**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

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

 

**for the quarterly period ended June30, 2006.**

 

**or**

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

 

**for thetransition period from                 to                 .**

**Commissionfile # 000-28229**

**CALIPER LIFE SCIENCES, INC.**

(Exact name of registrantas 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 wasrequired to 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 July 31, 2006: 34,202,845**

 

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**CALIPERLIFE SCIENCES, INC.**

**TABLE OFCONTENTS**

 
|                                                                                                                         | ** ** | **Page No.** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| PART I   FINANCIAL INFORMATION                                                                                     |       | 2            |
|                                                                                                                    |       |         |
| Item 1. Financial  Statements                                                                                      |       | 2            |
| Condensed  Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005  (unaudited)                      |       | 2            |
| Condensed  Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2006 and 2005 (unaudited) |       | 3            |
| Condensed  Consolidated Statements of Cash Flows for the Three and Six Months Ended June  30, 2006 and 2005 (unaudited) |       | 4            |
| Notes to  Unaudited Condensed Consolidated Financial Statements                                                         |       | 5            |
|                                                                                                                    |       |         |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations               |       | 12           |
|                                                                                                                    |       |         |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                |       | 18           |
|                                                                                                                    |       |         |
| Item 4.  Controls and Procedures                                                                                   |       | 18           |
|                                                                                                                    |       |         |
| PART II  OTHER INFORMATION                                                                                         |       | 19           |
|                                                                                                                    |       |         |
| Item 1. Legal  Proceedings                                                                                              |       | 19           |
|                                                                                                                    |       |         |
| Item  1A. Risk Factors                                                                                                  |       | 19           |
|                                                                                                                    |       |         |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                               |       | 23           |
|                                                                                                                    |       |         |
| Item 3.  Defaults Upon Senior Securities                                                                           |       | 23           |
|                                                                                                                    |       |         |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                       |       | 23           |
|                                                                                                                    |       |         |
| Item 5. Other  Information                                                                                         |       | 23           |
|                                                                                                                    |       |         |
| Item 6.  Exhibits                                                                                                  |       | 24           |
|                                                                                                                    |       |         |
| SIGNATURES                                                                                                              |       | 25           |
|                                                                                                                    |       |         |
| EXHIBIT  INDEX                                                                                                          |       | 26           |
|  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**

**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                      | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                 |       |                    |       |                        |       |
| Cash and cash  equivalents                      |       | $                       | 9,477      |                        | $          | 8,096 |   |
| Marketable securities                           |       | 14,288                  |       | 23,129                      |       |
| Restricted cash                                 |       | 667                     |       | 479                         |       |
| Accounts receivable,  net                       |       | 13,959                  |       | 19,532                      |       |
| Inventories                                     |       | 14,747                  |       | 11,061                      |       |
| Prepaid expenses and  other current assets      |       | 2,607                   |       | 2,657                       |       |
|                                            |       |                    |       |                        |       |
| Total current assets                            |       | 55,745                  |       | 64,954                      |       |
|                                            |       |                    |       |                        |       |
| Restricted cash                                 |       | 2,733                   |       | 3,145                       |       |
| Property and equipment,  net                    |       | 12,453                  |       | 12,019                      |       |
| Intangibles, net                                |       | 14,314                  |       | 16,822                      |       |
| Goodwill                                        |       | 60,866                  |       | 60,866                      |       |
| Other assets                                    |       | 2,375                   |       | 403                         |       |
|                                            |       |                    |       |                        |       |
| Total assets                                    |       | $                       | 148,486    |                        | $          | 158,209 |   |
|                                            |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**  | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                            |       |                    |       |                        |       |
| Accounts payable                                |       | $                       | 3,068      |                        | $          | 5,318 |   |
| Accrued compensation                            |       | 4,518                   |       | 6,774                       |       |
| Other accrued  liabilities                      |       | 7,496                   |       | 8,117                       |       |
| Deferred revenue and  customer deposits         |       | 6,796                   |       | 7,990                       |       |
| Current portion of  accrued restructuring       |       | 2,845                   |       | 2,872                       |       |
| Current portion of  long-term obligations       |       | 116                     |       | 133                         |       |
|                                            |       |                    |       |                        |       |
| Total current  liabilities                      |       | 24,839                  |       | 31,204                      |       |
|                                            |       |                    |       |                        |       |
| Noncurrent portion of  long-term obligations    |       | 264                     |       | 320                         |       |
| Noncurrent portion of  accrued restructuring    |       | 2,941                   |       | 4,358                       |       |
| Other noncurrent  liabilities                   |       | 3,909                   |       | 3,503                       |       |
| Deferred tax liability                          |       | 386                     |       | 386                         |       |
|                                            |       |                    |       |                        |       |
| Stockholders’ equity:                      |       |                    |       |                        |       |
| Preferred stock                                 |       | —                  |       | —                      |       |
| Common stock                                    |       | 34                      |       | 34                          |       |
| Additional paid-in  capital                     |       | 303,453                 |       | 302,412                     |       |
| Deferred stock-based  compensation              |       | —                  |       | (3,003                      | )          |
| Accumulated deficit                             |       | (187,620                | )          | (181,106                    | )          |
| Accumulated other  comprehensive income         |       | 280                     |       | 101                         |       |
|                                            |       |                    |       |                        |       |
| Total stockholders’  equity                |       | 116,147                 |       | 118,438                     |       |
|                                            |       |                    |       |                        |       |
| Total liabilities and stockholders’ equity |       | $                       | 148,486    |                        | $          | 158,209 |   |

 

*Seeaccompanying notes.*

2

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**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                             | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                              |       |                             |       |                           |       |   |   |   |   |
| Product revenue                                                        |       | $                                | 12,310     |                           | $          | 12,443 |   | $ | 27,008 |   | $ | 25,581 |   |
| Service revenue                                                        |       | 5,389                            |       | 3,600                          |       | 10,432 |   | 6,856 |   |
| License fees and  contract revenue                                     |       | 6,627                            |       | 4,290                          |       | 9,185 |   | 6,298 |   |
|                                                                   |       |                             |       |                           |       |   |   |   |   |
| Total revenue                                                          |       | 24,326                           |       | 20,333                         |       | 46,625 |   | 38,735 |   |
|                                                                   |       |                             |       |                           |       |   |   |   |   |
| Costs and  expenses:                                                   |       |                             |       |                           |       |   |   |   |   |
| Cost of product  revenue                                               |       | 8,825                            |       | 9,059                          |       | 18,614 |   | 17,890 |   |
| Cost of service  revenue                                               |       | 2,740                            |       | 1,745                          |       | 5,579 |   | 3,405 |   |
| Research and  development                                              |       | 4,928                            |       | 4,580                          |       | 9,386 |   | 8,599 |   |
| Selling, general  and administrative                                   |       | 8,929                            |       | 8,094                          |       | 17,405 |   | 15,863 |   |
| Amortization of  intangible assets                                     |       | 1,254                            |       | 898                            |       | 2,509 |   | 1,796 |   |
| Restructuring  charges, net                                            |       | 32                               |       | 86                             |       | 73 |   | 176 |   |
|                                                                   |       |                             |       |                           |       |   |   |   |   |
| Total costs and  expenses                                              |       | 26,708                           |       | 24,462                         |       | 53,566 |   | 47,729 |   |
|                                                                   |       |                             |       |                           |       |   |   |   |   |
| Operating loss                                                         |       | (2,382                           | )          | (4,129                         | )          | (6,941 | ) | (8,994 | ) |
| Interest income,  net                                                  |       | 180                              |       | 236                            |       | 371 |   | 468 |   |
| Other income  (expense), net                                           |       | 225                              |       | (245                           | )          | 278 |   | (458 | ) |
|                                                                   |       |                             |       |                           |       |   |   |   |   |
| Loss before  income taxes                                              |       | (1,977                           | )          | (4,138                         | )          | (6,292 | ) | (8,984 | ) |
| Provision for  income taxes                                            |       | (88                              | )          | (48                            | )          | (222 | ) | (132 | ) |
|                                                                   |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                               |       | $                                | (2,065     | )                              | $          | (4,186 | ) | $ | (6,514 | ) | $ | (9,116 | ) |
|                                                                   |       |                             |       |                           |       |   |   |   |   |
| Net loss per share,  basic and diluted                                 |       | $                                | (0.06      | )                              | $          | (0.14 | ) | $ | (0.19 | ) | $ | (0.30 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 33,695                           |       | 30,586                         |       | 33,607 |   | 30,520 |   |

