Caliper Technologies Form 10-K Period End 12/31/02

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

Based on the closing sale price of common stock on the Nasdaq National Market on June 28, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $149,880,705. Excludes an aggregate of 6,520,210 shares of common stock held by officers and directors and by each person known by the registrant to own 5% or more of the outstanding common stock.

Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

The number of shares outstanding of registrant’s common stock, $0.001 par value was 24,717,255 at March 7, 2003.

Certain information in Part III of this Annual Report on Form 10-K is incorporated by reference to the Proxy Statement for the registrant’s 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Act of 1934. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Factors Affecting Operating Results” contained in “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date we file this Form 10-K, and we do not intend to update any of the forward-looking statements after the date we file this Annual Report on Form 10-K to conform these statements to actual results, unless required by law.

LabChip, the LabChip logo, Caliper and the Caliper logo are registered trademarks of Caliper. We have applied for registration for the LibraryCard trademark.

We are a leader in microfluidic lab-on-a-chip technologies. We believe our LabChip systems can assemble the power and reduce the size of laboratories full of equipment and people. Our LabChip systems miniaturize, integrate and automate many laboratory processes and put them on a chip. Each chip contains a network of microscopic channels through which fluids and chemicals are moved, using electricity or pressure, in order to perform experiments. The chips are the key components of our LabChip systems, which also include reagents, as well as instruments and software, that together control and read the chips. We believe our LabChip systems have the potential to revolutionize experimentation in a wide range of industries by enabling researchers to get better quality data faster while using less material. Our initial commercialization focus is the pharmaceutical industry, where there is an urgent need to improve the efficiency and reduce the cost of drug discovery and development. Future target industries potentially include diagnostics, chemicals, agriculture and consumer products.

We believe that we are the first company to sell and deliver microfluidic lab-on-a-chip products to customers. We have two channels of distribution for our products; direct to customers and through Original Equipment Manufacturers (“OEM”). Our OEM distribution channel, of which Agilent Technologies, Inc. (“Agilent”) is a prime example, is core to our business strategy, and complementary to our direct sales activities, as it enables us to extend the commercial potential of our microfluidic LabChip technology into new industries and new applications with experienced commercial partners. In the direct systems business, we sell complete systems solutions, developed by Caliper, to end customers. In the OEM channel we provide chips and enabling technologies to commercial partners who then integrate the application solution and market it to their end customers.

Our earliest revenues were derived primarily from contract revenue earned under our collaboration agreement with Agilent and with other corporate partners through a fee-based technology access program. An initial microfluidic LabChip system, the 2100 Bioanalyzer, was introduced in late 1999 by our commercial partner, Agilent. Subsequent to that, we began work on our own instrument systems while continuing to expand the menu of applications for the 2100 Bioanalyzer. In September 2001, we began the transition to a commercial products business model when we launched the Caliper 250 Drug Discovery system. Currently we

have three systems that we sell directly: the Caliper 250; the AMS 90 SE, an automated electrophoresis system; and the Caliper 42, a microfluidics applications development workstation. In addition, our first and largest commercial partner, Agilent, sells the 2100 Bioanalyzer together with a comprehensive menu of applications for this instrument.

We were incorporated in Delaware on July 26, 1995. Our principal offices and manufacturing facilities are located at 605 Fairchild Drive, Mountain View, California 94043-2234 and our telephone number is (650) 623-0700. We file electronically with the Securities and Exchange Commission (or SEC) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and any amendments to those reports on the day of filing with the SEC through our website at http://www.calipertech.com. Our website address is given solely for informational purposes; we do not intend, by this reference, that our website should be deemed to be part of this Annual Report on Form 10-K.

We developed our microfluidic LabChip technology to provide a revolutionary advance in laboratory experimentation for the pharmaceutical and other industries. The chips are the key components of our LabChip systems, which also include a specific LabChip instrument together with experiment-specific reagents and software. Our chips contain a network of microscopic channels through which fluids and chemicals are moved to perform experiments. A single type of chip used with customized reagents and software to perform a particular experiment make up one LabChip application. Depending on the chip format, reagents are introduced either automatically or by the user. The chip is then placed in the instrument, which uses software to control the movement of fluids with pressure or voltage. The instrument also has an optical system for detecting the results. Because we have great flexibility in channel design and can exert split-second computer control over fluid flow, we have the ability to create chips for a multitude of experiments. Our LabChip systems miniaturize, integrate and automate experiments with the goal of providing the benefits of improved data accuracy, reduced cost, high speed, expanded individual researcher capability and improved enterprise-wide productivity.


	•	Miniaturization. Conventional laboratory equipment typically uses about a drop of fluid, 50 to 100 microliters, to perform each experiment. In some LabChip applications, this volume is reduced to 1 nanoliter, or one billionth of a liter, an improvement of up to 100,000-fold over conventional systems.

	•	Integration. Integration is the compression of multiple processes into a single process, or the inclusion of multiple functions into one device. Today most laboratory systems perform only one or two steps of an experimental protocol. Our LabChip systems can integrate complete experiments involving half a dozen or more steps into one continuous process performed on a single chip.

	•	Automation. Many laboratory experiments are performed in multiple manual steps. With our LabChip systems, entire experiments can be automated and performed inside a chip using one instrument, freeing up valuable research time.


	•	Improved Data Accuracy. Our LabChip systems are designed to produce more accurate and consistent data by reducing human error and the variability caused by the use of multiple instruments. With higher quality data, our customers can make better decisions. For example, biochemical determinations typically require accurate liquid measurements and precise incubation times. When these are manually performed significant variations can occur in liquid dispensing and in the duration of reaction times.

	•	Reduced Reagent and Labor Cost. Our LabChip systems utilize only a small fraction of the usual amount of expensive reagents used in experiments performed in test tubes, 96-well plates, or 384-well plates, and also reduce labor involved in each experiment. We believe that saving on reagent cost and labor can enable pharmaceutical companies to expand the scale of experimentation in ways that would otherwise not be feasible.

	•	High Speed. We believe our LabChip systems can accelerate some experiments as much as 100-fold or more, depending on the application. For example, molecular separations such as electrophoresis may take two hours or more using conventional equipment. On a chip, we can perform these separations in less than one minute. Another example is that chemical reactions are routinely incubated for 30 minutes or more before the results are determined. Often, these long incubation periods are necessary only to provide sufficient time for manual steps to be performed on large numbers of samples. By integrating sample processing and detection, we can perform reactions in one minute or less and achieve comparable results. Our customers may be able to take advantage of this acceleration to increase throughput or to complete experiments faster, depending on their needs.

	•	Expanded Individual Researcher Capability. Because our LabChip systems can collapse a multi-step, complex experiment into one step, we believe that individual researchers can perform experiments previously outside their areas of expertise. By comparison, with conventional, non-integrated equipment, researchers need to acquire the equipment and master the complexities of performing each individual step.

	•	Improved Enterprise-Wide Productivity. We believe our LabChip systems can improve data quality to the point where researchers can rely on data generated outside their laboratory or organization. We believe this would improve enterprise-wide productivity by supporting data sharing and reducing the need to repeat experiments. When different research groups use different assortments of conventional equipment to perform experiments, they often produce data that are not strictly comparable.

We believe that our microfluidic LabChip systems have the potential to expand the capabilities and improve the productivity of individual researchers and, on an institutional level, to streamline and bring greater efficiency and speed to the drug discovery and development process. Not all laboratory processes, however, are ideally suited to be performed with our LabChip systems. For example, detecting clinically important materials that appear in low concentrations in a sample, such as the virus that causes AIDS, is not always practical with our microfluidic LabChip systems. This is because there is a risk that the virus will not be present in the very small volumes employed by our chips. As a result, in certain applications use of our microfluidic LabChip system may require the pre-processing of a sample to increase concentration. Furthermore, if the analysis of a sample must involve even one process that cannot currently be performed in the microfluidic LabChip system, then use of the microfluidic LabChip system for the parts it can perform is often impractical. This is because the very small scale of the chip experiment does not generally produce enough material to be analyzed by conventional laboratory equipment.

We have developed three types of LabChip systems, based on distinct chip formats: personal laboratory systems, automated systems and application development systems. Our personal laboratory system uses chips with reservoirs for the various chemical reagents. With this system, the user introduces reagents and samples manually. Our automated systems use our sipper chips that have a short tube, or capillary, that draws nanoliter

volumes of reagents or samples into the chip. Our application development system, which is principally intended for use by OEM partners, is a flexible workstation that is used during product and application development.

Agilent 2100 Bioanalyzer. The first instrument platform to be introduced for LabChip applications is the Agilent 2100 Bioanalyzer, a desktop instrument designed to perform a wide range of everyday scientific applications using a menu of different LabChip kits. Each kit contains a chip and reagents designed specifically for the application. This LabChip system brings the benefits of miniaturized, integrated and automated experimentation to the researcher’s desktop. Agilent launched this product in September 1999 and continues to sell it today together with an expanded menu of applications.

Agilent is selling the Agilent 2100 Bioanalyzer with a menu of four LabChip kits for DNA sizing and concentration analysis, two for RNA sizing and concentration analysis, two for protein sample sizing and concentration analysis and one for cell analysis. For these applications, we believe the system’s principal advantages are that it:


	•	reduces analysis time from hours to minutes through the automation and integration of multiple experimental steps;

	•	integrates several experimentation steps into one;

	•	significantly reduces consumption of costly reagents and difficult-to-obtain samples; and

	•	produces higher quality data than conventional methods.

Because these applications are among the most common experiments performed in genetic research, the potential customer base for these applications includes most pharmaceutical and biotechnology companies, as well as research centers and other academic laboratories.

Our automated systems are designed to perform hundreds to tens of thousands of pharmaceutical experiments per day on each chip. The instrument platforms on which these systems run today include the Caliper AMS 90 SE and the Caliper 250. We are also developing new instrument platforms that have the potential to offer customers greater functionality and flexibility for automated experimentation. We believe the principal advantages of Caliper’s automated systems are that they:


	•	produce more reproducible, higher data quality than conventional methods;

	•	integrate multiple experimental functions;

	•	reduce the need for user intervention; and

	•	reduce costly reagent consumption.

Caliper 250 System. The Caliper 250 system performs screening experiments in a serial, continuous flow fashion inside the microchannels of the chip, constituting a closed, controlled environment. The chip employs a proprietary capillary-like sample access system, called a “sipper,” through which nanoliters of test compounds are drawn into the channels of the chip from microwell plates. There they are mixed with equally tiny quantities of the target biomolecule and other reagents for screening. The Caliper 250 system using a 12-sipper chip is capable of performing tens of thousands of experiments per chip per day, depending upon assay conditions, and offers walk-away automation and minimal user intervention. The system currently performs fluorogenic and electrophoretic mobility assays for multiple target classes including kinases, proteases, lipid-modulating enzymes and phosphatases. We also offer, on an “early release” basis, a chip that performs a calcium flux assay, essentially enabling researchers to monitor intracellular levels of calcium, an important variable in the analysis of G-protein coupled receptors (GPCRs). “Early release” products are available and sold to customers on a limited basis as they have not fully completed our product development process. Additional assays are in development. We market and distribute the Caliper 250 system directly through our own sales and marketing group. In addition to paying for the Caliper 250 instrument and compatible sipper chips, users of the system also typically pay to us, on a quarterly basis, datapoint fees based on the number of samples that the customer has processed through the Caliper 250 system. Prior to the Caliper 250 system, the following instruments were available: the Caliper 100 system; the Caliper 110 system; and the Caliper 220 system. However, with the introduction of the Caliper 250 system, we have discontinued offering the other systems.

Automated Microfluidics System 90 SE. The Automated Microfluidics System 90 SE, or AMS 90 SE, is an automated electrophoresis system designed to meet the needs of microarray and cloning laboratories that analyze hundreds of DNA samples per day. The AMS 90 SE, introduced in January 2002, is an improved version of the Caliper AMS 90. The AMS 90 was originally introduced in the third quarter of 2000, with the first units shipped to customers in the first quarter of 2001. The AMS 90 SE uses sipper-chip technology to

perform DNA fragment sizing, separation and quantitation analyses. The AMS 90 SE’s new features include: compatibility with 96- and 384-well plates; two DNA analysis speeds (30 seconds/sample and 55 seconds/sample); and a bar code reader for plate tracking. A protein assay for the AMS 90 SE is in development. We are commercializing the AMS 90 SE through our own sales and marketing force.

Caliper 42 System. The Caliper 42 system enables users to develop proficiency in fundamental microfluidics and to develop novel chip-based microfluidic applications using our proprietary LabChip technology. Principally for use by OEM partners, the Caliper 42 system includes an applications development workstation and diverse chip menu.

During 2001, Caliper transitioned from a fee-based technology access program model to a commercial products business. Previously Caliper used its automated systems internally to offer screening services to pharmaceutical and biotechnology customers that preferred to outsource this activity. As a result of our transition away from a fee-based technology access program model to a commercial product business, we no longer offer these services. However, we do offer a full range of customer and field service support for the products that we sell directly to customers.

For the year ended December 31, 2002, personal laboratory system products accounted for 23% of our revenue, automated system products accounted for 38% of our revenue and licensing and contract services accounted for 39% of our revenue. In 2001, personal laboratory system products accounted for 12% of our revenue, automated system products accounted for 30% of our revenue and licensing and contract services accounted for 58% of our revenue. For the year ended December 31, 2000, personal laboratory system products accounted for 9% of our revenue, automated system products accounted for 8% of our revenue and licensing and contract services accounted for 83% of our revenue.

Our business model includes two distribution channels — one where we sell directly to customers (“Direct”) and another that relies on commercial partners to sell to end-users (“OEM”). For example, in the U.S. and Europe we sell our automated systems, including the Caliper 250 system for drug discovery screening and the AMS 90 SE for automated electrophoresis, directly to end-user customers. In Japan, we have an exclusive distributor, Wako Pure Chemical Industries, Ltd. (“Wako”). Wako is a major supplier of specialty chemicals, clinical diagnostics and biological products for Japanese biotech research. To complement our direct efforts, Caliper is developing an OEM distribution channel. In this case, we sell microfluidic LabChip systems and products to end-users through partners. For example, the Agilent 2100 Bioanalyzer and related LabChip kits are sold by our largest commercial partner, Agilent. In addition, we have a multiple smaller partnerships in earlier stages of development.

In May 1998 we established a broad relationship with Agilent to create a line of commercial research products based on our microfluidic LabChip technologies. This relationship provides us with the scale and

expertise of a leading analytical instrumentation company to bring these novel products to market. Since this relationship was established in May 1998, Agilent and Caliper have collectively invested over $100 million to advance our core LabChip technologies and to create and commercialize a line of products based on these technologies. In September 1999, Agilent introduced the Agilent 2100 Bioanalyzer with three different LabChip kits, our first LabChip products under this agreement. Subsequently, Agilent and Caliper have expanded the Agilent 2100 Bioanalyzer application menu with six additional LabChip kits.

Our collaboration relationship with Agilent was established on a mutually exclusive basis during the term of the collaboration. The field of the collaboration includes products based on our lab-on-a-chip technologies for research, development, analytical and manufacturing applications, but excludes almost all diagnostic applications. Under the terms of our agreement, Agilent is required to obtain our consent before it may offer products exceeding established sample throughput limits, other than through our product collaboration. In return, Caliper is required to obtain Agilent’s consent before we may develop or offer Caliper products within the collaboration field of interest, directly or with other OEM customers, in excess of agreed upon limits. In December 2001, we agreed to permit Agilent to develop and manufacture certain chromatography products independent of Caliper, subject to gross margin sharing payments to Caliper, and Agilent agreed that Caliper could offer drug discovery products in the research market outside of our collaboration.

In May 2002, we notified Agilent of our intent to terminate the collaboration agreement effective May 2003, as permitted under the terms of the agreement. The existing collaboration agreement with Agilent spells out in detail the nature of the companies’ commercial product supply relationships for a three-year period after termination. Our principal motivation in terminating the formal agreement with Agilent was to give us more flexibility in developing new applications with other commercial partners. Termination of the agreement will also provide Caliper with greater ability to market and sell existing products in the field of the collaboration directly to end-user customers, in part utilizing the reciprocal supply arrangements set forth in the termination provisions of the agreement. Both parties will either operate under the existing termination provisions of the collaboration agreement or establish new terms, as yet to be determined.

In our collaboration with Agilent, Caliper has primarily focused on developing core LabChip technology and product applications. We have also manufactured the chips and supplied the chips and reagents to Agilent. Agilent has primarily focused on developing instruments and software, manufacturing instruments and marketing, selling and supporting complete systems. Agilent and Caliper have worked in a collaborative manner to identify new applications for development and distribution. Historically Agilent has also provided product development funding to Caliper. This funding could cease at any time after the termination of the formal agreement in May 2003. However, we anticipate that some product development funding will continue as we are working steadily with Agilent to develop new products.

Under the collaboration, Agilent purchases chips and reagents at a price which reimburses us for our costs of manufacturing chips and reagents and pays us a share of the gross margin on sales by Agilent of all components of LabChip systems, including instruments. We recognize revenue related to the reimbursement of costs for the supply of chips and reagents to Agilent upon shipment and we recognize the related costs as components of cost of sales. We recognize as revenue our share of gross margin on components of the systems sold by Agilent upon shipment to the end user. This general structure for existing products will survive termination of the agreement. Our gross margin share varies depending on the type of collaboration product, and on whether Agilent or we manufacture the collaboration product. After the collaboration agreement terminates in May 2003, our gross margin share for existing products will remain the same until November 2004. In November 2004, our gross margin share for chips and reagents will decrease, and in May 2006 our gross margin share for chips and reagents will decrease again. Our gross margin share for existing instruments will also decrease in the same time periods, although at somewhat different rates. Upon termination of the agreement in May 2003, Agilent will have a non-exclusive license in the field of the collaboration to Caliper’s then existing LabChip technology to develop, manufacture and sell new products in that field. Agilent will be required to pay royalties to Caliper based on its net revenue from sales of such products at the established royalty rates set forth in the termination provisions of our collaboration agreement.

Upon termination of the agreement, to the extent requested by Agilent, Caliper will be obligated to continue to supply existing chips and reagents to Agilent for a three-year period. Agilent will also have a non-exclusive license to manufacture chips for Agilent LabChip applications, in each case subject to gross margin sharing or royalty payments to Caliper described above. During the six-month period following termination, Caliper will also be obligated to train Agilent personnel with respect to the manufacturing of chips, subject in certain circumstances to reimbursement by Agilent of our incurred expenses. Agilent will be similarly obligated to train Caliper personnel regarding the manufacturing of instruments, and upon Caliper’s request, to transfer to us all Agilent know-how incorporated into collaboration products. Caliper will retain its entire license rights to Agilent’s technology granted to us during the term of the collaboration.

After a six-month period following termination of our agreement with Agilent, Caliper will be entitled to market, sell and support, either independently or with other third parties, all products developed during the collaboration. For a three-year period following termination, Caliper will be required to purchase its requirements for such products from Agilent, on the terms set forth in the termination provisions of the agreement.

In summary, although our first collaborative agreement with Agilent will end effective May 2003, we highly value our relationship with Agilent. We will work to continue to grow our business with Agilent, either in accordance with the termination provisions set forth in the existing agreement or pursuant to new terms to be agreed to by Agilent and us.

Central to Caliper’s business strategy is the expansion of the number and type of our commercial relationships. In addition to Agilent, the most mature of these partnerships, Caliper has announced agreements with two companies. These companies are Bacterial BarCodes, Inc. and Ambion, Inc. In addition, Caliper has certain research collaborations that we believe have the potential to evolve into commercial partnerships.

Bacterial BarCodes, Inc. In December 2001, we entered into an agreement with Bacterial BarCodes, Inc. (“BBCI”) to co-distribute molecular diagnostic systems based on our microfluidic LabChip technology and BBCI’s proprietary molecular identification and DNA fingerprinting technology known as rep-PCR (repetitive sequence-based polymerase chain reaction). As part of this collaboration, we developed the Caliper 1000 Analyzer system in 2002. The Caliper 1000 Analyzer instrument is manufactured for us by Agilent on an OEM basis. The Caliper 1000 Analyzer is being used with BBCI’s proprietary rep-PCR products to generate DNA fingerprints of bacteria for microbial typing and identification applications. We believe that the combination of Caliper’s microfluidic LabChip systems for DNA analysis and BBCI’s rep-PCR technology offers a practical method to quickly produce bacterial fingerprints in an automated format. The rep-PCR method produces a mixture of DNA fragments of varying sizes that must be separated according to size to form the actual unique fingerprint patterns. Previously, the rep-PCR method relied upon DNA molecule separation using traditional slab gel electrophoresis, a largely manual and time-consuming process.

The combined Caliper/ BBCI system is in the final stages of field-testing. Relative to traditional approaches, the system offers improved speed, ease-of-use and data analysis capabilities. Customer response at the testing sites has been positive, and we anticipate a product rollout in 2003. BBCI initially has targeted laboratories involved in epidemiology testing, such as reference laboratories and facilities in large hospitals. A clinical product, requiring regulatory approval, is also planned for which BBCI will manage the required submissions to the Food and Drug Administration. Under our agreement, Caliper will provide chips and analysis reagents to BBCI. BBCI will sell a combined assay kit that includes our chips and their rep-PCR DNA fingerprinting reagents and protocols, plus software to access BBCI’s database of bacterial DNA fingerprints. We will market and sell the Caliper 1000 Analyzer designed to run the chips.

