UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 September 30, 2004

OR

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from            to

Commission File Number: 0-27316

Molecular Devices Corporation

1311 Orleans Drive
Sunnyvale, California 94089
(Address of principal executive offices, including zip code)

(408) 747-1700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]

As of November 5, 2004, 17,425,928 shares of the Registrant’s Common Stock, $.001 par value, were outstanding.

MOLECULAR DEVICES CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004

INDEX

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PART I. FINANCIAL INFORMATION

The accompanying notes are an integral part of these statements

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MOLECULAR DEVICES CORPORATION

The accompanying notes are an integral part of these statements

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MOLECULAR DEVICES CORPORATION

The accompanying notes are an integral part of these statements

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MOLECULAR DEVICES CORPORATION

Note 1. Description of Business and Basis of Presentation

Molecular Devices Corporation (“Molecular Devices”, “we”, or “our”), a Delaware corporation, is principally involved in the design, development, manufacture, sale and service of bioanalytical measurement systems for life sciences and drug discovery applications. The principal markets for our products include leading pharmaceutical and biotechnology companies as well as medical centers, universities, government research laboratories and other institutions throughout the world.

We operate in a single industry segment: the design, development, sale and service of bioanalytical measurement systems for drug discovery and life sciences research applications.

The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the published rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements as allowed by such SEC rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2003, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the SEC on March 10, 2004.

The unaudited condensed consolidated financial statements include the accounts of Molecular Devices and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The unaudited condensed consolidated financial statements contained herein reflect all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2004.

Note 2. Business Combination

On July 1, 2004, we acquired all of the outstanding capital stock of Axon Instruments, Inc. (“Axon”) pursuant to an Agreement and Plan of Merger and Reorganization, dated as of March 20, 2004, as amended as of May 21, 2004, with Axon and two of our wholly owned subsidiaries, Astros Acquisition Sub I, Inc. and Astros Acquisition Sub II, LLC. This acquisition expands our product portfolio with systems for cellular neurosciences and genomics, and combines complementary product lines in high throughput imaging and electrophysiology.

The acquisition was accounted for under the purchase method of accounting. The results of operations of Axon have been included in the accompanying condensed consolidated financial statements from the date of the acquisition. The total cost of the acquisition is as follows (in thousands):

We issued approximately 3.6 million shares of Molecular Devices common stock to holders of Axon common stock. The fair value of the Molecular Devices common stock issued was based on the average of the closing prices for a range of trading days around and including the announcement date of the acquisition. We granted approximately 588,000 options to purchase Molecular Devices common stock at an average exercise price of $17.21 to holders of Axon common stock options. The value of the Axon common stock options converted to Molecular Devices common stock options was computed using the Black Scholes option pricing model, consistent with the assumptions in Note 3.

As of September 30, 2004, the purchase price allocation associated with this transaction is preliminary and subject to the finalization of restructuring costs. The preliminary purchase price allocation is as follows (in thousands):

As a result of the acquisition, we received $22.1 million in cash that had been on the balance sheet of Axon.

We allocated the preliminary purchase price based on the fair value of the assets acquired and liabilities assumed. A valuation of the purchased assets was undertaken by a third party valuation specialist to assist us in determining the estimated fair value of each identifiable asset and in allocating the preliminary purchase price among acquired assets, including the portion of the purchase price attributed to acquired in-process research and development projects. Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility and which have no alternative use. Technological feasibility is defined as being equivalent to completion of a beta-phase working prototype in which there is minimal risk relating to the development. Standard valuation procedures and techniques were utilized in determining the estimated fair value of the acquired in-process research and development. To determine the estimated fair value of the acquired in-process research and development, we considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, and expected income and associated risks. Associated risks included the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and the risks related to the viability of and potential changes to future target markets. The analysis resulted in $5.0 million of the purchase price being allocated to acquired in-process research and development and charged to earnings in the quarter ended September 30, 2004. The in-process research and development acquired from Axon consists of projects related to the PatchXpress and ImageXpress product development initiatives.

The value assigned to acquired in-process research and development was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased in-process research and development into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the acquired in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Axon and its competitors.

The rates utilized to discount the net cash flows to their present value were based on Axon’s weighted average cost of capital. The weighted average cost of capital was adjusted to reflect the difficulties and uncertainties in completing each project and thereby achieving technological feasibility, the percentage of completion of each project, anticipated market acceptance and penetration, and market growth rates and risks related to the impact of potential changes in future target markets.

The acquired goodwill value is primarily based on the complimentary technology that is expected to strengthen Molecular Devices’ product portfolio with systems for cellular neurosciences and genomics, and that combines complementary product lines in the areas of high throughput imaging and electrophysiology.

Restructuring activities as a result of the acquisition include termination and relocation of employees and closing of duplicate facilities. As of September 30, 2004, approximately $500,000 in restructuring costs have been estimated in connection with the above restructuring. At September 30, 2004, Molecular Devices had approximately $135,000 remaining in accrued expenses and other current liabilities related to the restructuring. The restructuring is expected to be completed by December 31, 2004.

Pro forma consolidated results for the three and nine months ended September 30, 2004 and 2003 for Molecular Devices as if the acquisition occurred at the beginning of the periods presented were as follows (in thousands, except per share amounts):

The net income (loss) includes, on a pre-tax basis, $5.0 million for the write-off of acquired in-process research and development costs for the three and nine months ended September 30, 2004 and 2003.

The pro forma information does not purport to be indicative of the results that actually would have occurred had the acquisition been consummated January 1, 2003, or of the results which may occur in the future.

Note 3. Stock Based Compensation

As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation,” as amended, we apply the intrinsic value method of accounting as described in APB Opinion 25 and related interpretations in accounting for our stock option plans and, accordingly, recognize no compensation expense for stock option grants with an exercise price equal to the fair market value of the shares at the date of grant. If we had elected to recognize compensation cost based on the fair value of the options granted on their grant date and shares issued under stock purchase plans as prescribed by SFAS 123, net income (loss) and net income (loss) per share would have been changed to the pro forma amounts indicated in the table below (in thousands, except per share amounts):

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The fair value of each option is estimated on the date of grant using Black Scholes option-pricing model with the following assumptions:

Note 4. Balance Sheet Components (in thousands)

Note 5. Goodwill and Purchased Intangible Assets

Goodwill was $109.0 million at September 30, 2004 and $26.0 million at December 31, 2003. The increase in goodwill is attributed to the Axon Instrument acquisition, as discussed further in Note 2.

