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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2005


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

For the transition period from to

Commission File Number: 0-27316

Molecular Devices Corporation

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		94-2914362 (I.R.S. Employer Identification No.)

1311 Orleans Drive
Sunnyvale, California 94089
(Address of principal executive offices, including zip code)

(408) 747-1700
(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As of July 29, 2005, 16,672,585 shares of the registrant’s Common Stock, $.001 par value, were outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MOLECULAR DEVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts, unaudited)


	June 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	12,465		$	30,175
Accounts receivable, net		35,061			36,995
Inventories, net		24,837			25,785
Deferred tax assets		8,438			9,654
Prepaids and other current assets		2,736			2,780

Total current assets		83,537			105,389
Equipment and leasehold improvements, net		10,790			11,762
Goodwill		104,228			104,228
Intangible assets		40,483			30,243
Other assets		3,289			3,607

Total assets	$	242,327		$	255,229


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,924		$	7,085
Accrued compensation		5,135			8,447
Other accrued liabilities		11,507			14,995
Deferred revenue		7,133			7,306

Total current liabilities		30,699			37,833
Other long-term liabilities		1,128			1,452
Deferred tax liabilities		5,251			5,324

Total liabilities		37,078			44,609
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $.001 par value; 60,000,000 shares authorized; 19,766,025 and 19,363,579 shares issued and 16,739,579 and 17,152,610 shares outstanding at June 30, 2005 and December 31, 2004, respectively		20			19
Additional paid-in capital		265,883			262,676
Accumulated deficit		(2,991	)		(8,873	)
Treasury stock, at cost; 3,026,446 and 2,429,446 shares at June 30, 2005 and December 31, 2004, respectively		(58,857	)		(46,595	)
Deferred stock compensation		—			(113	)
Accumulated other comprehensive income		1,194			3,506

Total stockholders’ equity		205,249			210,620

Total liabilities and stockholders’ equity	$	242,327		$	255,229

The accompanying notes are an integral part of these statements

MOLECULAR DEVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)


	Six Months Ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	5,882		$	3,934
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,352			2,616
Amortization of intangible assets		1,409			272
Amortization of deferred stock compensation		113			—
Equity investment exchanged for services		262			261
Income tax benefit realized as a result of employee exercises of stock options		248			—
(Increase) decrease in assets:
Accounts receivable, net		738			4,073
Inventories		(260	)		702
Deferred tax assets		1,198			2
Other current assets		10			23
Increase (decrease) in liabilities:
Accounts payable		(136	)		271
Accrued liabilities		(7,032	)		(1,844	)
Deferred revenue		21			(78	)

Net cash provided by operating activities		5,805			10,232


Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments		—			9,850
Capital expenditures		(1,511	)		(1,859	)
Purchase of intangible assets		(10,035	)		—
Increase in intangible assets		(2,017	)		—
Decrease (increase) in other assets		319			(3,103	)

Net cash provided by (used in) investing activities		(13,244	)		4,888


Cash flows from financing activities:
Issuance of common stock, net		2,959			1,314
Purchase of treasury stock		(12,262	)		(12,026	)

Net cash used in financing activities		(9,303	)		(10,712	)


Effect of exchange rate changes on cash and cash equivalents		(968	)		(502	)


Net (decrease) increase in cash and cash equivalents		(17,710	)		3,906
Cash and cash equivalents at beginning of period		30,175			50,260

Cash and cash equivalents at end of period	$	12,465		$	54,166

The accompanying notes are an integral part of these statements

MOLECULAR DEVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Description of Business and Basis of Presentation

Molecular Devices Corporation (“Molecular Devices,” “the Company,” “our,” “us” or “we”), a Delaware corporation, is principally involved in the design, development, manufacture, sale and service of bioanalytical measurement systems that accelerate and improve drug discovery and other life sciences research. The customers for our products include leading pharmaceutical and biotechnology companies as well as medical centers, universities, government research laboratories and other institutions throughout the world.

We operate in a single industry segment: the design, development, manufacture, sale and service of bioanalytical measurement systems for drug discovery and life sciences research applications.

The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the published rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements as allowed by such SEC rules and regulations. However, we believe that the disclosures herein are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2004, included in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2004, filed with the SEC on March 16, 2005.

The unaudited condensed consolidated financial statements include the accounts of Molecular Devices and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The unaudited condensed consolidated financial statements contained herein reflect all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results for the six-month period ended June 30, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2005.

Note 2. Stock Based Compensation

As permitted by the Financial Accounting Standard’s Board (“FASB”) Statement No. 123 (“FAS 123”), “Accounting for Stock-Based Compensation,” as amended, we apply the intrinsic value method of accounting as described in Accounting Principles Board Opinion No. 25 (“APB Opinion 25”) and related interpretations in accounting for our stock option plans and, accordingly, recognize no compensation expense for stock option grants with an exercise price equal to the fair market value of the shares at the date of grant. If we had elected to recognize compensation cost based on the fair value of the options granted on their grant date and shares issued under stock purchase plans as prescribed by FAS 123, net income and net income per share would have been changed to the pro forma amounts indicated in the table below (in thousands, except per share amounts):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income — as reported	$	3,703		$	2,505		$	5,882		$	3,934
Plus: Stock based employee compensation expense included in reported net income, net of tax		57			—			113			—
Less: Stock based compensation expense determined using the fair value method, net of tax		(1,704	)		(1,489	)		(3,460	)		(3,050	)

Net income — pro forma	$	2,056		$	1,016		$	2,535		$	884

Net income per share:

Basic — as reported	$	0.22		$	0.18		$	0.35		$	0.27
Basic — pro forma	$	0.12		$	0.07		$	0.15		$	0.06
Diluted — as reported	$	0.22		$	0.17		$	0.34		$	0.27
Diluted — pro forma	$	0.12		$	0.07		$	0.15		$	0.06

The fair value of each option was estimated on the date of grant using the Black Scholes option-pricing model with the following assumptions:


	Three and Six Months
	Ended June 30,
	2005			2004
Expected dividend yield		0	%		0	%
Expected stock price volatility		77	%		78	%
Risk-free interest rate		4	%		3.0-4.5	%
Expected life of options	6.0 years			6.7 - 7.5 years

In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”), which is a revision of FAS 123 and supersedes APB Opinion 25. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first annual period after June 15, 2005, with early adoption encouraged. On April 14, 2005, the SEC adopted a new rule that amended the compliance dates for FAS 123R such that we are now allowed to adopt the new standard effective January 1, 2006. The pro forma disclosures previously permitted under FAS 123 will no longer be an alternative to financial statement recognition. We currently account for share-based payments to employees using APB Opinion 25’s intrinsic value method and, as such, recognize no compensation cost for employee stock options. Although expected to be material, we cannot predict the impact of adoption of FAS 123R at this time because it will depend on the valuation methodology adopted, assumptions used and the levels of share-based payments granted in the future.

