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UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the quarterly period ended June 30, 2011.

Or

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

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  x  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, 2011: 53,056,824

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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, 2011

(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, 2010 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, 2010.

Operating results for the six months ended June 30, 2011, 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, 2010, filed with the SEC on March 11, 2011. 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. Product revenue is recognized upon passage of title, which for the majority of sales occurs when goods are shipped under Caliper’s standard terms of “FOB origin.” Revenue associated with customer product purchases delivered under terms of “FOB destination” is deferred until the product is received by the customer. Revenues on shipments subject to customer acceptance provisions are recognized only upon customer acceptance provided all other revenue recognition criteria are met. In general, sales made by Caliper do not 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. Revenue from services offered by Caliper is generally recognized as the services are performed (or, as applicable, ratably over the contract service term in the case of annual maintenance contracts). 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 warehouse. 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.

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Service and Annual Maintenance Agreements

Caliper’s general policy is to recognize revenue as services are performed, typically using the proportional performance method 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 Value 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.  Caliper’s investments are all classified as Level 1 inputs because they are valued using quoted market prices, broker or dealer quotations, or market prices received from industry standard pricing data providers.   On June 30, 2011, Caliper’s investments were valued as follows (in thousands):

As of June 30, 2011, Caliper’s cash and available for sale securities of $34.3 million all have contracted maturities of less than one year, with the exception of three securities with an aggregate value of $2.0 million.  In addition, Caliper held securities that were in an unrealized loss position as of June 30, 2011; however, these unrealized losses were not material 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, and accounts for uncertainty in income taxes recognized in financial statements in accordance with FASB ASC 740-10, Accounting for Uncertainty in Income Taxes. FASB ASC 740 prescribes a comprehensive model for the recognition, measurement, and financial statement disclosure of uncertain tax positions. Unrecognized tax benefits are the difference 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. For the six months ended June 30, 2011 and 2010, Caliper’s tax provisions primarily relate to foreign taxes in jurisdictions where its wholly owned subsidiaries are profitable and in certain states, state income taxes.

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.  As of June 30, 2011, Caliper analyzed its goodwill for indicators of impairment, and concluded that there were none.

Recently Issued Accounting Standards

There are no recently issued accounting standards, which, if adopted, would have a material impact on Caliper’s reported results of operations.

2. Acquisition

On December 17, 2010, Caliper completed the acquisition of Cambridge Research & Instrumentation, Inc. (“CRi”) for $20.0 million, consisting of approximately $7.9 million in cash, issuance of 1,648,641 shares of Caliper’s common stock valued at $10.3 million and an assumed liability resulting from a litigation settlement of approximately $1.8 million. Caliper incurred approximately $1.0 million in acquisition related costs that were expensed within selling, general and administrative costs, of which approximately $0.9 million was incurred within the fourth quarter of 2010 and approximately $0.1 million was incurred within the first quarter of 2011. CRi’s operations, assumed as of the date of the acquisition, are included in the results of operations of Caliper beginning on December 17, 2010, the closing date of the acquisition.

3.  Divestitures

On May 17, 2010, Caliper entered into a Purchase Agreement (the “Purchase Agreement”) providing for the sale of its specialty product lines, consisting of the TurboVap and RapidTrace instrument groups, 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.  As of the closing date for this transaction, the specialty 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 an $11.4 million gain before estimated income taxes of approximately $0.3 million.

4. 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):

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5. Intangibles

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

In connection with the acquisition of CRi, $2.3 million of the intangible assets acquired relate to in-process research and development (“IPR&D”) assets.  These IPR&D assets represent projects that were in existence as of the acquisition date.  Caliper assesses the status of the projects on a quarterly basis to determine whether they have been completed or abandoned. In the second quarter of 2011, Caliper abandoned certain of these projects, resulting in a $1.1 million impairment charge which is recorded within amortization of intangible assets within the accompanying consolidated statements of operations.  The abandonment of these projects represented an indicator of impairment, which prompted Caliper to perform a recoverability test during the interim period.  Caliper used a multi-period excess earnings approach which measures fair value by discounting expected future cash flows attributable to a single intangible asset.  The results of the test showed that there was no value to the projects a result of changes in the costs incurred to complete the projects based on information learned by Caliper during the second quarter as our research and analysis of the projects progressed.

