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UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

for the quarterly period ended June 30, 2010.

Or

for the transition period from                   to                  .

Commission file # 001-32976

CALIPER LIFE SCIENCES, INC.

(Exact name of registrant as specified in its charter)

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  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON July 31, 2010:   50,274,085

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CALIPER LIFE SCIENCES, INC.

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PART I. FINANCIAL INFORMATION

CALIPER LIFE SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)

Item 1.    Financial Statements

See accompanying notes.

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CALIPER LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)

See accompanying notes.

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CALIPER LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

See accompanying notes.

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CALIPER LIFE SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of Caliper Life Sciences, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Caliper”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules or regulations. The December 31, 2009 consolidated balance sheet has been derived from the Company’s audited financial statements as of that date, but does not include all disclosures required by U.S. GAAP.  However, in the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with Caliper’s Annual Report on Form 10-K for the year ended December 31, 2009.

Operating results for the three and six months ended June 30, 2010, are not necessarily indicative of the results that may be expected for the full fiscal year or for any future periods. For example, the Company typically experiences higher revenue in the fourth quarter of its fiscal year due to spending patterns of its customers, and may realize significant periodic fluctuations in license and contract revenue depending on the timing and circumstances of underlying individual transactions.

Summary of Significant Accounting Principles

The accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 12, 2010. Those policies are not presented herein, except to the extent that new policies have been adopted or that the description of existing policies has been meaningfully updated.

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 collectability is reasonably assured or probable, as applicable.  Sales made by Caliper do not typically include general return rights or privileges. In the limited circumstance where a right of return exists, Caliper recognizes revenue when the right has lapsed. Based upon Caliper’s prior experiences, sales returns have not been significant and therefore a general provision for sales returns or other allowances is not recorded at the time of sale. Provision is made at the time of sale for estimated costs related to Caliper’s warranty obligations to customers.

Cash received from customers as advance deposits for undelivered products and services including contract research and development services, is recorded within customer deposits until revenue is recognized. Revenue related to annual maintenance contracts or other remaining undelivered performance obligations is deferred and recognized upon completion of the underlying performance criteria.

Product Revenue

Product revenue is recognized upon the shipment and transfer of title to customers and is recorded net of discounts and allowances. Revenues on shipments subject to customer acceptance provisions are recognized only upon customer acceptance provided all other revenue recognition criteria are met. Customer product purchases are generally delivered under standardized terms of “FOB origin” with the customer assuming the risks and rewards of product ownership at the time of shipping from Caliper’s warehouses. Revenue associated with customer product purchases delivered under terms of “FOB destination” is deferred until product is delivered to the customer. In accordance with Accounting Standards Update (ASU) No. 2009-13, Caliper defers the relative selling price of any elements that remain undelivered after product shipment and/or acceptance (as applicable), such as remaining services to be performed.

Service and Annual Maintenance Agreements

Caliper’s general policy is to recognize revenue as services are performed, typically using the proportional performance method

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based upon defined outputs or other reasonable measures as applicable, or ratably over the contract service term in the case of annual maintenance contracts. Customers may purchase optional warranty coverage during the initial standard warranty term and annual maintenance contracts beyond the standard warranty expiration. These optional service offerings are not included in the price Caliper charges customers for the initial product purchase. Under Caliper’s standard warranty, the customer is entitled to repair or replacement of defective goods.

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 and milestone payments under licenses are recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectability is reasonably assured. Imaging patent rights granted to commercial imaging customers are recognized ratably over the term of the license.

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, unless based upon time and materials, time and expense, or substantive milestones, are generally recognized using the proportional performance method.

Fair Values of Assets and Liabilities

Caliper measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements, prioritizes the assumption that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy.  This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions.

Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2.  Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances.  Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.  These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

On June 30, 2010, Caliper’s investments were valued in accordance with the fair value hierarchy as follows (in thousands):

Investments are generally classified Level 1 or Level 2 because they are valued using quoted market prices, broker or dealer quotations, market prices received from industry standard pricing data providers or alternative pricing sources with reasonable levels of price transparency.  Investments in U.S. Treasury Securities and overnight money market mutual funds have been classified as Level 1 because these securities are valued based upon quoted prices in active markets or because the investments are actively traded.

As of June 30, 2010, Caliper’s cash and available for sale securities of $37.6 million all have contracted maturities of less than one year.  In addition, Caliper held securities that were in an unrealized loss position as of June 30, 2010; however, these unrealized losses were not material to Caliper either individually or in the aggregate.