 

*Seeaccompanying notes.*

3

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**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Operating  activities**                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net loss                                                                  |       | $                                                 | (6,514     | ) | $ | (9,116 | ) |
| Adjustments to  reconcile net loss to net cash from operating activities: |       |                                              |       |   |   |
| Depreciation and  amortization                                            |       | 4,155                                             |       | 3,515 |   |
| Stock-based  compensation expense, net                                    |       | 2,659                                             |       | 842 |   |
| Non-cash  restructuring charge, net                                       |       | 73                                                |       | 176 |   |
| Foreign currency  exchange (gains) losses                                 |       | (290                                              | )          | 440 |   |
| Changes in  operating assets and liabilities:                             |       |                                              |       |   |   |
| Accounts  receivable                                                      |       | 5,865                                             |       | 3,739 |   |
| Inventories                                                               |       | (3,523                                            | )          | (2,585 | ) |
| Prepaid expenses  and other current assets                                |       | 180                                               |       | (974 | ) |
| Accounts payable  and other accrued liabilities                           |       | (1,634                                            | )          | 1,492 |   |
| Accrued  compensation                                                     |       | (1,966                                            | )          | (1,700 | ) |
| Deferred revenue  and customer deposits                                   |       | (1,325                                            | )          | (114 | ) |
| Other noncurrent  liabilities                                             |       | 485                                               |       | 249 |   |
| Payments of  accrued restructuring obligations, net                       |       | (1,518                                            | )          | (1,737 | ) |
|                                                                      |       |                                              |       |   |   |
| Net cash from  operating activities                                       |       | (3,353                                            | )          | (5,773 | ) |
|                                                                      |       |                                              |       |   |   |
| **Investing  activities**                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Purchases of  marketable securities                                       |       | (11,769                                           | )          | (4,214 | ) |
| Proceeds from  sales of marketable securities                             |       | 6,285                                             |       | 3,759 |   |
| Proceeds from  maturities of marketable securities                        |       | 14,413                                            |       | 4,559 |   |
| Other assets                                                              |       | (1,842                                            | )          | (319 | ) |
| Restricted cash,  net                                                     |       | 224                                               |       | (1,273 | ) |
| Purchases of  property and equipment                                      |       | (3,715                                            | )          | (2,713 | ) |
|                                                                      |       |                                              |       |   |   |
| Net cash from  investing activities                                       |       | 3,596                                             |       | (201 | ) |
|                                                                      |       |                                              |       |   |   |
| **Financing  activities**                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Payments of  obligations under sale-leaseback arrangements                |       | —                                            |       | (301 | ) |
| Payments of  long-term obligations                                        |       | (74                                               | )          | — |   |
| Proceeds from  issuance of common stock                                   |       | 1,050                                             |       | 1,316 |   |
|                                                                      |       |                                              |       |   |   |
| Net cash from  financing activities                                       |       | 976                                               |       | 1,015 |   |
|                                                                      |       |                                              |       |   |   |
| Effect of  exchange rates on changes in cash and cash equivalents         |       | 162                                               |       | (337 | ) |
| Net increase  (decrease) in cash and cash equivalents                     |       | 1,381                                             |       | (5,296 | ) |
| Cash and cash  equivalents at beginning of period                         |       | 8,096                                             |       | 10,403 |   |
|                                                                      |       |                                              |       |   |   |
| Cash and cash  equivalents at end of period                               |       | $                                                 | 9,477      |   | $ | 5,107 |   |

 

*Seeaccompanying notes.*

4

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**CALIPERLIFE SCIENCES, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2006**

**(Unaudited)**

 

**1.Summary of Significant Accounting Principles**

***Basis of Presentation***

Caliper LifeSciences, Inc. (“Caliper”) uses its core technologies of liquid handling,automation, and LabChip microfluidics to create enabling solutions for the lifesciences industry. These products perform laboratory experiments for use in thepharmaceutical and other industries. Caliper currently operates in one businesssegment, the development and commercialization of life science instruments andrelated consumables and services for use in drug discovery and other lifesciences research and development.

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and 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 sixmonths ended June 30, 2006 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2006. For example,Caliper typically experiences higher revenues in the second half of its fiscalyear as a result of capital spending 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 and accompanyingnotes. 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.

Revenuearrangements with multiple contractual elements, which consist primarily of (i)sales of our products and associated accessories, (ii) services, includinginstallation, training and annual maintenance, and (iii) licenses to use ourtechnology, are divided into separate units of accounting if the deliverablesin the arrangement meet certain criteria under Emerging Issues Task Force(EITF) Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF00-21). 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.  Revenue allocated to each unitof accounting is recognized in accordance with the requirements of SAB 104, “RevenueRecognition (a replacement of SAB 101)” (SAB 104).

Cash received fromcustomers as advance deposits for undelivered products and services, includingcontract research and development services, is recorded within customerdeposits until revenue is recognized. Revenue related primarily to annual maintenance contracts and remainingundelivered performance obligations associated with product sales separatelyaccounted for under EITF 00-21 is deferred and recognized upon completion ofthe underlying performance criteria.

5

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*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- or 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***

At the timerevenue is recognized, Caliper establishes an accrual for estimated warrantyexpenses associated with sales, recorded as a component of cost of revenue.Caliper offers a one-year limited warranty on instrumentation products and a90-day warranty on chips, which is included in the sales price of many of itsproducts. Caliper’s standard limited warranty covers repair or replacement ofdefective goods, a preventative maintenance visit on certain products, andtelephone-based technical support. No upgrades are included in the standardwarranty. In accordance with FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, including IndirectGuarantees of Indebtedness of Others,” provision is made for estimated futurewarranty costs at the time of sale. Factors that affect Caliper’s warrantyliability include the number of installed units, historical and anticipatedrates of warranty claims, and cost per claim. Caliper periodically assesses theadequacy of its recorded warranty liabilities and adjusts amounts as necessary.

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

 

|                                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Balance at  beginning of period      |       | $                                             | 1,555      |   | $ | 1,436 |   |
| Warranties  issued during the period |       | 1,444                                         |       | 907 |   |
| Settlements made  during the period  |       | (1,106                                        | )          | (811 | ) |
|                                 |       |                                          |       |   |   |
| Balance at end of  period            |       | $                                             | 1,893      |   | $ | 1,532 |   |

 

***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 7.5 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 six months ended June 30, 2006 and 2005,respectively, as they would have had an antidilutive effect due to Caliper’snet loss. Common stock equivalents used to determine net loss per share in 2006also exclude contingently issuable shares and shares held in escrow inconnection with the NovaScreen acquisition (see Note 2).

***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 continued to recognizethe resulting compensation expense under the accelerated expense attributionmethod.  Periods prior to adoption of SFAS 123R have not beenrestated.  The majority of the incentiveand nonstatutory stock option grants and restricted stock awards carry a 4-yearvesting term, which is generally the requisite service period.  There is typically no acceleration provisionrelated to the stock option grants.  Theexercise price of stock option grants is equal to the fair market value ofCaliper’s stock on the date of grant. For restricted stock awards that cliff vest, Caliper recognizes theresulting compensation expense using a straight-line recognition method overthe applicable service period of each award.

6

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Under the modifiedprospective method, compensation cost recognized in the three and six monthsended June 30, 2006 include (a) compensation cost for all share-based paymentsgranted prior to, but not yet vested as of, January 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions ofStatement of Financial Accounting Standard No. 123 (“SFAS 123”), “Accountingfor Stock-Based Compensation,” and (b) compensation cost for all share-basedpayments granted subsequent to January 1, 2006, based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123R. Prior to theadoption of SFAS 123R, forfeitures of unvested awards were accounted for in theperiod in which they occurred.  Effectivewith the adoption of SFAS 123R, Caliper estimates prospective forfeitures indetermining compensation cost to be recognized. Caliper applied an expected forfeiture rate of 12% to unvested stockoptions for which expense was recognized during the three months ended June 30,2006, having revised its estimate from 5% during the three months ended March31, 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 isrecognized in Caliper’s financial statements for stock-based compensationgranted to employees, which had an exercise price equal to the fair value ofthe underlying common stock on the date of grant.  Upon the adoption of SFAS123R, deferredstock-based compensation of $3.0 million was reclassified to additional paid-incapital within stockholders’ equity.