Ambion, Inc. In October 2002, we initiated an application development collaboration with Ambion, Inc. (“Ambion”), an RNA-based products company, to develop a microfluidic RNA amplification system. The system would be used by researchers conducting gene expression experiments to prepare an amplified RNA probe prior to performing microarray analysis. Currently available amplification processes are labor-intensive.

Additionally, the quantity of sample RNA to be amplified is often limited. These challenges, which contribute to the time and expense of conventional RNA amplification methods, can also impact the validity of the results. Caliper and Ambion hope to address these inefficiencies by optimizing and automating RNA amplification in a microfluidic environment. The benefits of this approach should include increasing throughput, greater ease of use, minimizing sample requirements and achieving a uniformly high level of consistency in the amplified RNA probe.

Currently, Caliper scientists are developing the microfluidic LabChip device and instrument platform, assisting with assay development and collaborating with Ambion in the development of the integrated system. It is conceivable that a third-party will also participate in the development of the instrumentation. At this time, Ambion is primarily involved in the assay development and is optimizing reagents and conditions for the chip. We are working to develop a first-generation LabChip device and to complete feasibility experiments. In 2003, we anticipate making further progress toward an early stage, completely integrated LabChip amplification system. To date this work has been largely funded through Ambion by a Small Business Innovation Research grant from the National Institute of General Medical Sciences.

In 2000, Caliper created the Applications Developer Program (“ADP”) to enable customers to establish their own in-house microfluidic research programs using our microfluidic LabChip technology and developmental tool set. Participation in the ADP involved the purchase of instrumentation, training in microfluidics, custom-chip design services and a supply of microfluidic chips. During participation in the ADP, customers would determine the feasibility of, and develop, novel microfluidic applications by identifying an assay to address their specific needs. Subsequently, we would custom design a chip to perform that assay. We retain the rights to microfluidic technologies resulting from these collaborations, subject in some circumstances to royalties or other compensation to our collaborators.

All of the five ADP collaborations underway at the beginning of 2002 are being assessed to determine if they have significant commercial potential and a specific path to commercialization, similar to the criteria that we apply to our OEM prospects. Using this criteria, one of the collaborations, with an unnamed agricultural partner, has recently been terminated.

In September 2001, Caliper completed the formation of a new company, Amphora Discovery Corp. (“Amphora”), to create and commercialize a comprehensive database of chemical genomics information. Since that time, Amphora has engaged in large-scale implementation of LabChip drug discovery systems purchased directly from Caliper. Headquartered in Research Triangle Park, North Carolina, Amphora also maintains an office in Mountain View, California.

At the time of its formation, various venture capital firms invested $25 million in Amphora, resulting in Amphora becoming a separate, independent company from Caliper with its own management team and board of directors. ARCH Venture Partners and Venrock Associates are two of the venture capital firms that have invested in Amphora. One of our directors, Robert T. Nelsen, is a Managing Director of ARCH Venture Partners, and another of our directors, Anthony B. Evnin, is a Managing General Partner of Venrock Associates.

In December 2002, Amphora completed a second round of venture capital financing. After the completion of this financing, Caliper’s ownership in Amphora was reduced to approximately 13% from 28% on a fully diluted basis. Over time, if Amphora raises further equity capital, we expect that our ownership in Amphora will be further diluted, as we have no plans to make any future equity investments in Amphora. Caliper initially had the right to appoint two representatives to Amphora’s six-member board of directors. On March 17, 2003, one of Caliper’s two representatives, Dr. Michael R. Knapp, resigned from Amphora’s board of directors. Due to the reduction in Caliper’s percentage ownership of Amphora, Caliper now has the right to appoint only one member to Amphora’s board. Dr. Daniel L. Kisner, our chairman of the board, continues to serve as the sole Caliper representative on Amphora’s board of directors.

Since the completion of Amphora’s initial financing in September 2001, our investment in Amphora has been accounted for under the equity method of accounting. As our investment in Amphora has no basis for accounting purposes and, because Caliper does not guarantee any debt or have any commitment to fund losses of Amphora, Caliper has not recorded its proportionate share of Amphora’s operating losses in its financial statements. The completion of Amphora’s second round of venture capital financing in December 2002 did not have any impact on our method of accounting for Amphora.

For the fiscal year ended 2002, sales to Amphora of instruments, LabChip devices, datapoints and contract services were $6.2 million. Of the $6.2 million in total 2002 sales, $3.3 million related to drug discovery system products and, under the equity method of accounting, Caliper deferred 28% of the gross profit of these sales, or $333,000, that reflects its retained ownership interest in the products sold to Amphora in 2002. As all drug discovery system sales to Amphora occurred prior to Amphora’s December 2002 third party financing, all future drug discovery system sales will be deferred at Caliper’s then retained ownership interest level which is approximately 13% currently. In 2002, Caliper recognized a total of $177,000 of this deferred gross profit as revenue of which $121,000 related to drug discovery system products sold in 2001 and $56,000 related to products sold in 2002. Caliper expects to recognize the remaining $499,000 as revenue ratably over the next 36 months as Amphora records depreciation on its Caliper 250 Drug Discovery systems. For the fiscal year ended 2001, sales to Amphora of instruments, LabChip devices, datapoints and contract services were $3.9 million. As further described below, Caliper and Amphora agreed to a restructuring of the commercial relationship between the two companies in December 2002. Based on the restructured relationship, we expect in 2003 that Amphora will purchase one Caliper 250 instrument and make approximately $1.6 million in minimum datapoint payments to us. All revenues generated from Amphora are reported as related-party revenues.

In September 2001, we entered into a LabChip Solutions Agreement and an Intellectual Property Agreement with Amphora. Under the Intellectual Property Agreement, we granted Amphora certain exclusive rights to use our drug discovery products in a chemical genomics database business. The LabChip Solutions Agreement provided for the ongoing supply of our drug discovery systems and chips to Amphora, and for the provision of related services by us to Amphora. Under this agreement, Amphora had agreed to purchase a minimum of 11 Caliper 250 instruments by December 31, 2001 and at least 11 additional Caliper 250 instruments by December 31, 2002. Amphora had also agreed to purchase datapoints at a fixed amount of $2.0 million in the first year and a minimum of $4.0 million to a maximum, based on volume, of $6.0 million in the second year of the agreement, which began in December 2002.

In connection with the completion of Amphora’s December 2002 financing, Caliper and Amphora agreed to a renegotiation of Amphora’s obligations under the LabChip Solutions Agreement. Under the renegotiated agreement, the Companies agreed to restructure the $4 million minimum datapoint payment for 2002 as follows: Amphora agreed to purchase a minimum of $1.8 million of datapoints during the second year of the agreement beginning in December 2002 and over time to make up to $2.2 million of deferred payments to Caliper. These deferred payments are contingent upon Amphora’s future revenue generation, datapoint production and other conditions and can be satisfied by Amphora under three methods: i) quarterly payments to Caliper based on Amphora’s revenues; ii) commissions earned by Amphora as they provide certain marketing assistance to Caliper for Caliper’s instruments; and iii) additional datapoint payments if Amphora exceeds the certain minimum datapoint levels. Caliper also agreed to defer to December 31, 2003 Amphora’s obligation to purchase the one remaining Caliper 250 instrument of the 11 originally scheduled to be purchased by Amphora before December 31, 2002. In consideration for Caliper’s agreement to this restructuring, Amphora issued to Caliper 2.5 million shares of Amphora preferred stock. Caliper ascribed a nominal value of $25,000 to these shares as Amphora is a privately held research and development company.

In September 2001, Amphora entered into a three-year Sublease Agreement with Caliper for the rent of approximately 5,700 square feet in one of Caliper’s three Mountain View, CA leased buildings for Amphora’s research and development use. In December 2002, in connection with the completion of Amphora’s financing, we agreed to an early termination of this Sublease Agreement as of March 31, 2003. Although we were receiving approximately $20,000 a month in rent from Amphora, we intend to utilize this 5,700 square feet for our own research and development activities starting in April 2003.

Prior to transitioning to a commercial products business model, we had Technology Access Program (“TAP”) customers. In this program, focused on drug discovery screening systems, we worked directly with pharmaceutical company customers during the product development process. In 2001, following the commercial launch of the Caliper 250 system, our existing TAP customers purchased these systems for their internal use. These customers included: Millennium Pharmaceuticals, Eli Lilly and Amgen.

Beginning in August 2001, within the context of our planned evolution away from the Technology Access Program and conversion to a commercial products business structure, we initiated the renegotiation of our TAP agreements. We proposed to each customer, and they agreed, to convert the remaining technology access and subscription fees due us under their agreement to credits toward the purchase of products and services. The renegotiated contracts with Amgen, Eli Lilly and Millennium include discounts off our product list prices for their commitment and ongoing participation as a customer of our commercial business for a time period roughly equivalent to the length of time that they were a TAP customer.

To date, we have generated a substantial portion of our revenue from a limited number of sources. In the year ended December 31, 2002, Agilent, our major collaboration partner, alone accounted for 39% of our total revenue and 35% of our product revenue. We notified Agilent in May 2002 of our election to terminate the agreement between the companies as of May 2003. Under the terms of our agreement with Agilent, when our agreement terminates in May 2003, we will grant to Agilent a non-exclusive, royalty-bearing license to our LapChip technologies as then developed for Agilent to develop, make and sell products in the field of the collaboration. Consequently, there is the possibility that we may experience competition from Agilent after May 2003, which would reduce our ability to sell products independently or through other commercial partners. Amphora, a related party, accounted for 24% of our total revenue and 34% of our product revenue. Initial licensing of the Ramsey family of patents to Aclara accounted for 10% of our revenue and our former Technology Access Program customers, Amgen, Eli Lilly and Millennium, collectively accounted for 12% of our revenue in the 2002 period. In 2001, Agilent alone accounted for 32% of our revenue in this period, one TAP customer, Millennium, accounted for 10% of our revenue, Amphora alone accounted for 13% of our revenue, and initial licensing of the Ramsey family of patents to Aclara accounted for 17% of our revenue. In 2000, Agilent alone accounted for 45% of our revenue, and our three TAP customers, Amgen, Eli Lilly and Millennium, each accounted for 14%, 18% and 13%, respectively, of our revenue in this period. Although we are seeking to expand our customer base, we cannot assure you that these efforts will be successful. The loss of any of these customers would have a material adverse effect on our results of operations.

During the course of 2002, 2001 and 2000, we did not experience any material backlog in supplying products or services to our customers. Our customers purchase our products under standard commercial terms and conditions for payment due in 30 days from the invoice date, as we do not offer extended payment terms. We invoice our customers upon shipment “FOB Origin” on products or on the completion of services under our agreements. We offer our customers a one-year warranty on our automated system purchases and a 90-day warranty on chip purchases.

Approximately 92%, 97% and 100% of our total revenues for 2002, 2001 and 2000, respectively, were derived from customers in the United States as described in Note 17 to our financial statements located at the end of this Annual Report. Substantially all of our long-lived assets are located in the United States.

We believe that we have established a leading position in three areas of lab-on-a-chip technology.

We create microfluidic lab-on-a-chip devices using manufacturing methods similar to the semiconductor industry, sometimes referred to as “microfabrication.” Microfabrication makes it possible to create intricate

designs of interconnected channels that are extremely small and precise. Each pattern is designed to support a series of fluid manipulation steps that will comprise an experiment. We use the principles of fluid dynamics, chemical and electrical engineering, biophysics and computer-aided design tools to create various chip designs. Because we have designed, manufactured and tested hundreds of different chip configurations, we have the know-how and have developed proprietary design tools that make each cycle of chip creation and application development faster. The chips are designed to be passive devices, inexpensive and easy to manufacture. They rely on computer-controlled specialized instrumentation to manipulate the timing and sequencing of chemical processes on the chip.

Once a design or pattern is completed, we use microfabrication methods to replicate the design as channels in a sheet of quartz or glass. This process creates highly precise and reproducible channels with dimensions that can be varied by width and depth. A typical channel is roughly 50 microns wide and 10 microns deep, or smaller than the size of a strand of human hair. In the next step, a second sheet of quartz or glass with a pattern of holes, or wells, is fused to the first sheet using a proprietary bonding process. This second sheet covers the channels and converts them into closed microfluidic conduits. The end of each channel connects to an open reservoir through which fluids are introduced. The sheets are then cut into individual chips, which can be less than one inch to a few inches on a side. The individual chips are then packaged into plastic holders making them easier to handle.

We currently make two chip formats. In our planar chips, such as those used in the Agilent 2100 Bioanalyzer, the user pipettes all of the chemical reagents into the reservoirs or wells of the chip, including the various samples to be tested. The chip is then placed into the instrument. In our sipper chip products, such as those used in the AMS 90 SE and the Caliper 250 system, a small glass tube, or capillary, is part of the chip. Once the user prepares the chip and the chip is placed into a Caliper instrument, minute quantities of sample can be introduced, or “sipped,” through the capillary into the chip. This sipping process can be repeated many times, enabling a single chip to analyze thousands of samples quickly and without human intervention. Samples on sipper chips are processed utilizing continuous flow designs with integrated channel networks for completing experiments. We have a number of issued U.S. patents covering this sipper and continuous flow assay technique.

In our LabChip systems, the movement of minute quantities of fluids, or “microfluidics,” is actively controlled by computer programs. We use two different methods of generating fluid motion in microchannels, namely, electrokinetics and pressure.

Electrokinetic flow is generated when electrodes connected to computer-driven power supplies are placed in the reservoirs at each end of a channel and activated to generate electrical current through the channel. Under these conditions, fluids of the appropriate type will move by a process known as “electro-osmosis.” Another electrokinetic phenomenon known as “electrophoresis” also occurs in the channels. This is the movement of charged molecules or particles in an electric field. Electrophoresis can be used to move molecules in solution or to separate molecules with very subtle differences. Electrophoresis and electro-osmosis generally occur at the same time in channels. However, we have developed proprietary techniques for minimizing either force while maintaining the other, as appropriate, for a given application.

Pressure can also be used to move fluid in microchannels. An advantage to using pressure is that both charged and uncharged molecules, as well as cells, can be moved without separation.

Under typical conditions, flow rates in the microfluidic channels are about a millimeter per second. At these rates, and in contrast to macro conditions, the dispersion of fluids is limited and highly predictable. As a result, we are able to get very exact, reproducible data.

We use both computer-controlled pressure and electrokinetic forces to gain precise control over fluid flow in the microfluidic channel network. It is possible to use electrokinetic forces alone, pressure forces alone, or a combination of the two methods.

We have developed a large amount of expertise at discovering new functions that microfluidic chips can perform. We have generated proprietary computer models of how an experiment can be carried out. We store these functional designs, and we can incorporate them into new designs that simulate complete experimental pathways. In this way, we believe the value of new microfluidic inventions can be rapidly expanded across many application development projects.

We have also developed expertise conducting a variety of laboratory experiments in our chips. Currently, all of our systems use fluorescent chemical reagents and optical detection instruments to read experimental results. We often need to explore chemical strategies for labeling relevant reagents that can reveal how different molecular interactions take place. Another area of investigation addresses the fact that in small dimensions, within which our products operate, the amount of channel surface material relative to the amount of liquid is many times higher than in a test tube or microwell plate. Because of this, the surface material can exert a much greater chemical influence on the biochemical reactions taking place. We have created strategies to avoid the problems this can cause, or benefit from it if possible.

We have also developed sipper chips, which enable automated sample input into the chip, allowing for high throughput experimentation. These sipper chips perform enzyme reactions using part of the channel design as a tiny, continuously operating electrophoresis machine. Thus, reactions with one sample are going on in one area of the chip while electrophoretic separation of the products of another sample is taking place in a different part of the chip. Such an assembly line approach yields highly reproducible data unmatched by macroscopic formats. In general, our experience is that microfabrication and microfluidics provide a rich tool set with which to create innovative new applications.

We have made substantial investments in lab-on-a-chip research and product development since our inception. We explored fundamental issues of lab-on-a-chip technology as early as possible in order to find solutions to important technical challenges and seek patent protection for our solutions. Today we are supplementing these core technology research efforts with applied product development efforts in several areas.

Chip Design. We are increasing our understanding of the design rules guiding the development of new chips. Using the principles of engineering, we create patterns of interconnected channels that permit execution of the various common steps of experimentation. Designs from one chip can be used for other chips needing similar fluidic functions for a different application. Mathematics and computer models also help minimize the number of iterations necessary to achieve new functional chip designs.

Chip Manufacturing. We continue to seek ways to improve the yield and decrease the cost of manufacturing our chips. We are exploring novel fabrication techniques and the use of new materials that offer functional advantages, such as manufacturing in quartz to take advantage of its superior optical features. We have development programs in manufacturing technology for chips made of plastic. Plastic devices potentially offer cost advantages and can offer favorable surface chemical features for some applications. A major area of development is micromachining technology for precisely attaching capillaries to our sipper chips to access reagents. In automated experimentation, the number of capillaries and channels determines the level of throughput. Accordingly, we are developing high yield fabrication methods to enable us to cost-effectively manufacture chips with many capillaries to perform high throughput experimentation.

Engineering and Software. We use the skills of electrical engineers, optical engineers, mechanical engineers, product designers and software engineers to create new instrumentation to run our chips. These instruments control fluid movement inside the chip, present the reagents to the chip from conventional fluid sources, and detect the results of biochemical or cell-based experiments with optical methods. Software

engineers write computer programs that control the sources of fluid motion, communicate between different instrument components and interpret signals from the detection system. Currently we develop these incidental software programs for our automated systems. This software has no separate utility outside of its function of running the Caliper instrument. We collaborate with Agilent to develop software for the Agilent 2100 Bioanalyzer.

Systems Integration. When developing commercial LabChip products, we ensure that we incorporate all the features necessary for performing a specific experiment and configure the assay so that it offers tangible benefits to users. By carefully characterizing the problem, as well as the microfluidic solution, we are able to define precise product specifications. For instance, in each application, we determine how to manipulate flow conditions and how to control surface interactions in order to create novel functions and/or suppress undesirable effects. The resulting complete solution includes the LabChip device, the instrument interface, computer software and reagents needed for each total microfluidic application.

Our product development efforts are currently focused principally on new applications and capabilities for our existing instruments and the development of new instrument platforms.

Extensions of Existing Product Lines. For our automated instrument systems, we are expanding the menu of applications to include assays that measure many important activities of cells and proteins. Currently in development is a protein assay for the AMS 90 SE. In our drug discovery screening line, we are developing line extensions that are particularly well suited for the evaluation of kinases, one of the largest focus areas of drug discovery efforts today. Our recently introduced products include a new 12-sipper LabChip device and an “on-chip” mobility shift assay (available on an “early release” basis), both well suited to kinase testing. Caliper is also developing kinase profiling and selectivity screening kits. These kits will allow us to offer “plug-and-play” products to customers in the drug discovery market. For the Agilent 2100 Bioanalyzer, we intend to continue enhancing the existing menu of applications. We are also working with Agilent to develop new products.

LibraryCard System. Caliper’s microfluidic technology has the potential to reduce reagent, compound and sample consumption to remarkably small volumes in a wide variety of biochemical tests. To enable the full potential of small volume usage on the chip, we have developed a system to reduce the volume of samples being tested to nanoliter scale. In the LibraryCard system, samples or reagents to be tested are spotted down on specially prepared glass plates; 10,000 different samples or reagents can be accommodated. The spots are dried and the cards are stored until use with the Caliper microfluidic system. Each spot contains a few tenths of a nanogram of material, incredibly small amounts, but enough for testing in Caliper chips. Because chemical reagents are typically stable in dry formats, this technology has the additional benefit of enabling drug discovery screening and related testing in non-centralized locations. We are hoping to commercialize the technology through partnerships with other companies.

Genetic Analysis on a LabChip Device. Until the second half of 2002, we were developing a LabChip device for single nucleotide polymorphism (“SNP”) analysis that we intended to commercialize directly. More recently, we have decided to commercialize this product through corporate partnerships. PCR, or polymerase chain reaction, is a technique for rapidly producing many copies of a section of DNA. Like all experimentation processes, this application is a combination of various fluid manipulations, biochemical reactions and detection. We are developing an integrated PCR application that is designed to perform the steps of reagent assembly, amplification and readout in rapid, serial fashion inside the channels of a microfluidic chip. We believe that our genetic analysis system will offer the advantages of nanoliter-scale processing of valuable reagents, automated reagent assembly and computer-controlled heating and mixing for high-quality data production. Though our nanoliter-scale genetic analysis system is still in development, we are capable of routinely doing 16-hour unattended runs involving thousands of 2-nanoliter reactions with starting material down to single copies of genomic DNA. Compared to conventional methods, which take about 60 minutes, we can do a complete reaction in about 9 minutes. This underscores the benefits that can be achieved by integrating and automating multiple complex experimental steps on a single chip.

Our research and development expenses for the years ended December 31, 2002, 2001 and 2000 were approximately $43.3 million, $38.3 million and $33.5 million, respectively. We expect research and development spending to decrease in the future as we slow the pace of discretionary spending on research programs, complete certain research initiatives and continue to focus and prioritize ongoing research programs. As of December 31, 2002, we had 113 employees engaged in research and development, including 63 with advanced degrees.