Note 3. Balance Sheet Components (in thousands)


	June 30,		December 31,
	2005		2004
Inventories:
Raw materials	$	10,726	$	12,521
Work-in-process		2,027		2,202
Finished goods and demonstration equipment		12,084		11,062

	$	24,837	$	25,785


Other accrued liabilities:
Accrued income taxes	$	2,329	$	3,128
Warranty accrual		2,389		2,276
Other		6,789		9,591

	$	11,507	$	14,995

Note 4. Intangible Assets

At June 30, 2005 and December 31, 2004, purchased intangible assets not subject to amortization totaled $10.8 million and consisted of tradenames valued at $9.3 million and distribution rights valued at approximately $1.5 million.

Purchased intangible assets subject to amortization over ten years consist of patents, developed technology, license fees, and certain tradenames. Purchased intangible assets subject to amortization over one year consist of order backlog. The gross and net carrying value of these assets at June 30, 2005 and December 31, 2004 were included as intangible assets in the condensed consolidated balance sheets and were as follows (in thousands):


	Gross				Net
	Carrying		Accumulated		Carrying
	Value		Amortization		Value
Order backlog	$	100	$	92	$	8
Patents		1,372		541		831
Developed technology		28,868		2,137		26,731
Tradenames		200		5		195
License fees		2,688		643		2,045

Total at June 30, 2005	$	33,228	$	3,418	$	29,810


Order backlog	$	100	$	42	$	58
Patents		1,372		472		900
Developed technology		17,368		1,029		16,339
License fees		2,688		513		2,175

Total at December 31, 2004	$	21,528	$	2,056	$	19,472

The estimated future amortization expense of purchased intangible assets as of June 30, 2005 was as follows (in thousands):


	Amortization
For the year ending December 31,	Expense
2005 (remaining six months)	$	1,707
2006		3,303
2007		3,303
2008		3,303
2009		3,303
Thereafter		14,891

	$	29,810

Note 5. Net Income Per Share

Basic net income per share is computed using the weighted average number of shares of common stock outstanding and diluted net income per share is computed using the weighted average number of shares of common stock outstanding and common equivalent shares from outstanding stock options (using the treasury stock method), when dilutive. The computation of earnings per share was as follows (in thousands, except per share amounts):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Net income	$	3,703	$	2,505	$	5,882	$	3,934


Denominator for basic earnings per share — weighted average common shares outstanding		16,872		14,246		16,989		14,414
Effect of dilutive securities — employee stock options		263		148		272		174


Denominator for diluted earnings per share — weighted average common shares outstanding plus dilutive securities		17,135		14,394		17,261		14,588

Basic net income per share	$	0.22	$	0.18	$	0.35	$	0.27

Diluted net income per share	$	0.22	$	0.17	$	0.34	$	0.27

For the three and six months ended June 30, 2005, the total number of shares excluded from the calculations of diluted net income per share was 2,291,121 and 2,209,371, respectively, as the weighted-average exercise price of these outstanding stock options was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive. For the three and six months ended June 30, 2004, the total number of shares excluded from the calculations of diluted net income per share was 2,295,232 and 2,113,285, respectively.

Note 6. Comprehensive Income

Comprehensive income, net of tax, was approximately $3.1 million and $3.6 million for the three and six month periods ended June 30, 2005, respectively, and $2.0 million and $3.5 million for the three and six month periods ended June 30, 2004, respectively. The differences between reported net income and comprehensive income were principally comprised of changes in accumulated foreign currency translation, which was recorded in stockholders’ equity.

Note 7. Restructuring

On July 1, 2004, we acquired all of the outstanding capital stock of Axon Instruments, Inc. (“Axon”). Concurrent with the acquisition, we implemented an integration plan which included the termination of Axon employees, the relocation or transfer to other sites of employees and the closure of duplicate facilities. Costs for this plan associated with employee severance and relocation totaled $500,000 and costs associated with the closure of duplicate facilities totaled $2.2 million. In the fourth quarter of 2004, we implemented an integration plan which included the termination of additional employees. Termination costs related to Molecular Devices employees totaled $1.2 million. Activity for restructuring charges was as follows (in thousands):


						Balance at					Adjustments			Balance at
	Beginning					December 31,					Included in			June 30,
	Balance		Payments			2004		Payments			Net Income			2005
Axon employee severance and relocation	$	500	$	(365	)	$	135	$	(35	)	$	(100	)	$	—
Closure of duplicate facilities		2,200		—			2,200		(569	)		(54	)		1,577
Molecular Devices employee severance		1,157		(124	)		1,033		(939	)		(61	)		33


Total	$	3,857	$	(489	)	$	3,368	$	(1,543	)	$	(215	)	$	1,610

Note 8. Commitments and Contingencies

GUARANTEES

Under our charter, we have agreed to indemnify any person who is made a party to any action or threatened with any action as a result of such person serving or having served as an officer or director of Molecular Devices or having served, at our request, as an officer or director of another company. The indemnification does not apply if the person is determined not to have acted in good faith in the reasonable belief that his or her actions were in the best interests of Molecular Devices. The maximum potential amount of future payments that we could be required to make under the charter provision and the corresponding indemnification agreements is unlimited; however, we have director’s and officer’s liability insurance policies that, in most cases, would limit our exposure and enable us to recover a portion of any future amounts paid. The estimated fair value of these indemnification provisions is minimal. Most of these indemnification provisions were grandfathered under the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” as they were in effect prior to December 31, 2003. Accordingly, we had no liabilities recorded for these provisions as of June 30, 2005.

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, clinical sites and customers. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal. Accordingly, we had no liabilities recorded for these agreements as of June 30, 2005.

WARRANTY

At the time of sale, we record an estimate for warranty costs that may be incurred under product warranties. Our standard warranty generally includes parts and labor for a twelve month period. Warranty expense and activity are estimated based on historical experience. The warranty accrual is evaluated periodically and adjusted for changes in experience. Changes in the warranty liability during the six months ended June 30, 2005 were as follows (in thousands):


Balance at December 31, 2004	$	2,276
New warranties issued during the period		1,239
Cost of warranties incurred during the period		(1,126	)

Balance at June 30, 2005	$	2,389

Note 9. Revolving Credit Facility

In connection with the acquisition of Axon, we entered into a senior unsecured credit facility with Union Bank of California, N.A., which provides us with a revolving credit facility in the amount of up to $30.0 million. The revolving credit facility is guaranteed by our domestic subsidiaries. All loans outstanding under the senior unsecured credit facility will bear interest at a rate per annum equal to, at our option, either the base rate plus 0.50% or the London InterBank Offered Rate (LIBOR) plus 1.25%. The revolving credit facility may be drawn, paid and reborrowed at our option, and matures on July 1, 2007. The revolving credit facility had no outstanding balance as of June 30, 2005 and December 31, 2004. At June 30, 2005, we were in compliance with all of the credit facility covenants.

Note 10. Subsequent Event

In the third quarter of 2005, through August 3, 2005, we repurchased 118,322 shares of common stock for approximately $2.5 million. These shares will be accounted for as treasury stock, at cost.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Except for the historical information contained herein, the following discussion contains “forward-looking” statements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “anticipates,” “plans,” “predicts,” “expects,” “estimates,” “intends,” “will,” “continue,” “may,” “potential,” “should” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including, among others, those discussed in this section as well as under “Factors That May Affect Future Results,” and “Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and the risks detailed from time to time in our future SEC reports.

