The following discussion and analysis should be read with "Selected Financial Data" and our financial statements and notes included elsewhere in this Annual Report on Form 10-K. The discussion in this Annual Report on Form 10-K 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 Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in Part I, Item 1A, "Risk Factors," and "Factors Affecting Operating Results" below, as well as those discussed elsewhere.

The following discussion and analysis is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

Overview

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

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

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

We have multiple channels of distribution for our products: direct to customers, indirect through our international network of distributors, through partnership channels under our Caliper Driven program and through joint marketing agreements. Through our direct and indirect channels, we sell products, services and complete system solutions, developed by us, to end customers. Our Caliper Driven program is core to our business strategy and complementary to our direct sales and distribution network activities, as it enables us to extend the commercial potential of our LabChip and advanced

liquid handling technologies into new industries and new applications with experienced commercial partners. 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.

2008 Key Highlights

During 2008, we placed significant emphasis on our continued strategic transformation to higher growth, higher profit product lines. In pursuing this objective, we further consolidated and streamlined our operations in order to both reduce costs as well as sharpen our focus on the core areas of our business. Key highlights of the year included:

Product Line Divestitures

On November 10, 2008, we completed, in two unrelated transactions, the sales of our Pharmaceutical Development and Quality ("PDQ") and AutoTrace product lines. The PDQ product line was comprised of instruments used for drug content uniformity and dissolution rate testing and related services. The purchase price paid to us was approximately $15.8 million, including approximately $13.8 million in cash together with certain assumed liabilities which are estimated at approximately $2.0 million. The AutoTrace product line was designed for water sample clean-up by solid phase extraction prior to analysis of the sample for contamination. The purchase price paid to us was approximately $5.0 million in cash. We recorded a gain of approximately $2.1 million in 2008 related to these product line divestitures. In addition to the benefit of the cash proceeds generated from the sales of these two business lines, we believe the narrowed product line focus on our remaining core technologies will improve our ability to become profitable.

Business Realignment

During the third quarter of 2008, we reorganized our various products and services along three core business areas-Optical Molecular Imaging (Imaging), Discovery Research (Research), and Drug Discovery Services (Services or CDAS which stands for Caliper Discovery Alliances and Services).

º •
º The Imaging business is focused on preclinical imaging, where Caliper holds a global leadership position in the high growth optical molecular imaging market. Principal activities of this business area include the expansion of the IVIS imaging instrument and related reagent product lines, development of new therapeutic area applications and facilitating additional imaging modalities.

º •
º Research is responsible for utilizing Caliper's core automation and microfluidic technologies to address an expanding array of opportunities in drug discovery and life science research, including molecular biology sample preparation for genomics, proteomics, cellular screening and forensics.

º •
º CDAS is responsible for expanding drug discovery collaborations and alliances, and increasing sales of drug discovery services. The focus of CDAS is to capitalize on market "outsourcing" trends and to maximize the large contract opportunity with the Environmental Protection Agency under its ToxCast screening program.

Cost Reduction Initiatives

Over the course of 2008, we completed several cost reduction initiatives to conserve our cash needs as well as increase productivity. During the first quarter of 2008, we approved and initiated the consolidation of our research and development operations into our Alameda, California location, which was completed during the third quarter of 2008. This research and development consolidation was coupled with certain general and administrative streamlining actions, including the resolution of certain

ongoing lawsuits. Also, in connection with the business realignment discussed above, we reduced our workforce, including the elimination of certain management positions. The aggregate effect of cost reduction initiatives implemented in 2008 reduced our annualized operating expenses by approximately $5.7 million and resulted in restructuring charges which totaled $4.6 million. In addition to these actions, leases related to previously closed facilities expired in June 2008, which will result in annualized cash savings of approximately $3.5 million.

2008 Summary GAAP Financial Performance

º •
º We achieved $134.1 million of total revenue in 2008, a decrease of 5% from $140.7 million of total revenue in 2007. The key elements of the decline were the substantial microfluidic license transactions and collaboration arrangements completed in 2007 which were non-recurring by nature, the divestiture of two product lines (PDQ and AutoTrace) in November 2008, and reduced revenues within CDAS related to our
(1) ToxCast screening contract with the Environmental Protection Agency and (2) in vivo phenotyping and compound profiling service revenues from one customer. Offsetting these items were our key growth drivers in 2008 which were optical imaging product revenues, an increase in optical imaging license revenue, an increase in Staccato Automated Workstations and Zephyr liquid handling instrument sales, and the continued expansion of our microfluidic installed base, especially within the LabChip GX and EZ Reader platforms. On a pro forma basis, when excluding the product line divestitures and imaging licensing revenues which were reduced as a result of fair value purchase accounting, our total revenues of $122.8 million in 2008 grew by 7% compared to 2007.

