CALIPER TECHNOLOGIES CORP, 10-Q, 2000-08-11

CALIPER TECHNOLOGIES CORP
10-Q, 2000-08-11
LABORATORY ANALYTICAL INSTRUMENTS

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________________
TO _________________________.

Commission file # 000-28229

CALIPER TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Delaware 33-0675808
(State of Incorporation) (I.R.S. Employer Identification Number)
</TABLE>

605 FAIRCHILD DRIVE
MOUNTAIN VIEW, CA 94043-2234
(Address and zip code of principal executive offices)

Registrant's telephone number, including area code: (650) 623-0700

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 [ ]

COMMON SHARES OUTSTANDING ON JULY 20, 2000: 21,211,116

<PAGE> 2

CALIPER TECHNOLOGIES CORP.
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I Financial Information

Item 1. Financial Statements (unaudited)
Condensed Balance Sheets as of June 30, 2000
and December 31, 1999............................... 2
Condensed Statements of Operations for the
Three and Six Month Ended June 30, 2000 and 1999.... 3
Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999............. 4

Notes to Unaudited Condensed Financial Statements.......... 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8

Item 3. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 17

PART II OTHER INFORMATION

Item 1. Legal Proceedings.......................................... 17

Item 2. Changes in Securities and Use of Proceeds.................. 18

Item 3. Defaults Upon Senior Securities............................ 18

Item 4. Submisson of Matters to a Vote of Security Holders......... 18

Item 5. Other Information.......................................... 19

Item 6. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................... 19

Signatures.................................................................... 20
</TABLE>

<PAGE> 3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALIPER TECHNOLOGIES CORP.

CONDENSED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $ 25,492 $ 44,772
Marketable securities ........................ 40,119 28,520
Accounts receivable, net ..................... 1,238 1,055
Inventories .................................. 1,799 287
Prepaid expenses and other current assets .... 1,103 754
--------- ---------
Total current assets ......................... 69,751 75,388
Marketable securities ........................ 24,468 26,924
Property and equipment, net .................. 5,372 5,346
Notes receivable from officers ............... 540 625
Other assets, net ............................ 689 564
--------- ---------
Total assets ................................. $ 100,820 $ 108,847
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 1,304 $ 1,321
Accrued compensation ......................... 1,212 1,082
Other accrued liabilities .................... 1,298 1,011
Deferred revenue ............................. 2,644 2,210
Current portion of equipment financing ....... 1,638 1,454
--------- ---------
Total current liabilities .................... 8,096 7,078
Noncurrent portion of equipment financing .... 3,755 3,671
Deferred revenue ............................. 594 --
Other noncurrent liabilities ................. 373 235

Commitments
Stockholders' equity:
Common stock ................................. 21 21
Additional paid-in capital ................... 143,512 142,401
Deferred stock compensation .................. (6,674) (9,317)
Accumulated deficit .......................... (48,651) (35,109)
Accumulated other comprehensive loss ......... (206) (133)
--------- ---------
Total stockholders' equity ................... 88,002 97,863
--------- ---------
Total liabilities and stockholders' equity ... $ 100,820 $ 108,847
========= =========
</TABLE>

See accompanying notes.

<PAGE> 4

CALIPER TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Costs and expenses:
Research and development .............................. 7,406 3,964 14,496 7,442
General and administrative ............................ 2,123 990 4,836 2,087
Amortization of deferred stock compensation(1)......... 1,197 971 2,643 1,061
-------- -------- --------- --------
Total costs and expenses.................................. 10,726 5,925 21,975 10,590
-------- -------- --------- --------
Operating loss ........................................... (6,568) (2,763) (13,906) (5,145)
Interest income, net...................................... 1,320 270 2,658 589
-------- -------- --------- --------
Net loss before accounting change ........................ (5,248) (2,493) (11,248) (4,556)
Cumulative effect of a change in accounting principle .... -- -- (2,294) --
-------- -------- --------- --------
Net loss ................................................. (5,248) (2,493) (13,542) (4,556)
Accretion on redeemable convertible preferred stock ...... -- (607) -- (1,214)
-------- -------- --------- --------
Net loss attributable to common stockholders ............. $ (5,248) $ (3,100) $ (13,542) $ (5,770)
======== ======== ========= ========

Net loss per common share, basic and diluted:
Net loss before accounting change ........................ $ (0.25) $ (1.16) $ (0.54) $ (2.21)
Cumulative effect of a change in accounting principle .... -- -- (0.11) --
-------- -------- --------- --------
Net loss ................................................. $ (0.25) $ (1.16) $ (0.65) $ (2.21)
======== ======== ========= ========
Shares used in computing net loss per common share,
basic and diluted ........................................ 20,980 2,680 20,933 2,612

Pro forma net loss per share, basic and diluted .......... $ (0.25) $ (0.16) $ (0.65) $ (0.30)
======== ======== ========= ========
Shares used in computing pro forma net loss per
share, basic and diluted.................................. 20,980 15,213 20,933 15,145

(1) Amortization of deferred stock compensation
relates to the following:

Research and development ................................. $ 421 $ 103 $ 936 $ 185
General and administrative ............................... 776 868 1,707 876
-------- -------- --------- --------
Total .................................................... $ 1,197 $ 971 $ 2,643 $ 1,061
======== ======== ========= ========
</TABLE>

See accompanying notes.

<PAGE> 5

CALIPER TECHNOLOGIES CORP.

CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ...................................................... $ (13,542) $ (4,556)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Cumulative effect of a change in accounting principle ......... 2,294 --
Depreciation and amortization ................................. 941 604
Amortization of deferred stock compensation ................... 2,643 1,061
Stock options issued to non-employees ......................... 391 --
Changes in operating assets and liabilities:
Accounts receivable ........................................... (183) (196)
Notes receivable from officers ................................ 85 --
Inventories ................................................... (1,512) (179)
Prepaid expenses and other assets ............................. (349) (16)
Other noncurrent asset ........................................ (182) --
Accounts payable and other accrued liabilities ................ 270 595
Accrued compensation .......................................... 130 120
Deferred revenue .............................................. (1,266) (452)
Other noncurrent liabilities .................................. 138 128
--------- ---------
Net cash used in operating activities ......................... (10,142) (2,891)
--------- ---------

INVESTING ACTIVITIES
Purchases of available-for-sale securities .................... (51,983) (11,583)
Proceeds from sales of available-for-sale securities .......... 12,012 3,309
Proceeds from maturities of available-for-sale securities ..... 30,755 10,040
Capital expenditures .......................................... (910) (2,557)
--------- ---------
Net cash used in investing activities ......................... (10,126) (791)
--------- ---------

FINANCING ACTIVITIES
Proceeds from equipment financing.............................. 1,073 2,157
Payments of obligations under equipment financing ............. (805) (499)
Proceeds from issuance of common .............................. 720 89
--------- ---------
Net cash provided by financing activities ..................... 988 1,747
--------- ---------
Net decrease in cash and cash equivalents ..................... (19,280) (1,935)
Cash and cash equivalents at beginning of period .............. 44,772 5,158
--------- ---------
Cash and cash equivalents at end of period .................... $ 25,492 $ 3,223
========= =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ................................................. $ 306 $ 151
========= =========
SCHEDULE OF NONCASH TRANSACTION
Deferred stock compensation ................................... $ -- $ 6,313
========= =========
</TABLE>

See accompanying notes.