We manufacture all of our chips, automated instrument systems and a variety of consumables in-house. Caliper is ISO 9001 compliant for the development, manufacture and distribution of its chips and reagent systems. ISO, the International Standards Organization, sets international standards for quality in product design, manufacturing and distribution. We rely upon Agilent to manufacture the Agilent 2100 Bioanalyzer and, on an OEM basis, the Caliper 1000 Analyzer. We contract with third parties to supply raw materials, component parts and sub-assemblies used in our chips, reagents and instrument systems. We intend to continue to invest in our infrastructure for the manufacture and distribution of our chips and to continue to work with third parties for outsourcing opportunities for non-chip based products. For a discussion of the methods we use to manufacture our chips see “ Technology” and “Research and Development.”

Key components of our chips, instruments and reagent-based products are obtained from a number of single-source or limited-source suppliers. We rely on a privately held company for the supply of proprietary dyes used in many of our LabChip products. Furthermore, we depend on a foreign single-source supplier for the manufacture of glass stock used in the manufacture of certain types of our chips. The majority of our key components for our chip and instrument products are readily available from our suppliers to meet production requirements. The only component requiring any significant lead time to acquire is our proprietary glass stock, as our supplier requires a minimum order to cover an entire production run. We anticipate that inventories of this proprietary material, at current production levels, will be sufficient for the next 18 months.

Although we have established licensing arrangements and supply agreements with these suppliers, as well as other single- or limited-source suppliers, there can be no assurances that these companies would not in some way be adversely affected in the future and be unable to meet our critical supply needs. In the event that the supply of components from these suppliers and other single-source or limited-source suppliers were interrupted, we may not be able to manufacture, or manufacture in a timely fashion or in significant quantities, our products, which would delay our ability to deliver products to our customers.

Some of the raw materials we use are subject to price volatility caused by supply conditions, economic variables and other unpredictable factors. Historically we have not experienced significant supply or price constraints and we do not expect our financial position, profitability and liquidity to be affected materially by the supply-level fluctuations.

Although we believe that we are currently one of only a few companies selling and delivering, directly or in collaboration with corporate partners, commercial microfluidic lab-on-a-chip products to customers, we expect to encounter intense competition from a number of companies that offer products for laboratory experimentation. We anticipate that our competitors will come primarily from the following three sectors:


	•	companies providing conventional products for applications similar to ours, but based on established technologies, and incremental improvements to these products;

	•	companies developing their own microfluidics or lab-on-a-chip technologies; and


	•	companies developing new non-chip technologies that can be used in applications similar to the ones that can be served by our technology.

In order to compete against vendors of conventional products, we will need to demonstrate the advantages of our LabChip products over alternative well-established technologies and products. We will also need to demonstrate the potential economic value of our LabChip products relative to these conventional technologies and products. Some of the companies that provide these products include the Applied Biosystems division of Applera, Agilent, Amersham Biosciences, Beckman Coulter, Bio-Rad Laboratories, Molecular Devices, PerkinElmer and Tecan.

We will also need to compete effectively with companies developing their own microfluidics or lab-on-a-chip technologies and products, such as Fluidigm, Gyros, HandyLab, Micronics, Microfluidic Systems and Nanostream. Other companies known to have initiated microfluidic programs include Motorola, 3M, Applied Biosystems, Amersham Biosciences, Cepheid and Hitachi. Microfluidic technologies have undergone and are expected to continue to undergo rapid and significant change. Our future success will depend in large part on our ability to establish and maintain a competitive position in these and future technologies, which we may not be able to do. Rapid technological development may result in our products or technologies becoming obsolete. Products offered by us could be made obsolete either by less expensive or more effective products based on similar or other technologies.

In addition, there is the possibility that we may experience competition from Agilent after May 2003. Under the terms of our agreement, upon termination we will grant to Agilent a non-exclusive, royalty-bearing license to our LabChip technologies as then currently developed. Under the terms of this license, Agilent will be able to develop, make and sell products in the field of our collaboration with Agilent.

In many instances, our competitors have or will have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than we do. Moreover, competitors may have greater name recognition than we do, and may offer discounts as a competitive tactic. We cannot assure you that our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete. Also, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. Our success will depend in large part on our ability to maintain a competitive position with our technologies.

We seek patent protection on our lab-on-a-chip technologies. As of March 7, 2003, we owned or held licenses to 167 issued U.S. patents and 162 pending U.S. patent applications, some of which derive from a common parent application. The issued U.S. patents expire between 2012 and 2021. Foreign counterparts of many of these patents and applications have been filed and/or issued in one or more other countries, resulting in a total of more than 696 issued patents and pending patent applications in the United States and foreign countries. These patents and applications are directed to various technological areas which we believe are valuable to our business, including:


	•	control of movement of fluid and other material through interconnected microchannels;

	•	continuous flow high throughput screening assay methods and systems;

	•	analytical and control instrumentation;

	•	analytical system architecture;

	•	chip-based assay chemistries and methods;

	•	chip compatible sample accession;

	•	software for control of microfluidic based systems and data analysis; and

	•	chip manufacturing processes.

We also rely upon copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain our competitive position. Our success will depend in part on our ability to obtain patent protection for our products and processes, to preserve our copyrights and trade secrets, to operate without infringing the proprietary rights of third parties and to acquire licenses related to enabling technology or products used with our lab-on-a-chip technology.

We are party to various exclusive and non-exclusive license agreements with third parties which give us rights to use certain technologies. For example, we have licenses in the fields we are currently operating in from UT-Battelle, LLC, relating to patents covering inventions by Dr. J. Michael Ramsey, and from the Trustees of the University of Pennsylvania covering microfluidic applications and chip structures. A failure to maintain some or all of the rights to these technologies could seriously harm our business.

We continuously assess the compliance of our operations with applicable federal, state and local environmental laws and regulations. Our policy is to record liabilities for environmental matters when loss amounts are probable and reasonably determinable. Our manufacturing site utilizes chemicals and other potentially hazardous materials and generates both hazardous and non-hazardous waste, the transportation, treatment, storage and disposal of which are regulated by various governmental agencies. We have engaged environmental consultants on a regular basis to assist with our compliance efforts. We believe we are currently in compliance with all applicable environmental permits and are aware of our responsibilities under applicable environmental laws. Any expenditures necessitated by changes in law and permitting requirements cannot be predicted at this time, although such costs are not expected to be material to our financial position or results of operations.

We use market and industry data throughout this Annual Report on Form 10-K and the documents incorporated by reference herein, which we have obtained from market research, publicly available information and industry publications. These sources generally state that the information that they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information are not guaranteed. The market and industry data is often based on industry surveys and the preparers’ experience in the industry. Similarly, although we believe that the surveys and market research that others have performed are reliable, we have not independently verified this information. In particular, market share information has been coordinated and prepared for us by third party research companies at our request, based on market segments that we defined and for which we have paid customary fees. Therefore, such data, including the market category delineations that form the basis for such data, are not necessarily representative of results that would have been obtained from an independent source.

As of December 31, 2002, we had a total of 251 employees, including 113 in research and development, 62 in manufacturing, 27 in sales and marketing and 49 in administration and finance. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

Michael R. Knapp, Ph.D., who co-founded Caliper, assumed the duties of Chief Executive Officer in July 2002 and became a Director of Caliper in September 2002. Prior to that, Dr. Knapp served as our Vice President of Science and Technology from September 1995 through June 2002. From November 1994 through August 1995, Dr. Knapp was engaged in activities related to forming Caliper, including securing our core technology license and procuring financing. From October 1988 to October 1994, Dr. Knapp served as President and Scientific Director at Molecular Tool, Inc., a genetics technology company he co-founded in 1988. Previously, Dr. Knapp was on the staff of the Center for Neurobiology and Behavior at Columbia

University and was a Scientific Director of Genetica SARL, an affiliate of Rhone Poulenc SA in Paris, France. Dr. Knapp holds a B.S. in Biology from Trinity College (Hartford) and a Ph.D. in Medical Microbiology from Stanford University.

Daniel L. Kisner, M.D., served as our President and Chief Executive Officer from February 1999 through June 2002 before being elected Chairman of the Board on July 1, 2002. Dr. Kisner has served as a Director since March 1999. From May 1994 to January 1999, Dr. Kisner served as President and Chief Operating Officer of Isis Pharmaceuticals, Inc., a biotechnology company. From February 1993 to May 1994, Dr. Kisner served as Executive Vice President and Chief Operating Officer of Isis Pharmaceuticals, Inc. From March 1991 to February 1993, he served as Executive Vice President of Isis Pharmaceuticals and was responsible for business and product development, and manufacturing. From December 1988 to March 1991, Dr. Kisner served as Division Vice President of Pharmaceutical Development for Abbott Laboratories. Dr. Kisner has held a tenured position in the Division of Oncology at the University of Texas, San Antonio School of Medicine and is certified by the American Board of Internal Medicine and certified in Medical Oncology. Dr. Kisner holds a B.A. from Rutgers University and a M.D. from Georgetown University.

James L. Knighton, became President and Chief Financial Officer in July 2002. Mr. Knighton joined Caliper serving as our Vice President and Chief Financial Officer in September 1999 and was later promoted to Executive Vice President in April 2001. From October 1998 to September 1999, Mr. Knighton served as Senior Vice President and Chief Financial Officer of SUGEN, Inc., a publicly held biotechnology company acquired by Pharmacia. From July 1997 to October 1998, Mr. Knighton served as Vice President of Investor Relations and Corporate Communications at Chiron Corporation, a biotechnology company. From 1985 to 1994, Mr. Knighton served in various operations, planning and R&D functions at E. I. DuPont de Nemours Inc., a global, diversified chemical and life science company. Mr. Knighton holds a B.S. in Biology from the University of Notre Dame, an M.S. in Genetics from the University of Pennsylvania and a M.B.A. from the Wharton School at the University of Pennsylvania.

Anthony T. Hendrickson, was named Vice President of Finance in September 2002 in addition to serving as our Corporate Controller and Chief Accounting Officer since April 2000. From April 1997 to April 2000, Mr. Hendrickson was the Corporate Controller and Chief Accounting Officer for Sequus Pharmaceuticals, Inc., a biotechnology company. From April 1995 to March 1997, Mr. Hendrickson was the Director of Finance and Administration of a U.S. operating division of Lanier Worldwide, Inc. that specialized in electronic imaging. From 1993 to April 1995, Mr. Hendrickson was a Senior Manager for KPMG LLP, a public accounting firm. Mr. Hendrickson is a Certified Public Accountant and holds a B.A. in Accounting and Finance from the University of Cincinnati and an M.B.A. from The Ohio State University.

Bruce E. MacMillan has served as our Vice President, General Counsel and Corporate Secretary since May 2002. From April 1999 to December 1999 he was Vice President, General Counsel and Corporate Secretary for SUGEN, Inc., a publicly held biotechnology company acquired by Pharmacia. From January 1991 to April 1999 Mr. MacMillan served as Associate General Counsel for Raychem Corporation, an electronics and telecommunications component company. In his last position at Raychem, he was the principal legal officer responsible for the company’s worldwide electronics division. Prior to that, he was the principal legal officer for Raychem’s worldwide telecommunications business. As part of his responsibilities, Mr. MacMillan was also General Counsel of Ericsson-Raynet, a joint venture between Telefonaktiebolaget L.M. Ericsson and Raychem from 1995 to 1996. Prior to that he was in private practice for 10 years. Mr. MacMillan holds both an M.B.A. and a B.A. from the University of California at Berkeley and received a J.D. from the University of California, Hastings College of Law.

Michael Merion, Ph.D., has served as our Vice President of Sales and Marketing since August 2001. From November 1993 to July 2001, Dr. Merion was Vice President of Marketing for Dionex Corporation, a diagnostic instrument company, where he was responsible for worldwide marketing of all of Dionex products and new business development. From September 1984 to October 1993, Dr. Merion held various positions in sales, product management and program management for Waters Corporation, a diagnostic instrument company. Dr. Merion holds a B.A. in Biology from Rutgers University and a Ph.D. in Biochemistry also from Rutgers University.

William M. Wright III, was named Vice President of Partnership Relations in October 2002 after previously serving as our Vice President of Operations since joining the company in September 1998. From November 1995 to May 1998, Mr. Wright served as Vice President of Operations of Biocircuits Corporation, a medical diagnostic company, where he was responsible for instrument and immunoassay cartridge manufacturing. From 1984 to 1995, Mr. Wright was Vice President of Site Operations with Dade International Inc., formerly a division of Baxter International, Inc., a medical products manufacturing company, while there he assisted in the start-up and launch of the Baxter International Paramax Analytical Clinical Chemistry Business. Mr. Wright holds a B.S. in Industrial Technology from California State University at Long Beach.

Our principal research and development, manufacturing and administrative facilities are currently located in three buildings totaling approximately 110,000 square feet of leased space in Mountain View, California. The leases for this space will expire in 2007 and 2008. We have no other properties or facilities in the United States. Our wholly-owned subsidiary, Caliper Europe GmbH, engaged in marketing and sales activities in Europe, has approximately 1,700 square feet of leased office space in Waldems, Germany as of January 2002. The lease for this space will expire in 2005. We believe that our current facilities, based on our long term strategic facilities plan, are adequate for our needs through the fourth quarter of 2004, and we are currently assessing the need for additional facilities primarily for LabChip manufacturing to meet our future needs. If we are unable to locate additional facilities, we will be required to delay our planned expansion. Any facilities that we are able to locate and lease may be on terms that are expensive to us, especially since we are located in the Silicon Valley in California where supply of such facilities can fluctuate from year to year.

Commencing on June 7, 2001, Caliper and three of its officers and directors (David V. Milligan, Daniel L. Kisner and James L. Knighton) were named as defendants in three securities class action lawsuits filed in the United States District Court for the Southern District of New York. The cases have been consolidated under the caption In re Caliper Technologies Corp. Initial Public Offering Securities Litigation, 01 Civ. 5072 (SAS) (GBD). Similar complaints were filed in the same Court against hundreds of other public companies that conducted IPOs of their common stock since the late 1990s (the “IPO Lawsuits”). On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Together, those cases are denominated In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). On April 19, 2002, a Consolidated Amended Complaint was filed alleging claims against Caliper and the individual defendants under Sections 11 and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder. The Consolidated Amended Complaint also names certain underwriters of Caliper’s December 1999 initial public offering of common stock. The Complaint alleges that these underwriters charged excessive, undisclosed commissions to investors and entered into improper agreements with investors relating to aftermarket transactions. The Complaint seeks an unspecified amount of money damages. Caliper and the other issuers named as defendants in the IPO Lawsuits moved on July 15, 2002, to dismiss all claims on multiple grounds. By Stipulation and Order dated October 9, 2002, the claims against Messrs. Milligan, Kisner and Knighton were dismissed without prejudice. On February 19, 2003, the Court granted Caliper’s motion to dismiss all claims against it. Plaintiffs were not given the right to replead the claims against Caliper; the time to appeal the dismissal has not yet expired.

alleging that the same accused devices infringe one or more of the claims of that patent. The answer to Caliper’s first amended complaint was filed on December 17, 2002, and asserts a counterclaim seeking a declaratory judgment that both Caliper patents are invalid and not infringed. Caliper believes the amended counterclaim to be without merit. On January 28, 2003, Caliper filed a motion for preliminary injunction, which is scheduled to be heard by the court in May 2003. In that motion, Caliper has asked the court to preliminarily enjoin Molecular Devices from making, using, selling, and offering to sell its infringing IMAP kits for kinase assays. Discovery is underway, and no trial date has been set by the Court.

No matters were submitted to a vote of our security holders during the quarter ended December 31, 2002.

Our common stock has been quoted on the Nasdaq National Market under the symbol “CALP” since our initial public offering in December 1999. Prior to that time, there was no public market for our common stock. The following table shows the high and low sales prices per share of our common stock as reported on the Nasdaq National Market for the periods indicated:

As of December 31, 2002, there were approximately 190 holders of record of our common stock. We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business. Although we have no restrictions, we do not anticipate paying any cash dividends in the foreseeable future.

The statements of operations data for each of the years ended December 31, 2002, 2001 and 2000, and the balance sheet data as of December 31, 2002 and 2001, have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K which have been audited by Ernst & Young LLP, independent auditors. The statements of operations data for the years ended December 31, 1999 and 1998, and the balance sheet data as of December 31, 2000, 1999 and 1998 have been derived from our audited financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of results to be expected for any future period. The data presented below should be read with our financial statements, including the notes, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.


(2)	Accretion on redeemable convertible preferred stock ceased upon conversion of all of the outstanding preferred stock to common stock at the close of our initial public offering in December 1999.

(3)	See Note 2 of notes to our financial statements for an explanation of the cumulative effect of a change in accounting principle related to revenue recognition.

The following discussion and analysis should be read with “Selected Financial Data” and our financial statements and notes included elsewhere in this Annual Report on Form 10-K. The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in “— Factors Affecting Operating Results” below as well as those discussed elsewhere.

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

Caliper is a leader in microfluidic lab-on-a-chip technologies that miniaturize, integrate and automate many laboratory processes. The company develops, manufactures and sells our proprietary LabChip systems to pharmaceutical and other companies. We believe our LabChip systems have the potential to assemble the power, and reduce the scale, of laboratories full of equipment and people. We utilize two distribution channels for our products. In some cases, we sell instruments and chips directly to end users. In other instances we sell products to commercial partners, who in turn sell these products to end users.

2002 Highlights. During the year, Caliper had a number of achievements that we believe better position the company for the future. These included:


	•	Together with our commercial partner, Agilent Technologies, Inc. (“Agilent”), we introduced a new RNA 6000 Pico LabChip kit for the 2100 Bioanalyzer, a microfluidic benchtop system. The menu of applications for the system now numbers nine and includes LabChip kits for RNA, DNA, proteins and cells.

	•	Again with Agilent, we enhanced the Cell Fluorescence LabChip kit, also for the 2100 Bioanalyzer, by incorporating cell staining into the chip.

	•	We established a research collaboration with Ambion, Inc., an established leader in RNA-based research products, to develop a microfluidic RNA amplification system.

	•	We launched the AMS 90 SE, our automated instrument platform for DNA separations, allowing scientists to analyze large volumes of DNA fragments quickly and efficiently. This system, which we sell directly to end-users, is targeted to those laboratories that analyze 100 or more DNA samples per day.

	•	We introduced on an “early release” basis, the Calcium Flux LabChip device for use with the Caliper 250 Drug Discovery system. In this application, scientists investigating new chemical compounds can measure changes in intracellular calcium levels. Intracellular calcium levels are often used in pharmaceutical research and development as a means of studying interactions between potential drugs and particular receptors on a cell’s surface that can be targets for pharmaceutical intervention in disease processes.

	•	We saw increased usage of the Caliper 250 by customers doing production screening of pharmaceutical compound libraries. We believe this is an important indication that customers are integrating our system into their protocols.

	•	We expanded our intellectual property portfolio. Caliper was granted 51 U.S. patents, bringing our U.S. patent count to 127 at December 31, 2002. We also filed 65 new U.S. patent applications, increasing the total number of U.S. patents in prosecution to 214 at year-end.

	•	We improved yields across all LabChip types, while increasing the number and variety of chips manufactured.

In addition to these achievements, there were changes in a number of areas that either had a direct financial impact in 2002 or have the potential to do so in the future. These included:

Conversion of Technology Access Partners. From Caliper’s inception in July 1995 through September 2001, our operating activities were primarily devoted to research, development and commercialization of technologies involving the manipulation of very small amounts of fluid, which are referred to as “microfluidic technologies.” During this period our revenues were principally from contract services and, to a lesser extent, from product sales. With the introduction of the Caliper 250 Drug Discovery system in September 2001, we transitioned to a commercial products business from a technology access model.

Within the context of our planned discontinuation of our Technology Access Program (“TAP”), we initiated the renegotiation of our agreements with Amgen, Eli Lilly and Millennium Pharmaceuticals. Under the amended agreements with our TAP customers, Caliper agreed to convert technology access and subscription fees still outstanding to credits available towards the purchase of products and services that could be utilized by the customer no later than March 2003. In 2002, we recognized $3.1 million in revenue from these converted agreements based on purchases by our former TAP customers of instruments, chips, support services and custom solutions directly from Caliper. As of December 31, 2002, a total of $138,000 of revenue remains deferred related to just one former TAP customer. We expect to recognize this deferred revenue in the first quarter of 2003 as this customer purchases products or services. This ongoing revenue from former TAP customers reflects the continued transition from a technology collaboration-based company to a more scalable products-based company. However, it is still too soon to know whether these former TAP customers will continue to purchase our products and services at historic levels now that their converted TAP fees have been fully utilized, or whether we will be able to replace this revenue with revenue from sales to new customers.

Related Party. Entities upon which we can exercise significant influence, but not control, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to a company depends on an evaluation of several factors including, among others, representation on the company’s board of directors and ownership level, generally between 20% to 50% interest in the voting securities of the company, including rights associated with our holding in common shares of the company.

