UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

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

Commission file # 000-28229

CALIPER LIFE SCIENCES, INC.

68 Elm Street
Hopkinton, Massachusetts 01748
(Address and zip code of principal executive offices)

Registrant’s telephone number, including area code: (508) 435-9500

     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 þ No o

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

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON APRIL 29, 2005: 30,542,683

CALIPER LIFE SCIENCES, INC.
TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALIPER LIFE SCIENCES, INC.

See accompanying notes.

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CALIPER LIFE SCIENCES, INC.

See accompanying notes.

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CALIPER LIFE SCIENCES, INC.

See accompanying notes.

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CALIPER LIFE SCIENCES, INC.

1. Summary of Significant Accounting Principles

Basis of Presentation

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

     The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For example, we typically experience higher revenues in the second half of our fiscal year as a result of capital spending patterns of our customers. The consolidated balance sheet as of December 31, 2004, has been derived from audited financial statements as of that date. For further information, refer to the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2004, filed by Caliper Life Sciences, Inc.

Use of Estimates

     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. Certain prior period amounts have been reclassified to conform to the current period presentation.

Revenue Recognition

General Policy

     Caliper recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectibility is reasonably assured. Revenue is recognized on product sales when goods are shipped under Caliper’s standard terms of “FOB origin.” Revenues on shipments subject to customer acceptance provisions are recognized only upon customer acceptance, provided all other revenue recognition criteria are met. Services offered by Caliper are generally recognized as revenue as the services are performed (or, as applicable, ratably over the contract service term in the case of annual maintenance contracts). Revenue from licensing agreements is deferred and recognized over the term of the agreement, or in certain circumstances, when milestones are met. Revenue recognized is not subject to repayment. Cash received that is related to future performance under such contracts is deferred and recognized as revenue when earned. Except in limited circumstances, sales made by Caliper do not include general return rights or privileges. Based upon Caliper’s prior experience, sales returns are not significant, and therefore Caliper has made no provision for sales returns or other allowances. Provision is made at the time of sale for estimated costs related to Caliper’s warranty obligations to customers.

     Revenue arrangements with multiple contractual elements are divided into separate units of accounting if the deliverables in the arrangement meet certain criteria under Emerging Issues Task Force (EITF) Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” The criteria applied to multiple element arrangements are whether a) each delivered element has standalone value to the customer, b) there is objective and reliable evidence of fair value of the undelivered elements and if applicable, c) delivery of the undelivered elements is probable and within the control of Caliper. Arrangement consideration is allocated among the separate units of accounting based on their relative fair values.

Datapoints

     In certain cases, customers will be charged on a datapoint pricing basis for their usage of Labchips. A datapoint is generated each time a Caliper instrument system introduces a sample into a Labchip through a sipper in order to perform a particular LabChip technology assay. Datapoints are the test-results that Caliper’s customers record when they use Caliper’s instruments. Caliper records datapoint revenues in the period that Caliper’s customers produce these datapoints and communicate such use to Caliper. Datapoint

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rates are contractually negotiated between Caliper and its customers. Under minimum datapoint fee arrangements, datapoint revenues are recorded over the period during which the minimum applies, provided Caliper has no ongoing performance obligations with respect to these minimum fees.

Agilent Supply Terms

     Caliper sells LabChip kits and reagents to Agilent at a transfer price reflective of Caliper’s cost to manufacture, and receives a royalty based upon Agilent’s gross margin on sales to its end users. Revenue related to the reimbursement of costs for the supply of chips and reagents to Agilient is recognized upon shipment within product revenue. Caliper’s share of gross margin on components of the LabChip system sold by Agilent is recognized as product revenue upon shipment by Agilent to the end user.

Contract Revenue

     Revenue from contract research and development services is recognized as earned based on the performance requirements of the contract. Non-refundable contract fees which are neither time and materials- or time and expense- based, nor tied to substantive milestones, are recognized using the proportional performance method, subject to the consideration of the guidance in SAB 104, “Revenue Recognition (a replacement of SAB 101).” Contract fees received in advance of work performed are recorded as deferred revenue, and are recognized as revenue as the work is performed. For contracts recognized on the proportional performance method, the amount recognized as revenue is limited to the lesser of the amount measured as earned on a proportional performance method, or the cumulative amount of non-refundable payments earned in accordance with the contract.

Licensing and Royalty

     Revenue from up-front license fees is recognized when the earnings process is complete and no further obligations exist. If further obligations exist, the up-front license fee is recognized ratably over the obligation period. Royalties from licenses are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is reasonably assured.

Software

     Caliper has developed software that is marketed with its solutions as a component to operate and run its instruments and systems. Caliper does not sell or otherwise market the software. Caliper’s customers are purchasing the instruments and systems in order to be able to conduct scientific research, and the software is incidental to the overall cost of the instrument’s development and marketing effort. Caliper does not provide post-sale software support, except for functional defects in the software as contemplated in Caliper’s warranty on its instruments.

Warranty Obligations

     At the time revenue is recognized, Caliper establishes an accrual for estimated warranty expenses associated with sales, recorded as a component of cost of revenue. Caliper offers a one-year limited warranty on instrumentation products and a 90-day warranty on chips, which is included in the sales price of many of its products. Caliper’s standard limited warranty covers repair or replacement of defective goods, a preventative maintenance visit on certain products, and telephone-based technical support. No upgrades are included in the standard warranty. In accordance with FASB Interpretation No. 45 (“FIN 45”) “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others,” provision is made for estimated future warranty costs at the time of sale. Factors that affect Caliper’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. Caliper periodically assesses the adequacy of its recorded warranty liabilities and adjusts amounts as necessary.

Changes in Caliper’s warranty obligation during the three months ended March 31, 2005 and 2004 are as follows (in thousands):

Net Loss Per Share

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

     Common stock equivalents equal to 7.3 and 8.3 million shares (prior to the application of the treasury stock method) were

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excluded from the computation of net loss per share in each of the three months ended March 31, 2005 and 2004, respectively, as they would have an antidilutive effect due to Caliper’s net loss.

Stock-Based Compensation

     Caliper presently accounts for its stock options and equity awards in accordance with the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and has elected to follow the “disclosure only” alternative prescribed by Financial Accounting Standards Board’s SFAS No. 123, “Accounting for Stock-Based Compensation.” Accordingly, no compensation expense is recognized in Caliper’s financial statements for stock options granted to employees which had an exercise price equal to the fair value of the underlying common stock on date of grant. Caliper accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF No. 96-18, “Accounting for Equity Instruments that are issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” For the three months ended March 31, 2005 and 2004, compensation expense related to stock options issued to non-employees was not material.