Purchased intangible assets not subject to amortization, consisting of trade names valued at $9.3 million and distribution rights valued at $1.4 million, totaled $10.7 million at September 30, 2004. Purchased intangible assets not subject to amortization, consisted of trade names valued at $707,000 at December 31, 2003.

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Purchased intangible assets subject to amortization over ten years consist of patents, developed technology, and license fees. Purchased intangible assets subject to amortization over one year consist of order backlog. The gross and net carrying value of these assets at September 30, 2004 and December 31, 2003 were included in other assets in the condensed consolidated balance sheets and were as follows (in thousands):

The estimated future amortization expense of purchased intangible assets as of September 30, 2004 was as follows (in thousands):

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Note 6. Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and common equivalent shares from outstanding stock options (using the treasury stock method), when dilutive. Computation of earnings per share is as follows (in thousands, except per share amounts):

For the three month period ended September 30, 2004, we recorded a net loss and therefore have excluded all outstanding stock options from the calculation of diluted net loss per share as their effect would have been anti-dilutive. For the three months ended September 30, 2003, and the nine-month periods ended September 30, 2004 and 2003, the total number of shares excluded from the calculations of diluted net income per share was 2,027,000, 1,786,372 and 2,501,000, respectively, as the weighted-average exercise price of these outstanding stock options was greater than the average market price of the common shares and, therefore, their effect would have been anti-dilutive.

Note 7. Comprehensive Income (Loss)

Comprehensive income (loss), net of tax, was approximately ($139,000) and $3.0 million for the three-month periods ended September 30, 2004 and 2003, respectively. Comprehensive income, net of tax, was approximately $3.4 million and $5.8 million for the nine-month periods ended September 30, 2004 and 2003, respectively. The differences between reported net income (loss) and comprehensive income (loss) are principally comprised of changes in accumulated foreign currency translation, which is recorded in stockholders’ equity.

Note 8. Guarantees

Under our charter, we have agreed to indemnify any person who is made a party to any action or threatened with any action as a result of such person’s serving or having served as an officer or director of Molecular Devices or having served, at our request, as an officer or director of another company. The indemnification does not apply if the person is determined not to have acted in good faith in the reasonable belief that his or her actions were in the best interests of Molecular Devices. The maximum potential amount of future payments that we could be required to make under the charter provision and the corresponding indemnification agreements is unlimited; however, we have director’s and officer’s liability insurance policies that, in most cases, would limit our exposure and enable us to recover a portion of any future amounts paid. The estimated fair value of these indemnification provisions is minimal. Most of these indemnification

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provisions were grandfathered under the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” as they were in effect prior to December 31, 2003. Accordingly, we have no liabilities recorded for these provisions as of September 30, 2004.

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, clinical sites and customers. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of September 30, 2004.

At the time of sale, we record an estimate for warranty costs that may be incurred under product warranties. Our standard warranty generally includes parts and labor for a twelve month period. Warranty expense and activity are estimated based on historical experience. The warranty accrual is evaluated periodically and adjusted for changes in experience. Changes in the warranty liability during the nine months ended September 30, 2004 were as follows (in thousands):

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Note 9. Revolving Credit Facility

Simultaneously with the closing of the Axon acquisition on July 1, 2004 as described in Note 2 above, we entered into a new senior unsecured credit facility, which provides for a revolving credit facility in the amount of up to $35.0 million, reducing to $30.0 million 60 days after initial drawdown. The revolving credit facility is guaranteed by our domestic subsidiaries. All loans outstanding under the senior unsecured credit facility will bear interest at a rate per annum equal to, at our option, either the base rate plus .50% or LIBOR plus 1.25%. The revolving credit facility matures on July 1, 2007. As of September 30, 2004, $15.0 million was outstanding on the credit facility.

Note 10. Subsequent Event

In the fourth quarter of fiscal year 2004, through November 8, 2004, we repurchased 320,000 shares of common stock for approximately $6.8 million. These shares will be accounted for as treasury stock, at cost.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW Except for the historical information contained herein, the following discussion contains “forward-looking” statements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes”, “anticipates”, “plans”, “predicts”, “expects”, “estimates”, “intends”, “will”, “continue”, “may”, “potential”, “should” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including, among others, those discussed in this section as well as under “Factors That May Affect Future Results,” and “Item 3 - - Quantitative and Qualitative Disclosures about Market Risk” and the risks detailed from time to time in our future SEC reports.

We are a leading supplier of high-performance bioanalytical measurement systems which accelerate and improve drug discovery and other life sciences research. Our systems and consumables enable pharmaceutical and biotechnology companies to leverage advances in genomics, proteomics and combinatorial chemistry by facilitating the high-throughput and cost-effective identification and evaluation of drug candidates. Our solutions are based on advanced core technologies that integrate our expertise in engineering, molecular and cell biology, and chemistry. We enable our customers to improve research productivity and effectiveness, which ultimately accelerates the complex process of discovering and developing new drugs.

Our customers include small and large pharmaceutical, biotechnology and industrial companies as well as medical centers, universities, government research laboratories and other institutions throughout the world. The success of our business is impacted by research and development spending trends of these customers, which has been unpredictable over the last three years and remains unpredictable in the near term. We focus on generating revenue growth through the development of innovative products for these customers. In each of the last three years, our internal research and development efforts have enabled us to exceed our goal of generating over 50% of annual revenues from products that are introduced in the last three years.

We divide our revenues into two product families based primarily on the customers to which they are sold into. The Drug Discovery product family includes systems that integrate detection, liquid handling and automation, have price points in excess of $100,000, and are primarily sold to large pharmaceutical and biotechnology companies. Product lines included in the Drug Discovery family are IonWorks HT, PatchXpress, OpusXpress, FLIPR, Analyst, ImageXpress, and Discovery-1 systems. The Life Sciences product family, which includes bench-top detection and liquid handling products, consists of Maxline, MetaMorph, Skatron, Axopatch, GenePix, and Threshold product lines. These single-purpose instruments generally cost less than $60,000 and are sold throughout our entire customer base. We recognize revenue on the sale of these products, when collectibility is reasonably assured, at the time of shipment and transfer of title to customers and distributors. There are no significant customer acceptance requirements or post shipment obligations on our part.