In May 2001, we formed Amphora Discovery Corp. (“Amphora”) later transferring certain intangibles to Amphora in September of that year. Also in September 2001, Amphora completed a private placement of securities with third-party investors that reduced our ownership to 28%. In December 2002, Amphora completed a second placement of securities with third-party investors raising additional capital that further reduced our ownership to approximately 13%. Our investment in Amphora continues to be accounted for under the equity method of accounting. We initially received the right to appoint two representatives to Amphora’s six-member board of directors. On March 17, 2003, one of Caliper’s two representatives, Dr. Michael Knapp, resigned from Amphora’s board of directors. Due to the subsequent reduction in our percentage ownership, our right to appoint representatives to Amphora’s Board declined to one. As Caliper’s investment in Amphora has no basis for accounting purposes and, because Caliper does not guarantee any debt or have commitments to fund losses, Caliper has not recorded its proportionate share of Amphora’s operating losses in its financial statements since the completion of Amphora’s first financing. Future investments by Amphora’s third-party investors would further reduce our ownership interest. Caliper does not intend to make future equity investments in Amphora.

Since its inception and through December 31, 2002, Amphora has purchased 21 Caliper 250 Drug Discovery systems and $2.2 million in datapoints. In 2002 alone, we sold to Amphora products and services totaling $6.2 million and recorded it as a related-party revenues in the financial statements. Of the $6.2 million in total sales, $3.3 million related to drug discovery system products. Under the equity method of accounting, we deferred 28% of the gross profit of these sales, or $333,000, that reflected our retained ownership interest in the products sold to Amphora in 2002. All drug discovery system sales to Amphora occurred prior to Amphora’s December 2002 third-party financing. Future system sales will be deferred at our then retained ownership interest level, which is currently approximately 13%. In 2002, we recognized a total of $177,000 of this deferred gross profit as revenue of which $121,000 related to drug discovery system products sold in 2001

and $56,000 related to products sold in 2002. We expect to recognize the remaining $499,000 as revenue ratably over the next 36 months as Amphora records depreciation on its Caliper 250 systems.

Commercial Collaboration with Agilent Technologies, Inc. In May 1998, we established a broad relationship with Agilent Technologies, Inc. (“Agilent”) to create a line of commercial research products based on our microfluidic LabChip technologies. In September 1999, Agilent introduced our first LabChip system for use by individual researchers. Subsequently, Agilent and Caliper have expanded the application menu for this product and engaged in other new product development activities.

Under the collaboration agreement, Agilent funds our research and development expenditures related to the collaboration, reimburses us for our costs of supplying chips and reagents to Agilent and pays us a share of the gross margin earned on all components of LabChip systems they sell. We record revenue from development and support activities under our collaboration agreement in the period in which the costs are incurred. We report direct costs associated with this contract as research and development expense. We recognize revenue related to the reimbursement of costs for the supply of chips and reagents to Agilent upon shipment and we recognize the related costs as components of cost of sales. We recognize as revenue our share of gross margin on components of the systems sold by Agilent upon shipment to the end user.

In May 2002, we notified Agilent of our election to terminate the agreement between the companies, effective as of May 2003. If we do not enter into a new agreement before that time, then under the existing agreement, the parties’ relationship would change, including as follows:


	•	we could cease to receive development funding for new products;

	•	we will grant Agilent a non-exclusive, royalty-bearing license to use the lab-on-a-chip technologies that we have developed up to that time in order to develop, make and sell products in substantially the same field that applied during the collaboration;

	•	upon request by Agilent, we will also transfer chip manufacturing know-how over a limited period of time; and

	•	we will receive royalties on Agilent’s sales of systems that employ our patented technologies.

After the collaboration agreement terminates in May 2003, our gross margin share for existing products will remain the same until November 2004. In November 2004, our gross margin share for chips and reagents will decrease, and in May 2006 our gross margin share for chips and reagents will decrease again. Our gross margin share for existing instruments will also decrease in the same time periods, although at somewhat different rates. Upon termination of the agreement in May 2003, Agilent will have a non-exclusive license in the field of the collaboration to Caliper’s then existing LabChip technology to develop, manufacture and sell new products in that field. Agilent will be required to pay royalties to Caliper based on its net revenue from sales of such products at the established royalty rates set forth in the termination provisions of our collaboration agreement.

Beginning in November 2003, Caliper will have the right to market and sell collaboration products, with reciprocal supply arrangements with Agilent. Our principal motivation in terminating the formal agreement with Agilent was to give us more flexibility in commercializing new products with other commercial partners. Termination of the agreement will also provide Caliper with greater ability to market and sell existing products in the field of the collaboration directly to end-user customers, in part utilizing the reciprocal supply arrangements set forth in the termination provisions of the agreement. Both parties will either operate under the existing termination provisions of the collaboration agreement or establish new terms, as yet to be determined. Given the success of the Agilent 2100 Bioanalyzer products and the changing relationship between Caliper and Agilent, we are actively working to expand the number and scope of our commercial partnerships.

Increasing the Number and Scope of Commercial Partnerships. During 2002, we expanded our Business Development activities in order to pursue additional commercial partnerships. A core element of our business strategy is to broaden our network of commercial partners, accessing new applications and new markets. We believe that this will allow us to more effectively leverage the commercial potential of microfluidics in ways

that would be difficult to achieve, from both a research investment and infrastructure perspective, for a young company. This strategy allows us to combine our proprietary technical expertise with a partner who has complementary capabilities. These types of collaborations diminish our risk and reduce our costs while leveraging larger, established partners’ strengths to tap new markets. As we create new relationships of this type, we expect the financial implications for us to be modest in the early years — primarily product development funding — until product revenues are generated, beginning generally in the second or third year of a relationship.

Planned Entry into Molecular Diagnostics. In December 2001, we entered into an agreement with Bacterial BarCodes, Inc. (“BBCI”) to co-distribute molecular diagnostic systems based on our microfluidic LabChip technology and BBCI’s proprietary molecular identification and DNA fingerprinting technology known as rep-PCR (repetitive sequence-based polymerase chain reaction). As part of this collaboration, we developed the Caliper 1000 Analyzer system in 2002. The Caliper 1000, which is manufactured by Agilent on an OEM basis, is being used with BBCI’s proprietary rep-PCR products to generate DNA fingerprints of bacteria for microbial typing and identification applications. The combined Caliper/ BBCI system is in the final stages of field-testing. Customer response at the testing sites has been positive, and we anticipate a product rollout in 2003. BBCI initially has targeted laboratories involved in epidemiology testing, such as reference laboratories and facilities in large hospitals. A clinical product, requiring regulatory approval, is also planned for which BBCI will manage the required submissions to the Food and Drug Administration. Under our agreement, Caliper will provide chips and analysis reagents to BBCI. BBCI will sell a combined assay kit that includes our chips and their rep-PCR DNA fingerprinting reagents and protocols, plus software to access BBCI’s database of bacterial DNA fingerprints. We will market and sell the Caliper 1000 Analyzer designed to run these chips either directly or through distribution channel partners.

Intellectual Property. Key to our business strategy has also been the development of an extensive intellectual property portfolio. Consistent with this strategy, we have protected our patent portfolio as appropriate, this included litigation with Aclara Biosciences (“Aclara”). In January 2001, we announced a comprehensive settlement agreement with Aclara on all pending litigation between the two companies. As a result, Aclara agreed to pay us $37.5 million over a three-year period in a combination of stock, cash and committed minimum royalties. As of December 31, 2002, we have collected $35 million of this settlement with the remaining $2.5 million for minimum royalties payable in 2003.

During the fourth quarter of 2002, we entered into an amendment and restatement of our existing license agreements with UT-Battelle, LLC under which we had obtained an exclusive license to the patents covering the inventions of Dr. J. Michael Ramsey. Although we have minimum royalty obligations under this license agreement, its earned royalty payments exceeded the required minimum royalty for 2002. Royalty payments were $81,000 in 2002. We anticipate that its earned royalty obligation in future years will continue to exceed the minimum required royalty. We also have an exclusive license from the Trustees of the University of Pennsylvania to certain patents relating to microfluidic applications and chip structures. We anticipate that during the next several years the minimum royalty obligation under this license will exceed the earned royalty obligation. The minimum royalty obligation under this license rises over time, but never exceeds $200,000 per year.

Reduction in Force. In July 2002, due to the broader economic slowdown and a widely reported reduction in research and development spending by biopharmaceutical companies that we believed was affecting Caliper’s sales to customers, we began a detailed strategic review of our business. This process included evaluating each of our products and programs for commercial opportunity, time to market and resource requirements. As a result of that review, in September 2002, we conducted a reduction in force that resulted in a downsizing of our employee work force by 28 people, or approximately 10%. The reduction was primarily in our research and development staff where we changed the focus of our product development and technology research to align more with the changing needs of our customers. We recognized a charge of $314,000 in 2002 for severance payments and related benefits all of which were paid by the end of the 2002 calendar year. We expect to realize approximately $2 million in annualized savings from this employee downsizing action. The strategic review also served as the basis of our 2003 budget planning process and

continues to be utilized to allocate resources within Caliper. We anticipate making further expense reductions to better align our discretionary spending activities with revenue growth.

Stock Option Exchange. In October 2002, we commenced a voluntary stock option exchange program for regular employees of the company. This program seeks to align employee and stockholder interests while sustaining high levels of employee performance through what has been a lengthy stagnant economic period. A considerable number of our employees’ option exercise prices are significantly higher than the current market price of Caliper common stock, and the program is intended to address this situation. Our board and management believe that this program will help motivate and retain our employees. Under the program, eligible employees had the opportunity to exchange certain unexercised stock options for new options to be granted at least six months and one day following the cancellation of the exchanged options. The unexercised stock options that were tendered for exchange under the stock option exchange program was for 1,511,331 shares. The new options will be exercisable for an equal number of shares as the exchanged options. The exercise price of the new options will be equal to the most recent closing share price of Caliper common stock at the time of the new option grants, which is expected to be on or about May 20, 2003. The offer of the option exchange commenced on October 16, 2002, and expired on November 19, 2002.

Looking Ahead. Since our inception, Caliper has incurred significant losses and, as of December 31, 2002, we had an accumulated deficit of $85.6 million. Our losses have resulted principally from costs incurred in research and development, manufacturing scale-up, product research and commercialization and from general and administrative costs associated with our operations. We expect to continue to incur substantial research and development, product commercialization, manufacturing scale-up and general and administrative costs. As a result, we will need to generate significantly higher revenue to achieve profitability.

As we look to the future, our primary corporate focus remains unchanged. During 2003, we intend to: create market traction in our direct product sales; add new commercial partners; and continue improving the quality of our existing products. There are a number of milestones that will provide evidence of our sustained progress in these areas. For the Caliper 250 Drug Discovery system, we intend to expand the number of applications available to customers. It is also our intention to expand our customer base, as well as to increase usage by existing customers. We also plan to initiate multiple new commercial partnerships, and advance those currently in existence. This includes launching the Caliper 1000 Analyzer and increasing revenues from the Agilent collaboration.

Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, recommends all companies include a discussion of critical accounting policies or methods used in the preparation of financial statements. See Note 2 to our audited financial statements included elsewhere in this document for a summary of the significant accounting policies and methods used in the preparation of the financial statements. The following is a brief discussion of the more significant accounting policies and methods used by Caliper.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses, and assets and liabilities during the periods reported. Estimates are used when accounting for certain items such as warranty expense, sales and marketing programs, employee compensation programs, depreciation and amortization periods, taxes, inventory values, and valuations of investments and intangible assets. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates due to changing conditions or the validity of our assumptions. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition. We recognize instrument, LabChip products, datapoint and service support revenues on shipment or when the related services are performed, as applicable, net of credits and adjustments for discounts. In instances where we have customers who have requested acceptance provisions, no revenue is

recognized until such customer acceptance has been obtained. In connection with our adoption of the provisions of Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, we have changed our method of accounting effective January 2000 to recognize all customer support and service fees over the term of the related agreement.

Customer and Accounts Receivables. We currently have an allowance for doubtful accounts of $119,000 as of December 31, 2002 based on the aging of our accounts receivable balances and our historical experience of defaults and write-offs. If the financial condition of our customers were to further deteriorate, we will need to add to this allowance for doubtful accounts the estimated losses resulting from the inability of our customers to make required payments.

Inventory Write-Offs. We make inventory commitment and purchase decisions based upon sales forecasts. To mitigate the component supply constraints that have existed in the past and to fill orders with non-standard configurations, we build inventory levels for certain items with long lead times and enter into certain longer-term commitments for certain items. We permanently write off 100% of the cost of inventory that we specifically identify and consider obsolete or excessive to fulfill future sales estimates. We define obsolete inventory as inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage, and is determined using our best estimate of future demand at the time, based upon information then available to us. In making these assessments, we are required to make judgments as to the future demand for current or committed inventory levels. We use a twelve-month demand forecast and, in addition to the demand forecast, we also consider: (1) parts and subassemblies that can be used in alternative finished products, (2) parts and subassemblies that are unlikely to be engineered out of our products, and (3) known design changes which would reduce our ability to use the inventory as planned. Significant differences between our estimates and judgments regarding future volume and mix of customer demand for our products and actual volume and demand mix may result in additional write-offs in the future.

Depreciation. When recording depreciation expense associated with our production and microfluidic equipment, we use estimated useful lives based on the utility and service life of the equipment. As a result of changes in technology and industry conditions, we periodically evaluate the useful lives of our production and microfluidic equipment. These evaluations could result in a change in useful lives in future periods.

Warranty Expense. At the time revenue is recognized, we establish an accrual for estimated warranty expenses associated with our sales, recorded as a component of cost of revenue. Our standard warranty period extends 12 months from the date of sale on the automated drug discovery systems and 3 months on chips. Our warranty accrual represents our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While we believe that our warranty accrual is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what actually transpire in the future. If our actual warranty costs are greater than the accrual, costs of revenue will increase in the future.

Related Party. We have an ownership interest of approximately 13% in one entity, Amphora, for which we apply the equity method of accounting. Our investment in Amphora has no basis for accounting purposes and, because we do not guarantee debt or have commitments to fund any of Amphora’s losses, we have not recorded any proportionate share of Amphora’s operating losses in our financial statements since the completion of Amphora’s financing. Amphora is a major customer representing approximately 24% of our total revenue in 2002. Our investment in Amphora has no basis for accounting purposes and we do not guarantee debt or have any commitments to fund Amphora’s losses. All significant accounts and transactions with Amphora are disclosed as related party transactions. In 2002, we sold a total of $6.2 million in Caliper 250 Drug Discovery system products, LabChip products, datapoints and assay development services to Amphora, recording the sales as related party revenue in our financial statements. Under the equity accounting method, Caliper recorded $3.3 million in related party product sales and deferred 28% of the gross profit, or $333,000 that reflects Caliper’s retained ownership interest in the products sold to Amphora in 2002. The remaining $2.9 million of revenue recognized in 2002 consisted of $1.7 million in datapoints, $900,000 in assay development services and deferred gross profit revenue from Caliper 250 Drug Discovery system product

sales in 2002 and 2001. In 2002, we recognized a total of $177,000 of this deferred gross profit as revenue of which $121,000 related to drug discovery system products sold to Amphora in 2001 and $56,000 related to products sold in 2002. We expect to recognize the remaining $499,000 as revenue ratably over the next 36 months through September 2005 as Amphora records depreciation on its Caliper 250 Drug Discovery systems. As all automated drug discovery system sales to Amphora occurred prior to Amphora’s December 2002 third party financing, all future drug discovery system sales will be deferred at our then retained ownership interest level which is approximately 13% currently.

We have no guarantees of balance sheet debt of third parties and we have no debt obligations that contain provisions requiring accelerated payment in the event of specified levels of declines in liquidity or profitability. We do not have any special purpose entities in place.

Derivatives. In connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, we recognize derivative financial instruments in the financial statements at fair value regardless of the purpose or intent for holding the instrument. We recognize changes in the fair value of derivative financial instruments either periodically in income or in stockholders equity as a component of comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it is designated as a fair value hedge or cash flow hedge. For derivative instruments that are designated and qualify as fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), we recognize the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk in current earnings during the period of the change in fair values. We entered into a settlement agreement with Aclara in March 2001, the terms of which provided that if were to sell any of the 900,000 shares of Aclara’s common stock received in the settlement between 18 and 24 months from the effective date of the settlement agreement, and the then fair value of Aclara’s stock is less than $36.11 per share, Aclara agreed to pay us in cash a dollar amount equal to the difference between the aggregate fair value of the Aclara stock at the date the shares are disposed and $32.5 million. If the then fair value of the Aclara stock was greater than $36.11 per share, we would have received no additional consideration from Aclara. We were restricted from selling our shares of Aclara for 18 months following the effective date of the settlement agreement. If we were to sell the shares of Aclara stock at any time after 24 months from the effective date of the settlement agreement, Aclara would have no obligation to provide any additional consideration to us. Aclara executed a fully-funded $32.5 million standby letter of credit in favor of Caliper to secure its performance under this potential obligation. In effect, Aclara had guaranteed the aggregate settlement amount of $32.5 million, so long as we were to sell our Aclara stock within a specified period of time.

We accounted for this arrangement by initially recording $4.3 million in Aclara stock at fair market value, with a note receivable with a corresponding face value of $28.2 million for the fully funded letter of credit which was reduced by the initial fair value ($2.7 million) of an embedded derivative. The embedded derivative was designated as a fair value hedge of the Aclara stock. The mark-to-market change in the fair value of the Aclara stock was recorded in earnings in the other income or expense line on the statement of operations and offset by the gains or losses in the fair value of the derivative reported in the same other income or expense line. The ineffective portion of the embedded derivative was also recorded in the other income or expense line on the statement of operations. On October 15, 2002 we received $32.5 million in cash from Aclara and surrendered the 900,000 shares of Aclara common stock effectively completing the settlement transaction. As of December 31, 2002, we have no derivative financial instruments.

Stock Options. We have elected to continue to follow Accounting Principles Board Opinion No. 25 “Accounting for Stock-Based Compensation” (“APB 25”) to account for employee stock options because the alternative fair value method of accounting prescribed by SFAS No. 123 requires the use of option valuation models that were not developed or use in valuing employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant. Deferred compensation, if recorded, is amortized using the graded vesting method. Statement of Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) requires the disclosure of pro forma information regarding net

loss and net loss per share as if we had accounted for its stock options under the fair value method. See “Summary of Significant Accounting Policies” note to the financial statements for further discussion.

We account for stock option grants to non-employees in accordance with the Emerging Issues Task Force Consensus No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires the options subject to vesting to be periodically re-valued and expensed over their vesting periods.

Deferred Tax Assets. We have deferred tax assets related to net operating losses generated in the United States. Our accounting policy is to record valuation allowances when it is more likely than not that a tax benefit will not be realized. At December 31, 2002, we had deferred tax assets related to net operating losses of $33.2 million and a valuation allowance of $33.2 million to equally offset those assets as our lack of earnings history and the uncertainty of realizing these net operating losses significantly limits our ability to realize this tax asset.

Revenue. Revenue decreased 13% to $25.8 million in 2002 from $29.6 million in 2001. Of the $3.8 million decrease, we had increased growth of $3.8 million from increased product sales to commercial customers, including Amphora, a related party, and from our collaboration with Agilent offset by a decrease of $7.6 million in license and contract fees from an anticipated decline related to the discontinuation in 2001 of our Technology Access Program.

Related party revenue increased to $6.2 million in 2002 as compared to $3.9 million in 2001. This 59% increase resulted from sales to Amphora of $3.6 million in Caliper 250 Drug Discovery system products, $1.7 million in datapoints and $900,000 in assay development services in 2002 as compared to $3.0 million in Caliper 250 Drug Discovery system products, $500,000 in minimum datapoints revenues and $364,000 in assay development services in 2001. Based on the December 2002 restructured relationship with Amphora, we expect in 2003 that Amphora will purchase only one Caliper 250 instrument and make approximately $1.6 million in minimum datapoint payments to us. Product revenue from unrelated customers increased 18% to $10.4 million in 2002 as compared to $8.8 million in 2001. This increase of $1.6 million is mainly from product volume growth under our commercial collaboration with Agilent, with sales of our Caliper 250 Drug Discovery systems up only modestly. Product revenue increased 52% in 2002 under our commercial collaboration with Agilent driven by the Agilent 2100 Bioanalyzer unit sales increase of 27% and LabChip kit growth of 83% over the same period in 2001. In 2003, we expect continued unit growth in the Agilent 2100 Bioanalyzer product line. We estimate Bioanalyzer instrument sales to grow by 20% to 30%, while the number of LabChip kits sold are expected to increase by 50% to 60%. Product revenues from sales of our drug discovery system products increased 7% in 2002 driven by increased datapoint revenues of $385,000 as compared to none in 2001 offset by Caliper 250 Drug Discovery systems product sales declining 4% in 2002 as compared to 2001. Additionally, product revenues in 2002 from sales of the AMS 90 were essentially unchanged as compared to 2001 while product revenues from the Caliper 42 system declined 70% in 2002.

It has been widely reported that the sluggish economic environment, coupled with pharmaceutical industry-specific factors, has dampened research spending for many companies. As such, continuing market acceptance of our products will depend on our ability to demonstrate the advantages and potential economic value of our drug discovery systems in the context of decreased capital spending by our customers.

