial Mapping 500K Set Array had constrained shipmentvolumes for this product. Because users of Affymetrix’s Mapping 500K Set Arrayproduct are also expected to be users of the GCAS systems, if Affymetrixcontinues to have low production volumes for this product or experiencesdifficulties in launching other GeneChip® applications, the demand for GCASsystems will be adversely affected. In addition, Affymetrix may experienceother difficulties in the marketing, sale, and support of the GCAS system. Forthese reasons, our revenues from the sale of GCAS systems have been less thanwe originally anticipated. We believe that Affymetrix is addressing theproduction and other technical issues associated with its Mapping 500K SetAssay products and that shipments of the GCAS systems to end-users will resumein the fourth quarter.  However, ifAffymetrix continues to experience production and other technical issues withits products, our revenue from the sale of GCAS systems will be less thanexpected.  In addition, because the GCASsystem is a relatively new product for which there is limited commercialexperience, there can be no assurance that the demand for this product willmaterialize as expected.

*Our future revenue growth depends toa significant extent on the revenue growth of NovaScreen, which we recentlyacquired. If NovaScreen’s revenue does not grow as we anticipate, our futurerevenue targets may not be achieved.*

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

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

We market our products to pharmaceutical,biotechnology and chemical companies and biomedical research institutions, andthe capital spending policies of these entities can have a significant effecton the demand for our products. These policies vary significantly betweendifferent customers and are based on a wide variety of factors, including theresources available for purchasing research equipment, the spending prioritiesamong various types of research companies and the policies regarding capitalexpenditures. In particular, economic conditions faced by pharmaceutical andbiotechnology companies have at certain times directly affected their capitalspending budgets. In addition, continued consolidation within thepharmaceutical industry will likely delay and may potentially reduce capitalspending by pharmaceutical companies involved in such consolidations. Duringthe past several years, many of our customers and potential customers, particularlyin the biopharmaceutical industry, have reduced their capital spending budgetsbecause of these generally adverse prevailing economic conditions,consolidation in the industry and increased pressure on the profitability ofsuch companies, due in part to competition from generic drugs. If our customersand potential customers do not increase their capital spending budgets, becauseof continuing adverse economic conditions or further consolidation in theindustry, we could face weak demand for our products. Similarly, changes inavailability of grant moneys may impact our sales to academic customers. Recentdevelopments regarding safety issues for widely used drugs, including actualand/or threatened litigation, also may affect capital spending by pharmaceuticalcompanies. Any decrease or delay in capital spending by life sciences orchemical companies or biomedical researchers could cause our revenue to declineand harm our profitability.

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

*Our future revenue is unpredictableand could cause our operating results to fluctuate significantly from quarterto quarter.*

Our quarterly and annual operating results havefluctuated in the past and are likely to do so in the future. Our operatingresults have been historically stronger in the fourth quarter due to thedecision-making process of our customer base. Xenogen’s operating results have historically been stronger in thesecond and fourth quarters. The sale of many of our products typically involvesa scientific evaluation and commitment of capital by customers. Accordingly,the initial sales cycles of many of our products are lengthy and subject to anumber of significant risks that are beyond our control, including customers’budgetary constraints and internal acceptance reviews. As a result of thislengthy and unpredictable sales cycle, our operating results have historicallyfluctuated significantly from quarter to quarter, and we expect this trend tocontinue. In addition, a large portion of our expenses are relatively fixed.Historically, customer buying patterns and our revenue growth have caused asubstantial portion of our revenues to occur in the last month of the quarter.Delays in the receipt of orders, our recognition of product or service revenueor the manufacture of product near the end of the quarter could cause quarterlyrevenues to fall short of anticipated levels. Because our operating expensesare based on anticipated revenue levels and a high percentage of our expensesare relatively fixed, less than anticipated revenues for a quarter could have asignificant adverse impact on our operating results. Accordingly, if ourrevenue declines or does not increase as we anticipate, we might not be able tocorrespondingly reduce our operating expenses in a timely enough manner toavoid incurring additional losses. Our failure to achieve our anticipated levelof revenue could significantly harm our operating results for a particularfiscal period.