6. 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):

7. Comprehensive Income (loss)

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

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8. Accrued Restructuring Costs

Caliper’s accrued restructuring costs as of June 30, 2011 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, 2011 (in thousands):

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

The restructuring obligations reflected above resulted from the following actions:

Severance

In December 2010, Caliper acquired CRi (see Note 2). In connection with the acquisition in the fourth quarter of 2010, Caliper recorded a $0.7 million restructuring charge related to employee separation costs incurred by Caliper after the acquisition date. This action reduced the total CRi workforce by 13 employees, or approximately 28%. All affected employees were notified in December 2010 and all severance payments are expected to be completed by the end of the third quarter of 2011. The affected employees are not required to perform future services to earn the payments.  In March 2011, Caliper recorded an additional $0.5 million restructuring charge related to employee separation costs incurred in connection with the termination of a former executive officer of CRi.  As of June 30, 2011, the remaining obligation relates to personnel whose scheduled departure coincided with the shut-down of the Woburn facility discussed below.

Facility Closures

During 2008, Caliper consolidated its California-based 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. 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 April 2010, Caliper vacated approximately 5,400 additional square feet of its Mountain View, California facility to streamline chip manufacturing operations and increase the likelihood of securing a sub-tenant for unutilized space within the facility. 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

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discount rate of 5.5%) for the space no longer occupied, considering future estimated sublease income, estimated broker fees and required tenant improvements.

In September 2010, Caliper entered into a two year sublease for approximately 13,200 square feet of the unutilized space in Mountain View, California. As a result of entering into this agreement, Caliper revised its assumptions around the restructuring charge taken with respect to this property in 2009, and recorded an additional $0.7 million restructuring charge during the three months ended September 30, 2010. The effect of the charge was to update the sublease rates for the remaining space as well as to capture the period from the end of the sublease through November 2013 for which Caliper does not expect to receive sublease income.

In April 2011, Caliper entered into a sublease for approximately 13,080 square feet of the unutilized space in Mountain View, California, at terms consistent with those assumed in the previously recorded restructuring charges. As a result of entering into this agreement, Caliper revised its assumptions around the remaining space, concluding that the remaining space would not generate sublease income, and recorded an additional $0.4 million restructuring charge during the six months ended June 30, 2011. The effect of the charge was to update the timing of sublease income related to the remaining space in Mountain View, California.

In July 2009, Caliper vacated approximately 19,000 square feet at its Hopkinton, Massachusetts facilities in order to reduce idle excess capacity created as a result of product line divestitures completed in 2008. 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 June 2011, Caliper closed the Woburn, Massachusetts facility which was assumed as part of the CRi acquisition. The Woburn operations were transitioned to Caliper’s corporate headquarters in Hopkinton, Massachusetts, consistent with its announced integration plan.  Caliper recorded a restructuring charge of approximately $1.3 million related to this action in the second quarter of 2011. The facility closure was accounted for 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 4.0%), considering future estimated sublease income, estimated broker fees and required tenant improvements. The lease term expires on August 31, 2015.

9. Revolving Credit Facility

On December 31, 2010, Caliper entered into a Third Amended and Restated Loan and Security Agreement (“credit facility”) with a bank, which 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. The principal effect of this modification was to extend the maturity date of the credit facility from April 1, 2011 to April 1, 2013.  The modification also established financial covenants that are tested as of the last day of each quarter.  Principal borrowings under the credit facility accrue interest at a floating annual rate equal to the bank’s prime rate (4.0% at June 30, 2011).  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 90% of Caliper’s unrestricted cash at the bank or $15 million. Eligible accounts receivable do not include internationally billed receivables, unbilled receivables, and receivables aged over 90 days from invoice date. 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 certain financial covenants applicable to liquidity and earnings that are to be maintained by Caliper and tested as of the last day of each quarter. As of June 30, 2011, Caliper was in compliance with all of its covenants in the credit facility. There were no outstanding borrowings under the credit facility as of June 30, 2011.