<PAGE> 6

CALIPER TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring entries) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. For further information, refer to the financial
statements and notes thereto included in the Annual Report on Form 10-K for the
year ended December 31, 1999 filed by Caliper Technologies Corp.

REVENUE RECOGNITION

Revenues are earned from services performed pursuant to Caliper's
collaboration agreement, technology access program agreements and government
grants.

Collaboration Agreement

Revenue from development activities under Caliper's collaboration agreement
is recorded in the period in which the costs are incurred. Direct costs
associated with this contract are reported as research and development expense.
Revenue related to the reimbursement of costs for the supply of chips and
reagents to Caliper's collaboration partner is recognized upon shipment.
Caliper's share of gross margin on components of the LabChip(R) system sold by
the collaboration partner is recognized as revenue upon shipment by the
collaboration partner to the end user.

Technology Access Program Agreements

Caliper has entered into a number of multi-year technology access program
agreements consisting of four basic elements: (1) access to existing technology;
(2) a multi-year subscription for technology developed during the subscription
period; (3) development and support services; and (4) access to prototype
LabChip(R) systems developed during the subscription period. Caliper allocates
the total arrangement fees to each element based on fair value.

Prior to January 1, 2000, Caliper recognized non-refundable license fees
under its technology access programs as revenues upon transfer of the license to
third parties and when no further performance obligations existed. Effective
January 1, 2000, Caliper changed its method of accounting for non-refundable
license fees to recognize such fees ratably over the term of the committed
related technology access program agreement. Caliper believes the change in
accounting principle is preferable based on guidance provided in SEC Staff
Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements. The
$2.3 million cumulative effect of the change in accounting principle was
reported as a charge in the quarter ended March 31, 2000. The cumulative effect
was initially recorded as deferred revenue that will be recognized as revenue
over the remaining contractual terms of the technology access program
agreements. During the six months ended June 30, 2000, the impact of the change
in accounting was to increase net loss by $1.4 million, or $0.07 per share,
comprised of the $2.3 million cumulative effect of the change as described above
($0.11 per share), net of $900,000 of the related deferred revenue which was
recognized as revenue during the six months ended June 30, 2000 ($0.04 per
share). The remainder of the related deferred revenue will be recognized in
revenue approximately as follows: $400,000 over the remainder of 2000, $800,000
in 2001 and $194,000 in 2002. Had the change in accounting been adopted as of
January 1, 1999, revenue for the three and six months ended June 30, 1999 would
have increased by $117,000 and $233,000, respectively or decreased pro forma net
loss by $0.01 per share and $0.02 per share, respectively.

Subscription fees are recognized ratably over the subscription period. When
payment of the subscription fee is contingent upon reaching a milestone, revenue
is deferred until the milestone is met. Support and development services revenue
is recognized in the periods the costs are incurred. Product revenue is
recognized upon transfer of title to the customer.

<PAGE> 7

Government Grants

Caliper's grant from the National Institute of Standards and Technology
provides for the reimbursement of qualified expenses for research and
development as defined under the terms of the grant agreement. Revenue under
grant agreements is recognized when the related research expenses are incurred.

DEFERRED COMPENSATION ARRANGEMENTS

Caliper maintains certain trading assets to generate returns that offset
changes in certain liabilities related to deferred compensation arrangements.
The trading assets consist of marketable equity securities and are stated at
fair value. Both realized and unrealized gains and losses generally offset the
change in the deferred compensation liability and to date have not been
material.

STOCK-BASED COMPENSATION

Caliper accounts for its stock options and equity awards in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and has elected to follow the "disclosure only"
alternative prescribed by Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Caliper accounts for stock options issued to
non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force 96-18. For the six months ended June 30, 2000, compensation
expense related to stock options issued to non-employees was $391,000.

NET LOSS PER SHARE

Basic earnings per share is calculated based on the weighted-average number
of common shares outstanding during the period. Diluted earnings per share would
give effect to the dilutive effect of common stock equivalents consisting of
stock options and warrants (calculated using the treasury stock method).
Potentially dilutive securities have been excluded from the diluted earnings per
share computations as they have an antidilutive effect due to Caliper's net
loss.

Pro forma net loss per share has been computed to give effect to the
automatic conversion of preferred stock into common stock which occurred at the
completion of Caliper's initial public offering in December 1999 (using the
as-if converted method) from the original date of issuance.

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Basic and diluted:
Net loss............................................ $ (5,248) $ (2,493) $ (13,542) $ (4,556)
Accretion on redeemable convertible
preferred stock..................................... -- (607) -- (1,214)
-------- -------- --------- --------
Net loss attributable to common stockholders........ $ (5,248) $ (3,100) $ (13,542) $ (5,770)
======== ======== ========= ========

Weighted-average shares of common stock outstanding... 21,069 2,951 21,044 2,907
Less: weighted-average shares subject to repurchase... (89) (271) (111) (295)
-------- -------- --------- --------
Weighted-average shares used in basic and
diluted net loss ..................................... 20,980 2,680 20,933 2,612
======== ======== ========= ========

Pro forma basic and diluted:
Net loss............................................ $ (5,248) $ (2,493) $ (13,542) $ (4,556)
======== ======== ========= ========

Shares used above................................... 20,980 2,680 20,933 2,612

Adjustment to reflect weighted-average effect of
assumed conversion of preferred stock................. -- 12,533 -- 12,533
-------- -------- --------- --------
Weighted-average shares used in pro forma basic
and diluted net loss per share........................ 20,980 15,213 20,933 15,145
======== ======== ========= ========
</TABLE>

<PAGE> 8

NOTE 2 -- CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

As of June 30, 2000 Caliper invests its excess cash in U.S. government and
agency securities, debt instruments of financial institutions and corporations
and money market funds with strong credit ratings. They are classified as
available-for-sale and are carried at fair value with unrealized gains and
losses reported in stockholders' equity.

NOTE 3 -- INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw material.......................... $ 1,171 $ 253
Work in process....................... 605 13
Finished goods........................ 23 21
-------- -------
Total................................. $ 1,799 $ 287
======== =======
</TABLE>

NOTE 4 -- COMPREHENSIVE LOSS

The components of comprehensive loss for the three and six months ended
June 30, 2000 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders....... $ (5,248) $ (3,100) $ (13,542) $ (5,770)
Unrealized gain (loss) on securities............... 8 -- (73) --
-------- -------- --------- --------
Comprehensive loss................................. $ (5,240) $ (3,100) $ (13,615) $ (5,770)
======== ======== ========= ========
</TABLE>

NOTE 5 -- LITIGATION

On March 22, 1999, Caliper filed a lawsuit in California Superior Court for
the County of Santa Clara against Aclara Biosciences, Inc. and Caliper's former
patent counsel, alleging that all the defendants misappropriated certain of
Caliper's trade secrets relating to Caliper business plans, patents and
intellectual property strategy. The suit also alleges that Caliper's former
patent counsel committed a breach of the duties they owed to Caliper as its
former attorneys. The suit seeks damages and equitable remedies to prevent
Aclara and Caliper's former patent counsel from benefiting from the alleged
misappropriation and breach of duties. On January 12, 2000, Caliper filed a
lawsuit in United States District Court for the Northern District of California
alleging that Aclara is infringing four U.S. patents licensed to Caliper by
Lockheed Martin Energy Research Corporation. These patents cover technology for
controlling the flow of materials in microfluidic chips, as well as devices,
systems and applications that make use of this technology. Caliper subsequently
amended this complaint to allege that Aclara is infringing another of its
patents covering technology for controlling the flow of materials in
microfluidic chips. Aclara has counterclaimed for a declaratory judgment that
the patents in this suit are invalid, unenforceable and are not infringed by
Aclara. While Caliper believes that its complaints are meritorious, there can be
no assurance that Caliper will prevail in its actions against any or all of the
defendants, or that if Caliper prevails, the damages or equitable remedies
awarded, if any, will be commercially valuable. Furthermore, Caliper has
incurred and is likely to continue to incur substantial costs and expend
substantial personnel time in pursuing its claims against Aclara and Caliper's
former patent counsel.