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

·   changes in the demand for, and pricing of, ourproducts and services;

·         the length of our sales cycles and buying patterns ofour customers, which may cause a decrease in our operating results for aquarterly period;

·   the nature, pricing and timing of other products andservices provided by us or our competitors;

·   changes in our renewable contracts, includinglicenses;

·         our ability to obtain key components for products andmanufacture and install them on a timely basis to meet demand;

·   changes in the research and development budgets of ourcustomers;

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

·   customer reactions to our recent merger with Xenogen;

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

·         expenses related to our patent infringement litigationwith AntiCancer and other litigation in which we may become involved; and

·   expenses related to, and the results of, patentfilings and other proceedings relating to intellectual property rights.

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

*Our intellectual property rights may not provide meaningfulcommercial protection for our products, which could enable third parties to useour technology, or very similar technology, and could reduce our ability tocompete in the market.*

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

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

We own, or control through licenses, a variety ofissued patents and pending patent applications. However, the patents on whichwe rely may be challenged and invalidated, and our patent applications may notresult in issued patents. For example, in 2005 AntiCancer filed a lawsuitagainst Xenogen alleging infringement of five patents and requesting that thecourt declare invalid one of our primary patents covering methods of in vivobiophotonic imaging. For a description of our litigation with AntiCancer, seePart II, Item 1 (“Legal Proceedings”).

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

U.S. Patent No. 4,873,191, claiming the use ofcertain widely accepted microinjection techniques to create transgenic animalsand licensed exclusively to our subsidiary, Xenogen Biosciences Corp., expiredin October 2006. Due to the expiration of this patent, we will not be able toprevent others from practicing those methods for commercial purposes and we mayface competition from third parties seeking to provide those services on acommercial basis.

*We are currently involved in patent litigation and we mayneed to initiate other lawsuits to protect or enforce our patents or otherproprietary rights, which would be expensive and, if we lose, may cause us tolose some of our intellectual property rights, which would reduce our abilityto compete in the market and may cause our stock price to decline.*

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

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

*Acquisitionsmay have unexpected consequences or impose additional costs on us.*

Our business ishighly competitive and our growth is dependent upon market growth and ourability to enhance our existing products, introduce new products on a timelybasis and offer our customers products that provide a more complete solution.One of the ways we may address the need to develop new products is throughacquisitions of complementary businesses and technologies, such as ouracquisition of Zymark in July 2003, our acquisition of NovaScreen in October2005, and our recently completed acquisition of Xenogen in August 2006. Fromtime to time, we consider and evaluate potential business combinationsinvolving our acquisition of another company and transactions involving thesale of our company through, among other things, a possible merger orconsolidation of our business into that of another entity.

Acquisitionsinvolve numerous risks, including the following:

**•**                  difficulties in integration of theoperations, technologies and products and services of the acquired companies;

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**•**                  the risk of diverting management’sattention from normal daily operations of the business;

**•**                  potential cost and disruptions causedby the integration of financial reporting systems and development of uniformstandards, controls, procedures and policies;

**•**                  accounting consequences, includingamortization of acquired intangible assets or other required purchaseaccounting adjustments, resulting in variability or reductions of our reportedearnings;

**•**                  potential difficulties in completingprojects associated with purchased in-process research and development;

**•**                  risks of entering markets in which wehave no or limited direct prior experience and where competitors in thesemarkets have stronger market positions;

**•**                  the potential loss of our keyemployees or those of the acquired company due to the employment uncertaintiesinherent in the acquisition process;

**•**                  the assumption of known andpotentially unknown liabilities of the acquired company;

**•**                  the risk that we may find that theacquired company or business does not further our business strategy or that wepaid more than what the company or business was worth;

**•**                  our relationship with current and newemployees and customers could be impaired;

**•**                  the acquisition may result inlitigation from terminated employees or third parties who believe a claimagainst us would be valuable to pursue;

**•**                  our due diligence process may fail toidentify significant issues with product quality, product architecture andlegal contingencies, among other matters; and

**•**                  there may be insufficient revenues tooffset increased expenses associated with acquisitions.

Acquisitions mayalso cause us to issue common stock that would dilute our current stockholders’percentage ownership; record goodwill and non-amortizable intangible assetsthat will be subject to impairment testing and potential periodic impairmentcharges; incur amortization expenses related to certain intangible assets; orincur other large and immediate write-offs.