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Income Taxes

Caliper accounts for income taxes in accordance with FASB ASC 740, Accounting for Income Taxes, (“FASB ASC 740”), and accounts for uncertainty in income taxes recognized in financial statements in accordance with FASB ASC 740.  FASB ASC 740 prescribes a comprehensive model for the recognition, measurement, and financial statement disclosure of uncertain tax positions. Unrecognized tax benefits are the differences between tax positions taken, or expected to be taken, in tax returns, and the benefits recognized for accounting purposes pursuant to FASB ASC 740. Caliper classifies uncertain tax positions as short-term liabilities within accrued expenses.  During the six months ended June 30, 2010 and 2009, Caliper’s tax provision includes estimated foreign taxes in jurisdictions where its wholly owned subsidiaries are subject to current taxes. During the six months ended June 30, 2010, Caliper’s tax position includes a provision for estimated taxes incurred in connection with the gain realized on the May 24, 2010 TurboVap® and RapidTrace® product line divestiture discussed in Note 2.

Goodwill

Caliper performs a test for the impairment of goodwill annually, or more frequently if events or circumstances indicate that goodwill may be impaired. Because Caliper has a single operating segment, which is the sole reporting unit, Caliper performs this test by comparing the fair value of Caliper with its carrying value, including goodwill. If the fair value exceeds the carrying value, goodwill is not impaired. If the book value exceeds the carrying value, Caliper would calculate the potential impairment loss by comparing the implied fair value of goodwill with the book value of goodwill. If the implied fair value of goodwill is less than the book value, an impairment charge would be recorded equal to the difference.  Caliper concluded that approximately $2.7 million of goodwill was associated with the TurboVap and RapidTrace product lines that were sold in the second quarter of 2010 (Note 2).  Accordingly, this amount was reduced from goodwill and charged to the statement of operations as part of the gain on the divestiture.  Caliper reviewed its remaining goodwill for indicators of impairment as of June 30, 2010, and concluded that there was no impairment.

Recently Issued Accounting Standards

In January 2010, the FASB issued authoritative guidance on improving disclosures about fair value measurements. This guidance requires new disclosures about transfers in and out of Level 1 and 2 measurements and separate disclosures about activity relating to Level 3 measurements. In addition, this guidance clarifies existing fair value disclosures about the level of disaggregation and the input and valuation techniques used to measure fair value. The guidance only relates to disclosure and does not impact Caliper’s consolidated financial statements. Caliper adopted this guidance in the first quarter of fiscal year 2010. There was no significant impact to Caliper’s disclosures upon adoption.

In February 2010, the FASB issued an amendment to the guidance on subsequent events that removed the requirement for an SEC registrant to disclose the date through which subsequent events are evaluated. It did not change the accounting for or disclosure of events that occur after the balance sheet date but before the financial statements are issued. This amendment was effective upon issuance.

2.  Divestitures

TurboVap and RapidTrace Product Lines Divestiture

On May 17, 2010, Caliper entered into a Purchase Agreement (the “Purchase Agreement”) providing for the sale of its solvent evaporation and solid phase extraction product lines, consisting of the TurboVap and RapidTrace product lines, to Biotage LLC (“Biotage”) for approximately $16.5 million in cash. The sale of these product lines to Biotage was completed on May 24, 2010.  The Purchase Agreement contains representations, warranties and indemnities that are customary in purchase transactions.  In addition, Caliper has agreed not to engage in activities that are competitive with the divested product lines for five years from the closing date.  Upon the closing date, the parties also entered into a two-year toll manufacturing agreement, with an option for a third year, pursuant to which Caliper will exclusively manufacture the TurboVap and RapidTrace products in quantities requested by Biotage and sell such units to Biotage at fair market prices, mutually agreed to by both parties.  As of the closing date for this transaction, the TurboVap and RapidTrace product lines had net assets of $5.0 million comprised of $2.7 million of goodwill allocated on a relative fair value basis, $1.6 million in accounts receivable and $1.4 million in inventory, less $0.7 million of assumed liabilities.  The sale resulted in a $11.4 million gain based upon the net proceeds received in excess of total divested net assets.

Xenogen Biosciences Divestiture

On December 11, 2009, Caliper entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Taconic Farms, Inc. (“Taconic”). The Stock Purchase Agreement provided for the sale of Caliper’s preclinical mouse services business, Xenogen Biosciences Corporation (“XenBio”), to Taconic for a purchase price of approximately $10.8 million, which included $9.7 million in cash together with $1.1 million which was placed into an escrow account until April 30, 2011. The escrow secures Caliper’s indemnification obligations to Taconic, if any, under the Stock Purchase Agreement. The Stock Purchase Agreement also contains representations, warranties and indemnities that are customary in stock purchase transactions. As of the transaction date, XenBio had net

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assets of $4.9 million comprised of $2.6 million in identified intangibles, $1.9 million of goodwill allocated on a relative fair value basis, and $0.4 million of other net assets. The sale of XenBio resulted in a $4.2 million gain based upon the net proceeds received to date, excluding the amount held in escrow, in excess of total divested net assets.