On July 1, 2004, we acquired all of the outstanding capital stock of Axon Instruments, Inc. (“Axon”) pursuant to an Agreement and Plan of Merger and Reorganization, dated as of March 20, 2004, as amended as of May 21, 2004, with Axon and two of our wholly owned subsidiaries, Astros Acquisition Sub I, Inc. and Astros Acquisition Sub II, LLC. This acquisition expands our product portfolio with systems for cellular neurosciences and genomics, and combines complementary product lines in high throughput imaging and electrophysiology.

As a result of the acquisition, we received $22.1 million in cash that had been on the balance sheet of Axon. The total cost of the acquisition was $140.9 million. The acquisition was accounted for under the purchase method of accounting. The results of operations of Axon have been included in the accompanying condensed consolidated financial statements from the date of the acquisition.

We allocated the preliminary purchase price based on the fair value of the assets acquired and liabilities assumed. A valuation of the purchased assets was undertaken by a third party valuation specialist to assist us in determining the estimated fair value of each identifiable asset and in allocating the preliminary purchase price among acquired assets, including the portion of the purchase price attributed to acquired in-process research and development projects. Standard valuation procedures and techniques were utilized in determining the estimated fair value of the acquired in-process research and development. To determine the estimated fair value of the acquired in-process research and development, we considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, and expected income and associated risks. Associated risks included the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and the risks related to the viability of and potential changes to future target markets. The analysis resulted in $5.0 million of the purchase price being allocated to acquired in-process research and development and charged to earnings in the quarter ended September 30, 2004. The in-process research and development acquired from Axon consists of projects related to the PatchXpress and ImageXpress product development initiatives.

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CRITICAL ACCOUNTING ESTIMATES

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, bad debts, inventories, intangible assets, equity investments, income taxes and warranty obligations. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the SEC on March 10, 2004.

RESULTS OF OPERATIONS — THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

REVENUES. Revenues increased by 42% to $41.5 million in the third quarter of 2004 from $29.3 million in the third quarter of 2003. Drug Discovery product family revenues in the third quarter of 2004 increased by 19% compared to the third quarter of 2003 and represented 39% of total revenues during the quarter. The growth in Drug Discovery was driven by our acquired PatchXpress and ImageXpress product lines, offset partially by sales declines in IonWorks, Analyst, FLIPR, and Discovery-1 product lines. Life Sciences Research revenues increased by 62% compared to the third quarter of 2003 and represented 61% of total revenues during the quarter. The growth in Life Sciences Research was primarily driven by our acquired cellular neuroscience and genomics lines, as well as growth in our SpectraMax M2 and MetaMorph product lines.

Revenues increased by 23% to $101.0 million in the first nine months of 2004 from $82.3 million in the first nine months of 2003. Drug Discovery product family revenues in the first nine months of 2004 increased by 11% compared to the first nine months of 2003 and represented 42% of total revenues during the period. The growth in Drug Discovery was primarily driven by our acquired PatchXpress and ImageXpress lines, offset partially by sales declines in the Analyst family of products. Life Sciences Research revenues increased by 34% compared to the first nine months of 2003 and represented 58% of total revenues during the period. The growth in Life Sciences Research was primarily driven by our acquired cellular neuroscience and genomics lines, as well as growth in our SpectraMax M2 and MetaMorph product lines.

GROSS MARGIN. Gross margin decreased to 61.9% in the third quarter of 2004 compared to 63.2% in the same period of the prior year primarily due to the addition of lower margin products from Axon.

Gross margin decreased to 62.3% for the first nine months of 2004 compared to 62.5% for the first nine months of 2003 primarily due to the addition of lower margin products from Axon.

RESEARCH AND DEVELOPMENT. Research and development expenses increased in the third quarter of 2004 by 38% to $6.4 million from $4.6 million in the third quarter of 2003. Research and development expenses for the first nine months of 2004 increased by 7% to $15.2 million from $14.1 million for the same period of 2003. These increases were primarily attributed to additional expenses from Axon research and development activities, offset partially by the settlement of a patent infringement lawsuit late in 2003.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In the third quarter of 2004, a $5.0 million write-off of in-process research and development occurred in conjunction with the acquisition of Axon. There was no similar write-off in the three and nine months ended September 30, 2003.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses in the third quarter of 2004 increased by 29% to $13.8 million, from $10.7 million in the third quarter of 2003. Selling, general and administrative expenses for the first nine months of 2004 increased by 17% to $36.4 million, from $31.1 million in the same period of 2003. These increases were due to additional expenses from Axon selling and marketing activities, expansion in our international sales groups, higher costs associated with higher revenue and costs associated with worldwide compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

INTEREST EXPENSE. In the third quarter and first nine months of 2004, we incurred $95,000 in interest expense on our revolving credit facility entered into to finance our acquisition of Axon. There was no interest expense in the three and nine months ended September 30, 2003.

OTHER INCOME (NET). Other income (net) increased in the third quarter of 2004 by 86% to $136,000 from $73,000 in the third quarter of 2003. Other income (net) for the first nine months of 2004 decreased by 65% to $221,000 from $639,000 for the same period of 2003. This decrease was largely due to lower cash balances.

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INCOME TAX PROVISION. We recorded a tax provision of $1.7 million for the third quarter of 2004 compared to $977,000 in the third quarter of 2003, an increase of 74%. The income tax provision for the first nine months of 2004 increased by 86% to $3.9 million from $2.1 million in the first nine months of 2003. The income tax provision for the third quarter of 2004 was based on an estimated effective income tax rate of 364%, up from 30% in the third quarter of 2003. The income tax provision for the first nine months of 2004 was based on an estimated effective income tax rate of 59%, up from 30% in the first nine months of 2003. This increase in our estimated effective income tax rate was due to the non-deductible write-off of acquired in-process research and development and the full utilization in 2003 of the net loss carryforward amounts relating to certain of our foreign operations. Excluding the impact of the non-deductible write-off of acquired in-process research and development, we expect our effective tax rate for the year ending December 31, 2004 to be approximately 33.5%.

Liquidity and Capital Resources

We had cash, cash equivalents and short and long-term investments of approximately $19.4 million at September 30, 2004 compared to $58.4 million at December 31, 2003. Operating activities in the first nine months of 2004 provided approximately $11.9 million of cash primarily due to adjustments to income from noncash expenses including the write off of acquired in-process research and development and depreciation and amortization.