We cannot assureyou that future acquisitions will be successful and will not adversely affectour business. We must also maintain our ability to manage growth effectively.Failure to manage growth effectively and successfully integrate acquisitionsthat we make could harm our business.

*We may not realize all of theanticipated benefits of the Xenogen acquisition.*

The success of ouracquisition of Xenogen will depend, in part, on our ability to realize theanticipated synergies, cost savings, and growth opportunities from integratingthe businesses of Xenogen with our business. Our success in realizing thesebenefits and the timing of this realization depend upon the successfulintegration of the operations of Xenogen. The integration of two independentcompanies is a complex, costly, and time-consuming process.  For example, we are presently in the processof moving manufacturing operations for Xenogen optical imaging systems to ourmanufacturing facility in Hopkinton, Massachusetts, and we have no experiencewith manufacturing these types of instrument systems at that facility.  Delays or other disruptions in our ability tomanufacture these types of instruments could delay the shipment of theseinstruments to customers and adversely affect our future revenue.  The difficulties of combining the operationsof the companies include, among others:

·                  consolidatingresearch and development and manufacturing operations;

·                  retainingkey employees;

·                  consolidatingcorporate and administrative infrastructures;

·                  coordinatingsales and marketing functions;

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

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

·                  coordinatinggeographically separate organizations.

We cannot assureyou that the integration of Xenogen with us will result in the realization ofthe full benefits anticipated by us to result from the merger.

*We expect to incur future operatinglosses and may not achieve profitability.*

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We haveexperienced significant operating losses each year since our inception and weexpect to incur an operating loss in 2006. As of September 30, 2006, Caliperhad an accumulated deficit of approximately $201.0 million. As of theeffectiveness date of our merger with Xenogen, Xenogen had an accumulateddeficit of approximately $199.1 million. Our losses have resultedprincipally from costs incurred in research and development and productmarketing and from general and administrative costs associated with ouroperations. These costs have exceeded our cumulative cash proceeds which, todate, have been generated principally from product sales, collaborativeresearch and development agreements, technology access fees, license fees,litigation settlement proceeds and interest income on cash and investmentbalances.  To achieve profitability, wewill need to generate and sustain substantially higher revenue than we have todate, while achieving reasonable costs and expense levels. We may not be ableto generate enough revenue to achieve profitability. We may not achieve ormaintain reasonable costs and expense levels. Even if we become profitable, wemay not be able to sustain or increase profitability on a quarterly or annualbasis. If we fail to achieve profitability within the timeframe expected bysecurities analysts or investors, the market price of our common stock willlikely decline.

*Failure to raise additional capitalor generate the significant capital necessary to expand our operations andinvest in new products could reduce our ability to compete and result in lowerrevenue.*

We anticipate thatour existing capital resources, together with the revenue to be derived fromour commercial partners and from commercial sales of our products and services,will enable us to maintain currently planned operations at least through theyear 2007. However, we premise this expectation on our current operating plan,which may change as a result of many factors, including our acquisition of NovaScreenand our recently completed acquisition of Xenogen, or of another company orbusiness. Consequently, we may need additional funding sooner than anticipated.Our inability to raise needed capital would seriously harm our business andproduct development efforts. In addition, we may choose to raise additionalcapital due to market conditions or strategic considerations even if we believethat we have sufficient funds for our current or future operating plans. To theextent that additional capital is raised through the sale of equity orconvertible debt securities, the issuance of these securities could result indilution to our stockholders.