On April 23, 1999, Aclara Biosciences filed a lawsuit in United States
District Court for the Northern District of California alleging that Caliper is
making, using, selling or offering for sale microfluidic devices that infringe
United States Patent Number 5,750,015 in willful disregard of Aclara's patent
rights. This patent concerns methods and devices for moving molecules by the
application of electrical fields. The Aclara action seeks damages for past and
future reduced sales or lost profits based upon Caliper's alleged fabrication,
use, sale or offer for sale of allegedly infringing products and processes, and
seeks to enjoin Caliper's continued activities relating to these products.
Caliper has counterclaimed for a declaratory judgment of noninfringement,
invalidity and unenforceability of all claims of the Aclara patent. On July 19,
2000, the federal judge in this action issued an order finding that eight of the
eleven claims asserted against Caliper are invalid, and interpreting the
remaining asserted claims. This action subjects Caliper to potential liability
for damages, including treble damages, and could require Caliper to cease
making, using or selling the affected products, or to obtain a license in order
to continue to manufacture, use or sell the affected products. While Caliper
believes that it has

<PAGE> 9

meritorious defenses in this action, there can be no assurance that Caliper will
prevail or that any license required would be made available on commercially
acceptable terms, if at all. Even if Caliper prevails in the current action,
there can be no assurance that we will prevail again if Aclara appeals the case
to a higher court. Furthermore, Caliper has incurred and is likely to continue
to incur substantial costs and expend substantial personnel time in defending
against the claims filed by Aclara. Caliper's failure to successfully defend
itself against the Aclara action could have a material adverse effect on
Caliper's business, financial condition and operating results.

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, 2000 and for the three and six month
periods ended June 30, 2000 and June 30, 1999 should be read in conjunction with
the Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Caliper's Annual Report on Form 10-K for the year ended
December 31, 1999.

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

OVERVIEW

We are a leader in lab-on-a-chip technologies that miniaturize, integrate
and automate many laboratory processes. We develop, manufacture and sell our
proprietary LabChip(R) systems to pharmaceutical and other companies. We believe
our LabChip(R) systems have the potential to assemble the power and reduce the
scale of entire laboratories full of equipment and people. From inception in
July 1995 through June 2000, our operating activities were primarily devoted to
research, development and commercialization of technologies involving the
manipulation of very small amounts of fluid, which are referred to as
"microfluidic technologies," and first-generation products such as the Agilent
2100 Bioanalyzer, LabChip(R) kits and our high throughput system, recruiting
personnel, business development, raising capital and acquiring assets. In 1999,
we recognized revenue from our first product sales when we sold initial versions
of our high throughput system for drug screening to our three technology access
program customers. In addition, in September 1999, Agilent, our commercial
partner, introduced our first LabChip(R) system for use by individual
researchers. In March 2000, we recognized revenue from our first multi-capillary
Sipper(TM) chip system and Millennium Pharmaceuticals joined our technology
access program, becoming our fourth technology access program customer. In May
2000, we introduced the DNA 500 LabChip(R) kit for the automated analysis of DNA
fragments to determine their size and concentration.

Since our inception, we have incurred significant losses and, as of June
30, 2000, we had an accumulated deficit of $48.7 million. Our losses have
resulted principally from costs incurred in research and development,
manufacturing scale-up, and from general and administrative costs associated
with our operations. We expect to continue to incur substantial research and
development, manufacturing scale-up, and general and administrative costs. As a
result, we will need to generate significantly higher revenue to achieve
profitability.

Our revenue has been derived principally from contract revenue earned under
our collaboration agreement with Agilent and from our technology access program
customers. To a lesser extent, we have derived revenue from the sale of products
and government grants. Although we are developing and plan to introduce future
products, we cannot assure you that we will be successful in these efforts. To
date, we have generated a substantial portion of our revenue from a limited
number of sources. Four of our technology access program partners, Amgen, Eli
Lilly, Millenium, and Roche and our commercial partner, Agilent, each accounted
for in excess of 10% of our revenue in the three months ended June 30, 2000.
Agilent alone accounted for 40% of our revenue in this period, and the four
technology access program customers collectively accounted for 53% of our
revenue in this period. During the quarter ended June 30, 1999, Agilent
accounted for 52% of our revenue and a technology access program customer
accounted for 32% of our revenue.

Under our agreement, Agilent funds our research and development
expenditures related to the collaboration, reimburses us for our costs of
supplying chips and reagents to Agilent and pays us a share of the gross margin
earned on all components of LabChip(R)

<PAGE> 10

systems they sell. Revenue from development and support activities under our
collaboration agreement is recorded in the period in which the costs are
incurred. Direct costs associated with this contract are reported as research
and development expense. Revenue related to the reimbursement of costs for the
supply of chips and reagents to Agilent is recognized upon shipment. Our share
of gross margin on components of the LabChip(R) system sold by Agilent is
recognized as revenue upon shipment to the end user. Agilent only began in late
1999 the marketing and sales efforts for the Agilent 2100 Bioanalyzer. Sales of
new and innovative instrumentation such as the Agilent 2100 Bioanalyzer involve
a long sales cycle, requiring customer training and demonstration periods. As a
result, to date Agilent has sold a modest number of Agilent 2100 Bioanalyzers,
and it is too early for us to predict market acceptance of this technology.

Under our technology access program agreements, we recognize as revenue
non-refundable license subscription fees over the term of the subscription,
product sales upon the transfer of title to the customer, and development and
support fees in the period in which the costs are incurred. Subscription fees
and development and support fees may be received annually or quarterly in
advance depending upon the terms of the agreement. Payments received in advance
under all of these agreements are recorded as deferred revenue until earned. We
have evaluated the applicability of SAB 101 to our existing technology access
program agreements. We have concluded that the approach described in SAB 101 is
preferable and have changed our method of accounting effective January 1, 2000
to recognize such fees over the term of the related agreement. The cumulative
effect of this change in accounting principle is approximately $2.3 million as
of January 1, 2000 and has been recognized as a charge in the quarter ended
March 31, 2000. The cumulative effect is recorded as deferred revenue and will
be recognized as revenue over the remaining contractual terms of the technology
access program agreements. As of June 30, 2000, a total of $3.2 million of
revenue was deferred. We expect to recognize this deferred revenue through the
third quarter of year 2002.

