This Management's Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 2009 and for the three months ended March 31, 2009 should be read in conjunction with our financial statements included in this Quarterly Report on Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations and our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 13, 2009.

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

Executive Summary

Business

Caliper develops and sells innovative and enabling products and services to the life sciences research community, a customer base that includes pharmaceutical and biotechnology companies, and government and other not-for-profit research institutions. We believe our integrated systems, consisting of instruments, software and reagents, our laboratory automation tools and our assay 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. We expect that our 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, will allow us to continue to address growing, unmet needs in the market and drive ongoing 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 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.

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

† The Imaging business area is focused on preclinical imaging, where Caliper holds a global leadership position in the high growth 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.

† The Research business area 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.

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

First Quarter Overview

Our revenues during the three months ended March 31, 2009 were $28.5 million compared to $29.3 million for the three months ended March 31, 2008. In comparing our first quarter performance in 2009 to the same period in 2008, it is important to take into account the effect of the divestitures of our PDQ and AutoTrace product lines that occurred in the fourth quarter of 2008. On an "organic" growth basis (i.e., excluding the effects of the divested product lines and exchange rate fluctuations upon revenues), we experienced growth of 11% in the first quarter of 2009 compared to the same period in 2008. We believe that this strong quarter-on-quarter growth comparison benefited, in part, from a favorable timing of orders as a result of customer demand that was held back due to widespread market uncertainties in 2008, as well as from unanticipated service orders within our CDAS business.

During the three months ended March 31, 2009, the effect on revenues related to foreign exchange resulted in a 4% unfavorable impact as compared to the prior year. The effect of foreign exchange on net loss was less than 1% due to offsetting foreign denominated expenses.

The table below provides a reconciliation of our GAAP basis revenue to pro forma revenue results for the quarters ended March 31, 2009 and 2008, after giving effect to our divestures of the PDQ and AutoTrace product lines during the fourth quarter of 2008. We believe this is a useful measure in evaluating revenue performance between comparative periods; however, these non-GAAP comparisons are not intended to substitute for GAAP financial measures.

                                        Quarter Ended March 31,
                                       Non-GAAP Adjustments (1)
                        GAAP                (in thousands)               Non-GAAP         GAAP     Non-GAAP
                  2009        2008        2009          2008         2009        2008     % Chg     % Chg
Research        $ 13,521    $ 14,980   $     (343 )  $   (2,893 )  $ 13,178    $ 12,087     (10 )%        9 %
Imaging           10,741       9,774            -             -      10,741       9,774      10 %        10 %
CDAS               4,210       4,533            -             -       4,210       4,533      (7 )%       (7 )%
Total Revenue   $ 28,472    $ 29,287   $     (343 )  $   (2,893 )  $ 28,129    $ 26,394      (3 )%        7 %

Revenue Highlights by Strategic Business Unit

Research revenues associated with ongoing product lines (i.e., excluding revenue of divested product lines), comprised primarily of microfluidics and laboratory automation products and services, increased by 9% on a non-GAAP basis, to $13.2 million during the first quarter of 2009 from $12.1 million during the first quarter of 2008. This increase included a 6% unfavorable impact as a result of currency translation based upon currency rates in effect during the first quarter of 2009 compared to the first quarter of 2008. Research growth was strong, primarily due to sales of our proprietary LabChip GX instrument, which we believe is the "best-in-class" proprietary solution for characterizing proteins in the fast growing biologics market, and increased sales of our Profiler Pro reagent plates, which are consumable products used for kinase screening in connection with our EZ Reader instrument.

Imaging revenues increased by 10%, to $10.7 million during the first quarter of 2009 from $9.8 million during the first quarter of 2008. This increase included a 5% unfavorable impact from foreign currency translation compared to the first quarter of 2008. Imaging growth was driven by continued strong global demand for our IVIS instruments and accessories, reagents and services.

CDAS revenues decreased by 7% to $4.2 million during the first quarter of 2009 from $4.5 million during the first quarter of 2008. The net decrease resulted from a decrease in in vitro services revenues partially offset by in vivo services revenue improvement. We anticipate revenue from CDAS services to grow over the second half of 2009 based on our expectation that our CDAS unit will receive an additional task order under the Environmental Protection Agency's ToxCast program.