On August 9, 2006,Caliper entered into a Credit Facility with a bank which permits Caliper toborrow up to $20.0 million in the form of revolving loan advances including upto $5.0 million in the form of letters of credit.  The Credit Facility includes traditionallending and reporting covenants including that certain financial covenantsapplicable to liquidity and earnings are to be maintained by Caliper and testedas of the last day of each quarter.  TheCredit Facility also includes several potential events of default such aspayment default, material adverse change conditions and insolvency conditionsthat could cause interest to be charged at prime plus two percentage points, orfor any uncured events of default result in the bank’s right to declare alloutstanding obligations immediately due and payable.  While we believe that we will be able to remainin compliance with applicable loan covenants through the Credit Facility’smaturity in 2008, should our results of operations deteriorate or any othermaterial adverse change occur with our business, we may become in default ofone or more covenants under the Credit Facility.

If such eventswere to occur, we currently have no alternative committed sources of capital.In addition, to the extent that operating and capital resources areinsufficient to meet future requirements, we will have to raise additionalfunds to continue the development and commercialization of our technologies.These funds may not be available on favorable terms, or at all. If adequatefunds are not available on attractive terms, we may be required to curtailoperations significantly or to obtain funds by entering into financing, supplyor collaboration agreements on unattractive terms.

*The termination or non-renewal of a large contract or theloss of, or a significant reduction in, sales to any of our significantcustomers could harm our operating results.*

We currently derive, and we expect to continue toderive, a significant percentage of our total revenue from a relatively smallnumber of customers. If any of these customers terminates or substantiallydiminishes its relationship with us, our revenue could decline significantly.Our newly acquired Xenogen business often sells products and provides servicespursuant to agreements that are renewable on an annual basis. Failure to renewor the cancellation of these agreements by any one of our larger biophotonicimaging customers could result in a significant loss of revenue.

*We may not fully realize our revenue under long-termcontracts, which could harm our business and result in higher losses thananticipated.*

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

*Our success will depend partly onour ability to operate without infringing or misappropriating the proprietaryrights of others.*

We may be exposed to future litigation by thirdparties based on claims that our products infringe the intellectual propertyrights of others. This risk is exacerbated because there are numerous issuedand pending patents in the life sciences industry and, as described above, thevalidity and breadth of life sciences patents involve complex legal and factualquestions. Our competitors may

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assertthat their U.S. or foreign patents may cover our products and the methods weemploy. For example, we are involved in patent litigation with AntiCancer inwhich it has alleged that we have infringed certain of its patents. We havecounterclaimed with allegations that AntiCancer infringes our imaging patents,as well as allegations that certain AntiCancer’s patents are invalid. For adescription of our litigation with AntiCancer, see Part II, Item 1 (“LegalProceedings”). Also, because patent applications can take many years to issue,there may be currently pending applications of which we are unaware that maylater result in issued patents that our products may infringe. There could alsobe existing patents of which we are not aware that one or more of our productsmay inadvertently infringe.

From time to time, we have received, and may receivein the future, letters asking us to license certain technologies the signingparty believes we may be using or would like us to use. If we do not accept alicense, we may be subject to claims of infringement, or may receive lettersalleging infringement. Infringement and other intellectual property claims,with or without merit, can be expensive and time-consuming to litigate and candivert management’s attention from our core business.

If we lose a patent infringement lawsuit, we could beprevented from selling our products unless we can obtain a license to usetechnology or ideas covered by such patent or are able to redesign the productsto avoid infringement. A license may not be available at all or on termsacceptable to us, or we may not be able to redesign our products to avoid anyinfringement. If we are not successful in obtaining a license or redesigningour products, we may be unable to sell our products and our business couldsuffer.