º •
º Product gross margins decreased to 39% in 2008 versus 40% in 2007 primarily as a result of the increased material costs from the concentration of Staccato Automated Workstation revenue as offset by the benefit due to increased volume.

º •
º Service gross margins decreased to 34% in 2008 from 41% in 2007 due largely to the fixed cost base of our in vitro and in vivo facilities and the delay in timing of work within our in vivo services business, as well as an increase in the service costs, primarily headcount related, of the instrument services business, including costs of material.

º •
º Operating expenses increased $35.3 million in 2008 in comparison to 2007, primarily due to the goodwill impairment of $43.4 million and the restructuring charge related to the Mountain View, California facility of $4.6 million which are discussed below. All other operating expenses decreased $12.6 million in 2008 in comparison to 2007. This decrease resulted from reduced research and development spending of $3.0 million as a result of our West Coast consolidation and reduced funded collaboration work, and lower legal expenses including reduced litigation defense and settlement costs of $3.0 million. We also realized $4.8 million of reduced expenses primarily through efforts to streamline operations and gain efficiencies through reduced headcount and spending, and as a result of a decrease in incentive compensation expense in 2008. Other effects on operating expenses included a $1.8 million reduction in amortization expense from the Zymark intangibles that became fully amortized in July 2008.

º •
º Our annual goodwill impairment assessment has historically been completed at the beginning of the fourth quarter. With the sales of our PDQ and AutoTrace product lines in November 2008, we first determined the amount of goodwill that was to be allocated to these product groupings based upon their recent transaction values, and then applied our annual analysis (see Footnote 3 of Notes to Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K). As a result of our analysis we determined that the carrying value of the goodwill assigned to the overall business exceeded the implied fair value of goodwill resulting in a goodwill impairment of $43.4 million which was recorded in the fourth quarter.

º •
º During 2008, we recorded a restructuring charge of $4.6 million related to our West Coast consolidation and the related abandonment of approximately 36,500 square feet of space in Mountain View, California. We estimate that ongoing facility cash outflow, primarily rent payments net of sublease income, will be spread over the approximately 5 years remaining on our Mountain View, California lease. We expect this initiative to result in lower expensed facility costs of approximately $1.3 million per year.

º •
º Net loss for 2008 was $68.3 million, or $1.42 per share, compared to net loss of $24.1 million, or $0.51 per share in 2007. The increase in net loss was primarily due to the goodwill impairment charge of $43.4 million.

Performance Trends and Economic Conditions

    The table below provides a reconciliation of our GAAP basis revenue to pro
forma revenue results for 2008 and 2007, after giving effect to the divestures
of the PDQ and AutoTrace product lines which occurred in 2008. We believe this
is a useful measure in evaluating revenue performance among comparative periods,
but these non-GAAP comparisons are not intended to substitute for GAAP financial
measures.

                                            Year Ended December 31,

                          GAAP              Non-GAAP Adjustments              Non-GAAP           GAAP    Non-GAAP
                    2008        2007        2008           2007           2008        2007      % Chg      % Chg
                                                (In thousands)
                                                         $ (11,217 )(1)
                                          $ (11,308 )(2)   (15,492 )(2)

Research          $  68,519   $  80,673     (11,308 )      (26,709 )    $  57,211   $  53,964     (15% )        6%
Imaging              45,765      39,084          23 (3)      1,037 (3)     45,788      40,121      17%         14%
Services (CDAS)      19,770      20,950           -              -         19,770      20,950      (6% )       (6% )

Total revenue     $ 134,054   $ 140,707   $ (11,285 )    $ (25,672 )    $ 122,769   $ 115,035      (5% )        7%

º (1)
º Reflects elimination of certain collaboration-related microfluidic license and contract revenue recognized during the year ended 2007 which were concluded in 2007.

º (2)
º Reflects elimination of the revenues related to the PDQ and AutoTrace product lines divested in November 2008.

º (3)
º Reflects the add back of the deferred revenue adjustments recorded in purchase accounting that reduce revenues that would otherwise be recognized on a continuing GAAP basis.