10. Commitments and Contingencies

Caliper’s commitments and contingencies are disclosed within Note 11 to the consolidated financial statements included in Caliper’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 11, 2011.  There have not been any material changes to Caliper’s commitments and contingencies during the current period, except as follows.

On December 11, 2009, Caliper entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Taconic Farms, Inc., (“Taconic”), a New York corporation. The Stock Purchase Agreement provided for the sale of Caliper’s XenBio operations 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. On April 18, 2011, Caliper received notice from Taconic regarding a claim for indemnification by Taconic for various potential contingent losses that may be suffered by Taconic and for which, if such losses are actually realized by Taconic, Taconic believes Caliper would have an obligation to indemnify Taconic under the terms of the Stock Purchase Agreement. Under the terms of the Stock Purchase Agreement, Caliper’s maximum liability for any such losses actually suffered by Taconic, and for which Caliper is determined to be

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responsible, is $3.0 million.  Caliper believes that the $1.1 million placed into escrow will likely remain in escrow until this issue is further clarified or otherwise resolved.

On August 9, 2006, Stanford University provided Xenogen Corporation (“Xenogen”) 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 by Xenogen to Stanford 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 $71,000 were owed to Stanford, and paid this obligation in 2006. In July 2011, Caliper and Stanford entered into an agreement to resolve all remaining disputes regarding the audit report and how the terms of the license agreement would be interpreted by the parties going forward.  As a result of the agreement, no current payment was made to Stanford for past licensing or royalties.  However, the original agreement was modified to increase the prospective royalty rate, effective July 1, 2011, for purposes of calculating any future payments to Stanford from sublicensing revenue received by Caliper.

11. Legal Proceedings

As reported previously, on February 23, 2010, Caliper, its wholly owned subsidiary Xenogen, 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, treble 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 induced 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.

On June 8, 2010, the U.S. Patent and Trademark Office (“PTO”) issued U.S. Patent Number 7,734,325 (the “325 Patent”) to Carestream.  The next day, Caliper filed a request for reexamination of all claims of the 325 Patent.  On August 12, 2010, the PTO issued an order granting reexamination of all claims of the 325 Patent.  On the same day, the PTO also issued an action closing prosecution of the reexamination of the 325 Patent.  On September 29, 2010, the PTO issued a right of appeal notice notifying Caliper and Carestream of each party’s right to appeal the examiner’s determinations in the reexamination.  Caliper filed a Notice of Appeal with the PTO on October 29, 2010, and filed its appeal brief on February 4, 2011.  Carestream filed its reply to Caliper’s appeal brief on March 7, 2011.

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 infringes the 325 Patent and that Caliper indirectly infringes the 325 Patent.  Caliper filed its answer to Carestream’s complaint on August 2, 2010.  Carestream’s allegations of infringement do not involve any of Caliper’s imaging products other than the Lumina XR.  The Lumina XR system is a multi-modal imaging system with both optical and x-ray capabilities that Caliper first introduced in September 2009.  Caliper believes that the 325 Patent is invalid and that the Lumina XR system does not infringe the claims of the 325 Patent.  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 filed its opposition to Carestream’s motion for a preliminary injunction on October 20, 2010.  The hearing on Carestream’s preliminary injunction motion was held on March 4, 2011.  The Court issued its Opinion and Order denying Carestream’s preliminary injunction motion on March 31, 2011, finding that Carestream failed to establish either a reasonable likelihood of success on the merits of its infringement claim or any irreparable harm if the requested preliminary injunction were not entered. In its Opinion and Order the Court also denied both Caliper’s and Carestream’s cross-motions for summary judgment, but indicated that each party could file a new motion for summary judgment after additional discovery had taken place.  The Court also conducted a claim construction hearing on March 4, 2011, but the Court has not yet issued its claim construction order.