*Our rights to the use of technologies licensed to us bythird parties are not within our control, and without these technologies, ourproducts and programs may not be successful and our business prospects could beharmed.*

We rely on licenses to use various technologies thatare material to our business, including licenses, with sublicense rights, tocertain microfluidic technologies and in vivo imaging methods, licenses to theuse of certain biological materials, and licenses to engineer and commercializetransgenic animals. We do not own the patents that underlie these licenses. Ourrights to use these technologies and employ the inventions claimed in thelicensed patents are subject to the negotiation of, continuation of andcompliance with the terms of those licenses and the continued validity of thesepatents. In some cases, we do not control the prosecution or filing of thepatents to which we hold licenses, or the enforcement of these patents againstthird parties. For example, under the Promega Corporation and The Regents ofthe University of California licenses for a patented form of firefly luciferaseused in our LPTA animal models and certain of our bioware, we do not have theright to enforce the patent, and neither licensor is obligated to do so on ourbehalf.  Certain of our licenses containdiligence obligations, as well as provisions that allow the licensor to terminatethe license upon specific conditions. Some of the licenses under which we haverights, such as our licenses from the University of Pennsylvania and from UTBattele for certain microfluidic technologies and from Stanford University forcertain biophotonic imaging methods, provide us with exclusive rights inspecified fields, including the right to enforce the licensed patents , but thescope of our rights and obligations under these and other licenses may becomesubject to dispute by our licensors or third parties. For example, we arecurrently discussing with Stanford the scope of products that we sell which aresubject to the royalty provisions of our Stanford license agreement. As aresult of these discussions, we may amend the license agreement to change theroyalties we pay to Stanford for future product sales. The amendment mayalso include the payment of back royalties to Stanford for products we havealready sold. We have not discussed with Stanford the specific terms andconditions of an amendment or the amount of any back royalty payments. Anyincrease in the royalties we pay to Stanford would negatively impact our grossmargins.

*Our tax net operating losses andcredit carryforwards may expire if we do not achieve or maintain profitability.*

As of December 31,2005, we had federal and state net operating loss carryforwards ofapproximately $148.1 million and $44.6 million, respectively. We also hadfederal and state research and development tax credit carryforwards ofapproximately $4.7 million and $2.8 million, respectively. The federal netoperating loss and credit carryforwards will expire at various dates through2025 beginning in the year 2009 if not utilized. State net operating losses ofapproximately $5,000 expired in 2005. The current remaining state net operatinglosses have varying expiration dates through 2015.

Utilization of thefederal and state net operating losses and credits may be subject to asubstantial limitation due to the change in ownership provisions of theInternal Revenue Code of 1986 and similar state provisions. The annuallimitation may result in the expiration of net operating losses and creditsbefore utilization. As of December 31, 2005, Xenogen had federal and state netoperating loss carryforwards of approximately $126.3 and $28.6 million,respectively.  The acquisition of Xenogenresulted in Xenogen shareholders’ owning approximately one-third of Caliper andwill likely result in a change of ownership that will cause pre-merger lossesof the merged entities to be subject to limitation. The amount of limitationhas not yet been determined. Because of our lack of earnings history and theuncertainty of realizing these net operating losses, the deferred tax assetshave been fully offset by a valuation allowance.

33

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*If we are unable to meet customerdemand, it would adversely impact our financial results and restrict our salesgrowth.*

Upon our acquisition of Xenogen, manufacturing of IVISImaging Systems was transferred to our manufacturing plant in Hopkinton,Massachusetts.  While our manufacturinggroup has considerable expertise with the manufacture of complex systems, weare relatively inexperienced in the manufacture of IVIS Imaging Systems.  To be successful, we must manufacture ourIVIS Imaging Systems in substantial quantities at acceptable costs. If we donot succeed in manufacturing sufficient quantities of our imaging systems tomeet customer demand, we could lose customers and fail to acquire new customersif they choose a competitor’s product because our imaging system is notavailable. We believe our current manufacturing capacity in Hopkinton,Massachusetts is sufficient to meet our current and forecasted demand over theforeseeable future. Certain components of our IVIS systems are speciallymanufactured by our single-source suppliers and supply of these parts to usrequires adequate lead time that can result in production delays. If weexperience unexpected shifts in customer demand that requires alterations toplanned manufacturing, we may experience production delays that could restrictour sales growth. If we are unable to meet customer demand for IVIS ImagingSystems, it would adversely affect our financial results and restrict our salesgrowth.