AutoTrace Product Line Divestiture

On November 10, 2008, Caliper entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Dionex Corporation (“Dionex”). The Asset Purchase Agreement provided for the sale of Caliper’s AutoTrace product line to Dionex.  This transaction is further described within Note 3 to the consolidated financial statements included in Caliper’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 12, 2010.  Caliper continued to manufacture the AutoTrace products for Dionex for approximately three months following the closing of this transaction under a transition services agreement, which resulted in the recognition of approximately $0.3 million in revenue from this business during the first quarter of 2009.

3. Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis, or “FIFO”) or market. Amounts are relieved from inventory and recognized as a component of cost of sales on a FIFO basis. Inventories consist of the following (in thousands):

4. Intangibles

Intangibles, net of amortization expense and other charges, consist of the following assets acquired in connection with previous business combinations (in thousands):

5. Warranty Obligations

Caliper provides for estimated warranty expenses as a component of cost of revenue at the time product revenue is recognized.  Caliper offers a one-year limited warranty on most products, which is included in the selling price. Caliper’s standard limited warranty covers repair or replacement of defective goods, a preventative maintenance visit on certain products, and telephone-based technical support. 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 are as follows (in thousands):

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6. Comprehensive Income (Loss)

Comprehensive income (loss) is as follows (in thousands):

7. Accrued Restructuring Costs

Caliper’s accrued restructuring costs as of June 30, 2010 were comprised of future contractual obligations pursuant to facility operating leases covering certain idle space as further described below.  The following table summarizes changes in accrued restructuring obligations during the six months ended June 30, 2010 (in thousands):

The remaining facility obligations are payable as follows (in thousands):

The restructuring obligations reflected above resulted from the following actions:

Facility Closures

During 2008, Caliper consolidated its West Coast business operations to reduce overall facility costs and improve productivity and effectiveness of its research and development spending. The consolidation plan entailed vacating approximately 26,300 square feet of occupied space in Mountain View, California. In 2009, Caliper revised its assumptions around the restructuring charge taken in 2008 regarding the facility. The effect of the change was to update the sublease timing and rates assumed as a result of conditions in the current real estate market, as well as to correct an error in the amount of vacated space by approximately 10,200 square feet (see notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 12, 2010, for additional details). This facility closure was accounted for in accordance with FASB ASC 420, 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. Fair value was determined based upon the discounted present value of remaining lease rentals (using a discount rate of 5.5%) for the space no longer occupied, considering future estimated sublease income, estimated broker fees and required tenant improvements.  The lease term expires on November 30, 2013.

In July 2009, Caliper vacated approximately 19,000 square feet at its Hopkinton, Massachusetts facilities. This facility consolidation

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was enabled as the result of the product line divestitures completed in the fourth quarter of 2008 and continued efforts to reduce idle capacity. Caliper recorded a restructuring charge of approximately $1.0 million related to this action in the third quarter of 2009. Caliper has accounted for this restructuring activity in accordance with FASB ASC 420, pursuant to which Caliper has recorded a liability equal to the fair value of the remaining lease payments as of the cease-use date. Fair value was determined based upon the discounted present value of remaining lease payments (using a discount rate of 6.5%), considering future estimated sublease income, estimated broker fees and required tenant improvements. The lease term expires on December 31, 2015.

In April 2010, Caliper vacated approximately 5,400 additional square feet of its Mountain View, California facility.  This facility consolidation was due to the ongoing efforts to streamline chip manufacturing operations and increase the likelihood of securing a sub-tenant.  Caliper recorded a restructuring charge of approximately $0.6 million related to this action in the second quarter of 2010.  This partial facility abandonment was accounted for in accordance with FASB ASC 420, pursuant to which Caliper recorded a liability equal to the fair value of the remaining lease payments as of the cease-use date.  Fair value was determined based upon the discounted present value of remaining lease payments (using a discount rate of 5.5%) for the space no longer occupied, considering future estimated sublease income, estimated broker fees and required tenant improvements.