     The following table illustrates the effect on net loss and net loss per share if Caliper had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — and amendment of FASB Statement No. 123.” For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options using the straight-line method. Caliper’s pro forma information is as follows (in thousands, except per share data):

     The effects of applying SFAS No. 123 for pro forma disclosures are not likely to be representative of the effects on reported net loss for future years.

Recent Accounting Pronouncements

     On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), “Share-Based Payment” (“Statement 123(R)”), which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Caliper will be required to adopt Statement 123(R) at the beginning of its first quarter of fiscal 2006.

     Statement 123(R) permits public companies to adopt its requirements using one of two methods:

	•	A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
	•	A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

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     Caliper plans to adopt Statement 123(R) using the modified prospective method. Statement 123(R) will likely affect Caliper’s equity compensation strategy pursuant to its employee stock plans. Caliper is currently assessing the impact that the adoption of Statement 123(R) will have on its results of operations and related disclosures. In addition, Caliper is evaluating whether to use a closed-form model (for example, the Black-Scholes-Merton formula) or a lattice model to estimate fair value and whether to elect an accelerated method (for example, the graded-vesting method as defined by FASB Interpretation No. 28) or a straight-line recognition method.

2. Inventories

     Inventories are stated at the lower of cost or market (determined on a first-in, first-out basis). Inventories consist of the following (in thousands):

3. Comprehensive Loss

     Comprehensive loss for the three months ended March 31, 2005 and 2004 is as follows (in thousands):

4. Restructuring Activities

		The following summarizes restructuring activities which are not completed as of March 31, 2005:
	•	In November 2003, Caliper closed one of its three facilities in Mountain View, CA that was used primarily for instrument manufacturing and research and development activities, and recognized a $7.7 million charge related to costs estimated over the remainder of the lease (June 2008), including leasehold improvements having a carrying value of $319,000 that had no further use.
	•	In June 2004, as a result of efficiencies achieved following Caliper’s strategic prioritization of research and development programs, Caliper vacated and shut down approximately one half of a second Mountain View facility that was primarily used for research and development activities, and recognized an additional $2.2 million charge related to costs estimated over the remainder of the lease (June 2008), including leasehold improvements having a carrying value of $67,000 that had no further use.
	•	In December 2004, Caliper was successful in achieving additional efficiencies that enabled it to complete the full closure of the second facility above. In connection with this latest action taken in December 2004, Caliper also reassessed its previous estimates supporting the earlier charges taken and determined, on the basis of recent real estate market conditions, that a $3.6 million charge was necessary to both account for the latest closure and reflect the fair value of its remaining lease payments for both idled facilities as of December 31, 2004. Of the total charge, $1.7 million was related to Caliper’s revised estimate of the sublease income potential and $246,000 was related to leasehold improvements that had no further use.

     The facility closures were accounted for in accordance with Statement of Financial Accounting Standard No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” pursuant to which Caliper recorded a liability equal to the fair value of the remaining lease payments as of the cease-use date for each of the closed facilities. Fair value was determined based upon the discounted present value of remaining lease rentals (5% discount rate used), for the space no longer occupied, reduced by the discounted present value of future estimated sublease rentals (revised in December 2004 to assume no future sublease rental income based upon market conditions)

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through the end of the lease. Caliper intends to sublease the facilities if the commercial real estate market improves, and will adjust the fair value of the remaining lease payments in accordance with any new developments that result in changes to underlying assumptions.

     The following table summarizes the restructuring accrual activity during the three months ended March 31, 2005 (in thousands):

     The two unoccupied facilities each include 28,800 square feet of space. Minimum monthly lease and operating expense payments under these leases are currently $180,000 and $114,000 related to each building. These payments escalate at approximately 4% and 3%, respectively, through the expiration of the leases in June 2008. The restructuring liability as of March 31, 2005 reflects the minimum future payment obligations related to base lease rentals and operating charges over the remaining lease lives through June 30, 2008, discounted at 5%, as follows (in thousands):

5. Commitments

     As of March 31, 2005, future minimum payments under operating leases for occupied facilities, sale-leaseback obligations and other obligations were as follows (in thousands):

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     The table above does not include operating lease commitments related to a new lease agreement entered into on April 27, 2005, as further discussed in Note 6.

     Letters-of-Credit

     In connection with its Mountain View, CA leases, Caliper has pledged a portion of its cash investments to secure standby letters-of-credit in the outstanding amount of $2.2 million as of March 31, 2005 as security deposits under the leases. In addition, Caliper has pledged cash deposits to secure standby letters-of-credit in the amount of $212,000 as of March 31, 2005, as security for certain customer deposits. The total amount of cash deposits pledged as collateral of $2.4 million are shown as restricted cash on the accompanying balance sheet as of March 31, 2005, including $279,000 within cash and cost equivalents.

6. Subsequent Event

     On April 27, 2005, Caliper entered into a new lease agreement covering its Hopkinton, Massachusetts headquarters. Pursuant to the lease, Caliper will continue to lease its existing facilities, comprised of two separate buildings totaling approximately 117,000 square feet. This lease supercedes and replaces Caliper’s existing lease for these facilities, which otherwise was due to expire on December 31, 2005. The initial term of the lease will expire on December 31, 2015. The lease contains two five-year extension options, which are exercisable at Caliper’s option. Basic rent under the lease will be $97,000 per month for the remainder of 2005, which is unchanged from the former lease arrangement. Thereafter, annual basic rent for the leased facilities will be $1.2 million from January 1, 2006 through June 30, 2008; $1.5 million from July 1, 2008 through December 31, 2011; and $1.6 million from January 1, 2012 through December 31, 2015. Under the terms of the lease, Caliper is also required to pay utilities, property taxes, and other operating and maintenance expenses relating to the leased facilities. As a security deposit for Caliper’s obligations under the lease, Caliper is required to deliver to the landlord a letter of credit for approximately $1.5 million. The amount of this letter of credit will be reduced by $200,000 on each of the first seven anniversaries of the commencement date of the lease, provided that Caliper is not then in default under the terms of the lease. Under the terms of the lease Caliper is entitled to undertake certain improvements and expansions of the leased facilities, which Caliper does expect to undertake, subject to obtaining necessary permits and approvals. Caliper presently estimates that these improvements and expansions will cost approximately $4.9 million, of which approximately $3.3 million will be funded by the landlord, with the balance to be funded by Caliper. Caliper is obligated to spend not less than $1.6 million in connection with these improvements and expansions. The lease also contains other terms and conditions that are typical of commercial leases of this type.