First Quarter Financial Performance

Total gross margin decreased by approximately 1% during the first quarter of 2009 compared to the same period in 2008 primarily due to the overall service revenue decline which resulted primarily from the product lines that were divested in the fourth quarter of 2008.

Operating expenses (research and development plus selling, general and administrative expenses) decreased by 19% to $15.7 million during the first quarter of 2009 from $19.5 million in the first quarter of 2008. This reduction included $2.8 million of selling,

general and administrative expense reduction and $1.0 million of research and development expense reduction resulting from streamlining and cost-reduction initiatives implemented over 2008. Of the overall reduction, approximately $0.6 million related to the divested product lines and effects of exchange rate movements.

Net loss narrowed by $3.3 million, or 33%, to $6.6 million ($0.14 per share) during the first quarter of 2009 from $9.9 million ($0.21 per share) during the first quarter of 2008. The overall reduction in net loss reflected the benefit of cost reductions implemented in 2008 to coincide with our strategic reconfiguration around our high growth proprietary products and services.

The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in our Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC on March 13, 2009.

Results of Operations for the Three Months Ended March 31, 2009

Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For example, we typically experience higher revenues in the fourth quarter of our fiscal year as a result of the capital spending patterns of our customers.

Revenue



                                                Three Months Ended
                                                     March 31,
(In thousands)                        2009       2008      $ Change    % Change
Product revenue                     $ 18,309   $ 17,665   $      644          4 %
Service revenue                        7,657      9,008       (1,351 )      (15 )%
License fees and contract revenue      2,506      2,614         (108 )       (4 )%
Total Revenues                      $ 28,472   $ 29,287   $     (815 )       (3 )%

Product Revenue. Product revenue increased $0.6 million during the three months ended March 31, 2009, compared to the same period in 2008 due primarily to strong imaging and microfluidic instrument and consumable sales. Imaging product sales increased by $0.8 million, or approximately 12%, compared to the first quarter of 2008. This increase was due to a 19% increase in IVIS instrument placements compared to the first quarter of 2008. The IVIS instrument product mix during the quarter was more heavily comprised of lower-priced IVIS Lumina instruments, resulting in a lower average selling price.
Research product sales decreased $0.2 million, or 2%, during the first quarter of 2009 compared to the same quarter in 2008. This decrease was a net result of $1.3 million of product revenue for the first quarter of 2008 related to divested product lines, partially offset by a $1.1 million net revenue increase in the first quarter of 2009 from ongoing product lines. This $1.1 million net increase was made up of (a) sales increases in our LabChip GX and LabChip GXII microfluidic benchtop instruments (the "LabChip GX series") which were launched in July 2008 in response to strong market demand for systems capable of performing fast, automated, 1-D electrophoretic separations of protein, DNA, and RNA samples, (b) continued growth in revenues from microfluidic consumables (chips, kits and reagents) within our direct and original equipment manufacturer ("OEM") channels, and (c) a last time purchase by an automation OEM partner. These increases were partially offset by sales decreases caused by (a) reduced instrument sales of our TurboVap product line primarily within our European distribution channel, and (b) a shortfall in liquid handling instrument sales and OEM Twister sales within the period.

Service Revenue. Service revenue decreased during the three months ended March 31, 2009, compared to the same period in 2008 primarily from $1.2 million in service contract and billable revenue associated with the divested PDQ and AutoTrace product lines. The remaining decline consisted of a $0.1 million decrease in all other instrument services and a $0.1 million decrease in CDAS service revenues. CDAS service revenues were down on a net basis in the first quarter of 2009 as compared to the same period in 2008 and within this minor net change were decreases of $0.9 million related to in vitro government contracts, with the majority of the decline related to a contract that ended in 2008, and a $0.5 million decrease in in vitro and in vivo standard service offerings by the CDAS business. These CDAS revenue decreases were partially offset by a $0.6 million increase in phenotyping revenue related to a single customer contract that experienced contractual delays over the first half of 2008, and $0.7 million related to new in vitro screening contracts with a single customer.