8. Revolving Credit Facility

On May 24, 2010, Caliper entered into a Second Loan Modification Agreement relating to its Second Amended and Restated Loan and Security Agreement (the “credit facility”) with a bank dated March 6, 2009.  The credit facility permits Caliper to borrow up to $25 million in the form of revolving loan advances, including up to $5 million in the form of letters of credit and other contingent reserves. Principal borrowings under the credit facility accrue interest at a floating annual rate equal to the bank’s prime rate (4% at June 30, 2010) plus one-half of one percent. Under the credit facility, Caliper is permitted to borrow up to $25 million, subject to a borrowing base limit consisting of (a) 80% of eligible accounts receivable plus (b) the lesser of 70% of Caliper’s unrestricted cash at the bank or $12 million; provided, that on each of the first three (3) business days and each of the last three (3) business days of each fiscal quarter, the borrowing base is (a) 80% of eligible accounts receivable plus (b) the lesser of 90% of Caliper’s unrestricted cash at the bank or $12 million. Eligible accounts receivable do not include internationally billed receivables, unbilled receivables, and receivables aged over 90 days from invoice date. The current facility matures on April 1, 2011. The credit facility serves as a source of capital for ongoing operations and working capital needs.

The credit facility includes traditional lending and reporting covenants including that certain financial covenants applicable to liquidity and earnings are to be maintained by Caliper and tested as of the last day of each quarter. As of June 30, 2010, Caliper was in compliance with all of its covenants.  The credit facility also includes certain rights for the bank to accelerate the maturity of the debt, lower the borrowing base or stop making advances, which are typical within asset-based lending arrangements. Caliper does not believe the bank will exercise these rights as long as it is meeting its covenants and achieving its forecast. The credit facility also includes several potential events of default such as payment default, material adverse change conditions and insolvency conditions that could cause interest to be charged at the interest rate in effect as of the date of default plus two percentage points, or in the event of any uncured events of default (including non-compliance with liquidity and earnings financial covenants), could result in the bank’s right to declare all outstanding obligations immediately due and payable.

There were no outstanding obligations under the credit facility as of June 30, 2010, compared to $14.9 million which was outstanding as of December 31, 2009. The credit facility is classified as short-term consistent with Caliper’s intent to utilize the credit facility to fund operations and working capital needs, as needed, on a revolving loan basis. Interest is due monthly and has ranged from 4.5% to 5.5% during the three months ended June 30, 2010, and was 5.5% during the three months ended June 30, 2009.

9. Commitments and Contingencies

Caliper’s commitments and contingencies are disclosed within Note 10 to the consolidated financial statements included in Caliper’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 12, 2010.  The following represent changes within the current period and all other commitments and contingencies have not materially changed.

On August 9, 2006, Stanford University provided Caliper’s wholly owned subsidiary Xenogen Corporation with the results of an audit performed pursuant to the exclusive license agreement between Stanford and Xenogen. The audit report, which was prepared by a third party consultant, asserted certain claims of underpayments during the period from 2002 through March 31, 2006, based upon a different interpretation of the scope of imaging products that are subject to the royalty provisions of the license than Xenogen had used for the calculation of royalties since the beginning of this licensing arrangement in 1997. Upon review of the audit report, Caliper determined that additional royalties of approximately $71,000 were owed to Stanford, and paid this obligation in 2006. Caliper is contesting the remaining payment obligation that is claimed in the Stanford audit report, and as a result, has not accrued for any additional liability. The amount of any remaining contingent obligation, if any, cannot currently be estimated, nor does Caliper believe that it is probable that a liability exists. Stanford and Caliper are presently working with a neutral third party in an attempt to resolve this dispute.  At any time, either party may choose binding arbitration to resolve any dispute over the amount of back royalties owed, if any.

In March 2010, Caliper received a letter from AntiCancer Incorporated (“AntiCancer”) which claimed that Caliper had underpaid

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royalties, during the period from July 2008 through December 2009, under a cross-license agreement entered into in February 2008.  The claim is based upon a different interpretation of the royalty sharing provisions within the cross licensing agreement.  Caliper is contesting the claim that additional royalties are due, and as a result, has not accrued for any additional liability. The amount of any remaining contingent obligation, if any, cannot currently be estimated, nor does Caliper believe that it is probable that a liability exists. AntiCancer and Caliper have a mediation scheduled with a neutral third party in September 2010, to try to resolve this dispute.  If this dispute cannot be resolved through mediation, either party may choose binding arbitration to resolve any dispute over the amount of back royalties owed, if any.