We are a leading supplier of high-performance bioanalytical measurement systems that accelerate and improve drug discovery and other life sciences research. Our systems and consumables enable pharmaceutical and biotechnology companies to leverage advances in genomics, proteomics and parallel chemistry by facilitating the high-throughput and cost-effective identification and evaluation of drug candidates. Our solutions are based on our advanced core technologies that integrate our expertise in engineering, molecular and cell biology, and chemistry. We enable our customers to improve research productivity and effectiveness, which ultimately accelerates the complex process of discovering and developing new drugs.

Our customers include leading pharmaceutical and biotechnology companies as well as medical centers, universities, government research laboratories and other institutions throughout the world. The success of our business is impacted by research and development spending trends of these customers, which has been unpredictable over the last three years and remains unpredictable in the near term. We focus on generating revenue growth through the development of innovative products for these customers. In each of the last four years, our internal research and development efforts have enabled us to exceed our goal of generating over 50% of annual revenues from products that are introduced in the last three years.

We divide our revenues into two product families based primarily on the customers to which they are sold. The drug discovery product family includes systems that integrate detection, liquid handling and automation, generally have price points in excess of $100,000, and are primarily sold to large pharmaceutical and biotechnology companies. Product lines included in the drug discovery family are FLIPR, Analyst, IonWorks, PatchXpress, ImageXpress and Discovery-1 systems. The life sciences product family, which includes bench-top detection, imaging software and liquid handling products, consists of the SpectraMax, MetaMorph, GenePix, Threshold, Skatron and Axopatch product lines. These single-purpose instruments generally cost less than $60,000 and are sold throughout our entire customer base. We recognize revenue on the sale of these products, when collectibility is reasonably assured, at the time of shipment and transfer of title to customers and distributors. There are no significant customer acceptance requirements or post-shipment obligations on our part.

We are deriving an increasing portion of our revenues from overseas operations. Sales to customers outside of the United States accounted for 43% and 45% of total revenues during the second quarter and first six months of 2005, respectively, and 42% and 44% of total revenues during the second quarter and first six months of 2004, respectively. We anticipate that international sales will account for an increasing percentage of revenues in the future, and we expect to continue expanding our international operations in order to take advantage of increasing international market opportunities.

On July 1, 2004, we acquired all of the outstanding capital stock of Axon Instruments, Inc. (“Axon”). The total cost of the acquisition was $139.9 million including cash and stock paid, options assumed, and direct transaction costs. As a result of the acquisition, we received $22.1 million in cash that had been on the balance sheet of Axon. The acquisition was accounted for under the purchase method of accounting. The results of operations of Axon have been included in the accompanying condensed consolidated financial statements from the date of acquisition.

CRITICAL ACCOUNTING ESTIMATES

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, bad debts, inventories, intangible assets, equity investments, income taxes and warranty obligations. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the SEC on March 16, 2005.

RESULTS OF OPERATIONS — THREE AND SIX MONTHS ENDED JUNE 30, 2005 and 2004

REVENUES. Revenues increased by 38% to $44.5 million in the second quarter of 2005 from $32.2 million in the second quarter of 2004. Drug discovery product family revenues increased by 20% compared to the second quarter of 2004, and represented 42% of total revenue during the quarter. Life sciences research product family revenues increased by 55% compared to the second quarter of 2004, and represented 58% of total revenue during the quarter. The $12.3 million increase in revenues was due to $11.8 million of sales of our acquired Axon product lines, including PatchXpress, ImageXpress, GenePix and Axopatch and $2.4 million of growth in life sciences research products, including our SpectraMax and Threshold product lines, offset by a $1.9 million decrease in drug discovery products. The decrease in drug discovery products was primarily caused by an abnormally strong quarter ended June 30, 2004 for FLIPR, driven by the release of the FLIPR Tetra in that quarter. The decrease in FLIPR revenue was offset by increased sales from our IonWorks product line.

Revenues increased by 40% to $83.6 million in the first six months of 2005 from $59.5 in the first six months of 2004. Drug discovery product family revenues in the first six months of 2005 increased by 28% compared to the first six months of 2004, and represented 40% of total revenues during the period. Life sciences research product family revenues in the first six months of 2005 increased by 50% compared to the first six months of 2004, and represented 60% of total revenues during the period. The $24.1 million increase in revenue was due to $22.2 million of sales of our acquired Axon product lines, including PatchXpress, ImageXpress, GenePix and Axopatch and $3.1 million in growth in life sciences research products including our SpectraMax and Threshold product lines and MetaMorph software, offset by a $1.2 million decrease in drug discovery products primarily caused by declines in Analyst and Discovery-1 sales, offset by increased sales in our IonWorks product line.

GROSS PROFIT. Gross profit decreased to 60.5% in the second quarter of 2005 from 62.5% in the same period of the prior year, and decreased to 60.9% in the first six months of 2005 compared to 62.5% in the same period of the prior year, primarily due to the addition of lower margin products acquired from Axon.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses increased in the second quarter of 2005 by 34% to $6.3 million from $4.7 million in the second quarter of 2004. Research and development expenses increased in the first six months of 2005 by 44% to $12.5 million from $8.7 million in the first six months of 2004. These increases were primarily due to additional salary, benefits and other expenses associated with increased headcount, largely driven by the acquisition of Axon in the third quarter of 2004.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expenses in the second quarter of 2005 increased by 26% to $14.6 million from $11.6 million in the second quarter of 2004. The increase was primarily due to $1.6 million of additional salary, benefits and other expenses associated with increased headcount, largely driven by the acquisition of Axon in the third quarter of 2004 and $700,000 of increased amortization due to acquired intangible assets.

Selling, general and administrative expenses in the first six months of 2005 increased by 28% to $28.9 million from $22.5 million in the first six months of 2004. The increase was primarily due to $3.8 million of additional salary, benefits and other expenses associated with increased headcount, largely driven by the acquisition of Axon in the third quarter of 2004, $1.1 of increased amortization due to acquired intangible assets, and $800,000 of increased accounting and consulting fees associated with Sarbanes-Oxley Section 404 compliance.

INTEREST AND OTHER INCOME (EXPENSE), NET. Other income (expense), net was $(62,000) in the second quarter of 2005, compared to $49,000 in the second quarter of 2004. Other income (expense), net was $(26,000) in the first six months of 2005, compared to $85,000 in the first six months of 2004. The decreases were primarily due to the unfavorable impact of foreign exchange rates and a decrease in interest income due to lower cash and investment balances.

INCOME TAX PROVISION. We recorded a tax provision of $2.3 million for the second quarter of 2005 compared to $1.3 million in the second quarter of 2004. The income tax provision for the first six months of 2005 was $3.6 million as compared to $2.1 million in the first six months of 2004. The tax provision for the second quarter and the first six months of 2005 was based on a 38% annual estimated effective income tax rate for 2005, up from 35% in the second quarter and the first six months of 2004. The increase was due primarily to the reduction of federal and state research and development credits. The effective tax rates are calculated on profit before tax.