In the first nine months of 2004, net cash used in investing activities was approximately $43.2 million, primarily due to the acquisition of Axon.

In the first nine months of 2004, net cash used in financing activities was $737,000. We repurchased 960,000 shares of our common stock for $19.1 million, offset partially by $3.4 million received from the issuance of common stock associated with stock option exercises and shares issued under our employee stock purchase plan and a $30.0 million drawn down on our revolving credit facility established to assist in financing the Axon acquisition, $15.0 million of which was repaid within the third quarter of 2004. The timing of and amounts received under our employee stock option and purchase plans are determined by the decisions of the respective option or rights holders, and are not controlled by us. Therefore, funds raised from the issuance of common stock under our employee stock option and purchase plans should not be considered an indication of additional funds to be raised in future periods.

On July 1, 2004, we acquired all of the outstanding capital stock of Axon pursuant to an Agreement and Plan of Merger and Reorganization, dated as of March 20, 2004, as amended as of May 21, 2004, with Axon and two of our wholly owned subsidiaries, Astros Acquisition Sub I, Inc. and Astros Acquisition Sub II, LLC. Simultaneously with the closing of the Axon acquisition, we entered into a new senior unsecured credit facility, which provides for a revolving credit facility in the amount of up to $35.0 million, reducing to $30.0 million 60 days after initial drawdown. The revolving credit facility is guaranteed by our domestic subsidiaries. All loans outstanding under the senior unsecured credit facility will bear interest at a rate per annum equal to, at our option, either the base rate plus .50% or LIBOR plus 1.25%. The revolving credit facility may be drawn, paid and reborrowed at our option, and matures on July 1, 2007. We have initially used this credit facility to finance the cash portion of the merger consideration to be paid to Axon shareholders and certain optionholders. As of September 30, 2004, $15.0 million was outstanding on the credit facility.

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We believe that our existing cash and cash equivalents, anticipated cash flows from our operations and funds available under the senior unsecured credit facility described above, will be sufficient to support our current operating plan for the foreseeable future.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on our current plans, which may change, and assumptions that may prove to be wrong. Our ability to generate our anticipated cash flow from operations is subject to the risks and uncertainties discussed below under “Factors That May Affect Future Results,” including in particular variations in the amount of time it takes for us to sell our products and collect accounts receivable and the timing of customer orders, competition, risks associated with the pharmaceutical and biotechnology industries, supplier or manufacturing problems or delays, the remaining cost of integrating Axon, and other risks associated with past and potential future acquisitions, including risks related to potential difficulties in the integration of operations, strategies, technologies and products of the acquired company. Our future capital requirements will depend on many factors, including:

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the progress of our research and development;

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the number and scope of our research programs;

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market acceptance and demand for our products;

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the costs that may be involved in enforcing our patent claims and other intellectual property rights;

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potential acquisition and technology licensing opportunities;

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the costs associated with repurchasing shares of our common stock;

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the costs associated with compliance with current and future regulatory requirements, including Section 404 of the Sarbanes-Oxley Act of 2002;

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manufacturing capacity requirements; and

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the costs of expanding our sales, marketing and distribution capabilities both in the United States and abroad.

We have generated sufficient cash flow to fund our capital requirements primarily though operating and financing activities over the last three years. However, we cannot assure you that we will not require additional financing in the future to support our existing operations or potential acquisition and technology licensing opportunities that may arise. Therefore, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders.

Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality issuers.

Factors That May Affect Future Results

Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks that we do not know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be harmed and the trading price of our common stock could decline.

VARIATIONS IN THE AMOUNT OF TIME IT TAKES FOR US TO SELL OUR PRODUCTS AND COLLECT ACCOUNTS RECEIVABLE AND THE TIMING OF CUSTOMER ORDERS MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

The timing of capital equipment purchases by customers has been and is expected to continue to be uneven and difficult to predict. Our products represent major capital purchases for our customers. The list prices for our instruments range from $5,000 to $419,500. Accordingly, our customers generally take a relatively long time to evaluate our products, and a significant portion of our revenues is typically derived from sales of a small number of relatively high-priced products. Purchases are generally made by purchase orders and not long-term contracts. Delays in receipt of anticipated orders for our relatively high priced products could lead to substantial variability from quarter to quarter. Furthermore, we have historically received purchase orders and made a significant portion of each quarter’s product shipments near the end of the quarter. If that pattern continues, even short delays in the receipt of orders or shipment of products at the end of a quarter could have a material adverse affect on results of operations for that quarter.

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We believe that competition within the markets we serve is primarily driven by the need for innovative products that address the needs of customers. We attempt to counter competition by seeking to develop new products and provide quality products and services that meet customers’ needs. We cannot assure you, however, that we will be able to successfully develop new products or that our existing or new products and services will adequately meet our customers’ needs.

Rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and frequent new product and service introductions characterize the markets for our products. To remain competitive, we will be required to develop new products and periodically enhance our existing products in a timely manner. We are facing increased competition as new companies entering the market with new technologies compete, or will compete, with our products and future products. We cannot assure you that one or more of our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or future products, or that would render our technologies and products obsolete or uneconomical. Our future success will depend in large part on our ability to maintain a competitive position with respect to our current and future technologies, which we may not be able to do. In addition, delays in the launch of our new products may result in loss of market share due to our customers’ purchases of competitors’ products during any delay.

IF WE ARE NOT SUCCESSFUL IN DEVELOPING NEW AND ENHANCED PRODUCTS, WE MAY LOSE MARKET SHARE TO OUR COMPETITORS.

The life sciences instrumentation market is characterized by rapid technological change and frequent new product introductions. In the twelve months ended September 30, 2004, 67% of our revenues were derived from the sale of products that were introduced in the last three years, and our future success will depend on our ability to enhance our current products and to develop and introduce, on a timely basis, new products that address the evolving needs of our customers. We may experience difficulties or delays in our development efforts with respect to new products, and we may not ultimately be successful in developing or commercializing them, which would harm our business. Any significant delay in releasing new systems could cause our revenues to suffer, adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share. In addition, our future success depends on our continued ability to develop new applications for our existing products. If we are not able to complete the development of these applications, or if we experience difficulties or delays, we may lose our current customers and may not be able to attract new customers, which could seriously harm our business and our future growth prospects.