Caliper accounts foroptions 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 six months ended June 30, 2006 and 2005,compensation expense related to stock-based compensation issued tonon-employees was not material.

As a result ofadopting SFAS 123R on January 1, 2006, Caliper’s operating loss, loss beforeincome taxes and net loss for the three and six months ended June 30, 2006 are$0.9 million and $1.8 million, respectively, greater than if it had continuedto account for share-based compensation under APB No. 25.  Basic and diluted net loss per share for thethree and six months ended June 30, 2006 would have been lower by $0.03 and$0.05, respectively, if Caliper had not adopted SFAS 123R. The adoption of SFAS123R had no impact on cash flows.

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

 
| ** **                           | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cost of product  revenue             |       | $                                              | 123        |                                         | $          | 43 |   | $ | 250 |   | $ | 82 |   |
| Cost of service  revenue             |       | 41                                             |       | 6                                            |       | 66 |   | 13 |   |
| Research and  development            |       | 252                                            |       | 83                                           |       | 492 |   | 163 |   |
| Selling, general  and administrative |       | 953                                            |       | 290                                          |       | 1,843 |   | 573 |   |
| Total                                |       | $                                              | 1,369      |                                         | $          | 422 |   | $ | 2,651 |   | $ | 831 |   |

 

The following tableillustrates the effect on net loss and net loss per share for the three and sixmonths ended June 30, 2005 as if Caliper had applied the fair value-based methodin each of those periods (in thousands, except per share data):

 

|                                                                                                   | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
|                                                                                              |       |                  |       |                |       |
| Net loss:                                                                                         |       |                  |       |                |       |
| As reported                                                                                       |       | $                     | (4,186     | )                   | $          | (9,116 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss                     |       | 422                   |       | 831                 |       |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method |       | (1,860                | )          | (4,467              | )          |
| Pro forma net loss                                                                                |       | $                     | (5,624     | )                   | $          | (12,752 | ) |
| Net loss per  share:                                                                              |       |                  |       |                |       |
| As reported:                                                                                      |       |                  |       |                |       |
| Basic and diluted                                                                                 |       | $                     | (0.14      | )                   | $          | (0.30 | ) |
| Pro forma:                                                                                        |       |                  |       |                |       |
| Basic and  diluted                                                                                |       | $                     | (0.18      | )                   | $          | (0.42 | ) |

 

On June 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-

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Merton based option pricing model that uses the assumptions noted in thefollowing table.  Expected volatilitiesare based on historical volatility of Caliper’s stock.  The expected term of the options is based onCaliper’s historical option exercise data taking into consideration theexercise 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.

 
|                              | ** ** | **Six Months Ended June 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 stock optionand restricted stock activity under the Plans as of June 30, 2006, and changesduring the six months then ended is as follows:

 
| Stock Options                | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                                          | ** ** | **(in thousands)**             | ** ** |
|                              |       |       |       |                                   |       |                                                |       |                                |       |
| Outstanding at  December 31, 2005 |       | 6,381,195  |       | $                                      | 6.56       |                                                |       |                                |       |   |
| Granted                           |       | 564,000    |       | 6.40                                   |       |                                                |       |                                |       |
| Exercised                         |       | (248,012   | )          | 3.27                                   |       |                                                |       |                                |       |
| Canceled                          |       | (87,639    | )          | 10.16                                  |       |                                                |       |                                |       |
| Outstanding at  June 30, 2006     |       | 6,609,544  |       | $                                      | 6.62       |                                                | 5.99       |                                | $          | 4,024 |   |
| Exercisable at  June 30, 2006     |       | 4,743,449  |       | $                                      | 6.86       |                                                | 5.04       |                                | $          | 3,887 |   |
| Non-vested at June 30,  2006      |       | 1,866,095  |       | $                                      | 6.02       |                                                | 8.41       |                                | $          | 137 |   |

 
| 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                                                               |       | (17,812    | )          | *                                      |       |                                                |       |                                |       |
| Un-vested  repurchases                                               |       | (10,251    | )          | *                                      |       |                                                |       |                                |       |
| Outstanding at June 30,  2006                                        |       | 749,163    |       | *                                      |       | 2.86                                                |       | $                                   | 3,675      |   |
|                                                                      |            |            |            |                                        |            |                                                     |            |                                     |            |  |

 

----

*Nominal exerciseprice

During the sixmonths ended June 30, 2006, Caliper granted its employees 564,000 options at aweighted average grant date fair value of $2.07, and 165,000 restricted stockunits at a weighted average grant date fair value of $6.40. The total intrinsicvalue of options exercised during the six months ended June 30, 2006 wasapproximately $0.6 million. The total fair value of restricted stock thatvested during the six months ended June 30, 2006 was approximately $0.1million.

As of June 30,2006, there was $8.2 million of total unrecognized compensation cost related tonon-vested stock-based compensation arrangements granted under the Plans.  That cost is expected to be recognized over aweighted-average remaining service (vesting) period of 2.5 years.

***Reclassifications***

The 2006presentation includes the reclassification of restructuring-related accretioncharges from interest expense, as previously reported, to the restructuringline item within the accompanying consolidated statement of operations.  In addition, foreign currency transactionlosses (gains) have been reclassified within the statement of cash flows fromeffect of exchange rates to cash from operating activities.  Also, the current portion of restricted cashhas been reclassified on a separate line in the consolidated balance sheet,where it had previously been included within cash and cash equivalents.  In addition, employee stock-basedcompensation expense, which was previously disclosed as a separate incomestatement line item, has been reflected within costs and expenses in accordancewith SFAS 123R.  Amounts in the 2005financial statements have been reclassified to conform to the 2006 financialstatement presentation.  Thesereclassifications had no effect on previously reported net loss, totalstockholders’ equity or net loss per

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share.

**2.Acquisitions**

***NovaScreen Biosciences Corporation***

On October 3,2005, Caliper completed the acquisition of NovaScreen Biosciences Corporationfor $23.3 million, including $17.6 million in Caliper common stock,$4.4 million of cash and $1.3 million of estimated direct acquisitioncosts. The value of the common stock issued was calculated in accordance withthe terms of the merger agreement and EITF No. 99-12, “Determination ofthe Measurement Date for the Market Price of Acquirer Securities Issued in a PurchaseBusiness Combination.” Ten percent (10%) of the consideration payable to theformer stockholders of NovaScreen has been placed into escrow for atwelve-month period to cover any potential indemnification claims. NovaScreenshareholders are entitled to earn up to an additional $8.0 millioncontingent on the achievement of defined revenue milestones over the 30-monthperiod immediately following the closing date of the acquisition. If earned,the additional consideration will be treated as additional purchase price andrecorded as goodwill. The closing consideration was paid, and future contingentconsideration is payable, at a ratio of 80% Caliper common stock and 20% cash.Caliper issued 2,576,933 shares of common stock for the purchase of NovaScreenand reserved 1,124,450 shares of common stock for future issuance inconnection with the potential achievement of these milestone events.

NovaScreenrevenues did not meet the minimum requirement associated with a $3.0 millioncontingent milestone payment that would have been payable on April 3, 2006 tothe former NovaScreen shareholders, leaving $5.0 million of remainingcontingent payments tied to future milestones over the next 24-month period.