License fees and contract revenues decreased 45% to $9.3 million in 2002 compared to $16.9 million in 2001. The decrease of $7.6 million resulted mainly from the $2.5 million received in licensing fees in 2002 for the Ramsey family of patents to Aclara as opposed to $5.0 million in 2001, a $4.3 million decline in our Technology Access Program contract revenue, and a $540,000 decline in government contracted research offset by a $1.1 million increase in product support services on Caliper’s commercialized AMS 90 and Applications Developer Program services. The decline in our Technology Access Program revenue in 2002 was a result of our conversion from a fee-based technology access program model in September 2001 to a

commercial drug discovery products business. Also, contract fee revenues under our collaboration with Agilent declined 23% to $4.6 million in 2002 as we concluded several development programs related to the Agilent 2100 Bioanalyzer product line. Development program contract fees under our collaboration with Agilent could cease at any time after the termination of the formal agreement in May 2003. However, we anticipate that some product development contract fees will continue as we are working steadily with Agilent to develop new products.

Cost of Product Revenue. Cost of product revenue represents manufacturing costs incurred in the microfluidic chip and instrument production process, including component materials, assembly labor and overhead, packaging and delivery cost. Cost of products sold was $3.0 million in 2002 for the related party sales to Amphora as compared to $2.1 million in 2001. Of this $900,000 increase, $444,000 related to increased cost for warranty repairs and service costs driven by the increased number of our products in operation at Amphora, $248,000 related to higher component costs with the remainder driven by product mix due to increased LabChip product volume offset by a 10% decline in the number of drug discovery systems purchased in 2002 as compared to 2001. As a result, profit margins for product sales to Amphora were 43% in 2002 as compared to 41% for each of the same periods in 2001. Profit margins were positively impacted by a $1.2 million increase in datapoint revenue in 2002 as compared to 2001 offset by the added volume discounts earned by Amphora due to its higher accumulated instrument purchases during the course of the year. The profit margins on product sales to Amphora will continue to vary due to the volume of products purchased with their corresponding commercial volume discounts earned and due to datapoint revenue that has minimal associated costs to Caliper. Cost of all other products sold were $7.9 million for 2002 compared to $4.8 million in 2001. Product costs increased during 2002 by $3.1 million. Of this amount, $663,000 was largely as a result of component replacement cost under our product warranty provisions driven by the increased number of our products in the market. As we only began to commercially market our products in September 2001, there were no warranty costs incurred in 2001. Although warranty costs are common in our business and affect our profit margins variably during the year, we do not anticipate component replacements such as those that occurred throughout 2002 to continue at these levels indefinitely. Additionally in 2002, we wrote-off $701,000 in excess or obsolete inventory materials. Profit margins from product sales to unrelated customers declined overall to 24% in 2002 as compared to 46% in 2001. In addition to the warranty and inventory costs already noted, profit margins were also adversely impacted in 2002 by the increased volume of Agilent 2100 Bioanalyzer systems sold, which carry lower margins, and lower sales of Caliper’s own products. Product mix will affect future profit margins as Caliper earns a higher return from its own products sold as opposed to sharing gross margin revenues on collaboration products with Agilent. Datapoint revenue will also affect profit margins from unrelated customers as it has minimal associated costs to Caliper.

Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for chip development, material costs for prototype and test units, legal expenses resulting from intellectual property prosecution and litigation, and other expenses related to the design, development, testing, and enhancement of our products. We expense our research and development costs as they are incurred. Research and development expenses increased to $43.3 million during 2002 from $38.3 million in 2001. The increase of $5.0 million was primarily attributable to continued growth of research and development activities, consisting of $2.7 million related to increased personnel and services to support our expanded next generation drug discovery system and microfluidic chip development, partner collaboration and product scale-up, $199,000 for supplies required to assemble, build and test prototype LabChip systems, $699,000 for costs related to intellectual property matters and $1.4 million due to expansion in research facilities, equipment and activities.

Our research and development focus has been on product development in the areas of new applications, microfluidic instruments with expanded capabilities, our LibraryCard system and genomic analysis systems. In the future, we intend to focus for our LabChip technology development efforts on a narrow range of applications based on customer demand. We also will continue to make investments intended to advance and refine our manufacturing processes in order to improve the functionality and reliability of our chips and instruments. We expect to continue our efforts in these areas of research and development even though the outcomes of these projects are inherently uncertain. We will also continue to revise our research and

development focus and priorities to match the economic climate and the research and development spending by biopharmaceutical companies that we believe will affect the demand for our microfluidic products. We expect research and development spending to decline in 2003 as compared to 2002 as a result of our downsizing in September 2002 and reduced discretionary spending with our research and product development efforts, only expanding in subsequent years based on customer demand, market conditions and our commercial growth.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales and marketing, finance and other administrative personnel, recruiting expenses, professional fees, and other corporate expenses including business development and general legal activities. Selling, general and administrative expenses increased to $17.5 million during 2002 from $15.5 million in 2001. The increase of $2.0 million was due primarily to an increase of $795,000 related to employment costs for sales and marketing mostly due to our first full year of a commercial marketing and sales function, $213,000 for general legal fees related to expanded commercial initiatives, $467,000 in increase insurance and license fees to support our commercially marketed products and expanded operating facilities, $487,000 for market research, advertising and services to support our commercialized products and $801,000 for expanded facility operating costs offset by a $828,000 decline in outside consulting services. We expect selling, general and administrative expenses to moderate over the next several years increasing only to support demonstrated business growth or for activities required to further commercialize our products.

Amortization of Deferred Stock Compensation. Deferred stock compensation represents the difference, at the date of grant, between the deemed fair value of our common stock for accounting purposes and the exercise price of options. During 1998 and 1999, we recorded deferred stock compensation totaling $13.2 million. This amount is being amortized over the respective vesting periods of the individual stock options using the graded vesting method. We recorded amortization of deferred compensation, net of $378,000 in 2002 as compared to $2.5 million in 2001. The 2002 deferred stock compensation, net consisted of $1.4 million, offset by a reversal of $1.0 million in 2002 of stock compensation expense recognized in previous periods resulting from forfeited options from the approximate 10% reduction in force and other employee terminations. We expect to record amortization expense for deferred compensation of $542,500 during 2003 and $94,500 during 2004. The amount of deferred compensation expense to be recorded in future periods may further decrease if unvested options for which deferred compensation has been recorded are subsequently canceled.

Restructuring Charges. Restructuring charges represent the severance and related benefits paid to terminated employees as a result of the reduction in force conducted in September 2002. Due to the broader economic slowdown and reduced research and development spending by biopharmaceutical companies that we believed was affecting our sales to customers, we began in July 2002 a detailed strategic review in which we evaluated each of our products and programs for commercial opportunity, time to market and resource requirements. In September 2002, to better align our organizational structure with these depressed market conditions and customer demand, we conducted a reduction in force that resulted in a downsizing of our employee work force by 28 employees, or approximately 10%, concluding 2002 with 251 employees. Of the employees affected by the reduction in force, 75% were in research and development with the remaining divided equally between manufacturing and administrative functions. We recorded a charge of $314,000 for this reduction in force completing all the restructuring activity by December 31, 2002. We had no restructuring charges in prior periods.

Interest Income (Expense), Net. Interest income (expense), net consists of income from our cash and investments offset by expenses related to our financing obligations. Interest income, net was $7.0 million in 2002 as compared to $11.4 million in 2001. The decrease primarily resulted from lower cash, cash equivalents and marketable securities balances ratably during the months of 2002 as compared to the same monthly periods in 2001 and, to a lesser extent, the declining interest rate yields in 2002 as compared to last year.

Litigation settlement and reimbursement. There were no litigation settlements, reimbursement of fees or expenses in 2002. In January 2001, we recognized $27.5 million in a litigation settlement resulting from a

Income Taxes. As of December 31, 2002, we had federal and California net operating loss carryforwards of approximately $64.8 million and $5.9 million, respectively. We also had federal and California research and other development tax credit carryforwards of approximately $2.8 million and $2.4 million, respectively. The net operating loss and credit carryforwards will expire at various dates beginning on 2004 through 2022, if not utilized. Utilization of the net operating losses and credits may be substantially limited due to the change in ownership provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

As of December 31, 2002 and 2001 we had deferred tax assets of approximately $33.2 million and $15.8 million, respectively. The net deferred tax asset has been fully offset by a valuation allowance. The net valuation allowance increased by $17.4 million during the year ended December 31, 2002. The net valuation allowance decreased by $871,000 during the year ended December 31, 2001. Deferred tax assets relate primarily to net operating loss carryforwards, research credit carryforwards, and capitalized research and development costs.

Revenue. Revenue increased 59% to $29.6 million in 2001 from $18.6 million in 2000. Of the $11.0 million increase, $9.5 million was derived from increased product sales to commercial customers, including Amphora, a related party, and from our collaboration with Agilent.

Related party revenue was $3.9 million for 2001 resulting from sales of $3.0 million in Caliper 250 Drug Discovery system products, $500,000 in datapoints and $364,000 in assay development services to Amphora in 2001 subsequent to Amphora’s third-party financing. There were no related party revenues in 2000. Product revenue from unrelated customers increased 175% to $8.8 million in 2001, compared to $3.2 million in 2000. This increase of $5.6 million is from product volume growth under our commercial collaboration with Agilent, and from sales of our Caliper 250 Drug Discovery system launched in September 2001 and the AMS 90 and Applications Developer Program, both of which were introduced in March 2001. Product revenue increased 111% in 2001 under our commercial collaboration with Agilent driven by the Agilent 2100 Bioanalyzer unit sales increase of 158% over the same period in 2000. Product revenues from sales of our drug discovery systems increased 250% in 2001 driven by the commercial launch of the Caliper 250 Drug Discovery system, the AMS 90 and the Caliper 42 system. Additionally, we experienced this increase in part due to our conversion from a fee-based technology access program model to a commercial drug discovery products business and the associated change in revenue recognition methods.

License fees and contract revenues increased 10% to $16.9 million in 2001 compared to $15.4 million in 2000. The increase of $1.5 million resulted mainly from the $5.0 million licensing fee for the Ramsey family of patents to Aclara in connection with our litigation settlement with Aclara, and a $371,000 increase in product support services on Caliper’s newly commercialized AMS 90 and Applications Developer Program services offset by a $3.0 million decline in our Technology Access Program contract revenue. We experienced this 39% decline in our Technology Access Program revenue in 2001 as a result of our conversion from a fee-based technology access program model to a commercial drug discovery products business. Also, contract fee revenues under our collaboration with Agilent declined 12% principally from a one time $735,000 research and development reimbursement in 2000. Excluding this one time reimbursement, contract fees in 2001 under the collaboration with Agilent were essentially unchanged from 2000.

Cost of Product Revenue. Cost of products sold was $2.1 million for the related party sales to Amphora for 2001. The profit margins on product sales to Amphora vary due to the volume of products purchased and the corresponding commercial volume discounts earned and due to datapoint revenue that has minimal associated costs to Caliper. Cost of all other products sold were $4.8 million for 2001 compared to $2.5 million in 2000. The improved profit margins from product sales to unrelated customers in 2001 compared to 2000 was primarily due to the increased volume of Agilent 2100 Bioanalyzer systems sold and sales of Caliper’s own products.

Research and Development Expenses. Research and development expenses increased to $38.3 million during 2001 from $33.5 million in 2000. The increase of $4.8 million was primarily attributable to continued growth of research and development activities, including $7.7 million related to increased personnel and services to support our expanded next generation drug discovery system and microfluidic chip development, partner collaboration and product scale-up, $2.6 million for supplies required to assemble, build and test prototype LabChip systems and $3.0 million due to expansion in research facilities and activities, offset by a reduction of $8.6 million for costs related to intellectual property matters, primarily legal fees due to the settlement with Aclara.

General and Administrative Expenses. General and administrative expenses increased to $15.5 million during 2001 from $9.8 million in 2000. The increase of $5.8 million was due primarily to $3.0 million related to employment costs for marketing, general and administrative personnel, $1.3 million for general legal fees related to expanded commercial initiatives, $947,000 for market research and services to support our initial product launches and $558,000 for expanded operating facilities.

Amortization of Deferred Stock Compensation. We recorded amortization of deferred compensation of $2.5 million for 2001, $4.5 million for 2000 and $3.9 million for 1999.

Interest Income (Expense), Net. Net interest income increased to $11.4 million in 2001 from net interest income of $7.5 million in 2000. This increase primarily resulted from interest on proceeds of the $104.9 million raised in August 2000 from the sale of 2,300,000 shares of common stock in a private placement offset in part by generally declining interest rate yields in 2001.

Litigation settlement and reimbursement. In January 2001, we recognized $27.5 million in a litigation settlement resulting from a comprehensive settlement agreement with Aclara for the dismissal of all suits and countersuits between the two companies. In 2000, we received $13.3 million in a litigation settlement resulting from a settlement agreement with a former patent attorney and his former law firm. Of the $13.3 million recognized in 2000, $12.0 million was a settlement with Bertram Rowland and the law firm of Flehr, Hohbach, Test, Albritton and Herbert LLP in a breach of fiduciary duty and trade secret misappropriation case. The remainder relates to reimbursement of litigation fees and expenses from one of our collaborators.

We have financed our operations from inception primarily through equity sales, product sales and services, contract and milestone payments to us under our collaboration and Technology Access Program agreements, the $32.5 million received from the comprehensive settlement agreement with Aclara, and equipment financing under sale-leaseback arrangements. As of December 31, 2002, we had received net proceeds of $229.8 million from issuances of common and preferred stock which primarily includes $104.9 million raised in August 2000 from the sale of 2,300,000 shares of common stock in a private placement and $75.9 million raised from our initial public offering in December 1999. From inception through December 31, 2002 we had received $97.8 million from collaborations, product sales and services, Technology Access Program customers and government grants and had financed equipment purchases and leasehold improvements totaling approximately $12.3 million. We have used leases and loans to finance capital expenditures under sales-leaseback arrangements. As of December 31, 2002, we had $4.4 million in capitalized lease obligations. These obligations are secured by the equipment financed, bear interest at a weighted-average fixed rate of approximately 11.1%, and are due in monthly installments through June 2005. Under the terms of one equipment sale-leaseback agreement, the financed equipment may be purchased by us at a fair value at the end of the financing term. Other equipment sale-leaseback agreements require a balloon payment at the end of each loan term.

As of December 31, 2002, we had $154.3 million in cash, cash equivalents and marketable securities, as compared to $166.2 million as of December 31, 2001. We used $10.4 million for operations in 2002. This consisted of working capital changes of $23.9 million offset by the net loss for the period of $41.0 million and by non-cash charges of $6.6 million related to amortization of deferred stock compensation, stock options issued to non-employees, and depreciation and amortization expense. As of December 31, 2001, we had $166.2 million in cash, cash equivalents and marketable securities, as compared to $191.7 million as of

December 31, 2000. We used $22.6 million for operations in 2001. This consisted of working capital changes of $32.6 million offset by the net income for the period of $3.8 million and by non-cash charges of $6.2 million related to amortization of deferred stock compensation, stock options issued to non-employees, and depreciation and amortization expense.

Net cash provided by investing activities was $15.7 million for 2002, consisting primarily of $190.1 million of proceeds from sales and maturities of marketable securities offset in part by $5.8 million of capital expenditures and of $168.7 million of purchases of available-for-sale investments. We received $250,000 from financing activities for 2002, which consisted principally of $1.6 million raised in the issuance of common stock due to employee stock option exercises and employee stock purchase plan purchases and $822,000 from equipment sale-leaseback arrangements, offset in part by repayments of equipment sale-leaseback arrangements of $2.2 million. Net cash used in investing activities was $5.9 million for 2001, consisting primarily of $7.2 million of capital expenditures and of $188.5 million of purchases of available-for-sale investments, offset in part by proceeds from sales and maturities of available for sale investments. We received $3.0 million from financing activities for 2001, which consisted principally of $2.3 million raised in the issuance of common stock due to employee stock option exercises and employee stock purchase plan purchases and $2.5 million from equipment sale-leaseback arrangements, offset in part by repayments of equipment sale-leaseback arrangements of $2.0 million.

Through June 30, 2002, we drew down $822,000 of the $1.8 million remaining balance of the $3.0 million equipment sale-leaseback credit line which existed as of December 31, 2001 at a weighted-average interest rate of 11.9%. The drawdown period under this $3.0 million equipment sale-leaseback credit line expired on June 30, 2002. As of December 31, 2002, we drew down approximately $2.0 million in total under a new line at a weighted average interest rate of 11.7% and had $965,000 unused that expired under this arrangement on July 1, 2002. We did not renew this sale-leaseback arrangement and have no similar financing credit line in place as of December 31, 2002. As of December 31, 2002, we had $4.9 million in capitalized lease obligations outstanding compared to $5.8 million at December 31, 2001. We had commitments under non-cancelable operating leases, reduced by minimum sublease income in the case of operating leases, of $32.5 million to be paid through 2008. The following is a table of our commitments:

As of December 31, 2002, we also had a non-cancelable purchase commitment in the amount of approximately $450,000 with our foreign supplier for the purchase of our proprietary glass stock used in the manufacture of certain types of our chips. We have minimum royalty obligations under separate license agreements with UT-Battelle, LLC and the Trustees of the University of Pennsylvania. Royalty payments to UT-Battelle were $81,000 in 2002 and are expected to exceed the required minimum royalty amount in 2003 and through the remainder of the license. We anticipate that during the next several years of the license with the Trustees of the University of Pennsylvania that the minimum royalty obligation under this license will exceed the earned royalty obligation. The minimum royalty obligation under this license rises over time, but never exceeds $200,000 per year.

Based on our long term strategic plan, we believe that our current cash balances, together with the revenue to be derived from our commercial partners and from the commercial sale of our microfluidic

products and services will be sufficient to fund our operations at least through the next 24 months. Our future capital requirements will depend on many factors, including, among others;


	•	continued market acceptance of our microfluidic products;

	•	continued scientific progress in our microfluidic research and product development programs;

	•	the magnitude and scope of our research and product development programs;

	•	our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;

	•	the time and costs involved in expanding and maintaining our manufacturing facilities;

	•	the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims;

	•	the potential need to develop, acquire or license new technologies and products; and

	•	other factors not within our control.

Actual capital expenditures could vary considerably, however, depending on opportunities that arise over the course of the 2003 and 2004 period. In addition, we intend to seek additional funding through new OEM collaborations and commercial partnerships or additional capital sale-leaseback transactions. During or after this period, if cash generated by operations is insufficient to satisfy our liquidity requirements, we may need to reduce our research and development efforts, or sell additional equity or debt securities or obtain additional credit arrangements. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. Additional financing may not be available on terms acceptable to us or at all. The inability to obtain additional financing may force delays in research and product development activities and, ultimately, cause us to cease operations.

The effect of inflation and changing prices on our operations was not significant during the periods presented.

In May 2001, we formed Amphora, later transferring certain intangibles in September of that year. In September 2001, Amphora completed a private placement of securities with third party investors raising $25 million which reduced our ownership to 28%. In connection with this September 2001 financing, we received the right to appoint two representatives to Amphora’s six-member board of directors. These two members were Michael R. Knapp, then our Vice President of Corporate Development, and James L. Knighton, then our Executive Vice President and Chief Financial Officer. Mr. Knighton resigned from Amphora’s board of directors in February 2002 and was replaced by Daniel L. Kisner, Caliper’s Board Chairman, in May 2002. Mr. Knighton also served as Amphora’s acting Chief Financial Officer from September 2001 until January 2002. In connection with the formation of Amphora, Dr. Knapp and Mr. Knighton received 900,000 and 450,000 shares of restricted common stock, respectively, at a share value of $0.10 per share. Dr. Knapp and Mr. Knighton paid $0.01 per share of the purchase price in cash, with the remainder of the purchase price paid by the cancellation of all amounts owed by Amphora to Dr. Knapp and Mr. Knighton for services provided by them to Amphora prior to the issuance of such common shares to them. Initially, 100% of such shares were subject to a repurchase option in favor of Amphora. 50% of such shares were released from this repurchase option when Amphora completed its initial third party financing in September 2001. The remaining 50% of such shares will be ratably released from Amphora’s repurchase option over an eight-year period on a monthly basis with respect to each of Dr. Knapp or Mr. Knighton for so long as they serve on Amphora’s board or remain available to provide advisory services to Amphora pursuant to existing consulting contracts. Additionally, Dr. Knapp participated as a private investor in Amphora’s initial September 2001 financing, where he purchased 50,000 shares of Amphora’s preferred stock. Dr. Kisner did

In December 2002, Amphora completed a second private placement of securities with third party investors. After the completion of this financing, Caliper’s ownership in Amphora was reduced on a fully diluted basis to approximately 13% as of December 31, 2002 from 28% as of December 31, 2001. Over time we expect that our ownership in Amphora will be further diluted, as we have no plans to make any future equity investments in Amphora. On March 17, 2003, one of Caliper’s two representatives, Dr. Michael R. Knapp, resigned from Amphora’s board of directors. Due to the reduction in our percentage ownership of Amphora, we now have the right to appoint only one member to Amphora’s board. Dr. Kisner continues to be a member of Amphora’s board of directors.