WE MUST EXPEND A SIGNIFICANT AMOUNT OF TIME AND RESOURCES TO DEVELOP NEW PRODUCTS, AND IF THESE PRODUCTS DO NOT ACHIEVE COMMERCIAL ACCEPTANCE, OUR OPERATING RESULTS MAY SUFFER.

We expect to spend a significant amount of time and resources to develop new products and refine existing products. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenues from the sale of new products. Our ability to commercially introduce and successfully market new products is subject to a wide variety of challenges during this development cycle that could delay introduction of these products. In addition, since our customers are not obligated by long-term contracts to purchase our products, our anticipated product orders may not materialize, or orders that do materialize may be canceled. As a result, if we do not achieve market acceptance of new products, our operating results will suffer. Our products are also generally priced higher than competitive products, which may impair commercial acceptance. We cannot predict whether new products that we expect to introduce will achieve commercial acceptance.

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FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE.

We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accountants attesting to and reporting on these assessments. During the course of our testing, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we cannot favorably assess, or our independent registered public accountants are unable to provide an unqualified attestation report on our assessment of, or the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

WE OBTAIN SOME OF THE COMPONENTS AND SUBASSEMBLIES INCLUDED IN OUR SYSTEMS FROM A SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS OF ONE OF THESE SUPPLIERS COULD CAUSE PRODUCTION DELAYS AND A SUBSTANTIAL LOSS OF REVENUES.

We rely on outside vendors to manufacture many components and subassemblies. Certain components, subassemblies and services necessary for the manufacture of our systems are obtained from a sole supplier or limited group of suppliers, some of which are our competitors. Additional components, such as optical, electronic and pneumatic devices, are currently purchased in configurations specific to our requirements and, together with certain other components, such as computers, are integrated into our products. We maintain only a limited number of long-term supply agreements with our suppliers.

Our reliance on a sole or a limited group of suppliers involves several risks, including the following:

•		we may be unable to obtain an adequate supply of required components;
•		we have reduced control over pricing and the timely delivery of components and subassemblies; and
•		our suppliers may be unable to develop technologically advanced products to support our growth and development of new systems.

Because the manufacturing of certain of these components and subassemblies involves extremely complex processes and requires long lead times, we may experience delays or shortages caused by suppliers. We believe that alternative sources could be obtained and qualified, if necessary, for most sole and limited source parts. However, if we were forced to seek alternative sources of supply or to manufacture such components or subassemblies internally, we may be forced to redesign our systems, which could prevent us from shipping our systems to customers on a timely basis. Some of our suppliers have relatively limited financial and other resources. Any inability to obtain adequate deliveries, or any other circumstance that would restrict our ability to ship our products, could damage relationships with current and prospective customers and could harm our business.

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WE MAY ENCOUNTER MANUFACTURING AND ASSEMBLY PROBLEMS OR DELAYS, WHICH COULD RESULT IN LOST REVENUES.

We assemble our systems in our manufacturing facilities located in Sunnyvale and Union City, California; Downingtown, Pennsylvania; and Norway. Our manufacturing and assembly processes are highly complex and require sophisticated, costly equipment and specially designed facilities. As a result, any prolonged disruption in the operations of our manufacturing facilities could seriously harm our ability to satisfy our customer order deadlines. If we cannot deliver our systems in a timely manner, our revenues will likely suffer.

Our product sales depend in part upon manufacturing yields. We currently have limited manufacturing capacity and experience variability in manufacturing yields. We are currently manufacturing high-throughput instruments in-house, in limited volumes and with largely manual assembly. If demand for our high-throughput instruments increases, we will either need to expand our in-house manufacturing capabilities or outsource to other manufacturers. If we fail to deliver our products in a timely manner, our relationships with our customers could be seriously harmed, and our revenues could decline.

As we develop new products, we must transition the manufacture of a new product from the development stage to commercial manufacturing. We cannot predict whether we will be able to complete these transitions on a timely basis and with commercially reasonable costs. We cannot assure you that manufacturing or quality control problems will not arise as we attempt to scale-up our production for any future new products or that we can scale-up manufacturing and quality control in a timely manner or at commercially reasonable costs. If we are unable to consistently manufacture our products on a timely basis because of these or other factors, our product sales will decline.

IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED AND THE SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE.

Our products are complex and have at times contained errors, defects and bugs when introduced. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products would be harmed. Further, if our products contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our products. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.

MOST OF OUR CURRENT AND POTENTIAL CUSTOMERS ARE FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES AND ARE SUBJECT TO RISKS FACED BY THOSE INDUSTRIES.

We derive a significant portion of our revenues from sales to pharmaceutical and biotechnology companies. We expect that sales to pharmaceutical and biotechnology companies will continue to be a primary source of revenues for the foreseeable future. As a result, we are subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries, such as availability of capital and reduction and delays in research and development expenditures by companies in these industries, pricing pressures as third-party payers continue challenging the pricing of medical products and services, government regulation, and the uncertainty resulting from technological change.

In addition, our future revenues may be adversely affected by the ongoing consolidation in the pharmaceutical and biotechnology industries, which would reduce the number of our potential customers. Furthermore, we cannot assure you that the pharmaceutical and biotechnology companies that are our customers will not develop their own competing products or in-house capabilities.

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OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.

Third parties may assert infringement or other intellectual property claims against us. We may have to pay substantial damages for infringement if it is ultimately determined that our products infringe a third party’s proprietary rights. Further, any legal action against us could, in addition to subjecting us to potential liability for damages, prohibit us from selling our products before we obtain a license to do so from the party owning the intellectual property, which, if available at all, may require us to pay substantial royalties. Even if these claims are without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns. There may be third-party patents that may relate to our technology or potential products. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our stock price to decline. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources.

WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS, WHICH WOULD BE EXPENSIVE AND, IF WE LOSE, MAY CAUSE US TO LOSE SOME OF OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.

We rely on patents to protect a large part of our intellectual property and our competitive position. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:

•

assert claims of infringement;

•

enforce our patents;

•

protect our trade secrets or know-how; or

•

determine the enforceability, scope and validity of the proprietary rights of others.

Lawsuits could be expensive, take significant time and divert management’s attention from other business concerns. They would put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. We may also provoke third parties to assert claims against us. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. If initiated, we cannot assure you that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable. During the course of these suits, there could be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors were to perceive any of these results to be negative, our stock price could decline.