10. Legal Proceedings

On February 23, 2010, Caliper, its wholly owned subsidiary Xenogen Corporation, and Stanford University filed a complaint for patent infringement against Carestream Health, Inc. (“Carestream”) in the U.S. District Court for the Eastern District of Texas.  Caliper, Xenogen and Stanford University seek a judgment that Carestream induced infringement of seven United States patents that Caliper, through Xenogen, exclusively licenses from Stanford University.  Caliper and its co- plaintiffs seek an award of compensatory damages, trebled damages due to Carestream’s willfulness, a permanent injunction and attorneys’ fees against Carestream for its ongoing, indirect infringement of the patents-in-suit. The complaint was served on Carestream on February 26, 2010.  On April 20, 2010, Carestream filed its answer to the complaint, denying it induces infringement of the asserted patents.  Carestream also counterclaimed for declaratory judgments of non-infringement and invalidity of the asserted patents.  Carestream also filed a motion to transfer the venue of the litigation to another District Court.  Caliper and Carestream subsequently agreed to the transfer of this case to the U.S. District Court for the Northern District of California, where it is pending.  The Court scheduled the case management conference for this litigation for September 30, 2010.

On June 8, 2010, the United States Patent and Trademark Office issued U.S. Patent No. 7,734,325 (“the ‘325 Patent”) to Carestream.  The next day, Caliper filed a Request for Inter Partes Reexamination of the ‘325 Patent with the USPTO.  The USPTO is required by statute to indicate by mid-September whether it will order reexamination of the ‘325 Patent.

On July 9, 2010, Carestream filed a complaint for patent infringement against Caliper in the U.S. District Court for the Western District of Wisconsin.  Carestream’s complaint alleges that Caliper’s Lumina XR imaging system, which is a multi-modal imaging system with both optical and x-ray capabilities that Caliper first introduced in September, 2009, infringes the ‘325 Patent and that Caliper indirectly infringes the ‘325 patent.  Carestream’s allegations of infringement do not involve any of Caliper’s imaging products other than the Lumina XR.  Caliper believes that the ‘325 Patent is invalid and that the Lumina XR system does not infringe the claims of the ‘325 Patent, and Caliper intends to defend against this lawsuit vigorously.  With its complaint for patent infringement, Carestream also filed with the Court a motion for preliminary injunction to prevent Caliper from selling the Lumina XR system during the pendency of this litigation.  Caliper’s Opposition to Carestream’s motion for a preliminary injunction is due on August 11, 2010.  No hearing date for Carestream’s preliminary injunction motion has been set by the Court.

On July 26, 2010, Caliper filed a motion to transfer this litigation to the U.S. District Court for the Northern District of California, or in the alternative, to stay this litigation pending the resolution of any reexamination of the ‘325 Patent pursuant to the reexamination request filed by Caliper with the USPTO.  Carestream’s response to Caliper’s motion is due on August 16, 2010.  Caliper filed its answer to Carestream’s complaint on August 2, 2010.

From time to time Caliper is involved in litigation arising out of claims in the normal course of business, and when a probable loss contingency arises, records a loss provision based upon actual or possible claims and assessments. The amount of possible claim recorded is determined on the basis of the amount of the actual claim, when the amount is both probable and the amount of the claim can be reasonably estimated. If a loss is deemed probable, but the range of potential loss is wide, Caliper records a loss provision based upon the low end estimate of the probable range and may adjust that estimate in future periods as more information becomes available. Litigation loss provisions, when made, are reflected within general and administrative expenses in the Statement of Operations and are included within accrued legal expenses in the accompanying balance sheet. Based on the information presently available, management believes that there are no outstanding claims or actions pending or threatened against Caliper, the ultimate resolution of which will have a material adverse effect on our financial position, liquidity or results of operations, although the results of litigation are inherently uncertain, and adverse outcomes are possible.

11. Stock-Based Compensation, Options and Restricted Stock Activity and Net Loss per Weighted Average Common Share Outstanding

Stock-Based Compensation

Caliper recognizes all share-based payments, including grants of stock options, in the income statement as an operating expense, based on their fair values. Caliper estimates the fair value of each option award on the date of grant using a Black-Scholes-Merton based option-pricing model.  Stock-based compensation expense is included within costs and expenses as follows (in thousands):

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On June 30, 2010, Caliper had share-based compensation plans (the “Plans”), which are described within Note 12 to the consolidated financial statements included in Caliper’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 12, 2010.

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

Options and Restricted Stock Activity

A summary of stock option and restricted stock activity under the Plans as of June 30, 2010, and changes during the six months then ended is as follows:

Restricted stock units do not carry an exercise price and typically vest over a four-year period, although the vesting period of certain awards may vary. As of June 30, 2010, the weighted average remaining vesting term is 2.72 years and the aggregate intrinsic value of

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outstanding and non-vested restricted stock is approximately $6.0 million.