NovaScreen’s operations,assumed as of the date of the acquisition, are included in the results ofoperations of Caliper beginning on October 3, 2005. The acquisition wasaccounted for as a purchase in accordance with SFAS No. 141, “BusinessCombinations,” and Caliper accordingly allocated the estimated purchase priceof NovaScreen based upon the fair value of net assets acquired and liabilitiesassumed. The components and allocation of the purchase price, which is expectedto be finalized within one year of the date of the acquisition subject topotential contingent payments, consisted of the following (in thousands):

 
| Cash and cash equivalents       |   | $      | 1,015  |   |
|---------------------------------|--------|--------|--------|--------|
| Other current  assets           |   | 1,574  |   |
| Other assets                    |   | 919    |   |
| Liabilities  assumed            |   | (2,057 | )      |
| Identifiable  intangible assets |   | 8,148  |   |
| Goodwill                        |   | 13,651 |   |
|                            |   |   |   |
|                            |   | $      | 23,250 |   |

 

Unaudited pro formaoperating results for Caliper for the three and six months ended June 30, 2005,assuming the acquisition was completed as of January 1, 2005, would havebeen as follows (in thousands, except per share amounts):

 
|                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| Revenue                                    |       | $                                | 22,351     |                           | $          | 43,137 |   |
| Operating loss                             |       | (4,214                           | )          | (9,308                         | )          |
| Net loss                                   |       | (4,294                           | )          | (9,533                         | )          |
| Basic and  diluted loss per share          |       | (0.13                            | )          | (0.29                          | )          |
| Pro forma weighted  average shares assumed |       | 33,163                           |       | 33,097                         |       |
|                                            |            |                                  |            |                                |            |  |  |

 

The unaudited proforma financial information is presented for informational purposes only, andis not necessarily indicative of Caliper’s operating results had theacquisition been completed on the date for which the pro forma results give effect.  The pro forma results principally reflect thepro forma impact of intangibles amortization.

***Xenogen Corporation***

OnFebruary 13, 2006, Caliper announced a definitive agreement to merge withXenogen Corporation. Under the agreement, Caliper will issue up toapproximately 13.2 million common shares of common stock and warrants topurchase approximately 5.125 million shares of common stock, the value ofwhich was estimated to be approximately $81 million on the date of the mergerannouncement, in exchange for all of Xenogen’s equity securities outstanding atthe closing. The Caliper warrants will have a term of five years from theclosing and an exercise price of $6.79 per share. The final exchangeratios for the issuance of common shares and warrants will be based on thecapitalization of Xenogen at the closing of the proposed transaction.

A Form S-4Registration Statement covering the shares and warrants to be issued in thepending merger was declared effective by the Securities and Exchange Commissionon July 11, 2006 and on July 13, 2006, Caliper and Xenogen announced that eachcompany would hold a stockholder meeting on August 9, 2006 to seek approvalsfor the merger transaction.  The mergertransaction was completed on August 9, 2006.

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**3.Inventories**

 Inventories arestated 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 (in thousands):

 
| ** **      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Raw material    |       | $                 | 7,242      |                  | $          | 5,075 |   |
| Work-in-process |       | 1,517             |       | 762                   |       |
| Finished goods  |       | 5,988             |       | 5,224                 |       |
|            |       |              |       |                  |       |
| Inventories     |       | $                 | 14,747     |                  | $          | 11,061 |   |

 

**4.Comprehensive Loss**

Comprehensive loss is asfollows (in thousands):

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                       | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                                         |       | $                                | (2,065     | )                              | $          | (4,186 | ) | $ | (6,514 | ) | $ | (9,116 | ) |
| Unrealized gain  (loss) on marketable securities |       | 24                               |       | (103                           | )          | 89 |   | (210 | ) |
| Foreign currency  translation gain               |       | 83                               |       | 100                            |       | 91 |   | 27 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Comprehensive loss                               |       | $                                | (1,958     | )                              | $          | (4,189 | ) | $ | (6,334 | ) | $ | (9,299 | ) |

 

**5.Restructuring Activities**

The accruedrestructuring obligation as of June 30, 2006 includes remaining liabilitiesrelated to two facilities in Mountain View, California as a result of thefollowing restructuring activities:

·                  In November 2003, Caliperconsolidated instrument manufacturing and research and development facilities,and recognized a $7.4 million restructuring charge for estimated remaininglease costs through June 2008.

·                  In June 2004, Caliper partiallyconsolidated research and development facilities, and recognized a$2.1 million restructuring charge for estimated remaining lease coststhrough June 2008.

·                  In December 2004, as a result ofidentifying additional efficiencies, Caliper was able to achieve furtherconsolidation of its research and development facilities.  In addition, Caliper revised its estimate ofthe sublease income potential of its idle facilities.  Caliper recognized an additional $3.6 millionrestructuring charge as a result of these activities.

·                  In December 2005, Caliper recognizeda $1.4 million restructuring credit to reflect the net present value of futuresublease rental income based upon subleases entered into for portions of itstwo idle facilities.

The following tablesummarizes the restructuring accrual activity during the six months ended June30, 2006 (in thousands):

 
|                                  | ** ** | **Facility  Lease  Accrual** | ** ** |
|----------------------------------|------------|------------------------------|------------|
| Balance,  December 31, 2005 |       | $                            | 7,230      |   |
| Interest  accretion              |       | 147                          |       |
| Payments                         |       | (1,591                       | )          |
|                             |       |                         |       |
| Balance as of June 30,  2006     |       | $                            | 5,786      |   |

 

10

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Minimum monthly lease andoperating expense payments under the two idle facility leases are currently$0.3 million, subject to escalation through expiration of the leases in June 2008at an average rate of 3.6%. The restructuring liability as of June 30, 2006reflects the minimum future payment obligations related to base lease rentalsand operating charges over the remaining lease lives through June 30,2008, net of anticipated sublease income, discounted at 5%, as follows (inthousands):

 
| Years ending  December 31:             |   |   |   |
|---------------------------------------------|--------|--------|--------|
| 2006  (6 months)                       |   | $      | 1,575  |   |
| 2007                                        |   | 3,200  |   |
| 2008                                        |   | 1,604  |   |
|                                        |   |   |   |
| Total minimum  lease and principal payments |   | 6,379  |   |
| Less: Amount  representing interest         |   | 593    |   |
|                                        |   |   |   |
| Present value of  future payments           |   | 5,786  |   |
| Less: Current  portion of obligations       |   | 2,845  |   |
|                                        |   |   |   |
| Non-current portion of  obligations         |   | $      | 2,941  |   |

 

The facilityclosures were accounted for in accordance with SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities,” pursuant to whichCaliper recorded a liability equal to the fair value of the remaining leasepayments as of the cease-use date for each of the closed facilities. Fair valuewas determined based upon the discounted present value of remaining leaserentals (5% discount rate used) for the space no longer occupied, consideringsublease income at each point in time.

**6.Stockholders’ Equity**

During 2006,Caliper issued 399,651 shares of common stock, increasing the total sharesoutstanding as of June 30, 2006 to 34,185,443. The increase in shares relatesto shares issued as a result of stock purchases under the employee stockpurchase plan, stock option exercises and vesting of restricted stock awards.

**7.Subsequent Event**

On August 9, 2006,Caliper entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”/the “Credit Facility”) which permits Caliper to borrow up to $20 million in theform of revolving loan advances including up to $5 million in the form ofletters of credit.  Principal borrowingsunder the Credit Facility accrue interest at a floating per annum rate equal tothe prime rate if Caliper’s unrestricted cash held at SVB exceeds $20 million,or prime plus one-half of one percentage point if Caliper’s unrestricted cashheld at SVB is below $20 million.   Underthe Credit Facility, Caliper is permitted to borrow up to $20 million, providedit maintains unrestricted cash of at least $20 million with SVB, or is otherwisesubject to a borrowing base limit consisting of up to a) 80% of eligibleaccounts receivable, as defined, plus b) the lesser of 90% of Caliper’sunrestricted cash maintained at SVB or $10 million.  The Credit Facility has a two-year initialmaturity.  During the first eighteen (18)months following Caliper’s merger with Xenogen, Caliper is subject to payinterest on a minimum of $8 million 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 severalpotential events of default such as payment default, material adverse changeconditions and insolvency conditions that could cause interest to be charged atprime plus two percentage points, or for any uncured events of default resultin SVB’s right to declare all outstanding obligations immediately due andpayable.

Caliper intends toutilize the Credit Facility to refinance Xenogen’s outstanding credit facilitywith SVB (approximately $8 million as of August 9, 2006), consolidate otherexisting debt obligations of Caliper and Xenogen, and serve as a source ofcapital for ongoing operations and working capital needs.