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

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 2005 and for the three month periods ended March 31, 2005 and March 31, 2004 should be read in conjunction with our financial statements included in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations and our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

     The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed under the caption “Factors Affecting Operating Results” below as well as those discussed elsewhere. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report.

Executive Summary

Business

     Caliper uses its core technologies of liquid handling, automation, and LabChip microfluidics to create enabling solutions for the life sciences industry. Caliper is a leader in microfluidic lab-on-a-chip technologies. We believe our LabChip systems can add value to the life sciences industry by miniaturizing, integrating, automating and standardizing many laboratory processes, and by raising the quality of data derived from experimentation. In July, 2003, Caliper acquired Zymark Corporation, a global provider of liquid handling, laboratory automation and robotics technologies. We believe that by combining our microfluidic technologies with advanced liquid handling capabilities we are well positioned to develop and deliver next-generation laboratory automation products that address the key challenges of modern scientific research.

     Within the life sciences industry, Caliper is currently pursuing three major markets: drug discovery and development, genomics and proteomics, and molecular diagnostics. We believe that our products and technologies are capable of addressing these markets in a number of ways. For example, in the drug discovery and development market, pharmaceutical companies face many new challenges. These include late-stage drug failures, increased research and development spending yielding fewer new drugs and, more recently, drugs being removed from the market due to unforeseen side effects that were not discovered in pre-launch clinical trials. Caliper is focused on helping pharmaceutical companies address these challenges by providing products that help researchers make better choices earlier in their drug discovery process, increase the speed and efficiency of their high-throughput screening efforts, and enable profiling experiments that can identify drug side effects earlier in the drug discovery process. In the genomics and proteomics market, recent advances in DNA research and a subsequent surge of interest in protein functionality has created an increased industry need for high-throughput, cost-efficient tools for DNA and protein experiments.

     We have three channels of distribution for our products: direct to customers, indirect through our international network of distributors, and through original equipment manufacturer (“OEM”) channels. Through our direct and indirect distributor channels, we sell complete systems solutions developed by Caliper to end customers. Our OEM distribution channel is core to our business strategy and complementary to our direct sales and distribution network activities, as it enables us to extend the commercial potential of our LabChip and advanced liquid handling technologies into new industries and new applications with experienced commercial partners. In the OEM channel we provide liquid handling products, microfluidics chips, product development expertise and other enabling technologies to commercial partners who then typically integrate an application solution and market it to their end customers. In addition to these product distribution channels, Caliper has begun to out-license its extensive microfluidic patent estate for applications for which it does not have current product development plans, or which Caliper cannot access because of the licensee’s proprietary technology. By using direct and indirect distribution, and OEM product distribution channels, as well as out-licensing our technology in appropriate circumstances, Caliper seeks to maximize penetration of our products and technologies into the marketplace and position itself as a leader in the life sciences tools market.

Overview of First Quarter — 2005

     During the first quarter of 2005, we maintained revenue growth and the steps taken in 2004 to rationalize our cost structure continued to benefit our gross margins, reduce our cash utilization and improve our bottom line. The 9% overall increase in our first quarter revenue, compared to the first quarter of 2004, resulted primarily from increased sales of our drug discovery products and services, and as a result of a new multi-year supply agreement with Amphora Discovery Corporation and increased sales of Staccato Automated Workstations, including new sales to an OEM partner. However, we are cautious in our outlook for the remainder of 2005 due to general economic uncertainty and indications of reduced overall spending by pharmaceutical companies and the potential impact this may have on our industry. Also, during the first quarter we experienced a decline in sales of our pharmaceutical development and quality (PDQ) instrument products, and do not expect to see sales increase in this area on a comparable basis until next generation products presently in development become available for commercial release in the first half of 2006.

     We accomplished several important achievements during the first quarter including announcements of two new large pharmaceutical companies that have adopted our microfluidic technologies, and that we have entered into a new multi-year supply

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agreement with Amphora under which Amphora will purchase LabChip products and pay us for datapoints generated by Amphora on its LabChip instruments. In addition, we entered into a new microfluidic technology licensing agreement with Affymetrix. This license will enable Affymetrix to explore development of products that use both our LabChips and Affymetrix’ GeneChip technologies on one platform.

     Based upon our assessment of current economic conditions, our full year revenue projection is currently $84 to $90 million. This financial projection is a forward-looking statement that is subject to risks and uncertainties, and is only made as of the date of the filing of this Form 10-Q. This projection is based upon assumptions that we have made and believe to be reasonable. However, actual results may vary significantly from these projections due to the risks and uncertainties inherent in our business as described in the section entitled “Factors Affecting Operating Results” below. We are intending to aggressively pursue assay development services and aftermarket consumables revenues, which have higher margins and are less subject to capital spending fluctuations.

Critical Accounting Policies

     The critical accounting policies used in the preparation of our financial statements that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. There have been no material changes to the critical accounting policies.

Results of Operations for the Three Months Ended March 31, 2005 and 2004

Revenue

     Total Revenue. The total revenue increase in 2005 resulted primarily from increased product sales, new service revenues, and new license revenues, offset by a decrease in contract revenue in comparison to 2004. Changes in foreign currencies accounted for approximately $200,000, or 1.2% of the increase in total revenue.

     Product Revenue. The majority of the increase in product revenue was primarily due to strength of certain instrument sales, particularly our high-throughput screening and integrated workstations (Staccato Automated Workstations) that incorporate our Caliper Sciclone ALH 3000. Improved Staccato sales during the first quarter included sales of new OEM partner systems that we began manufacturing and delivering during the second half of 2004. In total, sales of instruments in our drug discovery product family, including the improvement in Staccato sales above, increased by approximately $1.8 million, and sales of instruments in our pharmaceutical development and quality (PDQ) product family and other specialty instruments declined by approximately $760,000. Sales of our existing PDQ products have slowed or declined as these products have matured, and we do not anticipate increasing sales of PDQ products until next generation products currently in development are commercially released in the first half of 2006. Within our overall product growth, we saw improvement in non-instrument product sales of approximately $950,000 in comparison to 2004, a significant portion of which was due to datapoint purchases pursuant to a new supply agreement for microfluidic products that we entered into during the first quarter. However, this improvement was offset by an $850,000 decrease in non-instrument product sales as a result of software product upgrades sold to a customer in the first quarter of 2004 for which there was no comparable revenue in 2005.

     Service Revenue. The increase in service revenue in 2005 was primarily due to assay development services related to compound selectivity screening profiles. Assay development services emerged as a growing business opportunity in 2004 as the need for drug compound selectivity screening, especially for kinases, has arisen in recent years. This trend has in turn generated the need for fast, cost-effective ways to generate numerous assays in response to companies’ specific profiling strategies.