In September 2001, we entered into a LabChip Solutions Agreement and an Intellectual Property Agreement with Amphora. The LabChip Solutions Agreement provides for the ongoing supply of our drug discovery systems and chips to Amphora, and for the provision of related services by us to Amphora. Under this agreement, Amphora agreed to purchase a minimum of eleven Caliper 250 Drug Discovery systems by December 31, 2001 and at least eleven additional Caliper 250 Drug Discovery systems by December 31, 2002. Amphora also agreed to purchase datapoints at a fixed amount of $2.0 million in the first year and a minimum of $4.0 million to a maximum based on volume of $6.0 million in the second year of the agreement. Under the Intellectual Property Agreement, we granted Amphora certain exclusive rights to use our drug discovery products in a chemical genomics database business.

In connection with the completion of Amphora’s December 2002 financing, Caliper and Amphora agreed to a renegotiation of Amphora’s obligations under the LabChip Solutions Agreement. Under the renegotiated agreement, the Companies agreed to restructure the $4 million minimum datapoint payment for 2002 as follows: Amphora agreed to purchase a minimum of $1.8 million of datapoints during the second year of the agreement beginning in December 2002 and over time to make up to $2.2 million of deferred payments to Caliper. These deferred payments are contingent upon Amphora’s future revenue generation, datapoint production and other conditions and can be satisfied by Amphora under three methods: i) quarterly payments to Caliper based on Amphora’s revenues; ii) commissions earned by Amphora as they provide certain marketing assistance to Caliper for Caliper’s instruments; and iii) additional datapoint payments if Amphora exceeds the certain minimum datapoint levels. We also agreed to defer to December 31, 2003 Amphora’s obligation to purchase the one remaining Caliper 250 instrument of the 11 originally scheduled to be purchased by Amphora before December 31, 2002. In consideration for our agreement to this restructuring, Amphora issued to Caliper 2.5 million shares of Amphora preferred stock. We ascribed a nominal value of $25,000 to these shares as Amphora is a privately held research and development company.

In 2002, we sold a total of $6.2 million in Caliper 250 Drug Discovery system products, chips, datapoints and assay development services to Amphora recording the sale of products and services as related party revenue in our financial statements. In 2001 by comparison, subsequent to Amphora’s initial financing in September 2001, we sold a total of $3.9 million in Caliper 250 Drug Discovery system products, chips, datapoints and assay development services. The completion of Amphora’s second financing in December 2002 did not have any impact on our method of accounting for sales to Amphora.

In December 2002, Amphora assumed full service responsibility for all of the 21 Caliper 250 Drug Discovery instruments purchased from Caliper including instruments still within their 12-month warranty period. In return, Caliper provided a $55,000 warranty rebate on the 10 Caliper 250 Drug Discovery instruments purchased earlier in 2002 and will provide a fixed discount on future sales of instruments purchased without a warranty. Caliper has no remaining warranty or service responsibility on instruments purchased now or in the future by Amphora.

In September 2001, Amphora entered into a three-year Sublease Agreement with Caliper for the rent of approximately 5,700 square feet in one of Caliper’s three Mountain View, CA leased buildings for Amphora’s research and development use. Amphora is obligated for monthly rent based on local market rates with a 3% per annum escalation and we, as landlord, are obligated to provide certain facilities maintenance services. In December 2002, in connection with the completion of Amphora’s second financing, we agreed to an early

termination of this Sublease Agreement as of March 31, 2003. In September 2001, we also entered into an Administrative Services Agreement with Amphora for certain financial accounting, purchasing and human resource services to be provided by our personnel. We charged for these services monthly at an hourly rate based on a cost plus mark-up basis recording the corresponding payments from Amphora as part of our overall employee costs. Amphora terminated this agreement at its option in June 2002 when it achieved adequate staffing to fulfill these functions.

In June 2002 the Financial Accounting Services Board (FASB), issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. The standard addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 states that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for a liability for one-time termination benefits that are incurred over a period of time. The standard will be effective for exit or disposal activities initiated after December 31, 2002. The provisions of Statement 146 are required to be applied prospectively after the adoption date to newly initiated exit activities, and may affect the timing of recognition of future restructuring costs, as well as amounts recognized.

In November 2002, the Financial Accounting Standards Board (or FASB) issued Interpretation No. 45 (or FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Our adoption of the recognition and measurement of FIN 45 are not expected to have a material impact on our results of operations and financial position. See the “Warranty Expense” note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K regarding our warranty-related disclosures.

In December 2002, the FASB issued SFAS No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS 148 are effective for fiscal years ending after December 15, 2002. We have included the required additional disclosures in Note 1 to our condensed consolidated financial statements and do not expect SFAS 148 to have an effect on our results of operations or financial condition.

In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period. We do not believe there will be a material effect upon our financial condition or results of operations from the adoption of the provisions of FIN 46.

In January 2003, the Emerging Issues Task Force published EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF Issue 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the impact the adoption of this issue will have on our results of operations and/or financial position.

Many of our technologies are still in the early stages of development, and our drug discovery systems incorporating these technologies have only recently been made commercially available. If our drug discovery systems do not gain further market acceptance, we will be unable to generate significant sales and our revenue will decline. The commercial success of our drug discovery systems will depend upon capital spending by our potential customers, and market acceptance of the merits of our drug discovery systems by pharmaceutical and biotechnology companies, academic research centers and other companies that rely upon laboratory experimentation. Market acceptance will depend on many factors, including:


	•	our ability to demonstrate the advantages and potential economic value of our drug discovery systems over alternative well-established technologies and products;

	•	capital spending by our customers and potential customers, which has decreased as a result of the current economic conditions and other industry-specific factors; and

	•	our ability to market our drug discovery systems.

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

We intend to continue developing lower cost drug discovery systems with enhanced features that address existing or emerging customer needs such as novel assay functionalities. If we are unable to do so, our drug discovery systems may not become widely used and we may experience a decline in revenue or slow revenue growth and may not achieve or maintain profitability.

We currently have several assays in development including assays that measure many important activities of cells and proteins. We are developing line extensions that are particularly well suited for the evaluation of kinases, one of the largest focus areas of drug discovery efforts today. We are creating new tools to make it

easier for our customers to develop their own custom assays in a microfluidic format. Caliper is also developing kinase profiling and selectivity screening kits. If we are not able to complete the development of these applications and tools, or if we experience difficulties or delays, we may lose our current customers and may not be able to obtain new customers.

We have experienced significant operating losses each year since our inception and expect to incur substantial additional operating losses for at least the next two years, primarily as a result of a current sluggish economic climate, dampened research spending for many companies affecting our product sales and expected continuing expenses for manufacturing capabilities, research and product development costs and general and administrative costs. We may not achieve profitability in future years. For example, we experienced net losses of approximately $3.0 million in 1998, $14.4 million in 1999, $13.3 million in 2000, a net profit of $3.8 million earned in 2001 followed by a net loss of $41.0 million in 2002. Without our litigation settlement and reimbursement of $27.5 million in 2001, we would have also had a net loss in 2001. As of December 31, 2002, we had an accumulated deficit of approximately $85.6 million. Our losses have resulted principally from costs incurred in research and development, product marketing and from general and administrative costs associated with our operations. These costs have exceeded our litigation settlement and reimbursement, interest income and revenue which, to date, have been generated principally from product sales, collaborative research and development agreements, technology access fees, cash and investment balances and, to a lesser extent, government grants.

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

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

Historically, we have had very few customers and one commercial partner, Agilent, from which we have derived the majority of our revenue and, if we were to lose any one of these, our revenue would decrease substantially. In 2002, Agilent represented 39% of total revenues and Amphora accounted for 24% of total revenues with three of Caliper’s previous Technology Access Program customers combined accounted for 12% of total revenues. Agilent, our Technology Access Program customers, Amphora and our initial licensing of the Ramsey family of patents to Aclara in connection with our litigation settlement with them, accounted for 93% of our total revenue for the year ended December 31, 2001. Agilent and three customers accounted for 90% of total revenue for the year ended December 31, 2000. Although we anticipate that future sales of the Agilent 2100 Bioanalyzer system will further expand our revenue base, we expect that we will continue to rely on a few customers and on Agilent for the majority of our revenues.

The final year of our Technology Access Program (“TAP”) agreements with Eli Lilly and Amgen concluded in August 2002 and December 2002, respectively. In addition, the third and final year of our Technology Access Program agreement with Millennium which began on March 24, 2000 concludes in the first quarter of 2003. It is too soon for us to know whether these former TAP customers will continue to purchase our products and support services at historic levels after they have fully utilized the credits created from the conversion of outstanding TAP subscription fees, or whether we will be able to replace this revenue from the utilization of these credits with revenue from the sale of products to new customers. If our former TAP customers do not continue purchasing products and support services at their historic levels, or if we are not able to replace this revenue with sales to new customers, our overall revenue will be adversely affected.

Agilent manufactures, markets and distributes the Agilent 2100 Bioanalyzer under an agreement we entered into in May 1998. Our ability to develop, manufacture and market these products successfully depends significantly on Agilent’s performance under this agreement. Sales of innovative instrumentation such as the Agilent 2100 Bioanalyzer involve a long sales cycle, requiring customer training and demonstration periods. Although sales of the Agilent 2100 Bioanalyzer increased in 2002, we cannot predict whether this trend will continue at its current pace, if at all. If Agilent experiences manufacturing or distribution difficulties, does not actively market the Agilent 2100 Bioanalyzer, our future revenue from the Agilent 2100 Bioanalyzer may not be material. We also anticipate research and development funding from Agilent to decrease by approximately 30% on an annualized basis beginning November 1, 2002. In addition, we have notified Agilent of our election to terminate the agreement between the companies as of May 2003, and Agilent may terminate the agreement at their discretion at any time. If we do not negotiate a new agreement with Agilent and the collaboration terminates in May 2003 as provided under the current agreement, we could cease to receive development funding from Agilent for new products. Furthermore, the revenue we receive from Agilent for existing collaboration products may grow more slowly or decline.

Amphora, which is independently managed and funded, has a significant on-going relationship with Caliper. After Amphora’s December 2002 completion of a second private placement of securities with third party investors, our ownership in Amphora was reduced to approximately 13% from 28% on a fully diluted basis. Over time we expect that our ownership in Amphora will be further diluted, as we have no plans to make any future equity investments in Amphora. Due to the reduction in our percentage ownership of Amphora, we now have the right to appoint only one member to Amphora’s board. Amphora is currently Caliper’s largest automated drug discovery customer representing 24% of our total revenue for 2002. As a development stage company, there can be no assurances that Amphora will become commercially successful or that in the near term its business strategy will not change. If Amphora reduces its purchases of products and services or stops using Caliper’s drug discovery systems, we could experience a significant decline in revenues. In connection with the completion of Amphora’s December 2002 financing, Caliper and Amphora agreed to a renegotiation of Amphora’s obligations under the LabChip Solutions Agreement. Under the renegotiated agreement, the Companies agreed to restructure the $4 million minimum datapoint payment for 2002 as follows: Amphora agreed to purchase a minimum of $1.8 million of datapoints during the second year of the agreement beginning in December 2002 and over time to make up to $2.2 million of deferred payments to Caliper. These deferred payments are contingent upon Amphora’s future revenue generation, datapoint production and other conditions and can be satisfied by Amphora under three methods: i) quarterly payments to Caliper based on Amphora’s revenues; ii) commissions earned by Amphora as they provide certain

marketing assistance to Caliper for Caliper’s instruments; and iii) additional datapoint payments if Amphora exceeds the certain minimum datapoint levels. We also agreed to defer to December 31, 2003 Amphora’s obligation to purchase the one remaining Caliper 250 instrument of the 11 originally scheduled to be purchased by Amphora before December 31, 2002. In consideration for our agreement to this restructuring, Amphora issued to Caliper 2.5 million shares of Amphora preferred stock. We ascribed a nominal value of $25,000 to these shares as Amphora is a privately held research and development company.

We receive revenue from Agilent based on a formula for gross margin sharing on sales by Agilent of instruments and chips developed under our collaboration agreement. To the extent that Agilent’s sales of these products after our agreement terminates is reduced for any reason, including competition from us or any other commercial partner of ours, then the revenue we would realized under the terms of the Agilent agreement would be reduced. Further, Agilent may decide for reasons wholly independent of competition to reduce its sales efforts and/or pricing for these products. If Agilent does so, our revenue may decline.

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

Third parties may assert infringement or other intellectual property claims against us. We may have to pay substantial damages, including treble damages, for past infringement if it is ultimately determined that our products infringe a third party’s proprietary rights. Further, we may be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial royalties. Even if these claims are without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns. We are aware of third-party patents that may relate to our technology or potential products. We have also been notified that a third party has attempted to provoke an interference with one issued U.S. patent that we have exclusively licensed to determine the priority of inventions. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our stock price to decline. In 2001, we settled intellectual property litigation with Aclara concerning one family of Aclara patents. However, Aclara could assert other patent infringement claims against us in the future in alternative dispute resolution proceedings established under our settlement agreement.

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 the patent infringement suit against Molecular Devices Corporation as described under “Part I — Item 3. Legal Proceedings.” These lawsuits could be expensive, take significant time, and could divert management’s attention from other business concerns. They would put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. We may also provoke these third parties to assert

claims against us. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. We cannot assure you that we will prevail in any of these suits or that the damages or other remedies awarded, if any, will be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive any of these results to be negative, it could cause our stock price to decline.

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

We notified Agilent in May 2002 of our election to terminate the agreement between the companies as of May 2003. Under the terms of our agreement with Agilent, when our agreement terminates in May 2003, we will grant to Agilent a non-exclusive, royalty-bearing license to our LabChip technologies as then developed for Agilent to develop, make and sell products in the field of the collaboration. Consequently, there is the possibility that we may experience competition from Agilent after May 2003, which would reduce our ability to sell products independently or through other commercial partners.

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

are currently manufacturing drug discovery instruments in-house and in limited volumes. If demand for our drug discovery instruments increases significantly, we will either need to expand our in-house manufacturing capabilities or outsource to other manufacturers. Our ability to scale-up manufacturing may be compromised by uncertainty regarding the volume of chips for the Agilent 2100 Bioanalyzer that we will need to supply to Agilent in the future. When our exclusive collaboration with Agilent terminates in May 2003 pursuant to the notice we have delivered to Agilent, Agilent will have the option to manufacture chips itself rather than continue to receive its supply of chips from Caliper. Accordingly, we will face uncertainty regarding future demand for these chips from our manufacturing operations.

We currently purchase a key component for our chips from a single-source supplier located in Germany. Although we keep surplus inventory in our Mountain View manufacturing facility, if we are unable to replenish this component on a timely basis, we will not be able to deliver our chips to our customers, which would harm our business.

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

We rely on a single manufacturing location to produce our chips and drug discovery systems, and have no alternative facilities. The facility and some pieces of manufacturing equipment are difficult to replace and could require substantial replacement lead-time. Our manufacturing facility may be affected by natural disasters such as earthquakes and floods. Earthquakes are of particular significance since the manufacturing facility is located in Mountain View, California, an earthquake-prone area. In the event our existing manufacturing facility or equipment is affected by man-made or natural disasters, we would be unable to manufacture products for sale, meet customer demands or sales projections. If our manufacturing operations were curtailed or ceased, it would harm our business.

We anticipate that our existing capital resources will enable us to maintain currently planned operations at least through the year 2004. However, we premise this expectation on our current operating plan, which may change as a result of many factors. Consequently, we may need additional funding sooner than anticipated. Our inability to raise needed capital would seriously harm our business and product development efforts. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in dilution to our stockholders.

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

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


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

	•	the risk of diverting management’s attention from normal daily operations of the business;

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

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

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

	•	the potential loss of key employees of the acquired company; and

	•	the assumption of unforeseen liabilities of the acquired company.

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

Our stock has been trading on the Nasdaq National Market only since mid-December 1999. We initially offered our common stock to the public at $16.00 per share. Since then our stock price has been extremely volatile and has ranged, through March 20, 2003, from a high of approximately $202.00 per share on March 2, 2000 to a low of $2.71 per share both on January 28, 2003 and February 6, 2003. Our stock price may drop substantially following an investment in our common stock. We expect that our stock price will remain volatile as a result of a number of factors, including:


	•	announcements by analysts regarding their assessment of Caliper and its prospects;

	•	announcements by our competitors of complementary or competing products and technologies;

	•	announcements of our financial results, particularly if they differ from investors’ expectations; and

	•	general market volatility for technology stocks.

In the Spring and Summer of 2001, class action lawsuits were filed against certain leading investment banks and over 300 companies that did public offerings during the prior several years, including lawsuits

against Caliper and certain of its officers and directors. See “Part I — Item 3. Legal Proceedings” for a description of these lawsuits. Other securities litigation could result in potential liability, cause us to incur litigation costs and divert management’s attention and resources, any of which could harm our business. In addition, announcements of future lawsuits of this or some other nature, and announcements of events occurring during the course of the current and any future lawsuits, could cause our stock price to drop.

As of December 31, 2002, our directors, entities affiliated with our directors, our executive officers and principal stockholders beneficially own, in the aggregate approximately 31% of our outstanding common stock. These stockholders as a group are able to substantially influence the management and affairs of Caliper and, if acting together, would be able to influence most matters requiring the approval by our stockholders, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets and any other significant corporate transaction. The concentration of ownership may also delay or prevent a change of control of Caliper at a premium price if these stockholders oppose it.

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

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

The table below presents our investment portfolio by expected maturity and related weighted average interest rates at December 31, 2002:

Our equipment sale-leaseback financings, amounting to $4.4 million as of December 31, 2002, are all at fixed rates and therefore, have minimal exposure to changes in interest rates.

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

The Report of Independent Auditors, Consolidated Financial Statements and Notes to Consolidated Financial Statements begin on page F-1 immediately following the signature page and certifications in this report and are incorporated here by reference, including the unaudited quarterly information for the last two years in Note 18.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Information concerning our directors is incorporated by reference to the section entitled “Proposal 1 — Election of Directors” contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than April 30, 2003 (the “Proxy Statement”). Information concerning our Executive Officers is set forth under “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K and is incorporated herein by reference. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” contained in our Proxy Statement.

This information is incorporated by reference from our definitive proxy statement to be filed with respect to the 2003 Annual Meeting of Stockholders.

Limitations on the Effectiveness of Controls. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will provide absolute assurance that all errors will be detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Caliper have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by

the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Evaluation of Disclosure Controls and Procedures. As of December 31, 2002, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2002. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002.

Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing the non-audit services approved by our Audit Committee to be performed by Ernst & Young LLP, our independent auditor. Non-audit services are defined as services other than those provided in connection with an audit or a review of our financial statements. The only non-audit services approved by our Audit Committee to be performed by Ernst & Young LLP are the preparation of tax returns, and tax advice in preparing for and in connection with such filings.

Schedule II, “Valuation and Qualifying Accounts” is included on page F-37 of this report. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.


	(1)	Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1, as amended, File No. 333-88827, filed on October 12, 1999 and incorporated by reference herein.

	(2)	Previously filed as Exhibit 3.4 to our Registration Statement on Form S-1, as amended, File No. 333-88827, filed on October 12, 1999 and incorporated by reference herein.

	(3)	Previously filed as the like-numbered Exhibit to our Registration Statement on Form S-1, as amended, File No. 333-88827, filed on October 12, 1999 and incorporated by reference herein.

	(4)	Management contract or compensatory plan or arrangement.

	(5)	Confidential treatment has been granted for a portion of this exhibit.

	(6)	Filed as the like-numbered exhibit to Annual Report of Form 10-K for the year ended December 31, 1999 and incorporated by reference herein.

	(7)	Previously filed as Exhibit 10.26 to Form 10-Q for the quarterly period ended March 31, 2000 and incorporated by reference herein.

	(8)	Previously filed as the like-numbered Exhibit to our Registration Statement on Form S-1, as amended, File No. 333-45942, filed on September 15, 2000, and incorporated by reference herein.

	(9)	Previously filed as the like-numbered Exhibit to Form 10-K/A for the year ended December 31, 2000 and incorporated by reference herein.


(10)	Previously filed as the like-numbered Exhibit to Form 10-Q for the quarterly period ended March 31, 2001 and incorporated by reference herein.

(11)	Previously filed as the like-numbered Exhibit to Form 10-Q for the quarterly period ended September 30, 2001 and incorporated by reference herein.

(12)	Previously filed as Exhibit 99.1 to Current Report on Form 8-K filed December 19, 2001 and incorporated by reference herein.

(13)	Previously filed as Exhibit 99.1 to our Registration Statement on Form S-8, File No. 333-76636, filed January 11, 2002 and incorporated by reference herein.

(14)	Previously filed as the like-numbered Exhibit to Form 10-K for the year ended December 31, 2001 and incorporated by reference herein.

(15)	Previously filed as the like-numbered Exhibit to Form 10-Q for the quarterly period ended June 30, 2002 and incorporated by reference herein.

(16)	Previously filed as the like-numbered Exhibit to Form 10-Q for the quarterly period ended September 30, 2002 and incorporated by reference herein.


(17)	Designates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 15(c) of this report.

(18)	Confidential treatment has been requested for a portion of this exhibit.

On December 17, 2002, we filed a Current Report regarding the restructuring of our contractual relationship with Amphora Discovery Corp.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2003.


	CALIPER TECHNOLOGIES CORP.