License Fees and Contract Revenue. License fees and contract revenue decreased during the three months ended March 31, 2009 compared to the same period in 2008 primarily as a result of CDAS in vitro Small Business Innovation Research grants to the CDAS business which ended in August 2008. All other license fees and royalties increased $0.1 million during the quarter.

Costs of Revenue



                                   Three Months Ended
                                        March 31,
(In thousands)           2009       2008      $ Change    % Change
Product                $ 11,253   $ 11,105   $      148          1 %
Service                   5,707      6,098         (391 )       (6 )%
License and contract        392        284          108         38 %
Total Costs            $ 17,352   $ 17,487   $     (135 )       (1 )%

Cost of Product Revenue. Cost of product revenue increased slightly during the three months ended March 31, 2009 as a result of the overall increase in product sales. The increase is primarily as a result of an increase in warranty parts and other variable manufacturing costs, as a percentage of sales, by approximately 400 basis points, or $0.8 million. This increase was offset in part by reduced material cost spending as a percentage of sales resulting from mix and a $0.1 million decrease in overall manufacturing spending comprised primarily of reduced labor costs incurred with respect to manufacturing operations.

Cost of Service Revenue. Cost of service revenue decreased during the three months ended March 31, 2009 as compared to the same period in 2008 primarily as a result of headcount reductions resulting from divested product lines and the strategic business unit consolidation we implemented in the third quarter of 2008.

Cost of License Revenue. Cost of license revenue increased during the three months ended March 31, 2009 compared to the same period in 2008 due primarily to an increase in a microfluidic contractual royalty obligation with a third party.

Gross Margins. Gross margin on product revenue was 39% for the three months ended March 31, 2009 which was an increase of 200 basis points compared to the same period in 2008, reflecting the effect of incremental margin contribution associated with increased sales volumes and improved product mix, partially offset by higher material and other variable costs incurred. Gross margin on service revenue was 25% for the three months ended March 31, 2009 as compared to 32% for the same period in 2008. This decreased service margin resulted primarily from the reduced leverage of the service contract and billable revenues related to the divested product lines.

Expenses



                                                 Three Months Ended
                                                      March 31,
(In thousands)                         2009      2008      $ Change    % Change
Research and development              $ 4,551   $ 5,532   $     (981 )      (18 )%
Selling, general and administrative    11,185    13,932       (2,747 )      (20 )%
Amortization of intangible assets       1,557     2,490         (933 )      (37 )%
Restructuring charges, net                 23         6           17        283 %

Research and Development Expenses. Research and development spending decreased by $1.0 million during the three months ended March 31, 2009 compared to the same period in 2008 primarily as a result of a reduction in personnel-related costs of $0.3 million, relating to the consolidation and cost reduction efforts initiated in 2008, a $0.4 million reduction in severance costs which related to actions taken in the first quarter of 2008, and $0.3 million in reduced material and operating supplies.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $2.7 million during the three months ended March 31, 2009 compared to the same period in 2008 due to equal reductions in both general selling and marketing expenses and general and administrative expenses. Selling and marketing expenses decreased by $1.4 million during the three months ended March 31, 2009 as compared to the same period in 2008 primarily due to a $0.7 million reduction in salaries and related costs due to reduced headcount from the divested product lines as well as cost reduction initiatives in 2008 to align our business along strategic business units, a $0.3 million reduction in travel and related costs and a reduction of $0.4 million in all other costs. General and administrative expenses decreased by $1.3 million during the three months ended March 31, 2009 as compared to the same period in 2008 primarily due to a $0.5 million reduction in legal costs as a result of litigation that was settled in the first quarter of 2008, a $0.2 million reduction in salaries and related costs, $0.2 million in reduced severance related primarily to the consolidation of responsibilities within our finance department, and a $0.4 million reduction in all other costs.

Amortization of Intangible Assets. The amortization of intangible assets for the three months ended March 31, 2009 relates to assets acquired in our previous business combinations. Amortization is computed based upon the estimated timing of the undiscounted cash flows used to value each respective asset over the estimated useful life of the particular intangible asset, or using the straight-line method over the estimated useful life of the intangible asset when the pattern of cash flows is not necessarily reflective of the true consumption rate of the particular intangible asset. The decrease in amortization during the three months ended March 31, 2009 is the

result of certain intangibles from our acquisition of Zymark Corporation in July 2003 that had a five-year life and therefore were fully amortized as of July 13, 2008.