     License Fees and Contract Revenue. The total increase in license fees and contract revenue during 2005 was primarily due to an initial license fee under a microfluidic technology licensing agreement we entered into during the quarter, offset in part by a decrease in contract revenue from two OEM collaboration partners, including one partner who launched a new product in October, 2004 as a result of our prior collaboration efforts.

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Costs

     Cost of Product Revenue. The net increase in cost of product revenue is due primarily to incremental direct costs associated with the increase in product revenues generated during the three months ended March 31, 2005 compared to 2004, offset by reductions in scrap and provisions for excess and obsolete inventory totaling approximately $250,000.

     Cost of Service Revenue. Cost of service revenue in 2005 remained relatively unchanged from 2004 due to the fact that the expense base has remained consistent and revenues increased only slightly during the first quarter.

     Gross Margins. Our gross margin on product revenue was 33% for the three months ended March 31, 2005, as compared to 28% for the same period in 2004. The improvement during the three-month period ended March 31, 2005 as compared to the same period in 2004 occurred as a result of manufacturing efficiencies, and the effects of reduced scrap and inventory provisions discussed above. Gross margin on service revenue was 49% for the three months ended March 31, 2005, as compared to 46%, for the same period in 2004. The increase in the service margin relates to the increase in billable services during the period while maintaining a relatively consistent expense base.

Expenses

     Research and Development Expenses. The decrease in research and development expenses is primarily due to a decrease of approximately $900,000 in employment costs associated with reduced headcount, which was lower by approximately 20 employees in comparison to the corresponding period in 2004. The reductions resulted from fewer projects, due to greater commercial emphasis on project prioritization, and improved productivity of our research and development investments. The level of ongoing research and development expense is highly dependent upon the number and significance of ongoing projects at any particular time. In addition, research and development expenses were approximately $400,000 lower as a result of reduced rent and operating costs stemming from our consolidation of facilities in Mountain View, CA during the second half of 2004. The remaining decrease resulted from $500,000 of reduced depreciation in connection with retired research and development capital assets and $400,000 related to other cost savings realized across various categories of operating expenses. We currently expect research and development expenses to be moderately higher in future quarters as we continue to develop new products and product enhancements.

     Selling, General and Administrative Expenses. The decrease in selling, general and administrative expenses was due primarily to a decrease of approximately $250,000 in employment costs associated with reduced headcount of approximately 15 employees which was evenly divided across sales and marketing and general and administrative departments. The reduced headcount was due to several factors including finalization of our integration with Zymark, planned attrition, and the timing of new hire replacements for certain open positions. The remainder of the reduction in selling, general and administrative expenses was due to several cost savings across various categories of spending due to effective cost management.

     Stock-based Compensation. The decrease in stock based compensation primarily results from charges of $1.4 million in the first quarter of 2004, that were related to employment and separation agreements with former executives and other senior employees whose employment was terminated during the first quarter of 2004. We had no comparable charges in the first quarter of 2005. Stock compensation expense, excluding these severance related costs in 2004, otherwise increased by approximately $150,000 as a result of incremental amortization of deferred compensation recorded during the third quarter of 2004 in connection with share-based equity awards granted to employees. In addition, amortization of below fair market value stock options issued prior to Caliper’s IPO in 1995, which was $55,000 during the first quarter of 2004, was completed during the third quarter of 2004. Assuming no changes to current outstanding stock awards or changes in personnel, we estimate stock-based compensation to be approximately $1.3 million over the remainder of 2005. We are in the process of completing our analysis of the effects of expensing of share-based equity awards in

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accordance with SFAS 123(R).

     Amortization of Intangible Assets. Amortization of intangible assets relates solely to the intangible assets acquired in the Zymark acquisition. The expense decreased as a result of certain intangible assets which were amortized over less than twelve months. Scheduled amortization is $2.7 million for the remainder of 2005, $3.6 million for each of the years 2006 and 2007, and the remaining $1.9 million in 2008.

     Restructuring Credit. We recognized a $134,000 restructuring credit in the three months ended March 31, 2004 to adjust the estimated restructuring liability related to severance and benefits associated with the December 2003 reductions in force.

Interest Income, Net

     Interest income, net decreased due to lower cash, cash equivalents and marketable securities balances over the three months ended March 31, 2005 as compared to the same period in 2004.

Liquidity and Capital Resources

     Our cash, cash equivalents and marketable securities decreased $2.6 million to $47.6 million at March 31, 2005, compared to $50.2 million as of December 31, 2004. During the corresponding three months of 2004, total cash, cash equivalents and marketable securities decreased by $11.0 million. This improvement in 2005 in comparison to 2004 resulted from our revenue growth and steps taken in 2004 to rationalize our cost structure and improve our gross margins.

Cash Flows

     Operating Activities. Our cash used in operations decreased as compared to the first quarter of 2004 primarily as a result of an increase in cash collected from customers of $8.7 million in 2005. Cash payments to employees as compared to the first quarter of 2004 decreased on an overall basis by $100,000 as a result of bonus payments of $1.5 million earned in 2004 and paid in 2005, offset by a $1.6 million savings as a result of having no severance-related restructuring payments to former employees in 2005. Payments of accrued facilities’ obligations due to building closures in 2003 and 2004 increased by $300,000. Cash payments to suppliers for all other operating expenses increased by approximately $200,000.

     Investing Activities. Our cash provided by investing activities decreased $5.1 million as compared to the first quarter of 2004 as a result of a decrease in proceeds from sales and maturities of marketable equity securities, offset in part by reduced spending for purchases of property and equipment.

     Financing Activities. Cash provided by (used in) financing activities as compared to the first quarter of 2004 decreased by $549,000 due to an $880,000 decrease in proceeds from common stock sales pursuant to option exercises, offset by a decrease of $331,000 in payments made under sale-leaseback obligations.

     Our commitments under leases and other obligations as of March 31, 2005 were not materially different from that as of December 31, 2004. As further described in Note 6 of the Notes to Consolidated Financial Statements, Caliper entered into a new lease agreement for its Massachusetts headquarters. Annual basic rent for the leased facilities will be $1.2 million from January 1, 2006 through June 30, 2008; $1.5 million from July 1, 2008 through December 31, 2011; and $1.6 million from January 1, 2012 through December 31, 2015. As of December 31, 2004, we had commitments under leases and other obligations totaling $26.0 million, payable in varying amounts over five years, as more fully described in Item 7 of our Annual Report on Form 10-K.