During the six months ended June 30, 2010, Caliper granted 1,118,194 options at a weighted average grant date fair value, using the Black-Scholes-Merton option pricing model, of $2.32 per share, and 351,625 restricted stock units at a weighted average grant date fair value of $3.48 per share. The total fair value of restricted stock that vested during the six months ended June 30, 2010 was approximately $1.8 million.

As of June 30, 2010, there was $6.3 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average remaining service period of approximately 2.83 years.

Common Shares Outstanding

During the six months ended June 30, 2010, Caliper issued 948,533 shares of common stock as a result of purchases under Caliper’s Employee Stock Purchase Plan and activity related to stock option exercises and vesting of restricted stock.

Net Income (Loss) per Weighted Average Common Share Outstanding

Basic net income (loss) per share is calculated based upon net income (loss) divided by the weighted-average number of common shares outstanding during the period. The calculation of diluted net income per share gives effect to the dilutive effect of common stock equivalents consisting of stock options, unvested restricted stock, unvested restricted stock units and warrants (calculated using the treasury stock method).  Potentially dilutive securities are excluded from the diluted earnings per share computation to the extent they have an antidilutive effect due to Caliper’s net loss.

A reconciliation of shares used in the calculations is as follows (in thousands):

The following outstanding options, restricted stock and warrants (prior to the application of the treasury stock method) were excluded from the computation of diluted net loss per share as they had an antidilutive effect (in thousands):

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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 June 30, 2010, and for the three and six months ended June 30, 2010, 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, 2009, filed with the SEC on March 12, 2010.

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 “Risk Factors” 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 develops and sells innovative and enabling products and services to the life sciences research community, a customer base that includes pharmaceutical and biotechnology companies, and government and other not-for-profit research institutions. We believe our integrated systems, consisting of instruments, software and reagents, our laboratory automation tools and our assay development and discovery services enable researchers to better understand the basis for disease and more effectively discover safe and effective drugs. Our strategy is to transform drug discovery and development by offering technologies and services that ultimately enhance the ability to predict the effects that new drug candidates will have on humans. Our offerings leverage our extensive portfolio of molecular imaging, microfluidics, automation and liquid handling technologies, and scientific applications expertise to address key opportunities and challenges in the drug discovery and development process—namely, the complex and costly process to conceive of and bring a new drug to market.

We believe that increasing the clinical relevance of drug discovery experimentation, whether at early stage, lower cost in vitro (in an artificial environment) testing or later stage, more expensive, preclinical in vivo (in a living organism) testing, will have a profound impact in helping our customers to determine the ultimate likelihood of success of drugs in treating humans. With enabling offerings in both the in vitro and in vivo testing arenas, and a unique strategy of enhancing the “bridge” or linkages between in vitro and in vivo research testing and between research testing and clinical diagnostic testing, we expect to continue to address growing, unmet needs in the market and drive on-going demand for our products and services. These market needs are underscored by key challenges that face the pharmaceutical and biotechnology industry, including late-stage drug failures and unforeseen side effects coming to light late in the development process or even after drugs are on the market.

We offer an array of products and services, many of which are based on our own proprietary technologies, to address critical experimental needs in drug discovery and preclinical development. Our technologies are also enabling for other life sciences applications beyond drug discovery, such as environmental-related testing, and in applied markets such as agriculture and forensics. We also believe that our technology platforms may be able to provide ease of use, cost and data quality benefits for certain in vitro and in vivo diagnostic applications.

We have multiple channels of distribution for our products: direct to customers, indirect through our international network of distributors, through partnership channels under our Caliper Driven program and through joint marketing agreements. Through our direct and indirect channels, we sell products, services and complete system solutions, developed by us, to end customers. Our Caliper Driven program is complementary to our direct sales and distribution network activities, as it enables us to extend the commercial potential of our LabChip technology into new industries and new applications with both experienced commercial partners and earlier stage companies with their own proprietary technologies. We also utilize joint marketing agreements to enable others to market and distribute our products. By using direct and indirect distribution, and out-licensing our technology under our Caliper Driven program, we seek to maximize penetration of our products and technologies into the marketplace and position Caliper as a leader in the life sciences tools market.

Our product and service offerings are organized into three core business areas—Imaging, Discovery Research (Research), and Caliper Discovery Alliances and Services (CDAS)—with the goal of creating a more scalable infrastructure while putting increased focus on growth and profitability.

·            The Imaging business holds, we believe, a global leadership position in the high-growth pre-clinical molecular imaging market. Principal activities of this business area include the expansion of the IVIS imaging instrument system and related reagent product lines, development of new therapeutic area applications and addition of and support for complementary imaging modalities.