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2000 and 1999

Revenue. Revenue was $4.2 million and $8.1 million for the three and six
months ended June 30, 2000, respectively, compared to $3.2 million and $5.4
million for the three and six months ended June 30,1999. The increase of $1.0
million during the three months ended June 30, 2000 compared to the same period
in 1999 resulted from increased revenue generated under our technology access
program, including $450,000 attributed to up-front fees received in prior years
which were ratably recorded as revenue during the quarter ended June 30, 2000,
as prescribed by SAB 101. The increase of $2.7 million during the six months end
June 30, 2000 compared to the same period in 1999 resulted from increased
revenue generated under our technology access program, including $900,000
attributed to up-front fees received in prior years which were ratably recorded
as revenue during the six months ended June 30, 2000, as prescribed by SAB 101.

Research and Development Expenses. Research and development expenses
consist primarily of salaries and related personnel costs, fees paid to
consultants and outside service providers for chip development, material costs
for prototype and test units, legal expenses resulting from intellectual
property prosecution and litigation, and other expenses related to the design,
development, testing, and enhancement of our products. We expense our research
and development costs as they are incurred. Research and development expenses
were $7.4 million and $14.5 million for the three and six months ended June 30,
2000, respectively, compared to $4.0 million and $7.4 million for the three and
six months ended June 30, 1999. The increase of $3.4 million during the three
months ended June 30, 2000 compared to the same period in 1999 was attributed to
continued growth of research and development activities, including $1.4 million
related to growth in personnel and services to support our technology access
program, partner collaboration and product launches, $1.1 million for costs
related to intellectual property matters and the remainder for supplies required
to assemble, build and test prototype LabChip(R) systems along with expansion in
our operating activities. The increase of $7.1 million during the six months
ended June 30, 2000 compared to the same period in 1999 resulted from $3.1
million related to growth in personnel and services to support our technology
access program, partner collaboration and product launches, $2.6 million for
costs related to intellectual property matters and the remainder for supplies
required to assemble, build and test prototype LabChip(R) systems along with
expansion in our operating activites. We expect research and development
spending to continue to rise and increase in proportion to our revenue growth
over the next several years as we expand our research and product development
efforts.

General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance and
other administrative personnel, recruiting expenses, professional fees, and
other corporate expenses including business development and general legal
activities. General and administrative expenses were $2.1 million and $4.8
million for the three and six months ended June 30, 2000, respectively, compared
to $990,000 and $2.1 million for the three and six months ended June 30, 1999.
The increase of $1.1 million during the three months ended June 30, 2000
compared to the same period in 1999 resulted from $746,000 related to employment
costs for general and administrative personnel, $215,000 related to costs
associated

<PAGE> 11

with being a public company and the remaining balance due to overall expansion
in our operations. The increase of $2.7 million during the six months ended June
30, 2000 compared to the same period in 1999 resulted from $1.8 million related
to employment costs for general and administrative personnel, $655,000 related
to costs associated with being a public company and the remaining balance due to
overall expansion in our operations. We expect general and administrative
expenses to continue to increase over the next several years to support our
growing business activities, the commercialization of our products, and costs
associated with operating a public company.

Amortization of Deferred Stock Compensation. Deferred stock compensation
represents the difference between the deemed fair value of our common stock for
accounting purposes and the exercise price of options at the date of grant.
During 1998 and 1999, we recorded deferred stock compensation totaling $13.2
million. This amount is being amortized over the respective vesting periods of
the individual stock options using the graded vesting method. We recorded
amortization of deferred compensation of $2.6 million for the six months ended
June 30, 2000, which includes $1.2 million for the three months ended June 30,
2000. We expect to record amortization expense for deferred compensation as
follows: $1.9 million for the remainder of 2000, $2.5 million during 2001, $1.4
million during 2002, $670,000 during 2003 and $122,000 during 2004. The amount
of deferred compensation expense to be recorded in future periods may decrease
if unvested options for which deferred compensation has been recorded are
subsequently canceled.

Interest Income, Net. Net interest income consists of income from our cash
and investments offset by expenses related to our financing obligations. Net
interest income was $1.3 million and $2.7 million for the three and six months
ended June 30, 2000, respectively, compared to $270,000 and $589,000 for the
three and six months ended June 30, 1999. This increase was due to higher cash
and investment balances as a result of $75.9 million net proceeds raised in our
December 1999 initial public offering, partially offset by increased interest
charges from higher financing obligation balances.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2000, cash, cash equivalents and marketable securities were
$90.1 million compared to $100.2 million at December 31, 1999. We used $10.1
million for operations for the six months ended June 30, 2000 as compared to
$2.9 for the comparable period in 1999. This consisted of the net loss of $13.5
million and working capital changes of $2.9 million offset by non-cash charges
of $6.3 million related to a change in accounting principle, amortization of
deferred stock compensation, stock options issued to non-employees and
depreciation and amortization expense.

Net cash used in investing activities was $10.1 million for the six months
ended June 30, 2000 as compared to $791,000 for the comparable period in 1999.
Net cash used in investing consists primarily of purchases of available-for-sale
investments offset by proceeds from sales and maturities of available-for-sale
investments, as well as capital expenditures.

We received $988,000 from financing activities for the six months ended
June 30, 2000 as compared to $1.7 million for the comparable period in 1999. Net
proceeds from financing activities consisted principally of $1.1 million from
equipment financing and $720,000 from common stock issuances primarily from the
employee stock purchase plan offset in part by repayments of equipment financing
arrangements of $805,000.

In May 2000 we entered into a $5.0 million financing arrangement for the
purchase of property and equipment. As of June 30, 2000, we had $5.4 million in
capitalized lease obligations outstanding compared to $5.1 million at December
31, 1999.

Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing and supporting
our products, and other factors. We expect to devote substantial capital
resources to continue our research and development efforts, to expand our
support and product development activities, and for other general corporate
activities. We believe that our current cash balances, together with the revenue
to be derived from our collaboration with Agilent and our technology access
program agreements, will be sufficient to fund our operations at least into the
year 2002. During or after this period, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we may need to sell
additional equity or debt securities or obtain additional credit arrangements.
Additional financing may not be available on terms acceptable to us or at all.
The sale of additional equity or convertible debt securities may result in
additional dilution to our stockholders.

FACTORS AFFECTING OPERATING RESULTS

OUR LABCHIP(R) SYSTEMS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD CAUSE OUR
REVENUE TO DECLINE.

<PAGE> 12

Our technologies are still in the early stages of development, and our
LabChip(R) systems incorporating these technologies have only recently been made
commercially available. If our LabChip(R) systems do not gain market acceptance,
we will be unable to generate sales and our revenue will decline. The commercial
success of our LabChip(R) systems will depend upon market acceptance of the
merits of our LabChip(R) systems by pharmaceutical and biotechnology companies,
academic research centers and other companies that rely upon laboratory
experimentation. We have not yet demonstrated these benefits. Market acceptance
will depend on many factors, including:

o our ability to demonstrate the advantages and potential economic value
of our LabChip(R) systems over alternative well-established
technologies and products

o the extent of Agilent's efforts to market the Agilent 2100 Bioanalyzer

o our ability to market our high throughput systems through our
technology access program

Because the products comprising our LabChip(R) systems have been in
operation for a limited period of time, their accuracy, reliability, ease of use
and commercial value have not been fully established. If the initial Agilent
2100 Bioanalyzer customers or our initial technology access program customers do
not approve of our initial LabChip(R) systems because these systems fail to
generate the quantities and quality of data they expect, are too difficult or
costly to use, or are otherwise deficient, market acceptance of these LabChip(R)
systems would suffer and further sales may be limited. We cannot assure you that
these customers' efforts to put our LabChip(R) systems into use will continue or
will be expeditious or effective. Potential customers for our high throughput
systems may also wait for indications from our four initial technology access
program customers that our high throughput systems work effectively and generate
substantial benefits. Further, non-acceptance by the market of our initial
LabChip(R) systems could undermine not only those systems but subsequent
LabChip(R) systems as well.