     Financial Projections. We are providing updated financial projections for 2005 as follows:

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	•	We expect full year revenues for 2005 to be approximately $84 million to $90 million, and second quarter 2005 revenues to be approximately $17 to $20 million. We reduced our full year revenue outlook from our prior estimate of $87 million to $92 million based upon indications of reduced overall spending by certain pharmaceutical companies and associated pressures on our industry. In addition, sales of our existing PDQ products have slowed or declined as these products have matured, and we do not anticipate being able to replace these sales until next generation products presently in development are commercially released during the first half of 2006.
	•	We project combined gross margins from products and services of approximately 36% in the second quarter and maintain our estimate of 37% to 40% on a full-year basis.
	•	We are maintaining our goal to attain positive cash flows from operations during the fourth quarter of 2005.

     The financial projections that we have provided above are forward-looking statements that are subject to risks and uncertainties, and are only made as of the date of the filing of this Form 10-Q. These projections are based upon assumptions that we have made and believe to be reasonable. However, actual results may vary significantly from these projections due to the risks and uncertainties inherent in our business as described in the section entitled “Factors Affecting Operating Results” below.

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

	•	continued market acceptance of our microfluidic and lab automation products;
	•	the magnitude and scope of our research and product development programs;
	•	our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;
	•	the time and costs involved in expanding and maintaining our manufacturing facilities;
	•	the potential need to develop, acquire or license new technologies and products; and
	•	other factors not within our control.

     Based on current plans, we believe that our current cash balances will be sufficient to fund our operations at least through the year 2006.

Factors Affecting Operating Results

Risks Related To Our Business

     Our LabChip products may not achieve widespread market acceptance, which could cause our revenue to grow slowly or decline.

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

     In addition, our strategy for the LabChip 3000 system depends upon the early users of these systems buying additional units as they spread the adoption of this technology throughout their organizations worldwide. New customers for our drug discovery systems may wait for indications from our initial drug discovery system customers that our drug discovery systems work effectively and generate substantial benefits. If the early users of our LabChip 3000 systems do not endorse the further adoption of these systems because they fail to generate the quantities and quality of data they expected, are too difficult or costly to use, or are otherwise deficient in meeting the screening needs of these customers, further sales of these systems to these early users may be limited, and our sales to new users will be more difficult.

     To date, our microfluidic-based drug discovery systems have been sold as a result of senior level relationship selling and we have not yet achieved broadened sales through our sales and marketing organization. In addition, these systems and the technologies are still relatively new to our sales and marketing organization, which may limit our ability to effectively market and sell these systems. If we cannot market these systems effectively, their market acceptance may be limited.

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     For all of the foregoing reasons, we cannot assure you that our efforts to increase the adoption of our high-throughput drug screening and automated electrophoresis systems, by both existing and new users, will be expeditious or effective.

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

	•	our ability to demonstrate the advantages and potential economic value of our LabChip drug discovery systems over alternative well-established technologies;
	•	our ability to develop a broader range of standard assays and applications that enable customers and potential customers to perform many different types of experiments on a single LabChip instrument system; and
	•	our ability to market and sell our drug discovery systems and related consumable products.

If we are not successful in developing new and enhanced liquid handling, LabChip and other life sciences products, we may lose market share to our competitors.

     The life sciences productivity tools equipment market is very competitive and is characterized by rapid technological change and frequent new product introductions. The commercial success of our liquid handling systems, LabChip and other products depends upon continued and expanding market acceptance of our systems and products by pharmaceutical and biotechnology companies and genomics research organizations, and upon our ability to address quickly any performance problems that our customers encounter. We anticipate that our competitors will introduce new, enhanced products in this market in the near future. Our future success will depend on our ability to offer new products and technologies that researchers believe are an attractive alternative to current products and technologies, that address the evolving needs of our customers and that are technologically superior to new products that may be offered by our competitors. We may experience difficulties or delays in our development efforts for new products, and we may not ultimately be successful in developing them. Any significant delay in releasing new products in this market could adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share.

If we are not successful in improving the cost of our LabChip products relative to the performance delivered, we may not be successful in displacing alternative or more established products and technologies that are competitive with our LabChip products.

     Customers in the life sciences productivity tools equipment market tend to be very price and cost sensitive relative to product performance. The commercial success of our LabChip products will depend not only upon our ability to demonstrate that their performance is superior to the performance of conventional products, but also that their total cost to purchase and operate is competitive with or lower than the cost of alternative or more established products. We may need to reduce our manufacturing costs in order for us sell our LabChip products at more competitive prices. Although we have been successful in achieving significant reductions in the manufacturing costs of our LabChip instruments and chips, we are engaged in ongoing efforts to further reduce the costs of our LabChip products. Some of these efforts involve a substantial amount of technical risk, such as manufacturing our chips on plastic substrates rather than glass. If we are not successful in achieving these additional cost reductions, the market demand for our LabChip products may be limited, and the rate of adoption of these products may be slower than we anticipate. We cannot assure you that our efforts to achieve further cost reductions will be successful.

If we do not successfully expand the range of applications for our drug discovery systems, we may experience a decline in revenue or slow revenue growth and may not achieve or maintain profitability.

     Because drug screening systems represent substantial capital expenditures, it is important that these systems be capable of performing a wide variety of different types of assays and experiments in order to justify the cost of the systems. We intend to continue developing new versions of our microfluidic-based drug discovery systems with enhanced features that address existing or emerging customer needs, such as offering a broad range of standardized, easy-to-use assays. If we are unable to do so, our drug discovery systems may not become more widely used and we may experience a decline in revenue or slow revenue growth and may not achieve or maintain profitability. We currently have several assays in development, including assays that measure many important activities of cells and proteins. We are developing product extensions that are particularly well suited for the evaluation of kinases, one of the largest focus areas of drug discovery efforts today, as well as running assays with adherent cell lines. We are creating new tools to make it easier for our customers to develop their own custom assays in a microfluidic format. We are also developing kinase profiling and selectivity screening kits. If we are not able to complete the development of any of these expanded applications and tools, or if we experience difficulties or delays, we may lose our current customers and may not be able to obtain new customers.

We are subject to the capital spending patterns of the pharmaceutical industry, which over the past several years have been adversely impacted by general economic conditions, industry consolidation and increased competition.

     Many of our instrument products represent relatively large capital expenditures by our customers. During the past several years, many of our customers and potential customers, particularly in the pharmaceutical industry, have reduced their capital spending budgets because of generally adverse prevailing economic conditions, consolidation in the industry, and increased pressure on the

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profitability of pharmaceutical companies, due in part to more competition from generic drugs. If our customers and potential customers do not increase their capital spending budgets, because of continuing adverse economic conditions or further consolidation in the industry, we could face weak demand for our products, in particular our products used for high-throughput screening. If the demand for our instrument products is weak because of constrained capital spending by our pharmaceutical industry customers and potential customers, we may not achieve our targets for revenue and cash flow from operations.