	By: /s/ MICHAEL R. KNAPP

	Michael R. Knapp, Ph.D.
	Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Michael R. Knapp, Ph.D., and James L. Knighton, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

1. I have reviewed this annual report on Form 10-K of Caliper Technologies Corp.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


	a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

1. I have reviewed this annual report on Form 10-K of Caliper Technologies Corp.;


	a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	/s/ JAMES L. KNIGHTON

	James L. Knighton
	President and Chief Financial Officer

We have audited the accompanying consolidated balance sheets of Caliper Technologies Corp. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audit also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Caliper Technologies Corp. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

Caliper Technologies Corp. (“Caliper”) was incorporated in the state of Delaware on July 26, 1995. Caliper develops lab-on-a-chip technologies and manufactures LabChip and automated drug discovery systems. These systems perform laboratory experiments for use in the pharmaceutical industry and other industries.

In December 1999, Caliper completed an initial public offering of 4,500,000 shares of its common stock to the public, at a per share price of $16.00. In conjunction with the initial public offering, Caliper’s underwriters exercised an option to purchase an additional 675,000 shares of common stock at a price of $16.00 per share to cover over-allotments. Caliper received net proceeds from the offering of approximately $75.9 million. Upon the closing of the initial public offering, each of the outstanding 11,703,692 shares of redeemable convertible preferred stock and 829,142 shares of convertible preferred stock was automatically converted into one share of common stock.

In October 1999, Caliper’s board of directors approved a 1-for-1.56 reverse stock split. The reverse stock split became effective in December 1999. The accompanying financial statements have been adjusted retroactively to reflect the reverse split of all outstanding common and convertible preferred stock.

The financial statements of Caliper include the accounts of Caliper’s wholly owned subsidiary, Caliper Europe GmbH formed on January 22, 2002. Investments in affiliates or interests in which Caliper has an equity interest of 50% or less and has significant influence are generally accounted for using the equity method with all accounts and transactions disclosed as related party transactions. All significant intercompany accounts and transactions have been eliminated in consolidation.

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.

Caliper considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. Management determines the appropriate classification of its investment securities at the time of purchase and reevaluates such determination as of each balance sheet date. Management has classified Caliper’s marketable securities as available-for-sale securities in the accompanying financial statements. Available-for-sale securities are carried at fair value based on quoted market prices, with unrealized gains and losses reported in a separate component of stockholders’ equity. Realized gains and losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are reported in other income or expense. The cost of securities sold is based on the specific identification method.

Caliper invests its excess cash in U.S. government and agency securities, debt instruments of financial institutions and corporations, and money market funds with strong credit ratings. Caliper has established guidelines regarding diversification of its investments and their maturities should maintain safety and liquidity.

Caliper does not generally invest in the common stock of corporations, partnerships or special purpose entities. As of December 31, 2001, however, Caliper had investments in common stock totaling $4.6 million from investments in Aclara Biosciences, Inc. and Amphora Discovery Corp. As a result of a settlement agreement between the Aclara Biosciences, Inc. and Caliper entered into in January 2001, Caliper had an investment of 900,000 shares in Aclara common stock. On October 15, 2002, Caliper received $32.5 million in cash from Aclara and surrendered the 900,000 shares of Aclara common stock effectively completing the settlement transaction As of December 31, 2002, Caliper has investments in the preferred and common stock of Amphora Discovery Corp.

Customer and accounts receivable are stated at amounts owed to the company, net of related reserves. No collateral is required on these receivables. No sales made by Caliper include any return rights or privileges. Caliper has historically not experienced significant credit losses in connection with its customer receivables. Accounts receivable, net of allowances at December 31, 2002 was $1.9 million substantially all of which were current and due in less than 35 days. Of this $1.9 million, Amphora, a related party, had a customer account balance of $115,000 related to minimum datapoint payments owed to Caliper as of December 2002. Caliper has only five international customers and requires all their purchases to be denominated and paid in U.S. dollars. Caliper recorded an allowance for doubtful accounts totaling $119,000 in 2002 based on analysis of aged receivables and will continue to analyze accounts receivable, historical bad debts, customer concentrations, changes in customer credit-worthiness subsequent to sales being made, current economic trends and changes in its customer payment terms when evaluating the necessity and or adequacy in future periods for an allowance for doubtful accounts.

Inventory consists primarily of glass, quartz and reagents used in the manufacture of Caliper’s chips as well as electronic components, devices and accessories from original equipment manufacturers used in the manufacture of Caliper’s microfluidic instruments. Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in first-out basis) or market, reflect appropriate reserves for potential obsolete, slow-moving or otherwise impaired material, and include appropriate elements of material, labor and indirect costs.

Additions to property and equipment are recorded at cost. Major replacements and improvements are capitalized while general repairs and maintenance are expensed as incurred. Depreciation commences once the assets have been placed in service and is computed using the straight-line method over the shorter of the financing period or the estimated useful lives of the assets, which primarily range from three to seven years. Furniture and equipment acquired under equipment sale and lease back arrangements are amortized over the shorter of the useful lives or the financing period, generally four years. Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or lease term, generally four to seven years.

Caliper reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment exist, recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which there are identifiable assets. If the aggregate undiscounted cash flows are less than the carrying value of the asset, the

resulting impairment charge to be recorded is calculated based on the amount by which the carrying amount of assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. To date, Caliper has not incurred any impairment losses.

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, notes receivable, other current assets, accounts payable, and other accrued expenses, approximate fair value due to their short-term maturities. Caliper’s available for sale marketable securities are carried at fair value based on quoted market prices, consistent with the requirements of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Caliper does not engage in interest rate swaps, foreign currency forward contracts or options on non-marketable instruments. Caliper’s only long-term debt is the long-term portions to the sale-leaseback agreement.

The fair value of Caliper’s cash, cash equivalents and marketable securities are subject to change as a result of potential changes in market interest rates. The potential change in fair value for interest rate sensitive instruments has been assessed on a hypothetical 100 basis point adverse movement across all maturities. Caliper estimates that such hypothetical adverse 100 basis point movement would not have materially impacted net income or materially affected the fair value of interest rate sensitive instruments.

Caliper recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. Revenue is recognized on product sales when goods are shipped under Caliper’s standard terms of “FOB origin”. Revenues on shipments subject to customer acceptance provisions are recognized only upon customer acceptance, provided all other revenue recognition criteria are met. Revenue from licensing agreements is deferred and recognized over the term of the agreement, or in certain circumstances, when milestones are met. Revenue recognized is not subject to repayment. Cash received that is related to future performance under such contracts is deferred and recognized as revenue when earned Revenue is earned from Caliper’s collaboration agreement with Agilent, Automated Drug Discovery systems, chips and datapoints, AMS 90, Applications Developer Program, Technology Access Program agreements, licensing and royalty agreements and government grants.

Revenue from development and support activities under Caliper’s collaboration agreement with Agilent is recorded in the period in which the costs are incurred. Direct costs associated with this contract are reported as research and development expense. Revenue related to the reimbursement of costs for the supply of chips and reagents to Caliper’s collaboration partner is recognized upon shipment. Caliper has no continuing obligations at the time these sales are made and Caliper’s collaboration partner has no return privileges. Further, Caliper’s transfer of this title to the chips and reagents are not contingent on the collaboration partner’s resale of these items to third parties. Caliper’s share of gross margin on components of the LabChip system sold by the collaboration partner is recognized as product revenue upon shipment by the collaboration partner to the end user. The instruments, chips and reagents as sold, are useable by Caliper’s collaboration partner and their customers without additional support from Caliper.

Product revenue is recognized upon the shipment and transfer of title to customers and is recorded net of discounts and allowances. Revenues on shipments subject to customer acceptance provisions are recognized only upon customer acceptance, provided all other revenue recognition criteria are met. Service revenue is

recognized ratably over the contract service term. Customers are able to purchase instruments, chips, support services and custom assay solutions directly from Caliper. Customer purchases of instruments and chips are delivered under standardized terms of “FOB origin” with the customer assuming the risks and rewards of product ownership at the time of shipping from Caliper’s warehouse with no return rights or privileges. Caliper offers discounts based on the volume of products and services purchased. Caliper publishes a catalog of its commercially available chips and drug discovery system products and the prices for each product configuration.

In certain cases, customers will be charged on a datapoint pricing basis for their usage of chips. A datapoint is generated each time a Caliper instrument system introduces a sample into a chip through a sipper in order to perform a particular LabChip assay. Datapoints are these test-results that Caliper’s customers record when they use Caliper’s instruments. Caliper records datapoint revenues in the period that Caliper’s customers attain these datapoints and communicate such use to Caliper. Datapoint rates are contractually negotiated between Caliper and its customers. Caliper has contracted for minimum datapoint fees from Amphora, a related party, and two additional customers in 2002. Under minimum datapoint fee arrangements, datapoints revenues are recorded in the period the minimum applies. Caliper has no performance obligations with respect to these minimum fees

Customers are shipped instruments and chips based upon purchase orders received. Two customers, however, have requested drug discovery system acceptance provisions. One of these customers is Amphora, a related party, where Amphora’s personnel review a system validation test at Caliper’s facility prior to shipment and prior to the transfer of title to the instrument by Caliper to Amphora.

The second customer is an unrelated customer and has requested a factory acceptance test in their purchase contract with Caliper where they require validation tests before acceptance. Caliper does not recognize revenue on the sale of any product until all acceptance tests are completed and approved by the customer. Caliper believes that once the general market acceptance of drug discovery systems is better established, acceptance test of these kinds will no longer be requested by customers. No sales made by Caliper include any return rights or privileges.

Caliper has made no provision for sales returns and other allowances. Although Caliper has been commercially selling its instruments only since September 2001, Caliper has been developing these instruments since 1999. Many of the buyers of Caliper’s instruments are the same companies with whom Caliper was collaborating to develop these instruments between 1999 and September 2001. As such, these customers are very familiar with Caliper’s equipment, and returns are therefore unlikely.

Caliper had entered into multi-year Technology Access Program agreements that included: (1) access to existing technology; (2) a multi-year subscription for technology developed during the subscription period; (3) development and support services; and (4) access to prototype LabChip systems developed during the subscription period. Caliper allocates the total arrangement fees to each element based on fair value. Fair value was based on renewal rates for subscriptions, prices established by Caliper’s management having the relevant authority for development and support services and the price at which a program participant had the ability to purchase unspecified quantities of a specific prototype product.

Prior to January 1, 2000, Caliper recognized non-refundable license fees under its Technology Access Programs as revenues upon transfer of the license to third parties and when no further performance obligations existed. Effective January 1, 2000, Caliper changed its method of accounting for non-refundable license fees to recognize such fees ratably over the term of the committed related Technology Access Program agreement. Caliper believes the change in accounting principle is preferable based on guidance provided in SEC Staff Accounting Bulletin No. 101 — Revenue Recognition in Financial Statements (“SAB 101”). The $2.3 mil-

lion cumulative effect of the change in accounting principle was reported as a charge in 2000. The cumulative effect was initially recorded as deferred revenue and was recognized as revenue over the remaining contractual terms of the Technology Access Program agreements commencing January 1, 2000. During the year ended December 31, 2000, the impact of the change in accounting was to increase net loss by $1.25 million, or ($0.06) per share, comprised of the $2.3 million cumulative effect of the change as described above ($0.11 per share), less $1.3 million of the related deferred revenue which was recognized as revenue during the year ended December 31, 2000 ($0.06 per share) and $250,000 ($0.01 per share) recorded as deferred revenue as of December 31, 2000 that would have been recognized as revenue had SAB 101 not been adopted. During the year ended December 31, 2001, Caliper recorded $800,000 ($0.03 per share) of the related deferred revenue as revenue. The remaining $194,000 of the related deferred revenue was recognized as revenue in 2002.

Product revenue was recognized upon transfer of title to the customer. Subscription fees were recognized ratably over the subscription period. When payment of the subscription fee was contingent upon reaching a milestone, revenue was deferred until the milestone was met. Support and development services revenue was recognized in the periods the costs were incurred. In December 2001, the last of the agreements with Caliper’s Technology Access Program customers was amended and converted into a commercial agreement. There are no further technology access fees or subscription fees recognized with products and services purchased by former Technology Access Program customers after December 2001. Revenue is recognized for all former Technology Access Program customers upon shipment and transfer of title to the product to the customer or when the assay development service has been provided by Caliper. Under the amended agreements with its Technology Access Program customers, Caliper agreed to convert technology access and subscription fees still outstanding and available to credits towards the purchase of products and services that can be utilized by the customer no later than March 2003. As of December 31, 2002, a total of $138,000 of this revenue was deferred. Caliper expects to recognize this deferred revenue through March 2003 as products and services are purchased by Caliper’s former Technology Access Program customers.

Revenue from Caliper’s up-front license fees is recognized when the earnings process is complete and no further obligations exist. If further obligations exist, the up-front license fee is recognized ratably over the obligation period. Royalties from licenses are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is assured. The impact of the adoption of SAB 101 in 2000 is discussed above.

Caliper’s grant from the National Institute of Standards and Technology (NIST) provided for the reimbursement of qualified expenses for research and development as defined under the terms of the grant agreement. Revenue under grant agreements was recognized when the related research expenses were incurred The NIST grant was a three-year grant that concluded in December 2001.

Caliper does not include with the initial product purchase any element of a maintenance contract. No upgrades or operational support is included in such purchases. All the customer is entitled to receive is service in accordance with Caliper’s standard warranty, which is to provide replacement of defective goods. Caliper, to date, has not focused on selling additional maintenance contracts and in fact has only sold two such contracts regarding early prototype instruments. This contract provided access to upgrades to Caliper’s product, if and when available, and operational support. In the future, Caliper expects to offer maintenance agreements to customer for access to instrument system upgrades and overall instrument maintenance after the expiration of

the 1 year limited warranty period. Revenue with respect to these maintenance contracts will be initially deferred and recognized ratably over the term of the contract.

Caliper has developed software that is embedded in Caliper’s instruments as a component to operate and run the instrument. Caliper does not sell or otherwise market the software separately and does not derive any independent revenues from the sale of software. The software has no separate utility outside of its function of running the Caliper instrument. Caliper’s customers are purchasing the instrument in order to be able to conduct scientific research, and the software is incidental to the overall cost of the instrument’s development and marketing effort. Caliper does not provide post-sale software support, except for functional defects in the software as contemplated in Caliper’s warranty on its instruments.

Caliper currently operates in one business segment, that being the development and commercialization of novel products from microfluidic technology. Caliper is managed and operated as one business. The entire business is comprehensively managed by a single management team that reports to the Chief Executive Officer. Caliper does not operate separate lines of business or separate business entities with respect to its products or product candidates. Accordingly, Caliper does not accumulate discrete financial information with respect to separate product areas and does not have separately reportable segments as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosure about Segments of an Enterprise and Related Information.”

Foreign currency transactions are translated into U.S. dollars at prevailing rates. Gains or losses resulting from foreign currency transactions are included in current period income or loss as incurred. Currently, all material transactions of Caliper are denominated in U.S. dollars, and Caliper has not entered into any material transactions that are denominated in foreign currencies.

Caliper charges research and development costs to expense as incurred. Research and development costs consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for chip development, material cost of prototypes and test units, legal expenses resulting from intellectual property prosecution and litigation, and other expenses related to the design, development, testing and enhancement of Caliper’s products.

At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with sales, recorded as a component of cost of revenue. Caliper offers a one-year limited warranty on the automated drug discovery systems and a 90-day warranty on chips, which is included in the sales price of many of its products. These warranties are the only post-sale obligation Caliper has to its customers. Provision is made for estimated future warranty costs at the time of sale. As the majority of Caliper’s drug discovery system parts are from original equipment manufacturers which provide one-year warranties already on these parts, Caliper has a warranty provision of $265,000 as of December 31, 2002 and $85,000 as of December 31, 2001 based on Caliper’s repair and warranty claims history and on the limited service cost to travel to the customer and maintain Caliper’s products under warranty. Caliper periodically assesses the adequacy of its recorded warranty liabilities and adjusts amounts as necessary.

Changes in Caliper’s warranty obligation during the year ended December 31, 2002 are as follows:

Shipping and handling fees billed to customers for product shipments are recorded in “Product revenue” in the Consolidated Statements of Operations. Shipping and handling costs incurred for inventory purchases are recorded in “Cost of revenue” in the Consolidated Statements of Operations.

Caliper expenses costs of advertising as incurred. Advertising costs were $690,000 for the year ending December 31, 2002 as compared to $631,000 in 2001 and $133,000 in 2000.

Caliper has purchased commercial insurance to cover its estimated future legal costs and settlements related to workers’ compensation, product, general, auto and operations liability claims. Caliper’s management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk coverage based on the cost and availability of insurance and the likelihood of a loss. Management believes that the levels of risk that Caliper has provided insurance coverage for are consistent with those of other companies in its industry. There can be no assurance that Caliper will not incur losses beyond the limits, or outside the coverage, of its insurance.

Financial instruments, which potentially subject Caliper to concentrations of credit risk, consist principally of cash and trade accounts receivable. Caliper invests excess cash in securities that it believes bear minimal risk. These investments are of a short-term nature and include investments in auction rate preferred securities, commercial paper and government and corporate debt securities. By policy, the amount of credit exposure to any one institution or issuer is limited. These investments are generally not collateralized and primarily mature within three years Caliper has not experienced any losses due to institutional failure or bankruptcy.

Caliper’s allowance for uncollectible accounts at December 31, 2002 was $119,000 and was not material in prior years. Caliper grants credit to customers based on evaluations of their financial condition, generally without requiring collateral. Concentrations of credit risk with respect to accounts receivable are present due to the small number of customers comprising Caliper’s customer base. However, the credit risk is reduced through Caliper’s efforts to monitor its exposure for credit losses and maintain allowances, if necessary. Two customers, Agilent and Amphora, accounted for approximately 63% of Caliper’s total revenues in 2002 and 45% in 2001. These two customers accounted for approximately 39% and 61% of Caliper’s outstanding accounts receivable balance at December 31, 2002 and 2001, respectively. Caliper’s policy is to perform an analysis of the recoverability of its trade accounts receivable at the end of each reporting period and to establish allowances for those accounts considered uncollectible. Caliper analyzes historical bad debts, customer concentrations, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.

Caliper’s products include certain components that are currently single-sourced. Caliper believes that other vendors would be able to provide similar equipment, however, the qualification of such vendors may require start-up time. In order to mitigate any adverse impacts from a disruption of supply, Caliper attempts to maintain an adequate supply of critical single-sourced equipment.

Effective January 1, 2001, Caliper adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. In connection with the adoption of SFAS No. 133, Caliper recognizes derivative financial instruments in the financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders equity as a component of comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it is designated as a fair value hedge or cash flow hedge. For derivative instruments that are designated and qualify as fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. Hedge effectiveness is assessed on a quarterly basis.

As discussed in Note 16, Caliper entered into a settlement agreement with Aclara Biosciences. The terms of the agreement provide that if Caliper sold any of the 900,000 shares of Aclara’s common stock received in the settlement between 18 and 24 months from the effective date of the settlement agreement, and the then fair value of Aclara’s stock is less than $36.11 per share, Aclara would pay Caliper in cash a dollar amount equal to the difference between the aggregate fair value of the Aclara stock at the date the shares were disposed and $32.5 million. If the then fair value of the Aclara stock was greater than $36.11 per share, Caliper would have receive no additional consideration from Aclara. Caliper was restricted from selling its shares of Aclara for 18 months following the effective date of the settlement agreement. If Caliper sold its shares of Aclara stock at any time after 24 months from the effective date of the settlement agreement, Aclara would of had no obligation to provide any additional consideration to Caliper. As discussed in Note 16, Aclara had executed a fully funded $32.5 million standby letter of credit in favor of Caliper to secure its performance under this obligation. In effect, Aclara guaranteed the aggregate settlement amount of $32.5 million, so long as Caliper sold its Aclara stock within a specified period of time.

Caliper accounted for this arrangement by initially recording $4.3 million in Aclara stock at fair market value, with a note receivable with a corresponding face value of $28.2 million including other receivable for the fully funded letter of credit which was reduced by the initial fair value ($2.7 million) of an embedded derivative. The embedded derivative had been designated as a fair value hedge of the Aclara stock.

The mark-to-market change in the fair value of the Aclara stock was recorded in earnings in the other income or expense line on the statement of operations and was offset by the gains or losses in the fair value of the derivative reported in the same other income or expense line. The ineffective portion of the embedded derivative was also recorded in the other income or expense line on the statement of operations. As of December 31, 2001, the balances in Aclara stock and the note receivable were $4.6 million and $26.9 million respectively.

On October 15, 2002, Caliper received $32.5 million in cash from Aclara upon delivering 900,000 shares of Aclara common stock to Aclara in accordance with the terms of the comprehensive settlement agreement between the companies. As of December 31, 2002, Caliper has no derivative financial instruments.

Caliper has adopted Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”. The only component of comprehensive income (loss) is unrealized gains and losses on available-for-sale securities. Comprehensive income (loss) has been disclosed in the Statement of Stockholders’ Equity.

Caliper accounts for its stock options and equity awards in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and has elected to follow the “disclosure only” alternative prescribed by Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). Caliper accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force 96-18. For the year ended December 31, 2002, compensation expense related to stock options issued to non-employees was $452,000 as compared to $80,000 for the year ended December 31, 2001 and $254,000 for the year ended December 31, 2000.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options using the graded vesting method. Caliper’s pro forma information is as follows:

The effects of applying SFAS No. 123 for pro forma disclosures are not likely to be representative of the effects on reported net loss for future years.