Restructuring Charges. We incurred restructuring charges in 2008 and prior periods related to acquisition and integration activities that are more fully discussed in Note 7 to the accompanying financial statements. Other restructuring charges during the three months ending March 31, 2009 and 2008 relate to accretion of interest related to idle facility rent obligations.

Interest and Other Income (Expense), Net



                                        Three Months Ended
                                            March 31,
(In thousands)                 2009     2008    $ Change    % Change
Interest expense, net         $ (212 ) $ (155 ) $     (57 )      (37 )%
Other (expense) income, net     (183 )    407        (590 )     (145 )%

Interest Expense, Net. Net interest expense increased during the three months ended March 31, 2009 compared to the same period in 2008 as a result of lower interest income due to reduced yield rates on our investments.

Other Income (Expense), Net. Other income (expense), net, decreased on a three-month basis compared to 2008 due to transaction losses on foreign denominated accounts receivable resulting from a stronger U.S. dollar in comparison to primarily the Euro and the British Pound. During the three months ended March 31, 2009, we incurred foreign currency transaction losses of approximately $0.2 million, compared to gains of approximately $0.4 million for the same period in 2008.

Liquidity and Capital Resources

As of March 31, 2009, we had $23.8 million in cash, cash equivalents and marketable securities, as compared to $26.7 million as of December 31, 2008.

On March 6, 2009, we entered into the Credit Facility, which permits us to borrow up to $25 million in the form of revolving loan advances, including up to $5 million in the form of letters of credit. Principal borrowings under the Credit Facility accrue interest at a floating annual rate equal to the Base Rate (as hereafter defined) plus one percent if our unrestricted cash held at the bank exceeds or is equal to $20 million, or the Base Rate plus two percent if our unrestricted cash held at the bank is below $20 million. The Base Rate is the greater of: (i) the bank's announced "prime rate" and (ii) four and one-half of one percent (4.5%). Under the Credit Facility, we are permitted to borrow up to $25 million, subject to a borrowing base limit consisting of
(a) 80% of eligible accounts receivable plus (b) the lesser of 70% of our unrestricted cash at the bank or $12 million; provided that on each of the first three business days and each of the last three business days of each fiscal quarter, the borrowing base is (a) 80% of eligible accounts receivable plus
(b) the lesser of 90% of our unrestricted cash at the bank or $12 million. Eligible accounts receivable do not include internationally billed receivables, unbilled receivables, and receivables aged over 90 days from invoice date. The Credit Facility matures on November 30, 2010. As of March 31, 2009, $14.9 million was outstanding under the Credit Facility. The Credit Facility serves as a source of capital for ongoing operations and working capital needs.

The Credit Facility includes customary lending and reporting covenants, including certain financial covenants regarding our required levels of liquidity and earnings that are tested as of the last day of each quarter. The Credit Facility also includes a net liquidity clause. Under this clause, if our total cash, cash equivalents and marketable securities held at the bank, net of debt outstanding under the Credit Facility, are less than $0.5 million (the Net Liquidity Limit), then the bank will apply all of our accounts receivable collections, received within our lockbox arrangement with the bank, to the outstanding principal. Such amounts would be eligible to be re-borrowed by us subject to the borrowing base limit. Based on our current forecast, we expect to fall below the net liquidity limit at certain times during the second half of 2009. As of March 31, 2009, we were in compliance with our covenants. We expect to remain in compliance with the covenants through the Credit Facility's maturity date based on current forecasts.

The Credit Facility also includes certain rights for the bank to accelerate the maturity date of the debt, modify the borrowing base or stop making advances upon the occurrence of certain customary events of default, some of which may be viewed as determinable based on the Bank's discretion. We do not believe the bank will exercise these rights as long as we are meeting our covenants and are achieving our forecasts. The Credit Facility also includes customary events of default such as payment default, material adverse change conditions and insolvency conditions that could cause interest to be charged at the interest rate in effect as of the date of default plus two percentage points, or in the . . .