THE RIGHTS WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE OUR TECHNOLOGY AND WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.

Our success will depend in part on our ability to obtain commercially valuable patent claims and to protect our intellectual property. Our patent position is generally uncertain and involves complex legal and factual questions. Legal standards relating to the validity and scope of claims in our technology field are still evolving. Therefore, the degree of future protection for our proprietary rights is uncertain.

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The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:

•

the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;

•

the claims of any patents which are issued may not provide meaningful protection;

•

we may not be able to develop additional proprietary technologies that are patentable;

•

the patents licensed or issued to us or our customers may not provide a competitive advantage;

•

other companies may challenge patents licensed or issued to us or our customers;

•

patents issued to other companies may harm our ability to do business;

•

other companies may independently develop similar or alternative technologies or duplicate our technologies; and

•

other companies may design around technologies we have licensed or developed.

In addition to patents, we rely on a combination of trade secrets, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Nevertheless, these measures may not be adequate to safeguard the proprietary technology underlying our products. If these measures do not protect our rights, third parties could use our technology, and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries. For a variety of reasons, we may decide not to file for patent, copyright or trademark protection or prosecute potential infringements of our patents. We also realize that our trade secrets may become known through other means not currently foreseen by us. Notwithstanding our efforts to protect our intellectual property, our competitors may design around our proprietary technologies or may independently develop similar or alternative technologies or products that are equal or superior to our technology and products without infringing on any of our intellectual property rights.

WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.

We expect to experience significant growth in the number of our employees and customers and the scope of our operations, including as a result of potential acquisitions. This growth may continue to place a significant strain on our management and operations. Our ability to manage this growth will depend upon our ability to broaden our management team and our ability to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our employees. Our future success is heavily dependent upon growth and acceptance of new products. If we cannot scale our business appropriately or otherwise adapt to anticipated growth and new product introductions, a key part of our strategy may not be successful.

WE RELY UPON DISTRIBUTORS FOR PRODUCT SALES AND SUPPORT OUTSIDE NORTH AMERICA.

In the first nine months of 2004, approximately 7% of our sales were made through distributors. We often rely upon distributors to provide customer support to the ultimate end users of our products. As a result, our success depends on the continued sales and customer support efforts of our network of distributors. The use of distributors involves certain risks, including risks that distributors will not effectively sell or support our products, that they will be unable to satisfy financial obligations to us and that they will cease operations. Any reduction, delay or loss of orders from our significant distributors could harm our revenues. We also do not currently have distributors in a number of significant international markets that we have targeted and will need to establish additional international distribution relationships. There can be no assurance that we will engage qualified distributors in a timely manner, and the failure to do so could have a material adverse affect on our business, financial condition and results of operations.

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IF WE CHOOSE TO ACQUIRE NEW AND COMPLEMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGIES INSTEAD OF DEVELOPING THEM OURSELVES, WE MAY BE UNABLE TO COMPLETE THESE ACQUISITIONS OR MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE AN ACQUIRED BUSINESS OR TECHNOLOGY IN A COST-EFFECTIVE AND NON-DISRUPTIVE MANNER.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, from time to time we have acquired complementary businesses, products or technologies instead of developing them ourselves, and we may choose to do so in the future. For example, we recently acquired Axon Instruments, Inc. and we acquired Universal Imaging Corporation in June 2002. We do not know if we will be able to complete any future acquisitions or whether we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees. Integrating any business, product or technology we acquire, both in connection with the acquisition of Axon and other potential future acquisitions, involves considerable operational and financial risks and strains, including:

•

the potential disruption of our ongoing business and distraction of our management;

•

the potential strain on our financial and managerial controls and reporting systems and procedures;

•

unanticipated expenses and potential delays related to integration of the operations, technology and other resources of acquired businesses;

•

the impairment of relationships with employees, suppliers and customers as a result of any integration of new management personnel;

•

greater than anticipated costs and expenses related to restructuring, including employee severance or relocation costs and costs related to vacating leased facilities; and

•

potential unknown liabilities associated with any acquisition, including higher than expected acquisition costs, which may cause our quarterly and annual operating results to fluctuate.

We may not succeed in addressing these risks or any other problems encountered in connection with the acquisition of Axon or other potential future acquisitions. If we are unable to successfully integrate the operations, products, technology and personnel of acquired businesses in a timely manner or at all, or if we do not achieve the perceived benefits of any acquisition as rapidly or to the extent anticipated by financial analysts or investors, the market price of our common stock could decline.

In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private equity or debt financings. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that may result in dilution to our stockholders. In connection with the acquisition of Axon, we borrowed $30 million on our revolving credit facility in order to pay the cash portion of the merger consideration to be paid to Axon shareholders and optionholders. The outstanding balance of $15.0 million on September 30, 2004 will significantly increase our leverage. While management believes that our cash flows will be more than adequate to service this new debt, there may be circumstances in which required payments of principal and/or interest on this new debt could adversely affect our cash flows and operating results, and therefore the market price of our common stock. In addition, any impairment of goodwill and amortization of other intangible assets or charges resulting from the costs of acquisitions could harm our business and operating results.

DUE TO THE AXON ACQUISITION, MOLECULAR DEVICES IS A SUBSTANTIALLY LARGER AND MORE COMPLEX ORGANIZATION, AND IF MOLECULAR DEVICES’ MANAGEMENT IS UNABLE TO SUFFICIENTLY MANAGE THE COMBINED COMPANY, ITS OPERATING RESULTS WILL SUFFER.

On July 1, 2004, Molecular Devices acquired approximately 128 employees based at Axon’s office in Union City, California and at its facilities in Melbourne, Australia and San Luis Obispo, California. The combined company continues to face challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. The inability to successfully manage the substantially larger and internationally diverse organization, or any significant delay in achieving successful management, could have a material adverse effect on the combined company and, as a result, on the market price of Molecular Devices common stock.

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THE ACQUISITION OF AXON COULD CAUSE US TO LOSE KEY PERSONNEL, WHICH COULD MATERIALLY AFFECT THE COMBINED COMPANY’S BUSINESS AND REQUIRE US TO INCUR SUBSTANTIAL COSTS TO RECRUIT REPLACEMENTS FOR LOST PERSONNEL.