Liquidity and Capital Resources

We had cash, cash equivalents and short and long-term investments of $12.5 million at June 30, 2005, compared to $30.2 million at December 31, 2004. Operating activities in the first six months of 2005 provided $5.8 million of cash, compared to $10.2 million in the first six months of 2004, primarily due to lower cash generated by collections on accounts receivable and a higher payout of accrued liabilities, which included a $3.0 million income tax payment related to the gain on the sale of equity securities in the fourth quarter of 2004.

We used $13.2 million of cash in investing activities in the first six months of 2005, primarily due to $10.0 million used to acquire intangible assets from Xsira Pharmaceuticals, Inc. (“Xsira”) in March 2005. In the first six months of 2004, we generated $4.9 million of cash from investing activities, primarily due to $9.9 million in proceeds received from the sale and maturity of short and long-term investments, which were offset by a $3.1 million increase in other assets related to the acquisition of distribution rights in Belgium and capitalized costs associated with the Axon acquisition, as well as $1.9 million in capital expenditures.

In the first six months of 2005, cash used in financing activities was $9.3 million. We repurchased 597,000 shares of our common stock for $12.3 million and raised $3.0 million from the issuance of common stock associated with stock option exercises and shares issued under our employee stock purchase plan. In the first six months of 2004, we used $10.7 million of cash in financing activities, primarily for the repurchase of shares of our common stock. The timing of and amounts received under our employee stock option and purchase plans are determined by the decisions of the respective option or rights holders, and are not controlled by us. Therefore, funds raised from the issuance of common stock under our employee stock option and purchase plans should not be considered an indication of additional funds to be raised in future periods.

We believe that our existing cash and anticipated cash flow from our operations will be sufficient to support our current operating plan for the foreseeable future. Our ability to generate our anticipated cash flow from operations is subject to the risks and uncertainties discussed below under “Factors That May Affect Future Results,” including, in particular, variations in the amount of time it takes for us to sell our products and collect accounts receivable, the timing of customer orders, competition, risks associated with the pharmaceutical and biotechnology industries, supplier or manufacturing problems or delays, and risks associated with past and potential future acquisitions.

Likewise, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on our current plans which may change and assumptions that may prove to be wrong. Our future capital requirements will depend on many factors, including:

•		the progress of our research and development;

•		the number and scope of our research and development programs;

•		market acceptance and demand for our products;

•		the costs that may be involved in enforcing our patent claims and other intellectual property rights;

•		potential acquisition and technology licensing opportunities;

•		the costs associated with repurchasing shares of our common stock;

•		manufacturing capacity requirements; and

•		the costs of expanding our sales, marketing and distribution capabilities both in the United States and abroad.

We have generated sufficient cash flow to fund our capital requirements primarily through operating and financing activities over the last three years. However, we cannot assure you that we will not require additional financing in the future to support our existing operations or potential acquisition and technology licensing opportunities that may arise. Therefore, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Additional financing may not be available on favorable terms or at all, and may be dilutive to our then-current stockholders.

Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality issuers.

Factors That May Affect Future Results

Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks that we do not know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be harmed and the trading price of our common stock could decline.

VARIATIONS IN THE AMOUNT OF TIME IT TAKES FOR US TO SELL OUR PRODUCTS AND COLLECT ACCOUNTS RECEIVABLE AND THE TIMING OF CUSTOMER ORDERS MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

The timing of capital equipment purchases by our customers has been and is expected to continue to be uneven and difficult to predict. Our products represent major capital purchases for our customers. Accordingly, our customers generally take a relatively long time to evaluate our products, and a significant portion of our revenues is typically derived from sales of a small number of relatively high-priced products. Purchases are generally made by purchase orders and not long-term contracts. Delays in receipt of anticipated orders

for our relatively high priced products could lead to substantial variability from quarter to quarter. Furthermore, we have historically received purchase orders and made a significant portion of each quarter’s product shipments near the end of the quarter. If that pattern continues, even short delays in the receipt of orders or shipment of products at the end of a quarter could have a material adverse affect on results of operations for that quarter.

We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our products. Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenues from that customer, if ever, varies widely. Our sales cycles typically range from three to six months, but can be much longer. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenues, and we may never receive any revenues from a customer despite our sales efforts.

The relatively high purchase price for a customer order contributes to collection delays that result in working capital volatility. While the terms of our sales orders generally require payment within 30 days of product shipment and do not provide return rights, in the past we have experienced significant collection delays. We cannot predict whether we will continue to experience similar or more severe delays.

The capital spending policies of our customers have a significant effect on the demand for our products. Those policies are based on a wide variety of factors, including resources available to make purchases, spending priorities, and policies regarding capital expenditures during industry downturns or recessionary periods. Any decrease in capital spending by our customers resulting from any of these factors could harm our business.

WE DEPEND ON ORDERS THAT ARE RECEIVED AND SHIPPED IN THE SAME QUARTER AND THEREFORE HAVE LIMITED VISIBILITY OF FUTURE PRODUCT SHIPMENTS.

Our net sales in any given quarter depend upon a combination of orders received in that quarter for shipment in that quarter and shipments from backlog. Our products are typically shipped within ninety days of purchase order receipt. As a result, we do not believe that the amount of backlog at any particular date is indicative of our future level of sales. Our backlog at the beginning of each quarter does not include all product sales needed to achieve expected revenues for that quarter. Consequently, we are dependent on obtaining orders for products to be shipped in the same quarter that the order is received. Moreover, customers may reschedule shipments, and production difficulties could delay shipments. Accordingly, we have limited visibility of future product shipments, and our results of operations are subject to significant variability from quarter to quarter.

MANY OF OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE DO, AND INCREASED COMPETITION COULD IMPAIR SALES OF OUR PRODUCTS.

We operate in a highly competitive industry and face competition from companies that design, manufacture and market instruments for use in the life sciences research industry, from genomic, pharmaceutical, biotechnology and diagnostic companies and from academic and research institutions and government or other publicly-funded agencies, both in the United States and elsewhere. We may not be able to compete effectively with all of these competitors. Many of these companies and institutions have greater financial, engineering, manufacturing, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been significant merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers are large companies that require global support and service, which may be easier for our larger competitors to provide.

We believe that competition within the markets we serve is primarily driven by the need for innovative products that address the needs of customers. We attempt to counter competition by seeking to develop new products and provide quality products and services that meet customers’ needs. We cannot assure you, however, that we will be able to successfully develop new products or that our existing or new products and services will adequately meet our customers’ needs.

Rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and frequent new product and service introductions characterize the markets for our products. To remain competitive, we will be required to develop new products and periodically enhance our existing products in a timely manner. We are facing increased competition as new companies entering the market with new technologies compete, or will compete, with our products and future products. We cannot assure you that one or more of our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or future products, or that would render our technologies and products obsolete or uneconomical. Our future success will depend in large part on our ability to maintain a competitive position with respect to our current and future technologies, which we may not be able to do. In addition, delays in the launch of our new products may result in loss of market share due to our customers’ purchases of competitors’ products during any delay.

IF WE ARE NOT SUCCESSFUL IN DEVELOPING NEW AND ENHANCED PRODUCTS, WE MAY LOSE MARKET SHARE TO OUR COMPETITORS.