WE EXPECT TO INCUR FUTURE OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY.

We have experienced significant operating losses each year since our
inception and expect to incur substantial additional operating losses for at
least the next two years, primarily as a result of expected increases in
expenses for manufacturing capabilities, research and product development costs
and general and administrative costs. We may not achieve profitability. For
example, we experienced net losses of approximately $6.3 million in 1997, $3.0
million in 1998, $14.4 million in 1999 and $13.5 million for the six months
ended June 30, 2000. As of June 30, 2000, we had an accumulated deficit of
approximately $48.7 million. Our losses have resulted principally from costs
incurred in research and development and from general and administrative costs
associated with our operations. These costs have exceeded our revenue and
interest income which, to date, have been generated principally from
collaborative research and development agreements, technology access fees, cash
and investment balances and, to a lesser extent, product sales and government
grants.

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

Our quarterly operating results have fluctuated significantly in the past
and we expect they will fluctuate in the future as a result of many factors,
some of which are outside of our control. For example, our revenues have varied
dramatically as a result of new customers joining our technology access program
and product shipments. It is possible that in some future quarter or quarters,
our operating results will be below the expectations of securities analysts or
investors. In this event, the market price of our common stock may fall abruptly
and significantly. Because our revenue and operating results are difficult to
predict, we believe that period-to-period comparisons of our results of
operations are not a good indication of our future performance.

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

WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH ACLARA BIOSCIENCES THAT
MAY HURT OUR COMPETITIVE POSITION, MAY BE COSTLY TO US AND MAY PREVENT US FROM
SELLING OUR PRODUCTS.

Our suits against Aclara are costly to litigate and if we are not
successful then we will not recover these costs. We have filed a suit against
Aclara Biosciences, Inc. and our former patent counsel alleging that they
misappropriated our trade secrets, and that our

<PAGE> 13

former patent counsel breached their duties to us as our attorneys. We also
filed suit against Aclara in January 2000 alleging Aclara is infringing certain
patent rights licensed to us. Aclara has counterclaimed for a declaratory
judgment that the patents in this suit are invalid, unenforceable and are not
infringed by Aclara. We may not be successful in our lawsuits against them, in
which case we will have incurred substantial litigation costs that we will not
recover and our patents may be invalidated or interpreted narrowly.

If we lose Aclara's suit against us it will hurt our competitive position,
may be costly to us and may prevent us from selling our products. In addition,
subsequent to the filing of our first suit, Aclara sued us claiming we are
infringing one of its patents with our LabChip(R) systems that use electrical
charges to move fluids and chemicals through the channels of the chip. We have
counterclaimed for a declaratory judgment of noninfringement, invalidity and
unenforceability of all claims of the Aclara patent. On July 19, 2000, the
federal judge in this action issued an order invalidating certain patent claims
and interpreting the remaining asserted claims. If we lose this case, we will
need to obtain from Aclara a license to this technology in order to continue to
market our products that have been found to infringe Aclara's patent, which may
include all products currently marketed by Agilent. This license could be
expensive, or could require us to license to Aclara some of our technology which
would result in a partial loss of our competitive advantage in the marketplace,
each of which could seriously harm our ability to conduct our business, and hurt
our financial condition and results of operations. We believe that we have
meritorious defenses in this action. However, litigation is unpredictable and we
may not prevail with any of these defenses. If Aclara is successful in its suit
against us and is unwilling to grant us a license, we will be required to stop
selling our products that are found to infringe Aclara's patent unless we can
redesign them so they do not infringe Aclara's patent, which we may be unable to
do. In addition, if we lose the patent suit, we could be required to pay Aclara
damages, including treble damages, which could be substantial and seriously harm
our financial position.

This litigation will be expensive to us, may be protracted and our
confidential information may be compromised. Whether or not we are successful in
these lawsuits, we expect this litigation to consume substantial amounts of our
financial and managerial resources. At any time Aclara may file additional
claims against Caliper, or we may file additional claims against Aclara, which
could increase the risk, expense and duration of the litigation. Either we or
Aclara may appeal rulings in the current cases, extending the litigation.
Further, because of the substantial amount of discovery required in connection
with this type of litigation, there is a risk that some of our confidential
information could be compromised by disclosure. For more information on our
litigation with Aclara, see " Part II - Item 1. Legal Proceedings."

PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS WITH ACLARA BIOSCIENCES MAY HURT OUR
STOCK PRICE.

During the course of our lawsuits with Aclara there may be public
announcements of the results of hearings, motions, and other interim proceedings
or developments in the litigation. If securities analysts or investors perceive
these results to be negative, it could have a substantial negative effect on the
trading price of our stock.

IF AGILENT DETERMINES THAT WE MAY BE VIOLATING A THIRD-PARTY PATENT, IT MAY
TERMINATE SALES OF THE AGILENT 2100 BIOANALYZER, WHICH WILL DECREASE OUR
REVENUE.

Under our collaboration agreement with Agilent, Agilent may elect at any
time to stop developing, manufacturing or distributing any product that it
reasonably determines, on the advice of counsel, poses a substantial risk of
infringing a third-party patent. For example, if we lose the Aclara litigation,
or if any adverse developments occur during the course of this litigation, or if
any other third-party claims that we are violating their patent, then Agilent
may terminate marketing and selling of the Agilent 2100 Bioanalyzer system,
which Agilent began marketing in September 1999, which will decrease our future
revenue.

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

Third parties may assert infringement or other intellectual property claims
against us, such as in the Aclara litigation described above and under "Part II
- Item 1. Legal Proceedings." We may have to pay substantial damages, including
treble damages, for past infringement if it is ultimately determined that our
products infringe a third party's proprietary rights. Further, we may be
prohibited from selling our products before we obtain a license, which, if
available at all, may require us to pay substantial royalties. Even if these
claims are without merit, defending a lawsuit takes significant time, may be
expensive and may divert management attention from other business concerns. We
are aware of third-party patents that may relate to our technology or potential
products. We have also been notified that third parties have attempted to
provoke an interference with one issued U.S. patent that we have exclusively
licensed to determine the priority of inventions. Any public announcements
related to litigation or interference proceedings initiated or threatened
against us could cause our stock price to decline.

<PAGE> 14

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

We rely on patents to protect a large part of our intellectual property and
our competitive position. In order to protect or enforce our patent rights, we
may initiate patent litigation against third parties, such as our patent
infringement suit against Aclara described above and under "Part II - Item 1.
Legal Proceedings." These lawsuits could be expensive, take significant time,
and could divert management's attention from other business concerns. They would
put our patents at risk of being invalidated or interpreted narrowly and our
patent applications at risk of not issuing. We may also provoke these third
parties to assert claims against us. Patent law relating to the scope of claims
in the technology fields in which we operate is still evolving and,
consequently, patent positions in our industry are generally uncertain. We
cannot assure you that we will prevail in any of these suits or that the damages
or other remedies awarded, if any, will be commercially valuable. During the
course of these suits, there may be public announcements of the results of
hearings, motions and other interim proceedings or developments in the
litigation. If securities analysts or investors perceive any of these results to
be negative, it could cause our stock to decline.