*We depend on a limited number ofsuppliers for components of IVIS Imaging Systems, and we will be unable tomanufacture or deliver our products if shipments from these suppliers areinterrupted or are not supplied on a timely basis.*

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

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

·                  the possibility that one or more of our supplierscould terminate their services at any time;

·                  the potential inability of our suppliers to obtainrequired components or products;

·                  reduced control over pricing, quality and timelydelivery due to the difficulties in switching to alternative suppliers;

·                  the potential delays and expense of seekingalternative suppliers; and

·                  increases in prices of raw materials, products and keycomponents.

*We face competition from companies with establishedtechnologies for in vivo biological assessment, which may prevent us fromachieving significant market share for our products.*

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

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

·                  established distribution networks;

·                  established relationships with life science,pharmaceutical, biotechnology and chemical companies as well as with biomedicalresearchers;

·                  additional lines of products, and the ability to offerrebates or bundle products to offer higher discounts or incentives to gain acompetitive advantage; and

·                  greater resources for technology and productdevelopment, sales and marketing and patent litigation.

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

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*Contamination in our animalpopulations could damage our inventory, harm our reputation and result indecreased sales.*

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

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

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

We rely on asingle manufacturing location to produce our microfluidic chips and drugdiscovery systems, and a single location to produce laboratory automation,imaging and robotics systems, with no alternative facilities. We relyprincipally on our facility in Cranbury, New Jersey, to produce LPTA animalmodels and our facility in Alameda, California to produce bioware cells andmicroorganisms. Alameda, California is also able to serve as a back-up facilityfor producing our LPTA animal models. These facilities and some pieces ofmanufacturing equipment are difficult to replace and could require substantialreplacement lead-time. Our manufacturing facilities may be affected by naturaldisasters, such as earthquakes and floods. Earthquakes are of particularsignificance because our LabChip product manufacturing facility is located inMountain View, California, an earthquake-prone area. In the event that ourexisting manufacturing facilities or equipment are affected by man-made ornatural disasters, we would be unable to manufacture products for sale, meetcustomer demands or meet sales projections. If our manufacturing operationswere curtailed or ceased, it would harm our business.

Terrorist acts, acts of war and natural disasters(wherever located around the world) may cause damage or disruption to us, ouremployees, facilities, partners, suppliers, distributors and customers, any andall of which could significantly impact our revenues, expenses and financialcondition. The terrorist attacks that took place in the United States onSeptember 11, 2001 were unprecedented events that have created manyeconomic and political uncertainties. The potential for future terrorist attacks,the national and international responses to terrorist attacks and other acts ofwar or hostility have created many economic and political uncertainties thatcould adversely affect our business and results of operations that cannotpresently be predicted. The tsunami in Asia on December 26, 2004 wasunpredictable and caused devastation of tremendous proportions and its effectsare still being realized. The unpredictability of such a disaster inevitablycauses uncertainty that could adversely affect our business and results ofoperations. We are largely uninsured for losses and interruptions caused byterrorist acts, acts of war and natural disasters.

*We use hazardous materials in our business. Any claimsrelating to improper handling, storage or disposal of these materials could betime consuming and costly.*

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

*Compliance with governmental regulations could increase ouroperating costs, which would adversely affect the commercialization of ourtechnology.*

The Animal Welfare Act, or AWA, is the federal lawthat covers the treatment of certain animals used in research. The AWAcurrently does not cover rats of the genus *Rattus* or miceof the genus *Mus* bred for use in research, andconsequently, we are not currently required to be in compliance with this law.