The life sciences instrumentation market is characterized by rapid technological change and frequent new product introductions. In the twelve months ended June 30, 2005, 76% of our revenues were derived from the sale of products that were introduced in the last three years, and our future success will depend on our ability to enhance our current products and to develop and introduce, on a timely basis, new products that address the evolving needs of our customers. We may experience difficulties or delays in our development efforts with respect to new products, and we may not ultimately be successful in developing or commercializing them, which would harm our business. Any significant delay in releasing new systems could cause our revenues to suffer, adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share. In addition, our future success depends on our continued ability to develop new applications for our existing products. If we are not able to complete the development of these applications, or if we experience difficulties or delays, we may lose our current customers and may not be able to attract new customers, which could seriously harm our business and our future growth prospects.

WE MUST EXPEND A SIGNIFICANT AMOUNT OF TIME AND RESOURCES TO DEVELOP NEW PRODUCTS, AND IF THESE PRODUCTS DO NOT ACHIEVE COMMERCIAL ACCEPTANCE, OUR OPERATING RESULTS MAY SUFFER.

We expect to spend a significant amount of time and resources to develop new products and refine existing products. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenues from the sale of new products. Our ability to commercially introduce and successfully market new products is subject to a wide variety of challenges during this development cycle that could delay introduction of these products. In addition, since our customers are not obligated by long-term contracts to purchase our products, our anticipated product orders may not materialize, or orders that do materialize may be canceled. As a result, if we do not achieve market acceptance of new products, our operating results will suffer. Our products are also generally priced higher than competitive products, which may impair commercial acceptance. We cannot predict whether new products that we expect to introduce will achieve commercial acceptance.

WE OBTAIN SOME OF THE CONSUMABLES, COMPONENTS AND SUBASSEMBLIES USED WITH OR INCLUDED IN OUR SYSTEMS FROM A SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS OF ONE OF THESE SUPPLIERS COULD CAUSE CUSTOMER SUPPLY OR PRODUCTION DELAYS AND A SUBSTANTIAL LOSS OF REVENUES.

We rely on outside vendors to manufacture many consumables, components and subassemblies. Certain consumables, components, subassemblies and services necessary for the manufacture of our systems are obtained from a sole supplier or limited group of suppliers, some of which are our competitors. Additional components, such as optical, electronic and pneumatic devices, are currently purchased in configurations specific to our requirements and, together with certain other components, such as computers, are integrated into our products. We maintain only a limited number of long-term supply agreements with our suppliers, and some of these agreements provide that the supplier is the exclusive supplier of a particular consumable, component or subassembly.

Our reliance on a sole or a limited group of suppliers involves several risks, including the following:

•		our suppliers may cease or interrupt production of required consumables, components or subassemblies or otherwise fail to supply us with an adequate supply of required consumables, components or subassemblies for a number of reasons, including due to contractual disputes with our suppliers or due to adverse financial developments at or affecting the supplier;

•		we have reduced control over the pricing of third party-supplied consumables, components and subassemblies, and our suppliers may be unable or unwilling to supply us with required consumables, components and subassemblies on commercially acceptable terms, or at all;

•		we have reduced control over the timely delivery of third party-supplied consumables, components and subassemblies; and

•		our suppliers may be unable to develop technologically advanced products to support our growth and development of new systems.

Because the manufacturing of certain of these consumables, components and subassemblies involves extremely complex processes and requires long lead times, we may experience delays or shortages caused by suppliers. We believe that alternative sources could be obtained and qualified, if necessary, for most sole and limited source parts, subject in certain cases to the terms of exclusive supply agreements with suppliers. However, if we were forced to seek alternative sources of supply or to manufacture such consumables, components or subassemblies internally, we may be forced to redesign our systems, which could prevent us from shipping our systems to customers on a timely basis, and we may be liable to suppliers under the terms of existing supply agreements. Some of our suppliers have relatively limited financial and other resources. Any inability to obtain adequate deliveries, or any other circumstance that would restrict our ability to ship our products, could damage relationships with current and prospective customers and could harm our business, and any disputes with suppliers could have an adverse impact on our financial condition.

WE MAY ENCOUNTER MANUFACTURING AND ASSEMBLY PROBLEMS OR DELAYS, WHICH COULD RESULT IN LOST REVENUES.

We manufacture our products at our facilities in Sunnyvale and Union City, both in California, and in Norway. We assemble the Discovery-1 system at our facility in Downingtown, Pennsylvania. Our manufacturing and assembly processes are highly complex and

require sophisticated, costly equipment and specially designed facilities. As a result, any prolonged disruption in the operations of our manufacturing facilities could seriously harm our ability to satisfy our customer order deadlines. If we cannot deliver our systems in a timely manner, our revenues will likely suffer.

Our product sales depend in part upon manufacturing yields. We currently have limited manufacturing capacity and experience variability in manufacturing yields. We are currently manufacturing high-throughput instruments in-house, in limited volumes and with largely manual assembly. If demand for our high-throughput instruments increases, we will either need to expand our in-house manufacturing capabilities or outsource to other manufacturers. If we fail to deliver our products in a timely manner, our relationships with our customers could be seriously harmed, and our revenues could decline.

As we develop new products, we must transition the manufacture of a new product from the development stage to commercial manufacturing. We cannot predict whether we will be able to complete these transitions on a timely basis and with commercially reasonable costs. We cannot assure you that manufacturing or quality control problems will not arise as we attempt to scale-up our production for any future new products or that we can scale-up manufacturing and quality control in a timely manner or at commercially reasonable costs. If we are unable to consistently manufacture our products on a timely basis because of these or other factors, our product sales will decline.

IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED AND THE SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE.

Our products are complex and have at times contained errors, defects and bugs when introduced. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products would be harmed. Further, if our products contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our products. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.

WE HAVE SIGNIFICANTLY EXPANDED OUR INTERNATIONAL OPERATIONS, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL BUSINESS ACTIVITIES.

We maintain facilities in the United Kingdom, Germany, Norway, Japan, South Korea, Australia and China. In addition to the increase in our international operations, we are also deriving an increasing portion of our revenues from customers located outside of the United States. Sales to customers outside of the United States accounted for approximately 45% our revenues during the first six months of 2005, and we anticipate that international sales will continue to account for a significant portion of our revenues. A key aspect of our business strategy has been and is to expand our sales and support organizations internationally in order to take advantage of increasing international market opportunities resulting from worldwide growth in the life sciences industry.

Our reliance on international sales and operations exposes us to a number of risks associated with conducting operations internationally, including:

•		political, social and economic instability;

•		trade restrictions and changes in tariffs;

•		the impact of business cycles and downturns in economies outside of the United States;

•		unexpected changes in regulatory requirements that may limit our ability to export our products or sell into particular jurisdictions;

•		import and export license requirements and restrictions;

•		difficulties and costs of staffing, managing and monitoring geographically disparate operations;

•		difficulties in maintaining effective communications with employees and customers due to distance, language and cultural barriers;

•		disruptions in international transport or delivery;

•		difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices do not protect proprietary rights to as great an extent as do the laws and practices of the United States;

•		difficulties in enforcing agreements through non-U.S. legal systems;

•		longer payment cycles and difficulties in collecting receivables; and

•		potentially adverse tax consequences.

If any of these risks materialize, our international sales could decrease and our foreign operations could suffer.