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·            The Research business area is responsible for utilizing Caliper’s automation and microfluidic technologies to address an expanding array of opportunities in drug discovery and life science research, including molecular biology sample preparation and analysis for genomics, proteomics, diagnostics, cellular screening and forensics.

·            The CDAS business area is responsible for expanding drug discovery collaborations and alliances, and increasing sales of drug discovery services. The focus of CDAS is to capitalize on market “outsourcing” trends, and to offer complementary services to Caliper’s Imaging and Research platform solutions.

Second Quarter Key Highlights

Summary Financial Performance

·            Our total revenues during the second quarter of 2010 decreased by approximately $3.1 million to $29.0 million, from $32.1 million in the second quarter of 2009 due to a $4.2 million net change resulting from recent divestitures, as described in Note 2 to our consolidated financial statements and summarized in the non-GAAP revenue reconciliation as set forth below, which was offset by 4% growth in revenue derived from our ongoing business. Total revenue derived from ongoing business operations increased 6% during the quarter, adjusted for unfavorable currency changes.  Key changes in revenue on a strategic business unit basis are discussed below (see non-GAAP revenue table and related discussion.)

·            Product gross margins increased to 50.7% in 2010 versus 40.3% in 2009 in the second quarter. The ten point improvement resulted from increased revenue on higher margin instruments such as the LabChip GX II and IVIS instruments, in contrast to lower product margin sales experienced in the second quarter of 2009, together with manufacturing efficiencies and lower material costs.  The favorable product mix shift accounted for approximately 4 points of gross margin gain, and improvements in manufacturing, procurement, warranty and distribution costs accounted for approximately 6 points of gross margin improvement compared to the second quarter of 2009.

·            Service gross margins increased to 38% in 2010 from 33% in 2009 due principally to the December 2009 divestiture of XenBio which contributed only 14% in service gross margin in the second quarter of 2009.

·            Net income for the second quarter of 2010 was $9.2 million, or $0.18 per share, compared to net loss of $4.1 million, or $0.08 per share, in 2009. The increase in the net income of $13.3 million was primarily related to the $11.4 million gain on the TurboVap and RapidTrace product line divestiture, but also was due to the increase in gross margin contribution.

Revenue Performance by Strategic Business Unit

The table below provides a reconciliation of our GAAP basis revenue to pro forma non-GAAP revenue results for the second quarters of 2010 and 2009, after giving effect to the divestures described in Note 2 to our consolidated financial statements. We believe this reconciliation, and the discussion that follows, provide meaningful comparisons for evaluating revenue performance between fiscal periods and understanding our ongoing business operations.  These non-GAAP comparisons are not intended to substitute for GAAP financial measures.

Imaging revenues increased by 16% on a non-GAAP basis to $14.8 million during the second quarter of 2010 from $12.8 million during the second quarter of 2009. Imaging revenue growth was primarily driven by expansion of the instrumentation business, including a 19% increase in the number of instruments sold within the quarter compared to the same period in 2009.

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Ongoing Research revenues decreased by 4% on a non-GAAP basis to $12.1 million during the second quarter of 2010 from $12.6 million during the second quarter of 2009. The overall Research decline included a decrease in automation sales of $1.2 million as a result of strategic refocusing of our automation platforms away from non-core applications in order to support microfluidic (LabChip) growth and fast-growing biomolecular market applications.  Microfluidic revenues increased by $0.7 million, or 11%, in total.  The microfluidics revenue increase resulted from an increase in sales of LabChip GX of $1.1 million driven by biotherapeutic discovery applications, offset by a decrease in sales of EZ Reader of approximately $1.4 million due to sluggish kinase screening demand.  LabChip- associated consumables (chips, kits and reagents) revenues and license revenues also increased by $0.5 million and $0.4 million, respectively, during the second quarter compared to the same period in 2009.

CDAS revenues decreased by 30% on a non-GAAP basis to $1.0 million during the second quarter of 2010 from $1.4 million during the second quarter of 2009. The net decrease resulted from the completion of a large oncology project with a single customer which generated approximately $0.5 million in revenue in the second quarter of 2009, offset in part by growth from government contract services.  CDAS also experienced continued delays in its Environmental Protection Agency (EPA) ToxCast screening program.  However, in May 2010, CDAS was awarded a new funding commitment for $2.9 million under its contract with the EPA, increasing the current backlog of Phase II task orders to $4.7 million.  CDAS is awaiting receipt of compounds to begin Phase II services, the timing of which is now expected to be late in the third quarter or the fourth quarter of 2010.

Critical Accounting Policies and Estimates

The critical accounting policies that we believe impact 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, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC on March 12, 2010.

Results of Operations for the Three and Six Months Ended June 30, 2010

Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For example, we typically experience higher revenues in the fourth quarter of our fiscal year as a result of the capital spending patterns of our customers.