As a result of the acquisition of Axon, our current and prospective employees could experience uncertainty about their future roles within Molecular Devices. This uncertainty may adversely affect our ability to attract and retain key management, sales, marketing and technical personnel. Any failure to attract and retain key personnel could have a material adverse effect on our business.

GENERAL UNCERTAINTY RELATED TO THE ACQUISITION OF AXON COULD HARM MOLECULAR DEVICES.

Our customers may, in response to the acquisition of Axon, delay or defer purchasing decisions. If our customers delay or defer purchasing decisions, our revenues could materially decline or any anticipated increases in revenue could be lower than expected.

CHARGES TO EARNINGS RESULTING FROM THE APPLICATION OF THE PURCHASE METHOD OF ACCOUNTING TO THE AXON ACQUISITION MAY ADVERSELY AFFECT THE MARKET VALUE OF MOLECULAR DEVICES COMMON STOCK.

If the benefits of the acquisition of Axon are not achieved, Molecular Devices’ financial results, including earnings per share, could be adversely affected. In accordance with United States generally accepted accounting principles, we accounted for the Axon acquisition using the purchase method of accounting. We allocated the total estimated purchase price to Axon’s net tangible assets, amortizable intangible assets, and in-process research and development based on their estimated fair values as of July 1, 2004, the date of completion of acquisition of Axon, and recorded the excess of the purchase price over those fair values as goodwill. We incurred additional amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection with the Axon acquisition, which is approximately $1.6 million on an annual basis. In addition, to the extent the value of goodwill or intangible assets with indefinite lives becomes impaired, we may be required to incur material charges relating to the impairment of those assets.

WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO COMPETE.

We are highly dependent on the principal members of our management, engineering and scientific staff. The loss of the service of any of these persons could seriously harm our product development and commercialization efforts. In addition, research, product development and commercialization will require additional skilled personnel in areas such as chemistry and biology, and software and electronic engineering. Our corporate headquarters are located in Sunnyvale, California, where demand for personnel with these skills is extremely high and is likely to remain high. As a result, competition for and retention of personnel, particularly for employees with technical expertise, is intense and the turnover rate for qualified personnel is high. If we are unable to hire, train and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced. The inability to retain and hire qualified personnel could also hinder the planned expansion of our business.

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WE ARE DEPENDENT ON INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO FOREIGN CURRENCY EXCHANGE RATE, POLITICAL AND ECONOMIC RISKS.

We maintain facilities in Norway, the United Kingdom, Germany, Japan and Australia, and sales to customers outside the United States accounted for approximately 42% our revenues in the first nine months of 2004. We anticipate that international sales will continue to account for a significant portion of our revenues.

All of our sales to international distributors are denominated in U.S. dollars. Most of our direct sales in the United Kingdom, Germany, France, Belgium, Canada and Japan are denominated in local currencies and totaled $34.7 million (34% of total revenues) in the first nine months of 2004. To the extent that our sales and operating expenses are denominated in foreign currencies, our operating results may be adversely affected by changes in exchange rates. Historically, foreign exchange gains and losses have been immaterial to our results of operations. However, we cannot predict whether these gains and losses will continue to be immaterial, particularly as we increase our direct sales outside North America. For example, we cannot predict whether other foreign exchange gains or losses in the future would have a material effect on our income. Owing to the number of currencies involved, the substantial volatility of currency exchange rates, and our constantly changing currency exposures, we cannot predict the effect of exchange rate fluctuations on our future operating results. We do not currently engage in foreign currency hedging transactions, but may do so in the future.

Our reliance on international sales and operations exposes us to foreign political and economic risks, including:

•

political, social and economic instability;

•

trade restrictions and changes in tariffs;

•

import and export license requirements and restrictions;

•

difficulties in staffing and managing international operations;

•

disruptions in international transport or delivery;

•

difficulties in collecting receivables; and

•

potentially adverse tax consequences.

If any of these risks materialize, our international sales could decrease and our foreign operations could suffer.

OUR OPERATING RESULTS FLUCTUATE AND ANY FAILURE TO MEET FINANCIAL EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE IN OUR STOCK PRICE.

We have experienced and in the future may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations, which could materially and adversely affect our business and the market price of our common stock. Our total revenues and operating results may fluctuate significantly because of a number of factors, many of which are outside of our control. These factors include:

•

customer confidence in the economy, evidenced, in part, by stock market levels;

•

changes in the domestic and international economic, business and political conditions;

•

economic conditions within the pharmaceutical and biotechnology industries;

•

levels of product and price competition;

•

the length of our sales cycle and customer buying patterns;

•

the size and timing of individual transactions;

•

the timing of new product introductions and product enhancements;

•		the mix of products sold;
•		levels of international transactions;

•

activities of and acquisitions by competitors;

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•

the timing of new hires and the allocation of our resources;

•

changes in foreign currency exchange rates; and

•

our ability to develop and market new products and control costs.

One or more of the foregoing factors may cause our operating expenses to be disproportionately high during any given period or may cause our revenues and operating results to fluctuate significantly. In particular, we typically experience a decrease in the level of sales in the first calendar quarter as compared to the fourth quarter of the preceding year because of budgetary and capital equipment purchasing patterns in the life sciences industry. Our quarterly operating results have fluctuated in the past, and we expect they will fluctuate in the future as a result of many factors, some of which are outside of our control.

In addition, we manufacture our products based on forecasted orders rather than on outstanding orders. Accordingly, our expense levels are based, in part, on expected future sales, and we generally cannot quickly adjust operating expenses. For example, research and development and general and administrative expenses are not directly affected by variations in revenues. As a result, if sales levels in a particular quarter do not meet expectations, we may not be able to adjust operating expenses in a sufficient timeframe to compensate for the shortfall, and our results of operations for that quarter may be seriously harmed. Likewise, our manufacturing procedures may in certain instances create a risk of excess or inadequate inventory levels if orders do not match forecasts.

Based upon the preceding factors, we may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations, which could materially and adversely affect our business, financial condition, results of operations and the market price of our common stock. Because our revenues and operating results are difficult to predict, we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance.

OUR STOCK PRICE IS VOLATILE, WHICH COULD CAUSE STOCKHOLDERS TO LOSE A SUBSTANTIAL PART OF THEIR INVESTMENT IN OUR STOCK.