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

In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
Nevertheless, these measures may not be adequate to safeguard the technology
underlying our products. If they do not protect our rights, third parties could
use our technology, and our ability to compete in the market would be reduced.
In addition, employees, consultants and others who participate in the
development of our products may breach their agreements with us regarding our
intellectual property, and we may not have adequate remedies for the breach. We
also may not be able to effectively protect our intellectual property rights in
some foreign countries. For a variety of reasons, we may decide not to file for
patent, copyright or trademark protection outside of the United States. We also
realize that our trade secrets may become known through other means not
currently foreseen by us. Notwithstanding our efforts to protect our
intellectual property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior to our
technology and products without infringing on any of our intellectual property
rights or design around our proprietary technologies. For further information on
our intellectual property and the difficulties in protecting it, see "Item 1.
Business -- Intellectual Property" in our Annual Report on Form 10-K for the
year ended December 31, 1999.

IF WE DO NOT SUCCESSFULLY INTRODUCE NEW PRODUCTS AND EXPAND THE RANGE OF
APPLICATIONS FOR OUR LABCHIP(R) SYSTEMS, WE MAY EXPERIENCE A DECLINE IN REVENUE
OR SLOW REVENUE GROWTH AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.

We intend to develop LabChip(R) systems with increasingly high throughput
capabilities and develop a broad range of applications for our LabChip(R)
technology. If we are unable to do so, our LabChip(R) systems may not become
widely used and we may experience a decline in revenue or slow revenue growth
and may not achieve or maintain profitability.

In order for our high throughput systems to achieve the levels of
throughput necessary to meet customers' demands, we need to develop and
manufacture Sipper(TM) chips with more than four capillaries. Our current high
throughput systems operate with Sipper(TM) chips with one and four capillaries,
small glass tubes used to draw compounds into the chip. In order to achieve the
levels of throughput that our customers desire, we may need to develop a
LabChip(R) system accommodating more than four capillaries, which we may not be
able to do. If we cannot cost-effectively deliver chips with more than four
capillaries, we may not be able to attract new customers to purchase our high
throughput systems, which would seriously harm our future prospects. Further,
our existing technology access program customers may decide not to renew their
annual access subscriptions, which would seriously reduce our revenue.

We must develop new applications for existing LabChip(R) instruments, which
we may not be able to do. The Agilent 2100 Bioanalyzer uses LabChip(R) kits that
we specifically design for each application. We currently have LabChip(R) kits
commercially available for only four applications relating to DNA and RNA sizing
and quantification. DNA and RNA are commonly used acronyms for chemicals that
contain, or transmit, genetic information in living things. We currently are
developing LabChip(R) kits for other applications. If we are unable to develop
LabChip(R) kits for specific applications required by potential customers, those
customers may not purchase the Agilent 2100 Bioanalyzer.

<PAGE> 15

We must also continue to develop applications for our high throughput
systems. If we are not able to complete the development of these applications,
or if we experience difficulties or delays, we may lose our current technology
access program customers and may not be able to obtain new customers.

WE RELY HEAVILY ON AGILENT TO MANUFACTURE, MARKET AND DISTRIBUTE THE AGILENT
2100 BIOANALYZER. IF AGILENT FAILS TO PERFORM UNDER OUR AGREEMENT OR
SUCCESSFULLY COMMERCIALIZE OUR COLLABORATIVE PRODUCTS, OUR REVENUE FROM THE
AGILENT 2100 BIOANALYZER MAY NOT BE MATERIAL AND WE MAY LOSE THE DEVELOPMENT
FUNDING WE CURRENTLY RECEIVE FROM AGILENT.

Agilent manufactures, markets and distributes the Agilent 2100 Bioanalyzer
under an agreement we entered into in May 1998. We also rely on Agilent for
significant financial and technical contributions in the development of products
covered by the agreement. Our ability to develop, manufacture and market these
products successfully depends significantly on Agilent's performance under this
agreement. Agilent has only recently begun its marketing and sales efforts for
the Agilent 2100 Bioanalyzer. Sales of new and innovative instrumentation such
as the Agilent 2100 Bioanalyzer involve a long sales cycle, requiring customer
training and demonstration periods. As a result, to date Agilent has sold a
modest number of Agilent 2100 Bioanalyzers, but it is too early for us to
predict peak market acceptance of this technology. If Agilent experiences
manufacturing or distribution difficulties, does not actively market the Agilent
2100 Bioanalyzer, or does not otherwise perform under this agreement, our
revenue from the Agilent 2100 Bioanalyzer may not be material. In addition,
Agilent may terminate the agreement at their discretion at any time after May
2001. If Agilent terminates this agreement, we would need to obtain development
funding from other sources, and we may be required to find one or more other
collaborators for the development and commercialization of our products. Our
inability to enter into agreements with commercialization partners or develop
our own marketing, sales, and distribution capabilities would increase costs and
impede the commercialization of our products.

AGILENT MAY COMPETE WITH US IF OUR COLLABORATION TERMINATES AFTER MAY 2003,
WHICH COULD REDUCE THE POTENTIAL REVENUE FROM OUR INDEPENDENT PRODUCT SALES.

Under the terms of our agreement with Agilent, if they, or we, terminate
our agreement after May 2003, we will grant to Agilent a non-exclusive license
to our LabChip(R) technologies as then developed for use in the research
products field. Consequently, there is the possibility that we may experience
competition from Agilent after May 2003, which would reduce our ability to sell
products independently or through other commercial partners. See "Item 1.
Business -- Commercialization -- Strategic Alliance with Agilent" in our Annual
Report on Form 10-K for the year ended December 31, 1999 for a further
description of the terms of our collaboration with Agilent.

WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND MAY ENCOUNTER
MANUFACTURING PROBLEMS OR DELAYS, WHICH COULD RESULT IN LOST REVENUE.

Although Agilent manufactures the Agilent 2100 Bioanalyzer, we manufacture
the chips used in this instrument and also currently manufacture instruments and
Sipper(TM) chips for our high throughput systems. We currently have limited
manufacturing capacity for our LabChip(R) system products and experience
variability in manufacturing yields for chips. If we fail to deliver chips and
high throughput screening products in a timely manner, our relationships with
our customers could be seriously harmed, and revenue would decline. We currently
have one manufacturing facility located in Mountain View, California. The actual
number of chips we are able to sell or use depends in part upon the
manufacturing yields for these chips. We have only recently begun to manufacture
significant numbers of Sipper(TM) chips and are continuing to develop our
manufacturing procedures for these chips. In order to offer Sipper(TM) chips
with more than four capillaries for high throughput applications, we will need
to continue to achieve consistently high yields in this process. We cannot
assure you that manufacturing or quality problems will not arise as we attempt
to scale-up our production of chips or that we can scale-up manufacturing in a
timely manner or at commercially reasonable costs. If we are unable to
consistently manufacture Sipper(TM) chips or chips for the Agilent 2100
Bioanalyzer on a timely basis because of these or other factors, our product
sales will decline. We are currently manufacturing high throughput instruments
in-house and in limited volumes. If demand for our high throughput instruments
increases, we will either need to expand our in-house manufacturing capabilities
or outsource to Agilent or other manufacturers.

IF A NATURAL DISASTER STRIKES OUR MANUFACTURING FACILITY WE WOULD BE UNABLE TO
MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND WE WOULD
EXPERIENCE LOST REVENUE.