11

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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 June 30, 2006 and for the three and six months ended June 30,2006 and June 30, 2005 should be read in conjunction with our financialstatements included in this Quarterly Report on Form 10-Q and Management’sDiscussion and Analysis of Financial Condition and Results of Operations andour financial statements included in our Annual Report on Form 10-K for theyear 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 uses itscore technologies of liquid handling, automation, LabChip microfluidics and drugdiscovery services to create enabling solutions for the life sciences industry.

Within the lifesciences industry, we are currently pursuing two major markets: drug discoveryand development and diagnostics. In the drug discovery and development market, ourproducts and services address many new challenges faced by pharmaceutical andbiotechnology companies. These challenges include late-stage drug failures,increased research and development spending yielding fewer new drugs and, morerecently, drugs being removed from the market due to unforeseen side effectsthat were not discovered in pre-launch research and development or clinicaltrials. Our products and services help researchers make better choices earlierin their drug discovery process, increase the speed and efficiency of theirhigh-throughput screening efforts, and enable profiling experiments that canidentify drug side effects earlier in the drug discovery process. With respectto diagnostics markets, we believe that our LabChip technologies may helpreduce the high cost of many diagnostic tests, and particularly moleculardiagnostic tests, through integration and miniaturization of the various stepsrequired to carry out these tests. We are presently primarily working withcollaboration partners in this area, although these projects are still in thefeasibility or early development stages.

We have threechannels of distribution for our products: direct to customers, indirectthrough our international network of distributors, and through partnershipchannels under our “Caliper DrivenÔ“program. Through our direct and indirect channels, we sell complete systemsolutions developed by us to end customers. Our Caliper Driven program is coreto our business strategy and complementary to our direct sales and distributionnetwork activities, as it enables us to extend the commercial potential of ourLabChip and advanced liquid handling technologies into new industries and newapplications with experienced commercial partners. Under this program, we supplyliquid handling products, microfluidics chips, and other products on an OEMbasis, and when requested provide product development expertise to ourcommercial partners, who then typically integrate an application solution andmarket it to their end customers. In addition, as part of our Caliper Drivenprogram we also provide licenses to our extensive microfluidic patent estate toother companies. We view out-licensing under our Caliper Driven program as away for us to extend our microfluidics technology into certain applicationareas that we do not have a present strategic intent to address directly, orthat may require the greater technical, marketing or financial resources of ourlicensing partner in order to obtain a more a rapid adoption of our technologyin the particular application area. By using direct and indirect distribution,and out-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 February 13, 2006, weannounced that we had entered into a definitive merger agreement on February10, 2006 to acquire Xenogen Corporation, a maker of advanced imaging systemsincluding instruments, biological solutions and software designed to acceleratedrug discovery and development. Under the agreement, we will issue up toapproximately 13.2 million common shares and approximately 5.125 millionwarrants to purchase Caliper common shares in exchange for all of Xenogen’sequity securities outstanding at the closing. As of February 10, 2006, theaggregate value of the Caliper shares and warrants to be issued in connectionwith the merger was approximately $81 million.

Caliper’s Form S-4Registration Statement covering the shares and warrants to be issued in theproposed merger transaction was declared effective by the Securities andExchange Commission on July 11, 2006, and subsequently, on July 13, 2006,Caliper and Xenogen announced that each company would hold its stockholdermeeting on August 9, 2006 to seek approvals for the merger transaction.

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

·             theexpected benefits, including revenue growth, from combining the two companiesmay not be realized;

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

12

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·             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 Second Quarter 2006***

During the secondquarter of 2006, we achieved total revenue of $24.3 million which wasslightly above the range of our projection of $22.0 million to$24.0 million. Our total revenues grew by 20% compared to the secondquarter of 2005.  Service revenues ofNovaScreen, which we acquired during the fourth quarter of 2005, andincremental license fees under our Caliper Driven program were the principalrevenue growth drivers during the second quarter of 2006.

We continue to seemomentum in the commercial adoption of our LabChip systems with the placementof an additional 11 systems during the second quarter.  This brought total placements to 24 systemson a year-to-date basis in comparison to 12 systems that were placed over thefirst six months of 2005.  IncreasedLabChip system sales and sales of our newly launched TPW3 tablet processingworkstation helped to offset revenue shortfalls from our relationship withAffymetrix, and overall automation and liquid handling product sales were upslightly during the second quarter of 2006 versus the second quarter of2005.  However, we had no additionalGeneChipÒ Array Station (“GCAS”) system sales toAffymetrix during the second quarter of 2006, nor did we have any such sales ona year-to date basis, which negatively impacted our product revenueperformance.  We believe that Affymetrixis continuing to address certain production and other technical issuesassociated with its Mapping 500K Set Array product, which we believe areindirectly impacting the demand for GCAS systems. We anticipate that theseconditions may continue throughout the remainder of 2006, although we expect tosee a modest number of GCAS system placements in the fourth quarter of 2006.

We continue tomanage our operating costs carefully. Operating expenses (selling, general, administrative and research anddevelopment expenses) increased $1.2 million in the second quarter, whichincluded costs of adopting SFAS123R of approximately $0.8 million and expensesrelated to NovaScreen of approximately $1.0 million, offset by approximately$0.6 million of reduced spending.  We arein the process of a strategic initiative to evaluate our sources of supply onkey parts and components for certain of our products where we believe there isconsiderable opportunity to reduce material costs while preserving or improvingquality.  This strategic initiativeinvolves several new vendor relationships we have established in China and inother low cost production regions.  Weexpect to begin realizing improved gross margin benefit on product revenuesbeginning in the fourth quarter of 2006 as a result of these strategic sourcinginitiatives.

We completed ourmerger with Xenogen Corporation on August 9, 2006.  We believe the acquisition of Xenogen willsignificantly advance our capabilities as a leading provider of tools andservices that increase the productivity and clinical relevance of life sciencesresearch, and is expected to accelerate our revenue growth and profitability.The integration of molecular tool technologies could present a key opportunityto improve drug discovery research. As highlighted in the FDA Critical Path Initiative,biomarker research and better experimentation models are essential to improvepredictability and efficiency along the critical path from laboratory tocommercial drug. The combination of our proprietary microfluidic technology andautomation expertise with Xenogen’s proprietary imaging technology addressesthese key research needs by creating molecular level solutions that encompass *in vitro*(test tube) to *in vivo*(living organism) research. Thesetechnologies offer exceptional data quality and productivity advantages, andcombining them to offer a highly correlated suite of products and servicesshould result in earlier, clinically relevant insights in the drug discoveryprocess.

**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 thecritical accounting policies, other than the adoption of SFAS 123R.

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:

13

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

·                  expectedoption term, which is based on the Company’s historical option exercise datataking into consideration the exercise patterns of the option holders duringthe option’s life;

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

·                  forfeiture rate.

The Companyapplied a historical forfeiture rate of 5% and 12% to unvested awards duringthe three and six months ended March 31, 2006 and June 30, 2006,respectively.  A 10% unfavorable changein expected volatility and option term, which represent the most sensitive andjudgmental assumptions, would not have a material effect on our financialstatements.

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.

The implementationof SFAS 123R has had no adverse affect 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.

**Resultsof Operations for the Three and Six Months Ended June 30, 2006 and 2005**

***Revenue***

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In thousands)**            | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **$ Change** | ** ** | **%  Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Product revenue                    |       | $                                | 12,310     |                           | $          | 12,443 |   | (133 | ) | (1 | )% | $ | 27,008 |   | $ | 25,581 |   | $ | 1,427 |   | 6 | % |
|                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service revenue                    |       | 5,389                            |       | 3,600                          |       | 1,789 |   | 50 | % | 10,432 |   | 6,856 |   | 3,576 |   | 52 | % |
|                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| License fees and  contract revenue |       | 6,627                            |       | 4,290                          |       | 2,337 |   | 55 | % | 9,185 |   | 6,298 |   | 2,887 |   | 46 | % |
|                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenues                     |       | $                                | 24,326     |                           | $          | 20,333 |   | $ | 3,993 |   | 20 | % | $ | 46,625 |   | $ | 38,735 |   | $ | 7,890 |   | 20 | % |
|                                    |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*TotalRevenue.* Our total revenue increase on both a three and sixmonth basis over 2005 resulted primarily from drug discovery screening andprofiling services provided by NovaScreen, which we acquired in October 2005,higher license fee revenue realized under our Caliper Driven program andincreases in most instrument product sales, with the exception of GCAS systemssold to Affymetrix on an OEM basis.  Wehave experienced no additional GCAS system sales to Affymetrix during the firsthalf of 2006.  In 2005, Affymetrixannounced that it was working to resolve low production yields and othertechnical issues associated with its Mapping 500K Set Array product.  We believe these issues have indirectlyimpacted GCAS end-user purchases, because the users of this product are alsoexpected to be users of the GCAS systems. We anticipate that these conditionsmay continue in the third quarter, although we expect to see improvement andfurther GCAS placements beginning in the fourth quarter of 2006.  Foreign currency exchange rate movements hada negligible impact on second quarter revenues and had a one percentage pointunfavorable impact on total revenue on a year-to-date basis in 2006 incomparison to 2005.