On August 4, 2011, Caliper and Carestream entered into a settlement agreement (the “Settlement Agreement”) which resolves both Caliper’s and Stanford University’s complaint against Carestream in the U.S. District Court for the Northern District of California (the “California Litigation”) as well as Carestream’s complaint against Caliper in U.S. District Court for the Western District of Wisconsin (the “Wisconsin Litigation”). To settle these lawsuits, Carestream and Caliper have agreed (i) to dismiss their respective claims and counterclaims in the California Litigation and the Wisconsin Litigation; (ii) that Carestream will not market and sell in-vivo optical imaging systems for certain applications covered by patents licensed from Stanford University by Xenogen and Caliper; and (iii) that Carestream will not assert that Caliper’s Lumina XR system as currently configured and sold by Caliper infringes any of Carestream’s patents.  Other terms of the Settlement Agreement were not disclosed. 

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On November 10, 2010, GenMark Diagnostics, Inc. (“GenMark”), a life sciences company based in Carlsbad, California, filed a complaint against Caliper in the U.S. District Court for the Northern District of California, seeking declaratory judgment that either (i) GenMark’s products do not infringe three microfluidic patents owned by Caliper (U.S. Patent Nos. 6,366,924; 6,399,025; and 6,495,104) and/or (ii) the claims of the three patents at issue are invalid.  GenMark’s complaint was served on Caliper on November 11, 2010.  The complaint filed by GenMark did not contain any other claims against Caliper, other than a claim for recovery of reasonable attorneys’ fees.  Caliper had been in the beginning stages of license discussions with GenMark when it filed its complaint.  On February 28, 2011, Caliper and GenMark entered an agreement under which Caliper agreed not to assert any infringement claims under certain specified patents against GenMark during the next six-month period and GenMark agreed to dismiss its complaint without prejudice.  Caliper intends to continue its discussions with GenMark regarding a potential licensing arrangement during this six-month period.

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 our 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.

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

Warrants

In connection with Caliper’s 2006 acquisition of Xenogen, Caliper granted Xenogen stockholders an aggregate of 4,701,733 warrants, and reserved an additional 411,814 warrants for potential issuance upon the exercise of Xenogen warrants which were assumed by Caliper. Upon the potential exercise of these assumed warrants, the holders are entitled to receive that number of Caliper shares and warrants that such holder would have been entitled to receive as a Xenogen stockholder as of the acquisition date.  Each warrant granted permits the holder to acquire one Caliper common share at an exercise price of $6.79 per share through August 9, 2011. The termination date of the Caliper warrants that are to be issued upon the eventual exercise of the assumed Xenogen warrants may not be extended beyond the 5 year expiration date for the Caliper warrants.

During the six months ended June 30, 2011, 575,547 Caliper warrants were exercised resulting in 4,151,226 warrants outstanding as of June 30, 2011.  In addition, during the six months ended June 30, 2011, 111,340 of the assumed Xenogen warrants were exercised resulting in 296,203 assumed warrants outstanding as of June 30, 2011.  Collectively, the net effect of the Caliper and Xenogen warrant exercises including the effect of “net or cashless exercises” was the issuance of 82,002 shares of Caliper common stock.  In July 2011 and through August 5, 2011, the net effect of Caliper and Xenogen warrant exercises including the effect of “net or cashless exercises,” was the issuance of 1,117,108 shares of Caliper common stock.  These exercises generated approximately $5.4 million in cash proceeds subsequent to June 30, 2011.

The following table summarizes information with respect to warrants assumed from Xenogen which remain outstanding and exercisable at June 30, 2011:

Stock Plans

Caliper’s stock plans are disclosed within Note 13 to the consolidated financial statements included in Caliper’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 11, 2011.  In June 2011, Caliper’s stockholders adopted the 2011 Employee Stock Purchase Plan (the “2011 Purchase Plan”). The initial number of shares reserved was 1.5 million shares, subject to adjustment, and the term of the 2011 Purchase Plan is ten years.  Under the 2011 Purchase Plan, employees have the option to purchase shares of Caliper’s common stock at 85% of the closing price on the first trading day of each offering period or the last trading day of each offering period (as defined in the 2011 Purchase Plan), whichever is lower, up to specified limits. Eligible employees are given the option to purchase shares of Caliper’s common stock, on a tax-favored basis, through regular payroll deductions in compliance with Section 423 of the Internal Revenue Code of 1986, as amended. The 2011 Purchase Plan will replace Caliper’s 1999 Employee Stock Purchase Plan, which will be terminated upon the expiration of the offering period ending November 30, 2011.