In addition, all of our sales to international distributors are denominated in U.S. dollars. Most of our direct sales in the United Kingdom, Germany, France, the Benelux, Canada and Japan are denominated in local currencies and totaled $26.6 million (32% of total revenues) for the first six months of 2005. To the extent that our sales and operating expenses are denominated in foreign currencies, our operating results may be adversely affected by changes in exchange rates. Historically, foreign exchange gains and losses have been immaterial to our results of operations. However, we cannot predict whether these gains and losses will continue to be immaterial, particularly as we increase our direct sales outside North America. For example, we cannot predict whether other foreign exchange gains or losses in the future would have a material effect on our income. Owing to the number of currencies involved, the substantial volatility of currency exchange rates, and our constantly changing currency exposures, we cannot predict the effect of exchange rate fluctuations on our future operating results. We do not currently engage in foreign currency hedging transactions, but may do so in the future.

MOST OF OUR CURRENT AND POTENTIAL CUSTOMERS ARE FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES AND ARE SUBJECT TO RISKS FACED BY THOSE INDUSTRIES.

We derive a significant portion of our revenues from sales to pharmaceutical and biotechnology companies. We expect that sales to pharmaceutical and biotechnology companies will continue to be a primary source of revenues for the foreseeable future. As a result, we are subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries, such as availability of capital and reduction and delays in research and development expenditures by companies in these industries, pricing pressures as third-party payers continue challenging the pricing of medical products and services, government regulation, and the uncertainty resulting from technological change.

In addition, our future revenues may be adversely affected by the ongoing consolidation in the pharmaceutical and biotechnology industries, which would reduce the number of our potential customers. Furthermore, we cannot assure you that the pharmaceutical and biotechnology companies that are our customers will not develop their own competing products or in-house capabilities.

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. We may have to pay substantial damages for infringement if it is ultimately determined that our products infringe on a third party’s proprietary rights. Further, any legal action against us could, in addition to subjecting us to potential liability for damages, prohibit us from selling our products before we obtain a license to do so from the party owning the intellectual property, 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. There may be third-party patents that may relate to our technology or potential products. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our stock price to decline. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources.

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 infringement suits or interference proceedings. Litigation may be necessary to:

•		assert claims of infringement;

•		enforce our patents;

•		protect our trade secrets or know-how; or

•		determine the enforceability, scope and validity of the proprietary rights of others.

Lawsuits could be expensive, take significant time and 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 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. If initiated, we cannot assure you that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable. During the course

of these suits, there could be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors were to perceive any of these results to be negative, our stock price could 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.

Our success will depend in part on our ability to obtain commercially valuable patent claims and to protect our intellectual property. Our patent position is generally uncertain and involves complex legal and factual questions. Legal standards relating to the validity and scope of claims in our technology field are still evolving. Therefore, the degree of future protection for our proprietary rights is uncertain.

The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:

•		the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;

•		the claims of any patents which are issued may not provide meaningful protection;

•		we may not be able to develop additional proprietary technologies that are patentable;

•		the patents licensed or issued to us or our customers may not provide a competitive advantage;

•		other companies may challenge patents licensed or issued to us or our customers;

•		patents issued to other companies may harm our ability to do business;

•		other companies may independently develop similar or alternative technologies or duplicate our technologies; and

•		other companies may design around technologies we have licensed or developed.

In addition to patents, we rely on a combination of trade secrets, 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 proprietary technology underlying our products. If these measures 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 or prosecute potential infringements of our patents. 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 design around our proprietary technologies or 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.

WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.

We expect to experience significant growth in the number of our employees and customers and the scope of our operations, including as a result of potential acquisitions. This growth may continue to place a significant strain on our management and operations. Our ability to manage this growth will depend upon our ability to broaden our management team and our ability to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our employees. Our future success is heavily dependent upon growth and acceptance of new products. If we cannot scale our business appropriately or otherwise adapt to anticipated growth and new product introductions, a key part of our strategy may not be successful.

WE RELY UPON DISTRIBUTORS FOR PRODUCT SALES AND SUPPORT OUTSIDE OF NORTH AMERICA.

In the first six months of 2005, approximately 15% of our sales were made through distributors. We often rely upon distributors to provide customer support to the ultimate end users of our products. As a result, our success depends on the continued sales and customer support efforts of our network of distributors. The use of distributors involves certain risks, including risks that distributors will not effectively sell or support our products, that they will be unable to satisfy financial obligations to us and that they will cease operations. Any reduction, delay or loss of orders from our significant distributors could harm our revenues. We also do not currently have distributors under contract in a number of significant international markets that we have targeted and will need to establish additional international distribution relationships. There can be no assurance that we will engage qualified distributors in a timely manner, and the failure to do so could have a material adverse affect on our business, financial condition and results of operations.

IF WE CHOOSE TO ACQUIRE NEW AND COMPLEMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGIES INSTEAD OF DEVELOPING THEM OURSELVES, WE MAY BE UNABLE TO COMPLETE THESE ACQUISITIONS OR MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE AN ACQUIRED BUSINESS OR TECHNOLOGY IN A COST-EFFECTIVE AND NON-DISRUPTIVE MANNER.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, from time to time we have acquired complementary businesses, products or technologies instead of developing them ourselves, and we may choose to do so in the future. For example, we acquired intellectual property relating to the Transfluor® technology from Xsira in March 2005 and acquired Axon in July 2004. We do not know if we will be able to complete any additional acquisitions, or whether we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees. Integrating any business, product or technology we acquire involves considerable operational and financial risks and strains, including:

•		the potential disruption of our ongoing business and distraction of our management;

•		the potential strain on our financial and managerial controls and reporting systems and procedures;

•		unanticipated expenses and potential delays related to integration of the operations, technology and other resources of acquired businesses;

•		the impairment of relationships with employees, suppliers and customers as a result of any integration of new management personnel;

•		greater than anticipated costs and expenses related to restructuring, including employee severance or relocation costs and costs related to vacating leased facilities; and

•		potential unknown liabilities associated with any acquisition, including higher than expected integration costs, which may cause our quarterly and annual operating results to fluctuate.

We may not succeed in addressing these risks or any other problems encountered in connection with the acquisition of complementary businesses, products or technologies. If we are unable to successfully integrate the operations, products, technology and personnel of acquired businesses in a timely manner or at all, or if we do achieve the perceived benefits of any acquisition as rapidly or to the extent anticipated by financial analysts or investors, the market price of our common stock could decline.

In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private equity or debt financings. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that may result in dilution to our stockholders. In addition, any impairment of goodwill and amortization of other intangible assets or charges resulting from the costs of acquisitions could harm our business and operating results.

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, engineering and scientific staff. The loss of the service 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, and software and electronic engineering. Our corporate headquarters are located in Sunnyvale, 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 qualified personnel 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.

CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT OUR RESULTS OF OPERATIONS AND CAUSE US TO CHANGE OUR BUSINESS PRACTICES.