Currently, the AWA imposes a wide variety of specificregulations that govern the humane handling, care, treatment and transportationof certain animals by producers and users of research animals, most notablypersonnel, facilities, sanitation, cage size, feeding, watering and shippingconditions. If in the future the AWA is amended to include mice or rats bredfor use in research in the scope of regulated animals, we will become subjectto registration, inspections and reporting requirements. We believe compliance

35

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withsuch regulations would require us to modify our current practices andprocedures, which could require significant financial and management resources.

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

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

Additionally, exports of our IVIS Imaging Systems andbiological reagents to foreign customers and distributors are governed by theInternational Traffic in Arms Regulations, the Export AdministrationRegulations, Patriot Act and Bioterrorism Safety Act. Although these laws andregulations do not restrict our present foreign sales programs, any futurechanges to these regulatory regimes may negatively affect or limit our foreignsales.

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

Governmental authorities could, for social or otherpurposes, limit the use of genetic modifications or prohibit thepractice of our technology. Publicattitudes may be influenced by claims that genetically engineered products areunsafe for use in research or pose a danger to the environment. The subject ofgenetically modified organisms, like genetically altered mice and rats, hasreceived negative publicity and aroused significant public debate. In addition,animal rights activists could protest or make threats against our facilities,which may result in property damage. Ethical and other concerns about ourmethods, particularly our use of genetically altered mice and rats, couldadversely affect our market acceptance.

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**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

None.

**Item 3.Defaults Upon Senior Securities**

None.

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

Our 2006 AnnualMeeting of Stockholders was held on August 9, 2006, at 10:00 a.m. local time atthe offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., OneFinancial Center, Boston, Massachusetts. There were present at the meeting, inperson or represented by proxy, the holders of 28,675,834 shares of commonstock. The matters voted on at the meeting and the votes cast are as follows:

(1) The approval of the issuance of Caliper commonstock and warrants to purchase shares of Caliper common stock pursuant to theAgreement and Plan of Merger, dated as of February 10, 2006, by and amongCaliper, Xenogen Corporation, and Caliper Holdings, Inc., as described inCaliper’s and Xenogen’s Joint Proxy Statement — Prospectus dated July 11,2006.  There were 22,195,083 shares ofCommon Stock voting in favor, 405,856 shares of Common Stock voting against,12,115 shares abstaining and 6,021,137 broker non-votes.

(2)  Consent toadjournment of the meeting, if necessary, if a quorum was present, to solicitadditional proxies if there were not sufficient votes in favor of Proposal No.1.  There were 27,946,173 shares ofCommon Stock voting in favor, 652,070 shares of Common Stock voting against,35,948 shares abstaining and zero broker non-votes.

(3)  Theapproval of an amendment to Caliper’s restated certificate of incorporation toincrease the number of authorized shares of common stock from 70,000,000 sharesto 100,000,000 shares, which represents an additional 30,000,000 shares, asdescribed in Caliper’s and Xenogen’s Joint Proxy Statement — Prospectus datedJuly 11, 2006.  There were 28,205,577shares of Common Stock voting in favor, 416,150 shares of Common Stock votingagainst, 12,464 shares abstaining and zero broker non-votes.

(4) Two persons were elected to serve as Directors ofthe Company to hold office until our 2009 Annual Meeting of Stockholders oruntil their successors are chosen and qualified. The following is a tablesetting forth the number of votes cast for and withheld for each nominee forDirector:
| Name of Nominee | ** ** | **No. of  Common  Votes in  Favor** | ** ** | **No. of  Common  Votes  Withheld** | ** ** |
|---------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Kathryn A.  Tunstall      |       | 28,121,632                                    |       | 512,559                                  |       |
| E. Kevin Hrusovsky        |       | 28,144,213                                    |       | 489,978                                  |       |

 

On August 9, 2006,pursuant to the terms of the merger agreement with Xenogen, the followingindividuals were appointed as Directors of the Company:  Michael Eisenson, whose term expires upon the2008 annual meeting of stockholders and David W. Carter, whose term expires uponthe 2009 Annual Meeting of Stockholders. The following individuals arecontinuing Directors with terms expiring upon the 2007 Annual Meeting of Stockholders:  Van Billet, Robert C. Bishop, Ph.D. andDavid V. Milligan, Ph.D.  Thefollowing individuals are continuing Directors with terms expiring upon the2008 Annual Meeting of Stockholders: Daniel K. Kisner, M.D., and Allan L. Comstock.