Significant developments and trends among each of our key product families during 2008 included:

In 2008, cumulative placements of IVIS imaging systems surpassed 675 units, making, we believe, our IVIS instrument one of the most successful platforms ever offered for pre-clinical molecular imaging. In 2008, overall imaging revenues increased 14% on a pro forma basis, including 13% product and service growth. We believe that there is continued market opportunity for this product line to grow, with instrument placements as well as expansion of the product line through aftermarket services and accessories, as well as reagents. We believe the opportunity for this product line to grow is enabled by
i) continuing to expand beyond our historic core emphasis on oncology, to include therapeutic areas

such as central nervous system disorders, infectious disease, inflammation and stem cell research, and ii) extension of the product line to further detection modalities beyond bioluminescence and fluorescence detection through organic investment and acquisition.

In 2008, overall research revenues comprised of our microfluidics and automation product groups increased 6% on a pro forma basis, when excluding revenues for the divested product lines and non-recurring microfluidic contract and license revenues. Key factors were as follows:

Microfluidics. During 2008, we experienced a 1% decline in total microfluidics products and services revenue on a pro forma basis. This decline was caused by a fall off in market demand for our LabChip 3000 system and lost datapoint revenues from a single customer who is no longer in business, offset by increasing demand for our LabChip GX instruments, which replaced the LabChip 90 in July 2008, and our EZ reader and ProfilerPro kinase profiling and reagent systems which replaced the LabChip 3000 in 2007. Our plans for 2009 and beyond are to capitalize on the successful 2008 consolidation of our West Coast research and development resources in order to broaden the capabilities and market attractiveness of our microfluidics product offerings, an example being the launch of the LabChip GX in 2008, across both our direct and indirect distribution channels. We are also exploring forensics and next generation sequencing sample preparation and molecular diagnostics as opportunities for longer-term growth.

Automation and Liquid Handling. During 2008, liquid handling and automation revenues increased 10% on a pro forma basis. The increase was driven by strong market demand for our core liquid handling offerings including Staccato Automated Workstations and Zephyr liquid handling instruments. We see the markets for liquid handling and automation as mature and intensely competitive; however, we believe we can continue to achieve success in these areas in a number of ways. We reorganized our sales and service teams during the third quarter of 2008, to expand our focus on utilizing our core automation and microfluidic technologies to address expanding market opportunities such as molecular biology sample preparation for genomics, proteomics, and cellular screening and forensics.

During 2008, CDAS service revenues decreased by approximately 6%. The decrease was balanced among both in vivo and in vitro services. In vivo decreases resulted primarily from a decline in phenotyping and compound profiling services provided to one large pharmaceutical company, and in vitro services decreased as a result of reduced level of services requested by the EPA in 2008 under the ToxCast screening contract we were awarded in 2007. The goal of the ToxCast screening program is for the EPA to shift more of its agricultural chemicals testing toward in vitro analysis as opposed to animal testing. This program has the potential to generate significant revenues over the next several years; however, the program is in its early beginning stages and relies on federal budget authorization.

Current economic conditions have led to an unprecedented level of uncertainty across industries, including the life sciences tools and services industry. Principal among concerns are that capital equipment and outsourced services budgets will be reduced and that companies will experience enhanced seasonality that could delay business to the second half of the calendar year. Coupled with these effects, the recent strengthening of the dollar in relation to certain currencies is expected to have an unfavorable impact on our reported revenues in 2009 versus 2008. If current exchange rates were to remain in effect over 2009, we estimate that this would have a potential negative impact of approximately 2 - 3% on our overall revenue growth. On the positive side, we have introduced several

potentially high impact products such as LabChip GX, IVIS Kinetic and Zephyr which are designed to benefit customers in the areas of genomics and molecular imaging, two fields in particular where research funding appears to remain strong. In addition, we believe that we will see at least a partial rebound in EPA task orders under the ToxCast screening program in 2009. The recent American Reinvestment and Recovery Act of 2009 (Stimulus Package) includes $10 billion in incremental funding to the NIH's annual budget. While these funds are yet to be dispersed, we believe that we will achieve some level of benefit from the Stimulus Package directly or indirectly from government and academic labs which draw upon NIH funding.

Results of Operations

Revenue

                     Year Ended                                Year Ended                               Year Ended
                    December 31,                              December 31,                             December 31,
                        2008        $ Change     % Change         2007        $ Change    % Change         2006
                                                            (In thousands)
Product revenue     $      85,149    $  2,188           3%    $      82,961    $ 13,713         20%    $      69,248
Service revenue            37,734         177           -%           37,557      13,103         54%           24,454
License fees and
contract revenue           11,171      (9,018 )       (45% )         20,189       6,020         42%           14,169

Total revenue       $     134,054    $ (6,653 )        (5% )  $     140,707    $ 32,836         30%    $     107,871