A significant portion of our business depends upon collaborations with OEM business partners, and our financial success depends upon our ability to develop new product concepts with compelling value propositions to generate new OEM collaboration relationships, as well as our ability to manage our existing OEM relationships.

     Historically, an important part of our business strategy has been to collaborate with OEM business partners in the development of new applications for our microfluidic and liquid handling products and the subsequent commercialization of the developed products. The expenses associated with these product development efforts are large, and the time to market for these product development efforts is generally two or more years. Accordingly, attracting an OEM collaboration partner to undertake and underwrite a proposed product development effort requires a compelling value proposition for the product proposed to be developed.

     Moreover, even if we are successful in initiating a new product development effort with an OEM partner, these collaboration arrangements can be difficult to manage, and technical problems encountered in the development programs or disagreements with our OEM business partners may adversely impact our ability to complete development programs, and therefore to realize increased product sales through these product development and commercialization collaborations. There can be no assurance that we will continue to be able to define compelling new products, or to identify new collaboration partners or new applications for our technologies to develop with our existing collaboration partners. If we are unable to define new product opportunities or to identify new collaboration partners or to agree on the terms of a collaboration, or if we are unable to identify new applications for our technologies to develop and commercialize with an existing collaboration partner, our revenues could decline and the growth of our business could be adversely affected.

     Potential future acquisitions may have unexpected consequences or impose additional costs on us.

     Our business is highly competitive and our growth is dependent upon market growth and our ability to enhance our existing products, introduce new products on a timely basis and offer products to our customers that provide a more complete solution. One of the ways we may address the need to develop new products is through acquisitions of complementary businesses and technologies, such as our acquisition of Zymark in July 2003. From time to time, we consider and evaluate potential business combinations both involving our acquisition of another company and transactions involving the sale of Caliper through, among other things, a possible merger or consolidation of our business into that of another entity. Acquisitions involve numerous risks, including the following:

	•	difficulties in integration of the operations, technologies, and products of the acquired companies;
	•	the risk of diverting management’s attention from normal daily operations of the business;
	•	potential cost and disruptions caused by the integration of financial reporting systems and development of uniform standards, controls, procedures and policies;
	•	accounting consequences, including amortization of acquired intangible assets or other required purchase accounting adjustments, resulting in variability or reductions of our reported earnings;
	•	potential difficulties in completing projects associated with purchased in-process research and development;
	•	risks of entering markets in which we have no or limited direct prior experience and where competitors in these markets have stronger market positions;
	•	the potential loss of key employees of Caliper or the acquired company due to the employment uncertainties inherent in the acquisition process;
	•	the assumption of known and potentially unknown liabilities of the acquired company;
	•	the risk that we may find that the acquired company or business does not further our business strategy or that we paid more than what the company or business was worth;
	•	our relationship with current and new employees and customers could be impaired;
	•	the acquisition may result in litigation from terminated employees or third parties who believe a claim against us would be valuable to pursue;

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	•	our due diligence process may fail to identify significant issues with product quality, product architecture and legal contingencies, among other matters; and
	•	insufficient revenues to offset increased expenses associated with acquisitions.

     Acquisitions may also cause us to:

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

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

     We expect to incur future operating losses and may not achieve profitability.

     We have experienced significant operating losses each year since our inception and expect to incur substantial additional operating losses in 2005. We may never achieve profitability. As of March 31, 2005, we had an accumulated deficit of approximately $171.6 million. Our losses have resulted principally from costs incurred in research and development, product marketing and from general and administrative costs associated with our operations. These costs have exceeded our interest income and revenue which, to date, have been generated principally from product sales, collaborative research and development agreements, technology access fees, cash and investment balances.

Our operating results fluctuate significantly and any failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our stock price.

     Our quarterly operating results have fluctuated significantly in the past, and we expect they will continue to fluctuate in the future as a result of many factors, some of which are outside of our control. For example, many of our products represent relatively large capital expenditures for our customers, which leads to variations in the amount of time it takes for us to sell our products because customers may take several months or longer to evaluate and obtain the necessary internal approvals for the purchase of our products. In addition, a significant portion of our revenues is derived from sales of relatively high-priced products, and these sales are generally made by purchase orders and not long-term contracts. Delays in receipt of anticipated orders for higher-priced products could lead to substantial variability of revenue from quarter to quarter. Furthermore, we commonly receive purchase orders and ship a significant portion of each quarter’s product orders 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 result in shipment during the next quarter, which could have a material adverse effect on results of operations for the quarter in which the shipment did not occur. Our business is affected by capital spending patterns of our customers with a greater percentage of purchases, and therefore we typically experience higher revenues in the second half of our fiscal year. There can be no assurance that this trend will continue. For all of these and other reasons, it is possible that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors. In this event, the market price of our common stock may fall abruptly and significantly. Because our revenue and operating results are difficult to predict, we believe that period-to-period comparisons of our results of operations are not a reliable indication of our future performance.

     If revenue declines in a quarter, whether due to a delay in recognizing expected revenue or otherwise, our earnings will decline because many of our expenses are relatively fixed. In particular, research and development and general and administrative expenses and amortization of deferred stock compensation and intangible assets are not affected directly by variations in revenue.

We have limited experience in manufacturing our products and may encounter manufacturing problems or delays, which could result in lost revenue.

     Although Agilent manufactures the Agilent 2100 Bioanalyzer and Bio-Rad manufactures the Experion instrument system, we manufacture the chips used in these instruments and in the Agilent 5100 instrument system. We also currently manufacture instruments and sipper chips for our drug discovery systems. If we fail to deliver chips and automated drug discovery products in a timely manner, our relationships with our customers could be seriously harmed, and revenue would decline. We currently have one manufacturing location for LabChip products in Mountain View, California, and one manufacturing location for instruments and other products located in Hopkinton, Massachusetts. The actual number of chips we are able to sell or use depends in part upon the manufacturing yields for these chips. We have only recently begun to manufacture significant numbers of sipper chips and are continuing to develop our manufacturing procedures for these chips. In order to offer sipper chips with four or more capillaries for

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drug discovery applications, we will need to continue to achieve consistently high yields in this process. We have experienced difficulties in manufacturing both our chips and instruments. We cannot assure you that manufacturing or quality problems will not continue or arise as we attempt to scale-up our production of chips or that we can scale-up manufacturing in a timely manner or at commercially reasonable costs. If we are unable to consistently manufacture sipper chips or chips for the Agilent 2100 Bioanalyzer or the Bio-Rad Experion instrument systems on a timely basis because of these or other factors, our product sales will decline. We are currently manufacturing drug discovery instruments in-house and in limited volumes. If demand for our drug discovery instruments increases significantly, we will either need to expand our in-house manufacturing capabilities or outsource to other manufacturers, which could result in a decrease in yields, and therefore an increase in manufacturing costs and a decrease in net income from sales.