We rely on a single manufacturing facility to produce our chips and high
throughput systems, and have no alternative facilities. The facility and some
pieces of manufacturing equipment are difficult to replace and could require
substantial replacement lead-time. Our manufacturing facility may be affected by
natural disasters such as earthquakes and floods. Earthquakes are of particular

<PAGE> 16

significance since the manufacturing facility is located in Mountain View,
California, an earthquake-prone area. In the event our existing manufacturing
facility or equipment is affected by man-made or natural disasters, we would be
unable to manufacture products for sale, meet customer demands or sales
projections. If our manufacturing operations were curtailed or ceased, it would
seriously harm our business.

BECAUSE A SMALL NUMBER OF CUSTOMERS AND AGILENT HAVE ACCOUNTED FOR, AND ARE
LIKELY TO CONTINUE TO ACCOUNT FOR, A SUBSTANTIAL PORTION OF OUR REVENUE, OUR
REVENUE COULD DECLINE DUE TO THE LOSS OF ONE OF THESE CUSTOMERS OR THE
TERMINATION OF OUR AGREEMENT WITH AGILENT.

Historically we have had very few customers and one commercial partner,
Agilent, from which we have derived the majority of our revenue and, if we were
to lose any one of these, our revenue would decrease substantially. Agilent and
four customers accounted for 93% of total revenue for the three months ended
June 30, 2000. Agilent and three customers accounted for 86% of total revenue
for the six months ended June 30, 2000. Agilent and two customers accounted for
88% of total revenue in 1999, and two customers and Agilent accounted for 97% of
total revenue in 1998. We and Agilent introduced the Agilent 2100 Bioanalyzer
system in September 1999 and have not yet derived significant revenue from the
sale of this product on a commercial scale. Although we anticipate that the
introduction of the Agilent 2100 Bioanalyzer system will expand our revenue
base, we expect that we will continue to rely on our large customers and on
Agilent for the majority of our revenue.

FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD REDUCE OUR
ABILITY TO COMPETE AND RESULT IN LOWER REVENUE.

We anticipate that our existing capital resources will enable us to
maintain currently planned operations at least into the year 2002. However, we
premise this expectation on our current operating plan, which may change as a
result of many factors. Consequently, we may need additional funding sooner than
anticipated. Our inability to raise capital would seriously harm our business
and product development efforts. In addition, we may choose to raise additional
capital due to market conditions or strategic considerations even if we believe
we have sufficient funds for our current or future operating plans. To the
extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of these securities could result in
dilution to our stockholders.

We currently have no credit facility or committed sources of capital other
than an equipment lease line with $4.8 million unused and available as of June
30, 2000. To the extent operating and capital resources are insufficient to meet
future requirements, we will have to raise additional funds to continue the
development and commercialization of our technologies. These funds may not be
available on favorable terms, or at all. If adequate funds are not available on
attractive terms, we may be required to curtail operations significantly or to
obtain funds by entering into financing, supply or collaboration agreements on
unattractive terms.

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

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

POTENTIAL ACQUISITIONS MAY HAVE UNEXPECTED CONSEQUENCES OR IMPOSE ADDITIONAL
COSTS ON US.

Our business is dependent upon growth in the market for microfluidic
products and our ability to enhance our existing products and introduce new
products on a timely basis. One of the ways we may address the need to develop
new products is through acquisitions of complementary businesses and
technologies. From time to time, we may consider and evaluate potential
acquisitions or business combinations, which may include a possible merger or
consolidation of our business with another entity. We may engage in discussions
relating to these types of transactions in the future. Acquisitions involve
numerous risks, including the following:

o difficulties in integration of the operations, technologies, and
products of the acquired companies

o the risk of diverting management's attention from normal daily
operations of the business

<PAGE> 17

o accounting consequences, including charges for in-process research and
development expenses, resulting in variability in our quarterly
earnings

o potential difficulties in completing projects associated with
purchased in-process research and development

o risks of entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market
positions

o the potential loss of key employees of the acquired company

o the assumption of unforeseen liabilities of the acquired company

We cannot assure you that future acquisitions or business combinations in
which we are involved, if any, will be successful and will not adversely affect
our financial condition or results of operations. Failure to manage growth
effectively and successfully integrate acquisitions we make could harm our
business and operating results.

RISKS RELATED TO OWNING OUR COMMON STOCK

OUR STOCK PRICE IS EXTREMELY VOLATILE, AND YOU COULD LOSE A SUBSTANTIAL PORTION
OF YOUR INVESTMENT.

Our stock has been trading on the Nasdaq National Market only since
mid-December 1999. We initially offered our common stock to the public at $16.00
per share. Since then our stock price has been extremely volatile and has
ranged, through July 19, 2000, from a low of approximately $22.50 per share to a
high of $202.00 per share. Our stock price may drop substantially following an
investment in our common stock. We expect that our stock price will remain
volatile as a result of a number of factors, including:

o announcements by analysts regarding their assessment of Caliper and
its prospects

o announcements of events regarding our litigation with Aclara

o announcements of our financial results, particularly if they differ
from investors' expectations

o general market volatility for technology stocks

CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.

Our directors, entities affiliated with our directors, and our executive
officers beneficially own, in the aggregate approximately 28% of our outstanding
common stock. These stockholders as a group are able to substantially influence
the management and affairs of Caliper and, if acting together, would be able to
influence most matters requiring the approval by our stockholders, including the
election of directors, any merger, consolidation or sale of all or substantially
all of our assets and any other significant corporate transaction. The
concentration of ownership may also delay or prevent a change of control of
Caliper at a premium price if these stockholders oppose it.

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

Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing an acquisition, merger in which we are not the
surviving company or changes in our management. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of
the Delaware General Corporation Law. These provisions may prohibit large
stockholders, in particular those owning 15% or more of the outstanding voting
stock, from consummating a merger or combination including us. These provisions
could limit the price that investors might be willing to pay in the future for
our common stock.

<PAGE> 18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. Declines of interest rates over
time will reduce our interest income from our investments. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities.

The table below presents our investment portfolio by expected maturity and
related weighted average interest rates at June 30, 2000:

<TABLE>
<CAPTION>
FAIR
2000 2001 2002 TOTAL VALUE
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Money market fund.......................... $ 25,492 -- -- $ 25,492 $ 25,492
Average interest rate...................... 6.49% -- -- 6.49%

Available for sale marketable securities... $ 14,512 $ 48,696 $ 1,585 $ 64,793 $ 64,587
Average interest rate...................... 6.25% 6.57% 7.60% 6.53%

Total securities........................... $ 40,004 $ 48,696 $ 1,585 $ 90,285 $ 90,079
Average interest rate...................... 6.41% 6.57% 7.60% 6.52%
</TABLE>

Our equipment financings, amounting to $5.4 million as of June 30, 2000,
are all at fixed rates and therefore, have minimal exposure to changes in
interest rates.