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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):

On June 30, 2011, Caliper had share-based compensation plans (the “Plans”), which are described within Note 13 to the consolidated financial statements included in Caliper’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 11, 2011.

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, 2011, and changes during the six months then ended is as follows:

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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, 2011, the weighted average remaining vesting term is 2.15 years and the aggregate intrinsic value of outstanding and non-vested restricted stock is approximately $10.4 million.

During the six months ended June 30, 2011, Caliper granted 946,630 options at a weighted average grant date fair value, using the Black-Scholes-Merton option pricing model, of $4.51 per share, and 240,122 restricted stock units at a weighted average grant date fair value of $6.62 per share. The total fair value of restricted stock that vested during the six months ended June 30, 2011 was approximately $1.1 million.

As of June 30, 2011, there was $9.8 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 3.1 years.

Common Share Issuances

During the six months ended June 30, 2011, Caliper issued 710,446 shares of common stock as a result of stock option and warrant exercises, issuances of shares under Caliper’s 1999 Employee Stock Purchase Plan and vesting of restricted stock.

Net 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, 2011 and for the three and six months ended June 30, 2011 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, 2010 filed with the SEC on March 11, 2011.

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 Life Sciences, Inc. develops and sells innovative and enabling products and services to the life sciences community, a customer base that includes pharmaceutical, biotechnology and diagnostics companies, universities 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 advances in the understanding of disease and will impact the realization of personalized medicine. Our strategy is to transform drug discovery by offering technologies and services that enhance researchers’ ability to predict the effects that new drug candidates or existing approved drugs will have on different groups of humans, and also to enhance our customers’ ability to offer companion diagnostic solutions that may allow prescribing the right drug to the right individual. Our offerings leverage our extensive portfolio of imaging, tissue analysis, microfluidics, automation and liquid handling technologies, and scientific applications expertise to address key opportunities and challenges in drug discovery and implementation of personalized medicine.  These opportunities and challenges include enhancing the efficiency of the complex and costly process to conceive of and bring a new class of drugs to market, including enabling the development of a new class of drugs that can be prescribed based on characteristics of the individual patient, which is referred to as personalized medicine. In addition, we believe our microfluidic systems can provide a highly accurate and reliable platform for life sciences research and for performing molecular diagnostics tests.

We believe that increasing the clinical relevance of drug discovery experimentation at each stage of research from early stage, relatively low cost in vitro testing (in an artificial environment) through later stage ex vivo testing (in cells and tissue), and in vivo testing (in a living organism) will have a profound impact on helping our customers to determine the ultimate likelihood of success of drugs in treating humans. Further, we believe that complementing this drug discovery enablement with companion diagnostic products to enable new drugs to be successful while efficiently and safely targeting a subpopulation of patients is critical to the future success of the pharmaceutical and biotechnology industries. With enabling offerings in the in vitro, in vivo, and ex vivo (cells and tissue) testing arenas, and a unique strategy of enhancing the “bridge” or linkages between preclinical research and clinical diagnostic testing, we expect to continue to address growing, unmet needs in the market, and to drive on-going demand for our products and services. These market needs are underscored by key challenges currently facing the pharmaceutical and biotechnology industry, including late-stage drug failures and unforeseen side effects coming to light late in the development process or after drugs are on the market.

We offer an array of products, assays and services, many of which are based on our proprietary technologies, to address critical needs in drug discovery and preclinical development, and to enable companion diagnostic determinations. Our technologies are also enabling for other life sciences research and applications beyond drug discovery, such as molecular diagnostics, sample preparation for next generation sequencing, environmental 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 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.

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Our product and service offerings are organized into three core business areas — molecular imaging and tissue analysis (“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 expanding preclinical imaging market. Principal activities of this business area include the expansion of our line of preclinical imaging systems and related software, applications, accessories and reagents. We continue to enhance performance, flexibility and ease of use of our systems, which consist of optical, x-ray, micro computed tomography (micro CT) and multiplex tissue analysis solutions. New imaging applications such as assessing stem cells and lung inflammation are often enabled by complementary reagent products, such as specialized dyes and targeted probes.  These products are being adopted by life sciences and clinical researchers who are developing more targeted (personalized) diagnostic, therapeutic and prognostic solutions, based on the enabling high-quality multiplexed tissue imaging capabilities provided by our products.