     Our ability to scale-up chip manufacturing may be compromised by uncertainty regarding the volume of chips for the Agilent 2100 Bioanalyzer and the Bio-Rad Experion instrument systems that we will need to supply to Agilent and Bio-Rad in the future. Due to our termination of our exclusive collaboration with Agilent in May 2003, Agilent now has the option to manufacture chips itself rather than continue to receive its supply of chips from Caliper. Accordingly, we face uncertainty regarding future demand for these chips from our manufacturing operations.

Because Agilent and a small number of other customers have accounted for, and may continue to account for, a substantial portion of our revenue, our revenue could decline due to the loss of one of these customers.

     Historically, we have had very few customers and one commercial partner, Agilent, from which we have derived a significant portion of our revenue, although our acquisition of Zymark in July 2003 greatly expanded our customer base. If we were to lose Agilent as a customer for our chips, and one or more of our other significant customers, our revenue could decrease significantly.

Our revenue could decline due to the termination of our agreement with Agilent because of a number of different factors, including a reduction in our gross margin share of Agilent 2100 Bioanalyzer and LabChip products sold by Agilent or reduced sales of such products by Agilent due to competition from us or our other commercial partners.

     Due to our termination of the collaboration agreement with Agilent, effective in May 2003, we are now operating under the surviving provisions of that agreement. We will continue to receive revenue from Agilent based on a formula for gross margin sharing on sales by Agilent of instruments and chips developed under our collaboration agreement, and we expect to continue to receive revenue from Agilent based on our sale of sipper chips to Agilent for its 5100 instrument system. Although we anticipate that future sales of the Agilent 2100 Bioanalyzer system will further expand our revenue base, under the surviving provisions of our agreement with Agilent, our gross margin share of collaboration products sold by Agilent declined at the end of 2004, and will decline again in May 2006. If sales of these products do not increase fast enough to offset the decline in our gross margin share, the amount of revenue we receive from Agilent will decline.

     In addition, under the surviving terms of our agreement with Agilent, we granted to Agilent a non-exclusive, royalty-bearing license to certain of our LabChip technologies existing as of the termination date for Agilent to develop, make and sell products in the field of the collaboration. Consequently, there is the possibility that Agilent may manufacture its own supply of LabChip products, rather than purchasing them from us, or that we may experience competition from Agilent in the future, which would reduce our ability to sell products independently or through other commercial partners.

     Now that our agreement with Agilent is terminated, Agilent’s sales of collaboration products could be reduced due to competition from us or our other commercial partners, such as Bio-Rad. In such event, the revenue we would receive from Agilent could be reduced by more than the revenue we receive from other commercial partners. Further, Agilent may decide for reasons wholly independent of competition to reduce its sales efforts and/or pricing for these products. If Agilent does so, our revenue may decline.

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 team, especially our Chief Executive Officer, and certain of our scientific staff. The loss of services 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, software engineering and electronic engineering. Our principal business locations in the United States are Silicon Valley, California, and in the Boston metropolitan area, where demand for personnel with these skills remains high, and may increase further as the economic outlook in these areas improves. As a result, competition for and retention of personnel, particularly for employees with technical expertise, is intense and the turnover rate for these people 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 any planned expansion of our business.

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, including treble damages, for past infringement if it is ultimately determined that our products infringe a third party’s proprietary rights. Further, we may be prohibited from selling our products before we obtain a license, 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. We are aware of third-party patents that may relate to our technology or

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potential products. In addition, a third party has provoked an interference action in the US Patent and Trademark Office with respect to one issued U.S. patent that we have exclusively licensed to determine the priority of the inventions covered by that patent. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our stock price to decline.

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, especially in our microfluidics business. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as the patent infringement suit against Molecular Devices we settled in November 2003. These lawsuits could be expensive, take significant time, and could 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 these 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. We cannot assure you that we will prevail in any of these suits or that the damages or other remedies awarded, if any, will be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive any of these results to be negative, it could cause our stock price to 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.

     In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, 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 technology underlying our products. If they 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 outside of the United States. 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 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 or design around our proprietary technologies.

We are dependent on a single-source supplier for the glass used in our LabChip products and if we are unable to buy this glass on a timely basis, we will not be able to deliver our LabChip products to customers.

     We currently purchase a key component for our chips from a single-source supplier located in Germany. Although we keep surplus inventory in our Mountain View manufacturing facility, if we are unable to replenish this component on a timely basis, we will not be able to deliver our chips to our customers, which would harm our business.

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 revenue.

     We rely on outside vendors to manufacture many components and subassemblies for our products. Certain components, subassemblies and services necessary for the manufacture of our products are provided by a sole supplier or limited group of suppliers, some of which are our competitors. We currently purchase additional components, such as optical, electronic, and pneumatic devices, in configurations specific to our requirements that, 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 complex processes and requires long lead times, we may experience delays or shortages caused by suppliers. We believe that alternative sources could be obtained at the same prices and on substantially the same terms and conditions, 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 might 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

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relatively limited financial and other resources, and, therefore, their businesses could fail. Any inability to obtain sufficient quantities of components and subassemblies, 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.

If a natural disaster strikes our manufacturing facility we would be unable to manufacture our products for a substantial amount of time and we would experience lost revenue.

     We rely on a single manufacturing location to produce our chips and drug discovery systems, and a single location to produce laboratory automation and robotics systems, with no alternative facilities. These facilities and some pieces of manufacturing equipment are difficult to replace and could require substantial replacement lead-time. Our manufacturing facilities may be affected by natural disasters such as earthquakes and floods. Earthquakes are of particular significance because our LabChip product manufacturing facility is located in Mountain View, California, an earthquake-prone area. In the event that our existing manufacturing facilities or equipment is affected by man-made or natural disasters, we would be unable to manufacture products for sale, meet customer demands or sales projections. If our manufacturing operations were curtailed or ceased, it would harm our business.

Failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and result in lower revenue.