We have operated primarily in the United States and all sales to date have
been made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On March 22, 1999, we filed a lawsuit in California Superior Court for the
County of Santa Clara (Case No. CV 780743), against Aclara Biosciences Inc., a
patent attorney named Bertram Rowland and the law firm of Flehr, Hohbach, Test,
Albritton and Herbert LLP, alleging that all three defendants misappropriated
our trade secrets relating to our business plans, patents and intellectual
property strategy. The suit also alleges that Dr. Rowland and Flehr Hohbach
committed a breach of the duties they owed to us as our former attorneys. The
suit seeks damages and equitable remedies to prevent Aclara, Dr. Rowland and
Flehr Hohbach from benefiting from the alleged misappropriation and breach of
duties. On January 12, 2000, we filed a lawsuit in the United States District
Court for the Northern District of California against Aclara (Case No.
C-00-0145CRB(JCS)) alleging that Aclara is infringing four U.S. patents that
have been licensed to us by Lockheed Martin Energy Research Corporation, which
operates the Department of Energy's Oak Ridge National Laboratory where the
inventions were made. These patents cover technology for controlling the flow of
materials in microfluidic chips, as well as devices, systems and applications
that make use of this technology. We recently amended this complaint to allege
that Aclara is infringing another patent we have licensed covering technology
for controlling the flow of materials in microfluidic chips. Aclara has
counterclaimed for a declaratory judgment that the patents in this suit are
invalid, unenforceable and are not infringed by Aclara. While we believe that
our complaints against Aclara and these others are meritorious, we cannot assure
you that we will prevail in our actions against any or all of the defendants and
Aclara's counterclaims against us, or that if we prevail, the damages or
equitable remedies awarded, if any, will be commercially valuable. Furthermore,
we have incurred and are likely to continue to incur substantial costs and
expend substantial personnel time in pursuing our claims against Aclara, Dr.
Rowland and Flehr Hohbach.

On April 23, 1999, Aclara Biosciences filed a lawsuit in United States
District Court for the Northern District of California (Case No. C-99-1968BZ)
alleging that we are making, using, selling or offering for sale microfluidic
devices that infringe United States Patent Number 5,750,015 in willful disregard
of Aclara's patent rights. This patent concerns methods and devices for moving
molecules by the application of electrical fields. The Aclara action seeks
damages for past and future reduced sales or lost profits based upon our alleged
fabrication, use, sale or offer for sale of allegedly infringing products and
processes, and seeks to enjoin our continued activities relating to these
products. We have counterclaimed for a declaratory judgment of noninfringement,
invalidity and

<PAGE> 19

unenforceability of all claims of the Aclara patent. On July 19, 2000, the
federal judge in this action issued an order finding that eight of the eleven
claims asserted against us are invalid, and interpreting the remaining asserted
claims. This action subjects us to potential liability for damages, including
treble damages, and could require us to cease making, using or selling the
affected products, or to obtain a license in order to continue to manufacture,
use or sell the affected products. While we believe we have meritorious defenses
and counterclaims to this action, we cannot assure you that we will prevail in
this action nor can we assure you that any license required would be made
available on commercially acceptable terms, if at all. Even if we prevail in the
current action, there can be no assurance that we will prevail again if Aclara
appeals the case to a higher court. Furthermore, we have incurred and are likely
to continue to incur substantial costs and expend substantial personnel time in
defending against the claims filed by Aclara. Failure to successfully defend
ourselves against the Aclara action could have a material adverse effect on our
business, financial condition and operating results. For further information on
the risks associated with this litigation see "Part I - Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Operating Results-- We are involved in
intellectual property litigation with Aclara Biosciences that may hurt our
competitive position, may be costly to us and may prevent us from selling our
products."

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Our initial public offering of Common Stock was effected through a
Registration Statement on Form S-1 (File No. 333-88827) that was declared
effective by the SEC on December 14, 1999 and pursuant to which we sold all
5,175,000 shares of our Common Stock registered.

Our initial public offering was completed after all of the shares of Common
Stock that were registered were sold. The managing underwriters in the offering
were Credit Suisse First Boston Corporation, CIBC World Markets Corp. and
Hambrecht & Quist LLC. The aggregate offering price of the 5,175,000 shares
registered and sold was $82.8 million. Of this amount, $5.8 million was paid in
underwriting discounts and commissions, and an additional $1.1 million of
expenses was incurred through December 31, 1999. None of the expenses were paid,
directly or indirectly, to directors, officers or persons owning 10 percent or
more of our common stock, or to our affiliates.

As of June 30, 2000, we had applied the estimated aggregated net proceeds
of $75.9 million from our initial public offering as follows:

<TABLE>
<S> <C>
Repayment of indebtedness: $ 0.8 million
Working capital: $ 4.6 million
Temporary investments: $70.5 million
</TABLE>

The foregoing amounts represent our best estimate of our use of proceeds
for the period indicated. No such payments were made to our directors or
officers or their associates, holders of 10% or more of any class of our equity
securities or to our affiliates, other than payments to officers for salaries in
the ordinary course of business.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on June 7, 2000. Proxies for
the meeting were solicited pursuant to Regulation 14A. At the meeting,
management's nominees for directors were submitted to our stockholders for
election, and a proposal to ratify the selection of Ernst & Young LLP as
independent auditors of Caliper for its fiscal year ending December 31, 2000 was
submitted to our stockholders. As of the record date of taking such actions, we
had outstanding 21,049,683 shares of our common stock.

Management's nominees for directors were elected by the following vote:

<TABLE>
<S> <C> <C>
For Withhold
Anthony B. Evnin, Ph.D. 14,410,245 12,827
Robert T. Nelsen 14,401,014 22,058
</TABLE>

<PAGE> 20

Charles M. Hartman, David V. Milligan, Ph.D, Michael Steinmetz, Ph.D.,
Daniel L. Kisner, M.D, and Regis P. McKenna also continued to serve as directors
of Caliper after the annual meeting. Charles M. Hartman, David V. Milligan,
Ph.D, and Michael Steinmetz, Ph.D., will continue to serve as directors until
the Annual Meeting of Stockholders to be held in 2001. Daniel L. Kisner, M.D,
and Regis P. McKenna will continue to serve as directors until the Annual
Meeting of Stockholders to be held in 2002.

The proposal to ratify the selection of Ernst & Young LLP as independent
auditors of Caliper for its fiscal year ending December 31, 2000 was approved by
the following vote:

<TABLE>
<S> <C>
For: 14,419,093
Against: 2,042
Abstain: 1,937
</TABLE>

ITEM 5. OTHER INFORMATION

NONE

ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation of Caliper.
3.2(2) Bylaws of Caliper.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(3) Specimen Stock Certificate.
27.1 Financial Data Schedule.
</TABLE>

(1) Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1,
Registration No. 333-88827.

(2) Previously filed as Exhibit 3.4 to our Registration Statement on Form S-1,
Registration No. 333-88827.

(3) Previously filed as the like-numbered Exhibit to our Registration Statement
on Form S-1, Registration No. 333-88827.

(b) Reports on Form 8-K

We did not file a Current Report on Form 8-K during the quarter ended June
30, 2000.

<PAGE> 21

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

CALIPER TECHNOLOGIES CORP.

August 11, 2000 By: /s/ JAMES L. KNIGHTON
------------------------------
James L. Knighton
Chief Financial Officer

By: /s/ ANTHONY HENDRICKSON
------------------------------
Anthony Hendrickson
Corporate Controller
(Principal Accounting Officer)

<PAGE> 22

EXHIBIT INDEX

(1) Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1,
Registration No. 333-88827.

(2) Previously filed as Exhibit 3.4 to our Registration Statement on Form S-1,
Registration No. 333-88827.

(3) Previously filed as the like-numbered Exhibit to our Registration Statement
on Form S-1, Registration No. 333-88827.