We prepare our financial statements to conform with U.S. generally accepted accounting principles. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange Commission and various other bodies formed to interpret and create appropriate accounting principles. A change in those principles can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, accounting principles affecting many aspects of our business, including rules relating to equity-related compensation, have recently been revised or are under review. The Financial Accounting Standards Board and other agencies have finalized changes to U.S. generally accepted accounting principles that will require us, starting in fiscal year 2006, to record a charge to earnings for employee stock option grants and other equity incentives. We will have significant and ongoing accounting charges resulting from option grant and other equity incentive expensing that could reduce our

overall net income. In addition, since we historically have used equity-related compensation as a component of our total employee compensation program, the accounting change could make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain employees. See Note 2 of the notes to our condensed consolidated financial statements for a discussion of the impact on our financial results if we were to use the fair value method of accounting for equity awards to our employees.

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

We have experienced and in the future may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations, which could materially and adversely affect our business and the market price of our common stock. Our total revenues and operating results may fluctuate significantly because of a number of factors, many of which are outside of our control. These factors include:

•		customer confidence in the economy, evidenced, in part, by stock market levels;

•		changes in the domestic and international economic, business and political conditions;

•		economic conditions within the pharmaceutical and biotechnology industries;

•		levels of product and price competition;

•		the length of our sales cycle and customer buying patterns;

•		the size and timing of individual transactions;

•		the timing of new product introductions and product enhancements;

•		the mix of products sold;

•		levels of international transactions;

•		activities of and acquisitions by competitors;

•		the timing of new hires and the allocation of our resources;

•		changes in foreign currency exchange rates;

•		our ability to develop and market new products and control costs; and

•		changes in U.S. generally accepted accounting principles.

One or more of the foregoing factors may cause our operating expenses to be disproportionately high during any given period or may cause our revenues and operating results to fluctuate significantly. In particular, we typically experience a decrease in the level of sales in the first calendar quarter as compared to the fourth quarter of the preceding year because of budgetary and capital equipment purchasing patterns in the life sciences industry. Our quarterly operating results have fluctuated 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.

In addition, we manufacture our products based on forecasted orders rather than on outstanding orders. Accordingly, our expense levels are based, in part, on expected future sales, and we generally cannot quickly adjust operating expenses. For example, research and development and general and administrative expenses are not directly affected by variations in revenues. As a result, if sales levels in a particular quarter do not meet expectations, we may not be able to adjust operating expenses in a sufficient timeframe to compensate for the shortfall, and our results of operations for that quarter may be seriously harmed. Likewise, our manufacturing processes may in certain instances create a risk of excess or inadequate inventory levels if orders do not match forecasts.

Based upon the preceding factors, we may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations, which could materially and adversely affect our business, financial condition, results of operations and the market price of our common stock. Because our revenues 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.

FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to and reporting on these assessments. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If we cannot favorably assess, or our independent registered public accounting firm is unable to provide an unqualified attestation report on our assessment of, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

OUR STOCK PRICE IS VOLATILE, WHICH COULD CAUSE STOCKHOLDERS TO LOSE A SUBSTANTIAL PART OF THEIR INVESTMENT IN OUR STOCK.

The stock market in general, and the stock prices of technology companies in particular, have recently experienced volatility which has often been unrelated to the operating performance of any particular company or companies. In the twelve months ended June 30, 2005, the closing sales price of our common stock ranged from $17.85 to $25.30. Our stock price could decline regardless of our actual operating performance, and stockholders could lose a substantial part of their investment as a result of industry or market-based fluctuations. In the past, our stock has traded relatively thinly. If a more active public market for our stock is not sustained, it may be difficult for stockholders to resell shares of our common stock. Because we do not anticipate paying cash dividends on our common stock for the foreseeable future, stockholders will not be able to receive a return on their shares unless they sell them.

The market price of our common stock will likely fluctuate in response to a number of factors, including the following:

•		domestic and international economic, business and political conditions;

•		economic conditions within the pharmaceutical and biotechnology industries;

•		our failure to meet our performance estimates or the performance estimates of securities analysts;

•		changes in financial estimates of our revenues and operating results by us or securities analysts;

•		changes in buy/sell recommendations by securities analysts; and

•		the timing of announcements by us or our competitors of significant products, contracts or acquisitions or publicity regarding actual or potential results or performance thereof.

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, or merger in which we are not the surviving company or which results in changes in our management. For example, our certificate of incorporation gives our Board of Directors the authority to issue shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, as the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. The issuance of preferred stock could also have a dilutive effect on our stockholders. 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 involving us. Further, in October 2001, our Board of Directors adopted a stockholder rights plan, commonly known as a “poison pill.” These provisions described above and our poison pill could limit the price that investors might be willing to pay in the future for our common stock.

OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS.

This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. When used in this report, you can identify forward-looking statements by terminology such as “believes,” “anticipates,” “plans,” “predicts,” “expects,” “estimates,” “intends,” “will,” “continue,” “may,” “potential,” “should” and similar expressions. These statements are only predictions. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of many factors, including those set forth above and elsewhere in this report.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Neither we nor any other person assumes responsibility for the accuracy and

completeness of these statements. We assume no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results. Accordingly, we caution readers not to place undue reliance on these statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, including changes in interest rates and foreign currency rates.

Foreign Currency Exchange

We are exposed to changes in foreign currency exchange rates primarily in the United Kingdom, Germany, France, the Benelux, Canada, Switzerland, Japan and South Korea, where we sell our products directly in local currencies. All other foreign sales are denominated in U.S. dollars and bear no exchange rate risk. However, a strengthening of the U.S. dollar could make our products less competitive in overseas markets. Gains and losses resulting from foreign currency transactions have historically been immaterial. A sensitivity analysis assuming a hypothetical 10% movement in exchange rates applied to our projected foreign sales for the remainder of 2005 indicated that such movement would not have a material effect on our business, operating results or financial condition. Translation gains and losses related to our foreign subsidiaries in the United Kingdom, Germany, Norway, Switzerland, Japan, South Korea, China and Australia are accumulated as a separate component of stockholders’ equity. We do not currently engage in foreign currency hedging transactions, but may do so in the future.

Interest and Investment Income

Our interest and investment income is subject to changes in the general level of interest rates, primarily U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash equivalents and short-term investments. We invest our excess cash primarily in demand deposits with U.S. banks and money market accounts and short-term securities. These securities are carried at market value, which approximate cost, typically mature or are redeemable within 90 days to two years and bear minimal risk. We have not experienced any significant losses on these investments. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our investment balances at June 30, 2005 indicated that such market movement would not have a material effect on our business, operating results or financial condition. Actual gains or losses in the future may differ materially from this analysis, depending upon actual balances and changes in the timing and amount of interest rate movements.

Debt and Interest Expense

In connection with the acquisition of Axon, we entered into a senior unsecured credit facility with Union Bank of California, N.A., which provides us with a revolving credit facility in the amount of up to $30.0 million. The revolving credit facility is guaranteed by our domestic subsidiaries. All loans outstanding under the senior unsecured credit facility will bear interest at a rate per annum equal to, at our option, either the base rate plus 0.50% or the London InterBank Offered Rate (LIBOR) plus 1.25%. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our debt balance at June 30, 2005 indicated that such market movement would not have a material effect on our business, operating results or financial condition, as there was no balance at quarter end. Actual gains or losses in the future may differ materially from this analysis, depending on the level of our outstanding debt and changes in the timing and amount of interest rate movements.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Based on our management’s evaluation (with the participation of our chief executive officer and chief financial officer), as of the end of the period covered by this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding repurchases of our common stock pursuant to our stock repurchase program during the quarter ended June 30, 2005.