     We anticipate that our existing capital resources, together with the revenue to be derived from our commercial partners and from commercial sales of our microfluidic and lab automation products and services, will enable us to maintain currently planned operations at least through the year 2006. However, we premise this expectation on our current operating plan, which may change as a result of many factors, including our acquisition of another company or business. Consequently, we may need additional funding sooner than anticipated. Our inability to raise needed capital would seriously harm our business and product development efforts. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in dilution to our stockholders.

     We currently have no credit facility or committed sources of capital. To the extent operating and capital resources are insufficient to meet future requirements, we will have to raise additional funds to continue the development and commercialization of our technologies. These funds may not be available on favorable terms, or at all. If adequate funds are not available on attractive terms, we may be required to curtail operations significantly or to obtain funds by entering into financing, supply or collaboration agreements on unattractive terms.

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

     As of December 31, 2004, Caliper had federal and state net operating loss carryforwards of approximately $132 million and $47 million, respectively. Caliper also had federal and state research and development tax credit carryforwards of approximately $4.1 million and $2.8 million, respectively. The federal net operating loss and credit carryforwards will expire at various dates through 2024 beginning in the year 2009 if not utilized. State net operating losses of approximately $750,000 expired in 2004. The current remaining state net operating losses have varying expiration dates through 2013.

     Utilization of the federal and state net operating losses and credits may be subject to a substantial limitation due to the change in ownership provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

     Because of our lack of earnings history and the uncertainty of realizing these net operating losses, the deferred tax assets have been fully offset by a valuation allowance.

Risks Related to Owning Our Common Stock

Our stock price is extremely volatile, and you could lose a substantial portion of your investment.

     Our stock has been trading on the Nasdaq National Market only since mid-December 1999. We initially offered our common stock to the public at $16.00 per share. Since then our stock price has been extremely volatile and has ranged, through March 10, 2005, from a high of approximately $202.00 per share on March 2, 2000 to a low of $2.71 per share both on January 28, 2003 and February 6, 2003. Our stock price may drop substantially following an investment in our common stock. We expect that our stock price will remain volatile as a result of a number of factors, including:

	•	announcements by analysts regarding their assessment of Caliper and its prospects;
	•	announcements by our competitors of complementary or competing products and technologies;
	•	announcements of our financial results, particularly if they differ from investors’ expectations;

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•

general market volatility for technology stocks.

     These factors and fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of our common stock.

We have been sued, and are at risk of future securities class action litigation.

     In the Spring and Summer of 2001, class action lawsuits were filed against certain leading investment banks and over 300 companies that did public offerings during the prior several years, including lawsuits against Caliper and certain of its officers and directors. This and other securities litigation could result in potential liability, cause us to incur litigation costs and divert management’s attention and resources, any of which could harm our business. In addition, announcements of future lawsuits of this or some other nature, and announcements of events occurring during the course of the current and any future lawsuits, could cause our stock price to drop.

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, merger in which we are not the surviving company or changes in our management. 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 including us. These provisions could limit the price that investors might be willing to pay in the future for our common stock.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

     Our primary market risk exposures are foreign currency fluctuation and interest rate sensitivity. There have been no material changes to the information included under Item 7A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

Item 4. Controls and Procedures

     We evaluated our “disclosure controls and procedures” and our “internal controls and procedures for financial reporting” as of March 31, 2005. This evaluation was done under the supervision and with the participation of management, including our chief executive officer and our chief financial officer.

Evaluation of disclosure controls and procedures. We have established disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

     Based on their evaluation as of March 31, 2005, the chief executive officer and the chief financial officer have concluded that our disclosure controls and procedures, as defined by Exchange Act Rules 13(a)-15(e) and 15(d)-15(e), are effective to provide reasonable assurance that information we are required to disclose 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 SEC rules and forms.

Limitations on the Effectiveness of Disclosure Controls and Procedures. Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures will prevent 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 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 Caliper 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. Because of the inherent limitations in a cost-effective control system, misstatements due to error fraud may occur and not be detected.

Part II – Other Information

Item 1. Legal Proceedings

        Commencing on June 7, 2001, Caliper and three of its officers and directors (David V. Milligan, Daniel L. Kisner and James L. Knighton) were named as defendants in three securities class action lawsuits filed in the United States District Court for the Southern District of New York. The cases have been consolidated under the caption In re Caliper Technologies Corp. Initial Public Offering Securities Litigation, 01 Civ. 5072 (SAS) (GBD). Similar complaints were filed against approximately 300 other public companies that conducted IPOs of their common stock during the late 1990s (the “IPO Lawsuits”). On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Together, those cases are denominated In re Initial Public Offering Securities Litigation, 21 MC 92(SAS). On April 19, 2002, a Consolidated Amended Complaint was filed alleging claims against Caliper and the individual defendants under Sections 11 and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder. The Consolidated Amended Complaint also names certain underwriters of Caliper’s December 1999 initial public offering of common stock. The Complaint alleges that these underwriters charged excessive, undisclosed commissions to investors and entered into improper agreements with investors relating to aftermarket transactions. The Complaint seeks an unspecified amount of money damages. Caliper and the other issuers named as defendants in the IPO Lawsuits moved on July 15, 2002 to dismiss all claims on multiple grounds. By Stipulation and Order dated October 9, 2002, the claims against Messrs. Milligan, Kisner and Knighton were dismissed without prejudice. On February 19, 2003, the Court granted Caliper’s motion to dismiss all claims against it. Plaintiffs were not given the right to replead the claims against Caliper; the time to appeal the dismissal has not yet expired. In May 2003, a Memorandum of Understanding was executed by counsel for plaintiffs, issuers and their insurers setting forth the terms of a settlement that would result in the termination of all claims brought by plaintiffs against the issuers and individual defendants named in the IPO Lawsuits. On July 7, 2003, a Special Litigation Committee of the Caliper Board of Directors approved the settlement terms described in that Memorandum of Understanding, which was subsequently set forth in definitive Settlement Agreement among the settling parties. On February 15, 2005, Judge Scheindlin issued an order granting preliminary approval of the settlement, subject to the condition that the settling parties agree to modify the terms of the settlement to limit the scope of the bar order contemplated by the settlement. Caliper has reviewed the impact of this condition to the Court’s approval of the settlement in the context of the overall benefits of the settlement for Caliper and determined that it is still in Caliper’s best interests to proceed with the settlement. Judge Scheindlin has scheduled the final hearing for this settlement during the first quarter of 2006. The final resolution of this litigation is not expected to have a material impact on Caliper’s financial statements.

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Item 6. Exhibits

*	The certifications attached as Exhibits 32.1 and 32.2 accompanies 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 the undersigned, thereunto duly authorized.

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*	The certifications attached as Exhibits 32.1 and 32.2 accompanies 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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