The stock market in general, and the stock prices of technology companies in particular, have recently experienced volatility which has often been unrelated to the operating performance of any particular company or companies. In the twelve months ended September 30, 2004, the closing sales price of our common stock ranged from $17.05 to $24.82. Our stock price could decline regardless of our actual operating performance, and stockholders could lose a substantial part of their investment as a result of industry or market-based fluctuations. In the past, our stock has traded relatively thinly. If a more active public market for our stock is not sustained, it may be difficult for stockholders to resell shares of our common stock. Because we do not anticipate paying cash dividends on our common stock for the foreseeable future, stockholders will not be able to receive a return on their shares unless they sell them.

The market price of our common stock will likely fluctuate in response to a number of factors, including the following:

•

domestic and international economic, business and political conditions;

•

economic conditions within the pharmaceutical and biotechnology industries;

•

our failure to meet our performance estimates or the performance estimates of securities analysts;

•

changes in financial estimates of our revenues and operating results by us or securities analysts;

•

changes in buy/sell recommendations by securities analysts; and

•

the timing of announcements by us or our competitors of significant products, contracts or acquisitions or publicity regarding actual or potential results or performance thereof.

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PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER, WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing an acquisition, or merger in which we are not the surviving company or which results in changes in our management. For example, our certificate of incorporation gives our Board of Directors the authority to issue shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, as the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. The issuance of preferred stock could also have a dilutive effect on our stockholders. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of the outstanding voting stock, from consummating a merger or combination involving us. Further, in October 2001, our Board of Directors adopted a stockholder rights plan, commonly known as a “poison pill.” These provisions described above and our poison pill could limit the price that investors might be willing to pay in the future for our common stock.

OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS.

This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. When used in this report, you can identify forward-looking statements by terminology such as “anticipates,” “plans,” “predicts,” “expects,” “estimates,” “intends,” “will,” “continue,” “may,” “potential,” “should” and the negative of these terms or other comparable terminology. These statements are only predictions. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of many factors, including those set forth above and elsewhere in this report.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We assume no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results. Accordingly, we caution readers not to place undue reliance on these statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in foreign currency rates, interest rates, as well as debt and interest expense.

Foreign Currency Exchange

We are exposed to changes in foreign currency exchange rates primarily in the United Kingdom, Germany, France, Belgium, Canada and Japan, where we sell direct in local currencies. All other foreign sales are denominated in U.S. dollars and bear no exchange rate risk. However, a strengthening of the U.S. dollar could make our products less competitive in overseas markets. Gains and losses resulting from foreign currency transactions have historically been immaterial. A sensitivity analysis assuming a hypothetical 10% movement in exchange rates applied to our projected foreign sales for the remainder of 2004 indicated that such movement would not have a material effect on our business, operating results or financial condition. Translation gains and losses related to our foreign subsidiaries in the United Kingdom, Japan, Germany, Switzerland, Norway and Australia are accumulated as a separate component of stockholders’ equity. We do not currently engage in foreign currency hedging transactions, but may do so in the future.

Interest and Investment Income

Our interest and investment income is subject to changes in the general level of interest rates. Changes in interest rates affect the interest earned on our cash equivalents and short-term investments. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our investment balances at September 30, 2004 indicated that such market movement would not have a material effect on our business, operating results or financial condition. Actual gains or losses in the future may differ materially from this analysis, depending upon actual balances and changes in the timing and amount of interest rate movements.

Debt and Interest Expense

In connection with the acquisition of Axon, we entered into a new senior unsecured credit facility, which provides for a revolving credit facility in the amount of up to $35.0 million (reducing to $30.0 million 60 days after initial drawdown). All loans outstanding under the credit facility will bear interest at a rate per annum equal to, at our option, either the base rate plus .50% or LIBOR plus 1.25%. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our projected debt balances for the remainder of 2004 indicated that such market movement would not have a material effect on our business, operating results or financial condition. Actual gains or losses in the future may differ materially from this analysis, depending on the level of our outstanding debt and changes in the timing and amount of interest rate movements.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Based on our management’s evaluation (with the participation of our chief executive officer and chief financial officer), as of the end of the period covered by this report, our chief executive officer and chief financial officer have concluded that, subject to limitations described below, our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal controls. There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the effectiveness of controls. Our management, including our chief executive officer and chief financial officer, does not expect that our control systems will prevent all error and all fraud. A control system, no matter how well conceived and operated, 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 are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Molecular Devices Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

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PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Item 2(c). The table below sets forth information regarding repurchases of Molecular Devices common stock by Molecular Devices during the three months ended September 30, 2004.

On August 2, 2001, we announced that our Board of Directors had approved our current stock repurchase program, in which we were authorized to repurchase up to 1,500,000 shares of our Common Stock, all of which were repurchased. On October 25, 2001, our Board of Directors determined to continue the stock repurchase program and authorized the repurchase of an additional 1,500,000 shares of our Common Stock, all of which were repurchased. On July 29, 2004, our Board of Directors again determined to continue the stock repurchase program and authorized the repurchase of an additional 1,500,000 shares of our Common Stock. The stock repurchase program will continue until all 1,500,000 shares approved for repurchase on July 29, 2004 have been repurchased, unless terminated earlier by our Board of Directors. In the event that all of such shares have been repurchased, our Board of Directors may again determine to continue our stock repurchase program and authorize management to repurchase additional shares of our Common Stock.

ITEM 6. EXHIBITS

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(1)		Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed on March 22, 2004.
(2)		Incorporated by reference to the similarly described exhibit in our Registration Statement on Form S-4 (File No. 333-114934), as amended.
(3)		Incorporated by reference to the similarly described exhibit in our Registration Statement on Form S-1 (File No. 33-98926), as amended.
(4)		Incorporated by reference to the similarly described exhibit in our Annual Report on Form 10-K for the year ended December 31, 2001 and filed on April 1, 2002.

* The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURE

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 the undersigned thereunto duly authorized.

Molecular Devices Corporation

Date: November 9, 2004

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EXHIBIT INDEX

(1)		Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed on March 22, 2004.
(2)		Incorporated by reference to the similarly described exhibit in our Registration Statement on Form S-4 (File No. 333-114934), as amended.
(3)		Incorporated by reference to the similarly described exhibit in our Registration Statement on Form S-1 (File No. 33-98926), as amended.
(4)		Incorporated by reference to the similarly described exhibit in our Annual Report on Form 10-K for the year ended December 31, 2001 and filed on April 1, 2002.

* The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.