·                  The Research business is responsible for utilizing our core automation and microfluidic technologies, including our LabChip systems, to address an expanding array of opportunities in drug discovery and life science research, including molecular biology sample preparation and analysis for genomics (particularly next generation sequencing), proteomics, cellular screening and forensics.

·                  CDAS is responsible for building drug discovery collaborations and alliances, and growing our sales of drug discovery services, with an emphasis on leveraging our core technologies to provide our customers with the option to purchase our instruments and reagents or to engage us to perform experiments for them using our instruments and reagents. The focus of CDAS is to capitalize on market “outsourcing” trends in preclinical drug research.   CDAS emphasizes the development and offering of more comprehensive scientific solutions to our clients in the fields of oncology, predictive toxicology, immunology, and large molecules/biologics, which we believe represent opportunities with growing demand in the life sciences outsourcing and alliances segments.

Second Quarter Key Highlights

Summary Financial Performance

·                  Our total revenues during the second quarter of 2011 increased by approximately $9.3 million, or 32%, to $38.3 million, from $29.1 million in the second quarter of 2010.  Our revenues for the second quarter of 2011 on a non-GAAP basis increased by $10.4 million, or 37%, compared to non-GAAP revenues of $27.9 million in the second quarter of 2010, which excludes $1.2 million of revenue from our former specialty product lines that we divested to Biotage in the second quarter of 2010. This increase included 23% Imaging revenue growth, 52% Research revenue growth, and 82% CDAS revenue growth, as further discussed below.

·                  Combined product and service gross margins were unchanged at 48% in the second quarter of 2011 compared to the second quarter of 2010. Service margins increased 5 percentage points resulting primarily from CDAS revenue growth and resulting fixed cost leverage, while product margins decreased slightly due to changes in product and channel mix as well as purchase accounting adjustments to record inventories acquired in connection with our acquisition of CRi at fair market value.

·                  Operating expenses increased $4.0 million during the second quarter of 2011 to $19.1 million, from $15.0 million in the second quarter of 2010.  Approximately 48% of this increase was due to the acquisition of CRi, while the remaining increase resulted from increases in selling and marketing headcount and related costs, and increased legal expenses resulting from ongoing litigation.

·                  Net loss for the second quarter of 2011 was $3.2 million, or $0.06 per share, compared to net income of $9.2 million, or $0.18 per share, in 2010. The $12.4 million net income decrease included $13.5 million of non-recurring income effects including the $11.1 million non-operating gain we recognized in connection with the divestiture of our specialty product lines in 2010, as well as $1.1 million of incremental intangible asset amortization from the abandonment of certain in-process research and development and $1.3 million of incremental restructuring charges for the planned closure of the CRi facility in Woburn, Massachusetts in the second quarter of 2011.

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 each of 2011 and 2010, after giving effect to the divestiture of the specialty products lines, which occurred in May 2010. We believe this reconciliation provides a useful comparison for evaluating revenue performance between fiscal periods, but these non-GAAP comparisons are

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not intended to substitute for GAAP financial measures.

(1)           For purposes of comparing growth rates for each of the three principal product and service groups within our business, the above non-GAAP table reconciliations exclude revenues related to the specialty product lines, which were divested in May 2010.

(2)           Foreign currency contributed to overall non-GAAP revenue growth by 4% in the second quarter of 2011, comprising a 7% benefit for Research and a 3% benefit for Imaging.

Imaging revenues increased by 23% to $18.2 million during the second quarter of 2011 from $14.8 million during the second quarter of 2010.  Imaging revenue growth was driven primarily by tissue imaging products which were added to our portfolio as a result of our acquisition of CRi in December 2010.  In vivo imaging revenues were relatively flat quarter over quarter, despite a 16% increase in unit placements and were impacted by some delayed funding situations in certain academic and commercial accounts, and to a lesser extent, the product and channel mix for the quarter.  Based on present in vivo imaging pipeline visibility and the anticipated release of new products, our second half outlook projects growth in this business area.