*ProductRevenue*.  Productrevenue decreased slightly during the second quarter of 2006 compared to thesecond quarter of 2005 primarily as a result of the decline in GCAS systemsales. All other product sales increased by approximately $1.1 million, led byimproved sales of LabChip instruments and our newly launched TPW3 tabletprocessing workstation.  During thesecond quarter of 2006 we placed a total of 11 new LabChip systems withcustomers versus 7 systems in the second quarter of 2005.

Product revenue increasedduring the six months ended 2006 compared to 2005 primarily due to increasedsales of LabChip instruments, and MultiDose and TPW workstations whichincreased $3.1 million on a combined basis. All other product revenues decreased approximately $1.7 million.  The majority of this decline was caused bythe absence of GCAS systems sales, and was influenced to a lesser extent bydecreases in datapoint and microfluidic chip and reagent revenues. During thesix months ended  June 30, 2006, weplaced a total of 24 LabChip systems with customers, in comparison to a totalof 12 systems during the six months ended 2005.

*ServiceRevenue*. Drug discovery screening, profiling services andassay development services provided by NovaScreen accounted for the majority ofthe increase in service revenue during the three and six months ended June 30,2006 in comparison to the same periods in 2005.

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*LicenseFees and Contract Revenue.* License fees and contract revenue, in total, increased during the threeand six months ended June 30, 2006 in comparison to the same periods in 2005primarily as a result of a $2.6 million increase in license revenues duringeach respective period under our Caliper Driven program and to a lesser extentas a result of SBIR grant research projects conducted at NovaScreen.  Collaborative funding revenues were downapproximately $0.7 million during the three and six months ended June 30, 2006compared to the same period in 2005, primarily related to one partner whichdecided to obtain a patent license from Caliper to pursue its ongoingmicrofluidics technology program in-house.

***Costs of Revenue***
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In thousands)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **$ Change** | ** ** | **%  Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Product                 |       | $                                | 8,825      |                           | $          | 9,059 |   | $ | (234 | ) | (3 | )% | $ | 18,614 |   | $ | 17,890 |   | $ | 724 |   | 4 | % |
|                    |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service                 |       | 2,740                            |       | 1,745                          |       | 995 |   | 57 | % | 5,579 |   | 3,405 |   | 2,174 |   | 64 | % |
|                    |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Costs             |       | $                                | 11,565     |                           | $          | 10,804 |   | $ | 761 |   | 7 | % | $ | 24,193 |   | $ | 21,295 |   | $ | 2,898 |   | 14 | % |

 

*Cost ofProduct Revenue.*  Costof product revenue decreased during the three months ended June 30, 2006 incomparison to the same period of 2005 primarily as a result of lower overallproduct sales and the allocation of certain personnel costs from manufacturingto research and development in 2006. The realignment of cost totaledapproximately $0.3 million and was related primarily to manufacturing individualswho took on responsibility to support product development activities in thesecond quarter of 2006 as a result of reductions in research and developmentheadcount that occurred in the fourth quarter of 2005.  This decrease was partially offset by $80,000of additional stock-based compensation expense due to the adoption of SFAS123R.

Cost of product revenueincreased during the six months ended June 30, 2006 in comparison to the sameperiod of 2005, primarily as a result of increased product sales, including theeffects of LabChip instruments which have a proportionately higher finishedgoods material cost.  In addition, costof product revenue increased approximately $0.2 million due to the adoption ofSFAS 123R. These increases were offset, in part, by the allocation of certainpersonnel costs as described above which totaled $0.3 million over the firstsix months of 2006. 

*Cost ofService Revenue.*  Costof service revenue increased during the three and six months ended June 30,2006 primarily as a result of costs associated with NovaScreen servicerevenues, which were new to Caliper in 2006 in comparison to 2005.

*GrossMargins.*  Gross marginon product revenue was 28% and 31%, respectively, for the three and six monthsended June 30, 2006, as compared to 27% and 30%, respectively in the sameperiods during 2005. The improvement over 2005 was due primarily to greaterabsorption of manufacturing costs, modestly reduced labor and overhead spendingrelated to chip manufacturing and the allocation of certain personnel costsprimarily to research and development as discussed above.  The adoption of SFAS 123R had a onepercentage point unfavorable impact on product gross margin during both thethree and six months ended June 30, 2006 in comparison to the same periods in2005.  

Gross margin on servicerevenue was 49% and 47%, respectively, for the three and six months ended June30, 2006, as compared to 52% and 50%, respectively, in comparison to the sameperiods in 2005.  The decrease in 2006 incomparison to 2005 reflects the combination of a higher level of servicecontract related costs, and the effects of NovaScreen’s service revenues which,year-to-date, have carried a lower proportionate gross margin versus Caliper’shistoric service revenues.  NovaScreen’sservice margins are currently influenced by a more significant proportion ofgovernment contract revenue than is typical of NovaScreen’s historicbusiness.  As service revenues expand,including NovaScreen’s commercial revenue base, we expect to see increasedgross margin on service revenues.

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***Expenses***

 

|                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In thousands)**              | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **$ Change** | ** ** | **%  Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Research and  development            |       | $                                | 4,928      |                           | $          | 4,580 |   | $ | 348 |   | 8 | % | $ | 9,386 |   | $ | 8,599 |   | $ | 787 |   | 9 | % |
|                                 |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative |       | 8,929                            |       | 8,094                          |       | 835 |   | 10 | % | 17,405 |   | 15,863 |   | $ | 1,542 |   | 10 | % |
|                                 |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization of  intangible assets   |       | 1,254                            |       | 898                            |       | 356 |   | 40 | % | 2,509 |   | 1,796 |   | 713 |   | 40 | % |
|                                 |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Restructuring charges                |       | 32                               |       | 86                             |       | (54 | ) | (63 | )% | 73 |   | 176 |   | (103 | ) | (59 | )% |
|                                      |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Researchand Development Expenses.* The net increase in research and development expenses during the threemonths ended June 30, 2006 in comparison to the same period in 2005 wascomprised of $0.2 million in stock-based compensation expense related to theadoption of SFAS 123R and $0.6 million of incremental costs stemming from ourpurchase of NovaScreen, offset by a $0.2 million decrease in staff-related costscaused by a net reduction in instrument development personnel costs, and acombined reduction in contract, consulting and depreciation charges of $0.3million.  

The net increase inresearch and development expenses during the six months ended June 30, 2006 incomparison to the same period in 2005 was comprised of $0.3 million instock-based compensation expense related to the adoption of SFAS 123R and $1.1million of incremental costs stemming from our purchase of NovaScreen, offsetby a $0.3 million decrease in staff-related costs, primarily related to reducedpersonnel costs within the instrumentation group to align resources withcurrent projects and a combined reduction in contract, consulting anddepreciation charges of $0.3 million.

As part of our CaliperDriven program, we may undertake potential projects that could cause ourresearch and development costs to increase as a percentage of revenue, althoughsuch increased spending may be fully or partially funded by our commercialpartners.

*Selling,General and Administrative Expenses.*  The net increase in selling, general andadministrative expenses during the three months ended June 30, 2006 incomparison to the same period in 2005 was comprised of $0.7 million instock-based compensation expense related to the adoption of SFAS 123R and $0.4million of incremental costs stemming from our purchase of NovaScreen.  These increases were partially offset by a$0.3 million net decrease in all other costs. This net decrease was comprised of decreases in legal expenses of $0.3million, primarily related to reduced patent related costs, and depreciationcharges on demonstration equipment of $0.2 million related to the level of demoequipment maintained during the period, offset by increases in integration relatedexpenses for Xenogen of $0.1 million and provisions for bad debt of $0.1million.  