Product Revenue. Product revenue increased during 2008 compared to 2007, primarily due to strong imaging sales which increased by $2.9 million, or 10%, driven by IVIS instrument growth, including an 8% increase in instrument placements. Research product sales decreased $0.7 million, or 1%, during 2008 as compared to 2007, primarily as a result of sales decreases caused by (a) weaker sales of non-core focus products, including the PDQ and AutoTrace product lines, which we divested in November 2008 which decreased by $3.8 million in 2008;
(b) lower revenue from kinase screening (LabChip 3000 systems and EZ Reader instruments) due to increased competition from kinase screening outsourcing, which decreased by $0.3 million; and (c) overall decreases within our OEM relationships and other research product lines which decreased by $2.5 million, of which $1.1 million was related to lost datapoint revenues from a single customer that is no longer in business. Offsetting these decreases within Research were (a) strong sales in our automated sample preparation solutions led by sales of Staccato Automated Workstations and Zephyr liquid handling instruments, which increased by $4.9 million; and (b) sales of LabChip GX and GXII, our latest microfluidic benchtop instruments launched in mid-2008 for genomic sample preparation and analysis, which resulted in a $1.0 million increase.

Product revenue increased during 2007 compared to 2006, primarily as a result of sales of optical imaging products which were added to our product portfolio as a result of our acquisition of Xenogen in August 2006. Overall, optical imaging products, which includes IVIS imaging systems and related consumables and reagents, accounted for $15.7 million of our increase in revenue in 2007, and 35% of total product revenue, with 2007 being the first full year of sales of this product line. We had a 10% increase in sales of IVIS imaging systems in 2007, compared to 2006, including during the period in which Xenogen was a standalone entity. Sales of microfluidic products, comprised of LabChip instruments and chips, increased by approximately $1.8 million, or 11%, from $15.8 million in 2006 to $17.6 million in 2007. The key reasons for this improvement were the introduction of the EZ Reader Kinase screening platform and associated ProfilerPro reagent kits in the first quarter of 2007, and continued strong demand for the LabChip 90 automated electrophoresis system. During 2007 we placed a total of 69 new LabChip systems with customers, which represented a 17% increase in units sold compared to 2006. Sales of liquid handling and automation products declined by $3.8 million on a net

basis overall, or 10%, from $39.5 million in 2006 to $35.8 million in 2007. This decline was driven mainly by a substantial decrease of $6.6 million in sales of liquid handling and automation products, primarily as a result of weakness experienced in OEM sales and integrated Staccato platform sales, which was partially offset by a $2.8 million increase in sales of analytical instruments for drug development and other specialty applications. We believe that the decline in liquid handling and automation product sales was due, in part, to temporary market conditions as evidenced by an increase in customer orders in our fiscal fourth quarter which led to a stronger ending backlog for such products at the end of 2007 in comparison to the end of 2006. In addition, during 2007 we introduced Zephyr, a lower-priced, desktop version of our Sciclone liquid handler and have begun to see strong initial customer interest in this newer liquid handling product. Finally, in response to the decrease in OEM product sales, we took steps to realign sales management and focus greater resources on the OEM channel effective at the start of 2008.

Service Revenue. Service revenue was flat during 2008 compared to 2007, consisting of a $1.8 million increase from instrument-based services driven primarily by increases in the installed bases of IVIS imaging and LabChip microfluidic instruments, net of a $0.8 million decrease from service revenues related to the PDQ and AutoTrace product lines which were sold in the fourth quarter of 2008 and a $0.8 million decrease in CDAS service revenues. The CDAS revenue decline included the loss of $1.7 million from a single customer contract that was not renewed in 2008, a $1.5 million decrease related to timing delays under a single contract with a particular customer in comparison to similar prior year revenues, and a $1.0 million decrease under the EPA ToxCast screening contract in comparison to 2007 revenues. The effects of these declines were partially offset by revenue increases from other CDAS service platforms including imaging studies, transgenic animal production, and in vitro screening projects.

Service revenue increased during 2007 compared to 2006 primarily as a result of in vivo drug discovery services performed by Xenogen Biosciences which became part of CDAS in 2006. Overall, the in vivo arm of CDAS generated $7.9 million of incremental service revenue for us in 2007, adding to $1.8 million of in vitro service revenue growth (performed by our NovaScreen business unit), the majority of which resulted from the ToxCast screening contract that we were awarded by the EPA during 2007. In addition, we experienced a $3.5 million increase in billable services and support contracts associated with our installed instrument base. This increase was primarily driven by substantial new placements of IVIS imaging systems in 2007.

License Fees and Contract Revenue. License fees and contract revenue decreased during 2008 compared to 2007 primarily as a result of anticipated . . .