(5) The appointment of Ernst & Young LLP as ourindependent registered public accounting firm for the fiscal year endingDecember 31, 2006 was ratified. There were 28,521,071 shares of Common Stockvoting in favor, 106,224 shares of Common Stock voting against, and 6,896shares of Common Stock abstaining with zero broker non-votes.

**Item 5.Other Information**

None.

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**EXHIBIT INDEX**

**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.                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                          |
| 3.4(4)          |       | Amendment No. 1 to 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            |       | Loan and Security Agreement, dated as of  August 9, 2006, among Silicon Valley Bank, Caliper Life  Sciences, Inc. and NovaScreen Biosciences Corporation.                                                           |
|            |       |                                                                                                                                                                                                                          |
| 10.2            |       | Joinder Agreement, dated as of September 28,  2006, among Silicon Valley Bank, Xenogen Corporation, Xenogen Biosciences  Corporation, Caliper Life Sciences, Inc. and NovaScreen Biosciences  Corporation.          |
|            |       |                                                                                                                                                                                                                          |
| 10.3            |       | Agreement, dated as of May 5, 2000, between the  Board of Trustess of the Leland Stanford Junior University and Xenogen  Corporation.                                                                                    |
|            |       |                                                                                                                                                                                                                          |
| 31.1            |       | Certification of Chief Executive Officer Required  Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934, as amended, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|            |       |                                                                                                                                                                                                                          |
| 31.2            |       | Certification of Chief Financial Officer Required  Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934, as amended, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|            |       |                                                                                                                                                                                                                          |
| 32.1*           |       | Certification of Chief Executive Officer Required  Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange  Act of 1934, as amended, and 18 U.S.C. Section 1350.                                     |
|            |       |                                                                                                                                                                                                                          |
| 32.2*           |       | Certification of Chief Financial Officer Required  Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange  Act of 1934, as amended, and 18 U.S.C. Section 1350.                                     |

 

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

** **

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                                    | **CALIPER LIFE SCIENCES, INC.**                      |
|------------------------------------|------------------------------------------------------|
|                               |                                                 |
| Date:  November  9, 2006 | 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 |

** **

39

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**EXHIBITINDEX**
| 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.                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                          |
| 3.4(4)          |       | Amendment No. 1 to 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            |       | Loan and Security Agreement, dated as of  August 9, 2006, among Silicon Valley Bank, Caliper Life  Sciences, Inc. and NovaScreen Biosciences Corporation.                                                           |
|            |       |                                                                                                                                                                                                                          |
| 10.2            |       | Joinder Agreement, dated as of September 28,  2006, among Silicon Valley Bank, Xenogen Corporation, Xenogen Biosciences  Corporation, Caliper Life Sciences, Inc. and NovaScreen Biosciences  Corporation.          |
|            |       |                                                                                                                                                                                                                          |
| 10.3            |       | Agreement, dated as of May 5, 2000, between the  Board of Trustess of the Leland Stanford Junior University and Xenogen  Corporation.                                                                                    |
|            |       |                                                                                                                                                                                                                          |
| 31.1            |       | Certification of Chief Executive Officer Required  Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934, as amended, and pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|            |       |                                                                                                                                                                                                                          |
| 31.2            |       | Certification of Chief Financial Officer Required  Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934, as amended, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|            |       |                                                                                                                                                                                                                          |
| 32.1*           |       | Certification of Chief Executive Officer Required  Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange  Act of 1934, as amended, and 18 U.S.C. Section 1350.                                     |
|            |       |                                                                                                                                                                                                                          |
| 32.2*           |       | Certification of Chief Financial Officer Required  Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange  Act of 1934, as amended, and 18 U.S.C. Section 1350.                                     |

 

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

 

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