The net increase inselling, general and administrative expenses during the six months ended June30, 2006 in comparison to the same period of 2005 was comprised of $1.3 millionin stock-based compensation related to the adoption of SFAS 123R and $0.8million of incremental costs stemming from our purchase of NovaScreen.  These costs were partially offset by a $0.6million net decrease in all other costs. This net decrease was comprised ofdecreases in legal expenses of $0.1 million, primarily related to reducedpatent related costs, reduced marketing costs of $0.2 million related topromotions in 2005 related to consumables, and depreciation charges ondemonstration equipment of $0.3 million related to the level of demo equipmentmaintained during the period, offset by increases in integration relatedexpenses for Xenogen of $0.1 million and provisions for bad debt of $0.1million.  All other costs resulted in anadditional $0.2 million decrease during the period.

*Amortizationof Intangible Assets.* Amortization of intangible assetsrelates to the intangible assets acquired in the NovaScreen acquisition inOctober 2005 and the Zymark acquisition in 2003. The expense increase during2006 resulted entirely from the acquisition of NovaScreen.

*RestructuringCharges.* We incurred restructuring charges in 2006 and 2005related to accretion charges from the facility closures in Mountain View.  During 2006, these charges were partiallyoffset by sublease income that we recognized on a cash basis.

***Interest and OtherExpense, Net***

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In thousands)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **$ Change** | ** ** | **%  Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Interest income,  net   |       | $                                | 180        |                           | $          | 236 |   | $ | (56 | ) | (24 | )% | $ | 371 |   | $ | 468 |   | $ | (97 | ) | (21 | )% |
| Other income (expense)  |       | 225                              |       | (245                           | )          | 470 |   | 192 | % | 278 |   | (458 | ) | 736 |   | 161 | % |
|                         |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*InterestIncome, Net.*  Interestincome in 2006 decreased on both a three and six 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

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investing activities.

*OtherIncome, Net.*  Otherincome, net increased on a three and six month basis compared to 2005 primarilyfrom gains and losses associated with recording account balances denominated innon-U.S. currencies at fair market value. During the three and six months endedJune 30, 2006, we incurred foreign currency transaction gains of approximately$0.2 million and $0.3 million compared to transaction losses of $0.2 millionand $0.4 million in 2005.

**Liquidityand Capital Resources**

As of June 30,2006, we had $24.4 million in cash, cash equivalents, marketable securities andshort-term restricted cash, as compared to $31.7 million as of December 31,2005.

As noted in Note 7of the Notes to Condensed Consolidated Financial Statements, on August 9, 2006,Caliper entered into a Credit Facility with SVB which permits Caliper to borrowup to $20 million in the form of revolving loan advances including up to $5million in the form of letters of credit. Principal borrowings under the Credit Facility accrue interest at afloating per annum rate equal to the prime rate if Caliper’s unrestricted cashheld at SVB exceeds $20 million, or prime plus one-half of one percentage pointif Caliper’s unrestricted cash held at SVB is below $20 million.   Under the Credit Facility, Caliper ispermitted to borrow up to $20 million, provided it maintains unrestricted cashof at least $20 million with SVB, or is otherwise subject to a borrowing baselimit consisting of up to a) 80% of eligible accounts receivable, as defined,plus b) the lesser of 90% of Caliper’s unrestricted cash maintained at SVB or$10 million.  The Credit Facility has atwo-year initial maturity.  During thefirst eighteen (18) months following Caliper’s merger with Xenogen, Caliper issubject to pay interest on a minimum of $8 million 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 severalpotential events of default such as payment default, material adverse changeconditions and insolvency conditions that could cause interest to be charged atprime plus two percentage points, or for any uncured events of default resultin SVB’s right to declare all outstanding obligations immediately due andpayable.   

Caliper intends toutilize the Credit Facility to refinance Xenogen’s outstanding credit facilitywith SVB (approximately $8 million as of August 9, 2006), consolidate otherexisting debt obligations of Caliper and Xenogen, and to serve as a source ofcapital for ongoing operations and working capital needs.

***Cash Flows***

 
| ** **                  | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                  | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| **(In thousands)**     | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **$ Change** | ** ** |
| Cash provided by  (used in) |       |                           |       |       |       |   |   |
| Operating  Activities       |       | $                              | (3,353     | )          | $          | (5,773 | ) | $ | 2,420 |   |
| Investing  Activities       |       | 3,596                          |       | (201       | )          | 3,797 |   |
| Financing Activities        |       | 976                            |       | 1,015      |       | (39 | ) |
|                             |            |                                |            |            |            |  |  |  |  |  |

 

*OperatingActivities.*  During thesix months ended June 30, 2006 we used $3.4 million of cash for operatingactivities which included approximately $1.5 million of restructuring accruallease payments, net of sublease income, related to our idle facilities inMountain View, California. Net operating results and all other working capitalchanges consumed approximately $1.9 million of cash.  Primary cash sources were comprised ofimproved collection on trade receivables of approximately $3.5 million, drivenprimarily by increased license revenues and $1.5 million of cash provided bytenant reimbursement funding from our Hopkinton, Massachusetts landlord, andprimary cash uses included inventory purchases of approximately $3.5 millionassociated with newer products, and 2005 bonus payments of approximately $2.5million.  All other working capitalchanges consumed cash of approximately $0.9 million.

*InvestingActivities.*  During thesix months ended June 30, 2006, net proceeds from purchases, sales andmaturities of marketable securities generated $8.9 million of cash which weused for operations and property and equipment purchases.  Our primary investing activities includedpurchases of property and equipment of $3.7 million, of which the majorityrelated to facility improvements made to our Hopkinton, Massachusettsheadquarters. As noted above, we received tenant improvement funding from ourlandlord reflected in operating activities which partially offset thisinvestment.  In addition, we used $1.8million in cash for deferred acquisition costs related to our transaction withXenogen.  All other investing activitiesprovided approximately $0.2 million of cash.

*FinancingActivities.*  During thesix months ended June 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. As noted above, Caliperentered into a Credit Facility with SVB which permits Caliper to borrow up to$20 million in the form of revolving loan advances including up to $5 millionin the form of letters of

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credit, subject tocertain loan covenants and borrowing restrictions.

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

·      continuedmarket acceptance of our microfluidic and lab automation products;

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

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

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

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

·      other factors not within ourcontrol.

Based on currentplans, we expect that our current cash balances together with borrowingavailability under the SVB Credit Facility will be sufficient to fund ouroperations at least 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.

**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 June 30, 2006. This evaluation was done under the supervisionand with the participation of Caliper’s management, including our chiefexecutive 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 their evaluationas of June 30, 2006, the chief executive officer and the chief financialofficer have concluded that our disclosure controls and procedures areeffective to provide reasonable assurance that information we are required to disclosein reports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin 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 thesecond 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 those modificationsand on August 31, 2005, Judge Scheindlin issued an order grantingpreliminary approval of the settlement as modified and certifying settlementclasses. The fairness hearing for final approval of the settlement was held onApril 24, 2006. As of August 9, 2006, Judge Scheindlin had not issued anyorder regarding the Court’s decision with respect to the final approval of thesettlement. The final resolution of this litigation is not expected to have amaterial impact on Caliper.

**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 drug screeningsystems represent substantial capital expenditures, it is important that thesesystems be capable of performing a wide variety of different types of assaysand experiments in order to justify the cost of the systems. We intend to continueto lower the cost of these systems and to develop new versions of ourmicrofluidic-based drug discovery systems with enhanced features that addressexisting and emerging customer needs, such as offering a broad range ofstandardized, easy-to-use assays. If we are unable to do so, our drug discoverysystems may not become more widely used and we may experience a decline inrevenue or slow revenue growth and may not achieve or maintain profitability.We currently have several assays in development, including assays that measuremany important activities of cells and proteins. We are also developing productextensions that are particularly well suited for the evaluation of kinases, oneof the largest focus areas of drug discovery efforts today. We are alsodeveloping kinase profiling and selectivity screening kits. If we are not ableto complete the development of any of these expanded applications and tools, orif we experience difficulties or delays, we may lose revenues from our currentcustomers and may not be able to obtain new customers.