	Total				Total Number of		Maximum Number
	Number of		Average Price		Shares Purchased as		of Shares that
	Shares		Paid		Part of Publicly		May Yet Be Purchased
Period	Purchased		Per Share		Announced Programs		Under the Programs

April 1, 2005 through April 30, 2005		—		—		—		—
May 1, 2005 through May 31, 2005		200,000	$	19.33		200,000		1,478,000
June 1, 2005 through June 30, 2005		—		—		—		—

Total		200,000	$	19.33		200,000		1,478,000

On August 2, 2001, we announced that our Board of Directors had approved our current stock repurchase program, pursuant to which we were authorized and did repurchase 1,500,000 shares of our common stock. On October 25, 2001, our Board of Directors determined to continue the stock repurchase program and authorized the repurchase of an additional 1,500,000 shares of our common stock, all of which have since been repurchased. On July 29, 2004, our Board of Directors again determined to continue the stock repurchase program and authorized the repurchase of an additional 1,500,000 shares of our common stock, all of which have since been repurchased. On February 17, 2005, our Board of Directors authorized the repurchase of an additional 1,500,000 shares of our common stock under the stock repurchase program, under which 22,000 shares have been repurchased. The stock repurchase program will continue until all 1,478,000 shares currently approved for repurchase under the stock repurchase program have been repurchased, unless terminated earlier by our Board of Directors. In the event that all of such shares have been repurchased, our Board of Directors may again determine to continue our stock repurchase program and authorize management to repurchase additional shares of our common stock.

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

On May 26, 2005, our 2005 Annual Meeting of Stockholders was held at our corporate offices in Sunnyvale, California. During this meeting, our stockholders voted on the following three proposals:

(a) Proposal to elect directors to serve for the ensuing year and until their successors are elected:


	For		Authority Withheld
Joseph D. Keegan, Ph.D.		14,471,835		958,002
Moshe H. Alafi		9,775,705		5,654,132
David L. Anderson		13,035,399		2,394,438
A. Blaine Bowman		14,458,078		971,759
Paul Goddard, Ph.D.		10,717,096		4,712,741
Andre F. Marion		14,273,172		1,156,665
Harden M. McConnell, Ph.D.		14,474,706		955,131
J. Allan Waitz, Ph.D.		14,126,993		1,302,844

(b) Proposal to approve the Molecular Devices Corporation 2005 Equity Incentive Plan:


For	Against		Abstain		Broker Non-Vote
7,956,645		4,884,119		35,029	2,554,044

(c) Proposal to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2005:


For	Against		Abstain
15,180,236		243,694		5,907

ITEM 6. EXHIBITS


Exhibit
Number		Description of Exhibit
3.1(1)		Amended and Restated Certificate of Incorporation of the Registrant.

3.2(1)		Bylaws of the Registrant.

3.3(2)		Certificate of Amendment to Certificate of Incorporation.

4.1(1)		Specimen Certificate of Common Stock of the Registrant.

10.50(3)		Form of Stock Option Agreement for Non-Employee Directors under the 1995 Stock Option Plan.

10.52(4)		2005 Equity Incentive Plan.

10.53(4)		Form of Stock Option Agreement under the 2005 Equity Incentive Plan.

10.54(4)		Form of Stock Option Agreement for Non-Employee Director under the 2005 Equity Incentive Plan.

31.1		Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1*		Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C 1350).


(1)		Incorporated by reference to the similarly described exhibit in our Registration Statement on Form S-1 (File No. 33-98926), as amended.

(2)		Incorporated by reference to the similarly described exhibit in our Annual Report on Form 10-K for the year ended December 31, 2001 and filed on April 1, 2002.

(3)		Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed on April 18, 2005.

(4)		Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed on June 1, 2005.

*		The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EXHIBIT INDEX


Exhibit
Number		Description of Exhibit
3.1(1)		Amended and Restated Certificate of Incorporation of the Registrant.

3.2(1)		Bylaws of the Registrant.

3.3(2)		Certificate of Amendment to Certificate of Incorporation.

4.1(1)		Specimen Certificate of Common Stock of the Registrant.

10.50(3)		Form of Stock Option Agreement for Non-Employee Directors under the 1995 Stock Option Plan.

10.52(4)		2005 Equity Incentive Plan.

10.53(4)		Form of Stock Option Agreement under the 2005 Equity Incentive Plan.

10.54(4)		Form of Stock Option Agreement for Non-Employee Director under the 2005 Equity Incentive Plan.

31.1		Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1*		Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C 1350).


(1)		Incorporated by reference to the similarly described exhibit in our Registration Statement on Form S-1 (File No. 33-98926), as amended.

(2)		Incorporated by reference to the similarly described exhibit in our Annual Report on Form 10-K for the year ended December 31, 2001 and filed on April 1, 2002.

(3)		Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed on April 18, 2005.

(4)		Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed on June 1, 2005.

*		The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenues	$	44,537		$	32,205		$	83,602		$	59,542
Cost of revenues		17,600			12,075			32,647			22,318

Gross profit		26,937			20,130			50,955			37,224

Operating expenses:
Research and development		6,309			4,709			12,535			8,726
Selling, general and administrative		14,593			11,616			28,907			22,536

Total operating expenses		20,902			16,325			41,442			31,262

Income from operations		6,035			3,805			9,513			5,962
Interest and other income (expense), net		(62	)		49			(26	)		85

Income before income taxes		5,973			3,854			9,487			6,047
Income tax provision		(2,270	)		(1,349	)		(3,605	)		(2,113	)

Net income	$	3,703		$	2,505		$	5,882		$	3,934

Basic net income per share	$	0.22		$	0.18		$	0.35		$	0.27

Diluted net income per share	$	0.22		$	0.17		$	0.34		$	0.27

Shares used in computing basic net income per share		16,872			14,246			16,989			14,414


Shares used in computing diluted net income per share		17,135			14,394			17,261			14,588


Date: August 5, 2005	By:	/s/ TIMOTHY A. HARKNESS

	Timothy A. Harkness
	Senior Vice President and Chief Financial Officer
	(Duly Authorized and Principal
	Financial and Accounting Officer)

/s/ Joseph D. Keegan, Ph.D.

/s/ Timothy A. Harkness

Joseph D. Keegan, Ph.D.

Timothy A. Harkness

President and Chief Executive Officer

Senior Vice President and Chief Financial Officer


		PAGE
		NUMBER
PART I.	FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS		3
	CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2005 and December 31, 2004		3
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three and Six Months Ended June 30, 2005 and 2004		4
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2005 and 2004		5
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		11
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		22
ITEM 4.	CONTROLS AND PROCEDURES		22
PART II.	OTHER INFORMATION		22
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		22
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		23
ITEM 6.	EXHIBITS		24
SIGNATURE			25
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


/s/ Joseph D. Keegan

Joseph D. Keegan, Ph.D.
President and Chief Executive Officer