Revenue

Product Revenue.   Product revenue decreased during the three months ended June 30, 2010, by $1.0 million compared to the same period in 2009, due primarily to revenues of $1.5 million from divested product lines that we realized during the second quarter of 2009.  Net of the impact of divestitures, product revenues from ongoing product lines increased $0.5 million during the period, including an increase in Imaging product sales of $1.3 million, or approximately 15%, and a decrease in Research product sales of $0.9 million, or 9%, compared to the second quarter of 2009.  The increase in Imaging product sales was primarily due to a 19% increase in IVIS instrument placements (44 units in 2010 compared to 37 units in 2009). Research product sales in the quarter decreased due to a decrease in EZ Reader unit sales of approximately $1.4 million and a $1.1 million decrease in liquid handling instrument sales, offset by a $1.1 million increase in LabChip GX unit sales and a $0.5 million increase in microfluidic chip, kit and reagent sales. We believe the increase in LabChip GX instrument performance contrasted with the decrease in EZ Reader instrument sales characterizes a trend of increased investment by pharmaceutical companies in biotherapeutic research and development programs and a scale back of funding of small molecule discovery programs and, to a lesser extent, spending delays due to recent pharmaceutical mergers.

Product revenue increased by $1.0 million during the six months ended June 30, 2010, which includes a $1.7 million decrease in product revenues from divested product lines.  Net of the impact of divestitures, product revenues from ongoing product lines increased $2.7 million during the period, including an increase in Imaging product sales of $3.6 million, or 22%, and a decrease in Research revenues of $0.9 million, or 5%, compared to the six months ended June 30, 2009.  The Imaging product sales increase was due to a

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19% increase in IVIS instrument placements (81 units in 2010 compared to 68 units in 2009) as well as an increased average selling price which was favorably impacted by IVIS Spectrum and Lumina XR instrument sales.

The Research product sale decrease during the six months ended June 30, 2010, was comprised of a $1.3 million, or 13%, increase in microfluidic product revenues and a $2.2 million, or 26%, decline in automation product revenues, compared to the same period in 2009. The increase in microfluidic revenues during the six months ended June 30, 2010, compared to 2009, was primarily due to (a) a $1.6 million increase in sales of our LabChip GX instruments from a 56% increase in instrument placements; (b) a $0.9 million, or 16%, increase in sales of microfluidic consumables (chips, kits and reagents) resulting from growth in the installed base of LabChip instruments as well as an increase in the usage of ProfilerPro consumables by a single customer in the first quarter compared to 2009; offset in part by (c) a $1.2 million decrease in sales of EZ Reader instrument sales. The decrease in automation product revenues during the six months ended June 30, 2010 compared to 2009 was primarily due to (a) a $1.1 million decrease in sales of Staccato Automated Workstation instruments; (b) a $0.9 million decrease in unit sales of our Zephyr liquid handling instrument; and (c) a $0.6 million last time purchase of product we no longer manufacture by an automation OEM customer in the first quarter of 2009; offset in part by sales of Twister plate handling systems and other accessories.

Service Revenue.   Total service revenue decreased $2.6 million during the three months ended June 30, 2010, compared to the same period in 2009, including a decrease of $2.6 million as a result of the divestiture of XenBio in December 2009, an increase of $0.4 million in instrument service revenues associated with Imaging and Research instrument offerings and a $0.4 million decrease in CDAS service revenues. The CDAS decrease was comprised of a $0.5 million decline attributed to the completion of a large oncology project with a single customer, offset in part by a $0.1 million increase in government contract services.

Total service revenue decreased $5.1 million during the six months ended June 30, 2010, compared to the same period in 2009, including a decrease of $5.2 million as a result of the divestiture of XenBio, an increase of $0.8 million in instrument service revenues from Imaging and Research product offerings and a $0.7 million decrease in CDAS service revenues. The $0.8 million increase in instrument service revenues was primarily due to an increase in service revenues generated from the Imaging and Microfluidic installed bases, offset in part by a decrease in automation service revenue.  The CDAS decrease was comprised of a $1.2 million decline attributed to the completion of a large oncology project with a single customer, offset in part by growth from other commercial customers and government contract services.

License Fees and Contract Revenue.    License fees and contract revenue increased during the three and six months ended June 30, 2010, compared to the same periods in 2009, primarily as a result of an increase in microfluidic license and contract revenues received from new licensees secured after the second quarter of 2009 and an increase in Imaging license revenue of $0.2 million and $0.5 million during the three and six months ended June 30, 2010, respectively.

Costs of Revenue