Research revenues increased by 52% on a non-GAAP comparative basis to $18.3 million during the second quarter of 2011 from $12.1 million during the second quarter of 2010. Overall Research growth was primarily attributable to demand in certain end markets for our LabChip (microfluidic) and automation instruments, most notably end market demand for our analytical and preparative NGS platforms for sample preparation and process control.  In addition, we experienced an increase in revenues from (i) our OEM relationship with Agilent Technologies, due to both volume and improved chip pricing, (ii) growing LabChip Dx sales stemming from our collaboration agreement with Seegene, Inc. (“Seegene”) for sales of our LabChip Dx system outside of the U.S. with Seegene’s diagnostic assays, and (iii) an increase in microfluidic license revenues as a result of a scheduled milestone payment from a pre-existing arrangement.

CDAS revenues increased by 82% to $1.8 million during the second quarter of 2011 from $1.0 million during the second quarter of 2010. The net increase resulted from compound screening and analysis performed pursuant to Phase II task orders under our contract with the U.S. Environmental Protection Agency (EPA) for its ToxCast screening program.  In June 2011, we received authorization under task orders issued in February 2011 to begin work on the Phase II follow-up project which we expect to complete in the third quarter of 2011.  As of June 30, 2011, there is one additional unfulfilled task order with the EPA for approximately $1.2 million for which compounds are required, and at this time we expect these compounds to be received in the fourth quarter of 2011 or early 2012.

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, 2010 filed with the SEC on March 11, 2011.

Results of Operations for the Three and Six Months Ended June 30, 2011

Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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. In addition, service revenues from our CDAS strategic business unit will vary based upon receipt of compounds and issuance of new arrangements which can vary the timing of service revenue recognized within a year.

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Revenue

Product Revenue.   Product revenue increased by $6.2 million during the three months ended June 30, 2011, compared to the same period in 2010.  Included in this increase was $2.4 million of product revenue from ex vivo tissue imaging products added by the acquisition of CRi, which offset a $1.0 million decrease in product revenues from the divestiture of our former specialty product lines in May 2010.  Within Research product revenues for the second quarter of 2011, microfluidic (LabChip) product revenues increased $2.6 million, or 44%, and automation product revenues increased $2.1 million, or 69%, compared to 2010. Both LabChip and automation growth was driven by end market demand for our analytical and preparative NGS for sample preparation and quality control platforms.  LabChip revenues also benefitted from market adoption of our LabChip Dx instrument for multiplex molecular diagnostic analysis, currently marketed through our recent distribution agreement with Seegene, and initial shipments of the LabChip DS instruments under our exclusive North American distribution agreement with Trinean N.V. regarding a microplate reader that gives full spectrum scans of 96 samples in less than 6 minutes. In addition, LabChip product revenues increased as a result of our OEM relationship with Agilent Technologies due to increases in both chip prices and volume of chips sold.  Imaging product sales increased $2.5 million, or 24%, with the majority of the increase related to ex vivo tissue imaging products added to our imaging platform capabilities as a result of our acquisition of CRi in 2010.  Our existing in vivo imaging product sales increased $0.1 million, or 1%, primarily due to an increase in reagent sales within the period.  In vivo imaging instrument unit sales increased 16% during the quarter (51 units in the second quarter of 2011 compared to 44 units in the comparable period in 2010), however this involved a decrease in sales of higher priced Spectrum units and a corresponding decline in the average selling price of instrument sold.  We believe that product and channel mix were affected by longer purchase approval cycles, principally among academic institutions, arising out of concern over future levels of government funding.  These effects consequently resulted in a lower average selling price for units placed in the second quarter.