To date, a largeportion of our microfluidic-based drug discovery systems have been sold as aresult of senior-level relationship

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selling and we have notyet achieved broad-based sales of our LabChip microfluidic instruments throughour sales and marketing organization. In addition, these systems and theirunderlying technologies are still relatively new to our sales and marketingorganization, which may limit our ability to effectively market and sell thesesystems. If we cannot market and sell these systems effectively, marketacceptance of these products may be limited.

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:

·                  ourability to demonstrate the advantages and potential economic value of ourLabChip drug discovery systems over alternative, well-established technologies;

·                  ourability to develop a broader range of standard assays and applications thatenable customers and potential customers to perform many different types ofexperiments on a single LabChip instrument system; and

·                  ourability to market and sell our drug discovery systems and related consumableproducts through our marketing and sales organization without the involvementof our senior management.

*We haveexperienced no GCAS system sales to Affymetrix during the first half of 2006,and our future revenue growth depends to a significant extent on sales byAffymetrix of the GCAS automated target preparation system, which is based onthe Caliper Sciclone liquid handling instrument. If end-user demand for thisproduct is not as strong as anticipated by Affymetrix, our revenue targets maynot 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 willcontinue in the fourth quarter.  However,if Affymetrix continues to experience production and other technical issueswith its 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.

*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 our acquisitionof Zymark in July 2003, our acquisition of NovaScreen in October 2005, and ourjust completed acquisition of Xenogen. From time to time, we consider andevaluate potential business combinations involving our acquisition of anothercompany and transactions involving the sale of our company through, among otherthings, a possible merger or consolidation of our business into that of anotherentity.

Acquisitions involvenumerous risks, including the following:

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·                  difficultiesin integration of the operations, technologies and products and services of theacquired companies;

·                  therisk of diverting management’s attention from normal daily operations of thebusiness;

·                  potentialcost and disruptions caused by the integration of financial reporting systemsand development of uniform standards, controls, procedures and policies;

·                  accountingconsequences, including amortization of acquired intangible assets or otherrequired purchase accounting adjustments, resulting in variability orreductions of our reported earnings;

·                  potentialdifficulties in completing projects associated with purchased in-processresearch and development;

·                  risksof entering markets in which we have no or limited direct prior experience andwhere competitors in these markets have stronger market positions;

·                  thepotential loss of our key employees or those of the acquired company due to theemployment uncertainties inherent in the acquisition process;

·                  theassumption of known and potentially unknown liabilities of the acquired company;

·                  therisk that we may find that the acquired company or business does not furtherour business strategy or that we paid more than what the company or businesswas worth;

·                  wemay disagree with the former management of businesses that we acquire with respectto the interpretation of provisions in the acquisition agreement relating toearn out provisions or other provisions that have ongoing effect after thecompletion of the acquisition, which could result in disputes or litigationwith current employees who joined us as part of the acquisition;

·                  ourrelationship with current and new employees and customers could be impaired;

·                  theacquisition may result in litigation from terminated employees or third partieswho believe a claim against us would be valuable to pursue;

·                  ourdue diligence process may fail to identify significant issues with productquality, product architecture and legal contingencies, among other matters; and

·                  theremay be insufficient revenues to offset increased expenses associated withacquisitions.

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 themerger will depend, in part, on our ability to realize the anticipatedsynergies, cost savings, and growth opportunities from integrating thebusinesses 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. The difficulties ofcombining the operations of 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

21

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result from the merger.

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

We haveexperienced significant operating losses each year since our inception and weexpect to incur an operating loss in 2006. We may never achieve profitability.As of June 30, 2006, Caliper had an accumulated deficit of approximately $187.6million. Our losses have resulted principally from costs incurred in researchand development and product marketing and from general and administrative costsassociated with our operations. These costs have exceeded our cumulative cashproceeds which, to date, have been generated principally from product sales,collaborative research and development agreements, technology access fees,license fees, litigation settlement proceeds and interest income on cash andinvestment balances.

*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 ofNovaScreen and our recently completed acquisition of Xenogen, or of anothercompany or business. Consequently, we may need additional funding sooner thananticipated. Our inability to raise needed capital would seriously harm ourbusiness and product development efforts. In addition, we may choose to raiseadditional capital due to market conditions or strategic considerations even ifwe believe that we have sufficient funds for our current or future operatingplans. To the extent that additional capital is raised through the sale ofequity or convertible debt securities, the issuance of these securities couldresult in dilution to our stockholders.

On August 9, 2006,Caliper entered into a Credit Facility with SVB which permits Caliper to borrowup to $20 million in the form of revolving loan advances including up to $5million in the form of letters of credit. The Credit Facility includes traditional lending and reporting covenantsincluding that certain financial covenants applicable to liquidity and earningsare to be maintained by Caliper and tested as of the last day of eachquarter.  The Credit Facility alsoincludes several potential events of default such as payment default, materialadverse change conditions and insolvency conditions that could cause interestto be charged at prime plus two percentage points, or for any uncured events ofdefault result in SVB’s right to declare all outstanding obligationsimmediately due and payable.   While webelieve that we will be able to remain in compliance with applicable loancovenants through the Credit Facility’s maturity in 2008, should our results ofoperations deteriorate or any other material adverse change occur with ourbusiness, we may become in default of one 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.

*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 net operatingloss and credit carryforwards will expire at various dates through 2025beginning 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 described in Note 2, on February 13, 2006 Caliperannounced a definitive agreement to acquire Xenogen. This acquisition willultimately result in Xenogen shareholders’ owning approximately one-third ofCaliper and will likely result in a change of ownership that will causepre-merger losses to be subject to limitation. The amount of limitation has notyet 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.

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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**

None.

**Item 5.Other Information**

None.

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**EXHIBITINDEX**

**Item 6.Exhibits**

 
| Exhibit  Number | ** ** | **Description of document**                                                                                                                                                                                         |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)          |       | Amended and Restated Certificate of Incorporation of  Caliper.                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                          |
| 3.2(2)          |       | Certificate of Designation Of Series A Junior  Participating Preferred Stock.                                                                                                                                            |
|            |       |                                                                                                                                                                                                                          |
| 3.3(3)          |       | Restated Bylaws of Caliper.                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                          |
| 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.                                                                                                 |
|            |       |                                                                                                                                                                                                                          |
| 31.1            |       | Certification of Chief Executive Officer Required  Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934, as amended, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|            |       |                                                                                                                                                                                                                          |
| 31.2            |       | Certification of Chief Financial Officer Required  Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934, as amended, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|            |       |                                                                                                                                                                                                                          |
| 32.1*           |       | Certification of Chief Executive Officer Required  Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange  Act of 1934, as amended, and 18 U.S.C. Section 1350.                                     |
|            |       |                                                                                                                                                                                                                          |
| 32.2*           |       | Certification of Chief Financial Officer Required  Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange  Act of 1934, as amended, and 18 U.S.C. Section 1350.                                     |

 

----

| (1)    |   | Previously filed as the like-numbered Exhibit to  Form 10-Q for the quarterly period ended March 31, 2004 and incorporated  by reference herein.                                                                                                                                                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                           |
| (2)    |   | Previously filed as Exhibit 4.1 to Current  Report on Form 8-K filed December 19, 2001 and incorporated by reference  herein.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                           |
| (3)    |   | Previously filed as Exhibit 3.4 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 the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                                  | **CALIPER LIFE SCIENCES, INC.**                      |
|----------------------------------|------------------------------------------------------|
|                             |                                                 |
| Date:  August  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 |

 

25

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**EXHIBIT INDEX**

 
| Exhibit  Number | ** ** | **Description of document**                                                                                                                                                                                         |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)          |       | Amended and Restated Certificate of Incorporation of  Caliper.                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                          |
| 3.2(2)          |       | Certificate of Designation Of Series A Junior  Participating Preferred Stock.                                                                                                                                            |
|            |       |                                                                                                                                                                                                                          |
| 3.3(3)          |       | Restated Bylaws of Caliper.                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                          |
| 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.                                                                                                 |
|            |       |                                                                                                                                                                                                                          |
| 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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