Product revenue increased by $10.8 million during the six months ended June 30, 2011, compared to the same period in 2010, which included $4.7 million of revenue increase from the sale of ex vivo tissue imaging products added by the acquisition of CRi and reflected a $3.2 million decrease in product revenues from the divestiture of the specialty product lines in May 2010.  Imaging product sales increased $7.3 million, or 37%, with approximately two-thirds of the increase related to newly added tissue imaging products.  Our in vivo imaging product sales increased $2.6 million, or 13%, primarily due to a 28% increase in instrument placements. In vivo instrument revenue reflected a lower average selling price compared to the six months ended June 30, 2010 due to a higher percentage of lower priced instrument sales and increased sales through our distributor channels.  Within Research product revenues for the six months ended June 30, 2011, microfluidic (LabChip) product revenues increased $4.4 million, or 39%, compared to 2010 primarily due to growth in LabChip GX instrument placements (75 units in 2011 compared to 64 units in the comparable period of 2010), an increase in revenues from our OEM relationship with Agilent Technologies due to increases in both chip prices and volume of chips sold, increased sales of the LabChip XT due to DNA sample sizing needs driven by next generation sequencing market growth, and initial commercial sales of the LabChip Dx under our recent distribution agreement with Seegene. Excluding revenues for the specialty product lines which were divested in May 2010, Research product sales also reflected a $2.4 million, or 39%, increase in automation product sales during the six months ended June 30, 2011 compared to the same period in 2010 which resulted primarily from sample preparation needs driven by next-generation sequencing and genomic drug discovery research applications.

Service Revenue.   Total service revenue increased $1.5 million in the second quarter of 2011, compared to the same period in 2010, due to an increase in CDAS service revenue of $0.8 million, an increase in instrument-related service revenues of $0.3 million and as a result of contract manufacturing revenue of $0.4 million related to products we manufacture for Biotage.  The CDAS revenue increase resulted from timing in work completed under the EPA ToxCast screening program compared to minimal work done in the second quarter of 2010. In the second quarter of 2011, we began work on two task orders totaling $1.9 million which were approximately 43% complete as of quarter end.  The $0.3 million increase in instrument service revenues was primarily due to an increase in Imaging and LabChip instrument service revenues due to growth in the installed bases for our products, offset in part by a decrease in automation instrument service revenue resulting from the specialty product lines divestiture and expired Staccato system contracts.

Total service revenue increased $3.6 million in the six months ended June 30, 2011, compared to the same period in 2010, due to an increase in CDAS service revenue of $2.0 million, an increase in instrument-related service revenues of $0.9 million and as a result of contract manufacturing revenue of $0.7 million related to products we manufacture for Biotage. The CDAS increase resulted from the completion of the Phase IIb primary screening task orders under the EPA ToxCast screening program and the new task orders for which work was started during June 2011.  The $0.9 million increase in instrument service revenues was primarily due to an increase in Imaging and LabChip instrument service revenues due to growth in the installed bases for our products, offset in part by a decrease in automation instrument service revenue resulting from the Specialty Product Lines divestiture and expired Staccato system contracts.

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License Fees and Contract Revenue.    License fees and contract revenue increased by $1.6 million during the second quarter of 2011 compared to the same period of 2010, primarily as a result of microfluidic license revenue related to a scheduled payment for the extension of rights under an existing license arrangement, a $0.1 million increase in Imaging license revenue and $0.3 million in revenue from work performed under Small Business Innovation Research (SBIR) grants assumed with the CRi acquisition.  License fees and contract revenue increased by $2.0 million during the six months ended June 30, 2011 compared to the comparable period of 2010, primarily as a result of microfluidic license revenue related to a milestone payment from an existing contract, a $0.3 million increase in Imaging license revenue and $0.5 million in revenue from work performed under SBIR grants assumed with the CRi acquisition.

Costs of Revenue

Cost of Product Revenue.    Cost of product revenue increased $3.5 million during the second quarter of 2011, compared to the same period in 2010, primarily as a result of the volume increase in product sales. The net increase of cost of product revenue included (i) a $0.2 million fair value step-up adjustment related to acquired CRi inventory; (ii) a 2.0%, or approximately $0.5 million, increase in direct material costs influenced by the mix of product sales including product sales from instruments that we in-source from our North American distribution arrangement with 3D Histech for automated whole slide tissue imagers and our International distribution agreement with Seegene for our LabChip DX instrument; and (iii) a $0.8 million increase in manufacturing labor and overhead expenses primarily related to the CRI acquisition, including the temporary ongoing operation of CRi’s Woburn, Massachusetts facility which was shut down prior to the end of the second quarter of 2011 and transitioned to our Hopkinton, Massachusetts facility.