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

Proforma net loss per share has been computed to give effect to the adoption of the SEC Staff Accounting Bulletin No. 101 — Revenue Recognition in Financial Statements — as a cumulative change in accounting principle effective January 1, 2000.

A reconciliation of shares used in the calculations is as follows (in thousands except per share data):

The following outstanding options and warrants (prior to the application of the treasury stock method) were excluded from the computation of diluted net loss per share as they had an antidilutive effect (in thousands):

Financial instruments that potentially subject Caliper to concentrations of credit risk primarily consist of cash equivalents, marketable securities and trade receivables (see Note 3).

In 2002, Agilent represented 39% of total revenues and Amphora, a related party, accounted for 24% of total revenues. In 2002, three of Caliper’s previous Technology Access Program customers combined

accounted for 12% of total revenues. . In 2001, Agilent represented 32% of total revenues and three of Caliper’s Technology Access Program customers accounted for 6%, 6% and 10% of total revenues. Also in 2001, Amphora, a related party, accounted for 13% of total revenues. In 2000, Agilent represented 45% of total revenues and three of Caliper’s Technology Access Program customers accounted for 18%, 14% and 13% of total revenues

Agilent and Amphora represented 36% and 3%, respectively, of Caliper’s outstanding accounts receivable balance as of December 31, 2002 as compared to 13% and 48% as of December 31, 2001, respectively. Other customers who represented 10% or greater of Caliper’s outstanding accounts receivable balance were Ambion and Wako at 13% and 11%, respectively, as of December 31, 2002, and SUGEN and a petrochemical customer at 15% and 13%, respectively, as of December 31, 2001.

Caliper relies on several companies as the single source of various materials in its manufacturing process. Any extended interruption in the supply of these materials could result in the failure to meet customer demand.

Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform with the 2002 financial statement presentation. These reclassifications had no effect on previously reported net income (loss), stockholders’ equity or net income (loss) per share.

In June 2002 the Financial Accounting Services Board (FASB), issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. The standard addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 states that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for a liability for one-time termination benefits that are incurred over a period of time. The standard will be effective for exit or disposal activities initiated after December 31, 2002. The provisions of Statement 146 are required to be applied prospectively after the adoption date to newly initiated exit activities, and may affect the timing of recognition of future restructuring costs, as well as amounts recognized.

In November 2002, the Financial Accounting Standards Board (or FASB) issued Interpretation No. 45 (or FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Caliper’s adoption of the recognition and measurement of FIN 45 are not expected to have a material impact on its results of operations and financial position. See the “Warranty Expense” note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K regarding our warranty-related disclosures.

for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS 148 are effective for fiscal years ending after December 15, 2002. Caliper has included the required additional disclosures in Note 1 to its condensed consolidated financial statements and does not expect SFAS 148 to have an effect on its results of operations or financial.

In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period. Caliper does not believe there will be a material effect upon its financial condition or results of operations from the adoption of the provisions of FIN 46.

In January 2003, the Emerging Issues Task Force published EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF Issue 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Caliper is currently evaluating the impact the adoption of this issue will have on its results of operations and/or financial position.

Caliper’s cash, cash equivalents and marketable securities are invested in a diversified portfolio of financial instruments, including money market instruments, corporate notes and bonds, government or government agency securities and other debt securities issued by financial institutions and other issuers with strong credit ratings. By policy, the amount of credit exposure to any one institution is limited. Investments are generally not collateralized and primarily mature within three years. The following is a summary of available-for-sale securities as of December 31, 2002:

The following is a summary of the cost and estimated fair value of available-for-sale securities at December 31, 2002, by contractual maturity:

The following is a summary of available-for-sale securities as of December 31, 2001:

Gross realized gains and losses on sales of available for sale securities were immaterial.

As of December 31, 2002, Caliper held a note receivable of $215,000 from Daniel L. Kisner, Board Chairman of Caliper. This note, with an initial principal amount of $500,000, bears annual interest at 5.96% and is repayable upon the earlier of; (i) July 29, 2005, or (ii) the voluntary termination of the officer’s employment with Caliper. Prior to July 1, 2002, this note was subject to forgiveness by Caliper of principal and interest amounts based on performance reviews of the officer with $285,000 of the note principal having been forgiven between 1999 and 2001. Caliper believes this $215,000 note receivable approximates fair value as of December 31, 2002. In 2002, Michael R. Knapp, Caliper’s Chief Executive Officer, paid Caliper in full for the $200,000 promissory note held by Caliper associated with Dr. Knapp’s purchase of a residence in July 1997. This note had an initial principal amount of $200,000 with an annual interest at 5.96% and was not subject to forgiveness by Caliper of any principal or interest amounts.

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Inventories consist of the following (in thousands):

Caliper permanently writes off 100% of the cost of inventory that Caliper specifically identifies and considers obsolete or excessive to fulfill future sales estimates. Caliper defines obsolete inventory as inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage, and is determined using management’s best estimate of future demand at the time, based upon information then available to Caliper. Caliper uses a twelve-month demand forecast and, in addition to the demand forecast, Caliper also considers: (1) parts and subassemblies that can be used in alternative finished products; (2) parts and subassemblies that are unlikely to be engineered out of Caliper’s products; and (3) known design changes which would reduce Caliper’s ability to use the inventory as planned. In the year ended December 31, 2002, Caliper recorded a charge of $701,000 to cost of product revenues for excess and obsolete inventories. There were no charges to cost of revenues for excess and obsolete inventories in prior years.

As of December 31, 2002 and 2001, property and equipment includes assets acquired under capital leases of approximately $9.9 million and $9.0 million respectively. Accumulated depreciation related to leased assets was approximately $6.4 million and $4.7 million at December 31, 2002 and 2001.

As of December 31, 2002, Caliper had $9.9 million of property and equipment financed through capital lease obligations and approximately $965,000 unused and expired under an equipment sale-leaseback credit line. The obligations under the equipment sale-leaseback arrangements are secured by the equipment financed, bear interest at a weighted-average fixed rate of approximately 12.2%, and are due in monthly installments through June 2005. Under the terms of one equipment sale-leaseback agreement, ownership of

the financed equipment may be purchased by Caliper at fair value at the end of the financing term. Other equipment sale-leaseback agreements require a balloon payment at the end of each loan term.

As of December 31, 2002, future minimum lease payments under operating and capital leases, reduced by minimum sublease income in the case of operating leases, and principal payments on equipment loans are as follows:

Through June 30, 2002, Caliper drew down $822,000 of the $1.8 million remaining balance of the $3.0 million equipment sale-leaseback credit line which existed as of December 31, 2001 at a weighted-average interest rate of 11.9%. The drawdown period under this $3.0 million equipment sale-leaseback arrangement expired on June 30, 2002. As of December 31, 2002, Caliper drew down approximately $2.0 million in total under the sale-leaseback arrangement at a weighted average interest rate of 11.7% and had $965,000 expire as unused under this arrangement. Caliper did not renew or have any similar arrangements in place to finance equipment purchases as of December 31, 2002.

Rent expense relating to operating leases was approximately $5.2 million in 2002, $3.9 million in 2001, and $2.5 million in 2000.

In December 1998, Caliper entered into a 10-year facility operating lease agreement. Caliper also entered into a sublease agreement pursuant to which it received a monthly amount of $18,000 from December 1998 through November 1999 and a monthly amount of $24,000 in December 1999 and January 2000. In June 2000, Caliper entered into an 8-year facility operating lease agreement and also entered into a sublease agreement with a third party for a monthly amount of $42,000 from September 2000 through June 2001. In June 2001, Caliper entered into an 7-year facility operating lease agreement and also entered into a sublease agreement with Amphora, a related party, for a monthly amount of $18,500 from September 2001 through August 2004 subject also to a 3% per annum increase. In December 2002, in connection with the completion of Amphora’s second financing, Caliper agreed to an early termination of this Sublease Agreement as of March 31, 2003. The annual increase is 4% for the first operating lease agreement and is 3% for the second and third agreement. In connection with these three facility leases, Caliper has a $2.8 million standby letter-of-credit arrangement with a bank expiring in year 2008. Caliper has pledged a certificate of deposit of $2.8 million as collateral on outstanding letters of credit related to Caliper’s operating lease agreements and is classified as security deposits on the balance sheet.

As of December 31, 2002, Caliper had a non-cancelable purchase commitment in the amount of approximately $450,000 with its foreign supplier for the purchase of proprietary glass stock used in the manufacture of certain types of its chips.

During the fourth quarter of 2002, Caliper entered into an amendment and restatement of Caliper’s existing license agreements with UT-Battelle, LLC under which Caliper has obtained an exclusive license to the patents covering the inventions of Dr. J. Michael Ramsey. Although Caliper has minimum royalty obligations under this license agreement, its earned royalty payments exceeded the required minimum royalty for 2002. Royalty payments were $81,000 in 2002. Caliper also has an exclusive license from the Trustees of the University of Pennsylvania to certain patents relating to microfluidic applications and chip structures. The minimum royalty obligation under this license rises over time, but never exceeds $200,000 per year.

Other current and non-current liabilities at December 31, 2002 and December 31, 2001 consist of the following;

Due to the broader economic slowdown and reduced research and development spending by biopharmaceutical companies that Caliper believed was affecting Caliper’s sales to customers, Caliper began in July 2002 a detailed strategic review in which it evaluated each of its products and programs for commercial opportunity, time to market and resource requirements. In September 2002, to better align Caliper’s organizational structure with these depressed market conditions and customer demand, Caliper conducted a reduction in force that resulted in a downsizing of its employee work force by 28 employees, or approximately 10% concluding 2002 with 251 employees. Of the employees affected by the reduction in force, 75% were in research and development with the remaining divided equally between manufacturing and administrative functions. Prior to the date of the financial statements, management with the appropriate level of authority approved and committed Caliper to a plan of termination that included the benefits terminated employees would receive. In addition, prior to the date of the financial statements, the termination benefits were communicated to employees in detail sufficient to enable them to determine the nature and amounts of their

individual severance benefits. As of December 31, 2002, all of the employee separations were completed. Caliper recorded a charge of $314,000 for severance and related benefits with all payments distributed prior to December 31, 2002. Caliper has had no other restructuring charges in prior periods.

In August 2000, Caliper completed a private placement of 2,300,000 shares of its common stock to selected institutional investors, at a per share price of $48.00. Caliper received aggregate gross proceeds from the offering of approximately $110.4 million before payment of placement agent fees and other expenses of approximately $5.5 million.

In December 2001, the board of directors and stockholders of Caliper adopted a Preferred Share Purchase Rights Plan (“Rights Plan”) under which Caliper issued as a dividend certain rights to all holders of its common stock to acquire additional shares of common stock at a discount price under certain circumstances. The dividend of the Rights was made to holders of record of Caliper’s common stock as of January 8, 2002 and shares of common stock that are newly issued after this date will also carry Rights. The Rights Plan is to provide protection to stockholders from various unsolicited and abusive takeover tactics, including attempts to acquire control of Caliper at an inadequate price or treat all stockholders equally. Under the Rights Plan, each stockholder received one Right for each share of Caliper’s outstanding common stock held by the stockholder. Each Right will entitle the holder to purchase one one-hundredth of a share of newly designated Series A Junior Participating Preferred Stock of Caliper at an initial exercise price of $100. Initially, the Rights are not detachable from Caliper’s common stock and are not exercisable. Subject to certain exceptions, they become immediately exercisable after any person or group (an “Acquiring Person”) acquires beneficial ownership of 15% or more of Caliper’s common stock or 10 business days (or such date as the board of directors may determine) after any person or entity announces a tender or exchange offer that would result in a 15% or greater beneficial ownership level. At no time will the Rights have any voting power. If the Rights become exercisable and a buyer becomes an Acquiring Person, all Rights holders, except the Acquiring Person, will be entitled to purchase, for each Right held, $200 worth of Caliper’s common stock for $100. Caliper’s board of directors may amend or terminate the Rights Plan at any time or redeem the rights prior to the time a person acquires more than 15% of Caliper’s common stock. Issuance of the Rights will not affect the financial position of Caliper or interfere with its business plans. Issuance of the Rights will not affect reported earnings per share and will not be taxable to Caliper or Caliper’s stockholder except under certain circumstance if the Rights become exercisable.

During 1999, Caliper recorded $2.3 million for accretions up to the date of initial public offering. Upon the closing of the initial public offering, each of the outstanding 11,703,692 shares of redeemable convertible preferred stock and 829,142 shares of convertible preferred stock was automatically converted into one share of common stock.

In January 1996, in connection with an equipment financing agreement, Caliper issued a warrant that entitles the holder to purchase 3,276 shares of common stock at an exercise price of $1.22 per share. In June 2000, the warrant was exercised under a net exercise provision and 3,194 shares of common stock were issued.

In May 1996, in connection with a capital lease agreement, Caliper granted a warrant that entitles the holder to purchase 32,767 shares of Series B preferred stock at an exercise price of $1.22 per share. In June 2000, the warrant was exercised under a net exercise provision and 31,862 shares of common stock were issued.

In October 1996, in connection with certain agreements, Caliper issued two warrants that entitle the holders to purchase a total of 38,460 shares of common stock at an exercise price of $1.22 per share. One of these warrants is exercisable through October 11, 2006. In July 2000, the other warrant was exercised under a net exercise provision and 18,729 shares of common stock were issued.

No amounts have been recorded by Caliper for the above warrant issuances, as the amounts were determined to be immaterial at the time of issuance.

In August 1995, Caliper executed an agreement which called for the issue of two warrants, upon achievement of a certain patent milestone, to purchase a total of 38,460 shares of common stock at an exercise price of $1.22 per share. This patent milestone was met in December 1999, and the two warrants were issued in February 2000. These warrants will expire in January 2006. The fair value of the warrants was capitalized in 1999 and is being amortized over 5 years. One of these warrants is exercisable through January 17, 2006. In July 2000, one of these warrants was exercised under a net exercise provision and 18,729 shares of common stock were issued. There were no exercises in 2002 or in 2001.

Common stock issued to founders of Caliper vested generally over five years at 20% one year from the date of grant and on a monthly, pro rata basis thereafter. At December 31, 2002, no shares were subject to repurchase at the original issuance price in the event of termination of employment or services to Caliper. Caliper has not repurchased any shares in accordance with these rights.

In December 2001, Caliper’s board of directors adopted the 2001 Non-Statutory Stock Option Plan (“2001 Non-Statutory Plan”). A total of 500,000 shares of common stock has been reserved for issuance under this plan. Caliper issued 230,400 shares under the 2001 Non-Statutory Plan in the year 2001 at a weighted average price of $12.24. Caliper issued the remaining 269,600 shares under the 2001 Non-Statutory Plan in the year 2002 at a weighted average price of $7.82. Of the 269,600 shares issued in 2002, 50,713 shares expired and were canceled which became available for future issuance. Options under the 2001 Non-Statutory Plan cannot be issued to Caliper’s current officers and directors and was therefore not required to be voted on and approved by stockholders.

In October 1999, Caliper’s board of directors and stockholders adopted the 1999 Equity Incentive Plan (“1999 Equity Plan”). The 1999 Equity Plan amended and restated the 1996 Stock Incentive Plan and increased the shares reserved for issuance to 4 million. In addition, the 1999 Equity Plan provides for an automatic increase in the shares reserved for issuance by the greater of 5% of outstanding shares on a fully-diluted basis or the number of shares that have been made subject to awards granted under the 1999 Equity Plan during the prior 12-month period. The automatic share reserve increase may not exceed 12,820,000 shares in aggregate over the 10-year period. In June 2002, 2001 and 2000, an additional 2,456,997 shares, 1,350,058 shares and 1,439,198 shares of common stock, respectively, became issuable under this plan.

In October 1999, Caliper’s board of directors and stockholders adopted the 1999 Non-Employee Directors’ Stock Option Plan (“1999 Directors’ Plan”) which provides for the automatic grant of options to non-employee directors. A total of 200,000 shares of common stock has been reserved for issuance under this plan. The number of shares reserved for issuance will automatically increase by the greater of 0.3% of

outstanding shares on a fully-diluted basis or the number of shares subject to options granted under the 1999 Directors’ Plan during the prior 12-month period. In June 2002, 2001 and 2000, an additional 36,000 shares, 77,017 shares and 69,496 shares of common stock, respectively, became issuable under this plan.

On August 31, 1996, Caliper’s board of directors and stockholders adopted the 1996 Stock Incentive Plan (the “1996 Stock Plan”). This plan supersedes the 1996 Equity Incentive Plan and provides for the issuance of common stock and the granting of options to purchase common stock to employees, officers, directors, and consultants of Caliper. Caliper granted shares of common stock for issuance under the 1996 Stock Plan at no less than the fair value of the stock (no less than 85% of fair value for nonqualified options). Options granted under the 1996 Stock Plan generally vest over 5 years at a rate of 20% one year from the grant date and 1/60 monthly thereafter. Options canceled under the 1996 Equity Incentive Plan are not available for future grants.

Caliper granted nonqualified options of 1,757,729, 1,402,344, and 391,841 for the years ended December 31, 2002, 2001, and 2000, respectively.

The weighted-average fair value of options granted during 2002, 2001, and 2000 was $7.16, $15.72, and $47.60, respectively.

The following table summarizes information with respect to stock options outstanding at December 31, 2002:

In October 1999, the board of directors and stockholders adopted the 1999 Employee Stock Purchase Plan (“1999 Purchase Plan”). A total of 300,000 shares of common stock has been reserved for issuance under the 1999 Purchase Plan. The number of shares reserved automatically increases by the greater of 0.5% of outstanding shares on a fully-diluted basis or the number of shares issued under the 1999 Purchase Plan during the prior 12-month period. The automatic share reserve increase may not exceed 3 million shares in aggregate over the 10-year period. The 1999 Purchase Plan permits eligible employees to acquire shares of Caliper’s common stock through payroll deductions of up to 10% of their gross earnings. No employee may participate in the 1999 Purchase Plan if immediately after the grant the employee has voting power over 5% or more of the outstanding capital stock. Under the 1999 Purchase Plan, the board may specify offerings of up to 27 months. Unless the board determines otherwise, common stock may be purchased at the lower of 85% of the fair market value of Caliper’s common stock on the first day of the offering or 85% of the fair market value of Caliper’s common stock on the purchase date. The initial offering period began on the effective date of the initial public offering. Caliper issued 337,424 shares under the 1999 Purchase Plan in the year 2002 at a weighted average price of $4.33. Caliper issued 69,201 and 112,881 shares under the 1999 Purchase Plan in the year 2000 and 2001 at a weighted average price of $14.27 and $12,51, respectively. In June 2002, 2001 and 2000, an additional 201,642, 128,361, and 115,827 shares, respectively, of common stock became issuable under the 1999 Purchase Plan. As of December 31, 2002, 226,324 shares remain available for future issuance.

Pro forma information regarding net loss and net loss per share is required by SFAS No. 123, and has been determined as if Caliper had accounted for its employee stock options under the fair-value method of

that Statement (see Note 1 of the Notes to Consolidated Financial Statements). The fair value of these options was estimated at the date of grant using the Black-Scholes method and the following assumptions:

Caliper has recorded deferred stock compensation of approximately $12.7 million for the year ended December 31, 1999, representing the difference between the exercise price of the options granted and the deemed fair value of the common stock. These amounts are being amortized by charges to operations over the vesting periods of the individual stock options using the graded vesting method. Such amortization expense amounted to approximately $378,000, $2.5 million, and $4.5 million for the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively. The amortization expense recorded in 2002 was net of $1.0 million reversal of stock compensation expense recognized through the third quarter of 2002 resulting from forfeited options in connection with its 10% reduction in force and other employee terminations conducted in September 2002. Caliper expects to record amortization expense for deferred compensation of $542,500 and $94,500 during 2003 and 2004, respectively.

As of December 31, 2002, Caliper had reserved shares of common stock for future issuance as follows:

On October 16, 2002, Caliper commenced a voluntary stock option exchange program for its employees. Under the program, employees were given the opportunity to submit for cancellation certain of their outstanding stock options in a one-for-one exchange for replacement options to be granted on a day that is at least six months and one day from the date of cancellation of the submitted options. The unexercised stock options that were tendered for exchange under the stock option exchange program were for 1,511,331 shares with 194 employees participating in the exchange program. The exercise price of the replacement options will be equal to the closing price of Caliper’s common stock as reported on the Nasdaq National Market on the grant date of the replacement options, which is expected to be on or about May 20, 2003. The offer of the option exchange commenced on October 16, 2002, and expired on November 19, 2002.

Caliper has no provision for U.S. federal or state income taxes for any period as it has incurred operating losses.

A reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the accompanying statements of operations is as follow:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting purposes and the amounts used for income tax purposes. Significant components of Caliper’s deferred tax assets for federal and state income taxes are as follows:

As of December 31, 2002, Caliper had federal and California net operating loss carryforwards of approximately $64.8 million and $5.9 million. Caliper also had federal and state research and development tax credit carryforwards of approximately $2.8 million and $2.4 million, respectively. The federal net operating loss and credit carryforwards will expire at various dates beginning in the year 2009 through 2022, if not utilized. The state of California net operating losses will begin to expire in year 2004, if not utilized.

Because of Caliper’s lack of earnings history and the uncertainty of realizing these net operating losses, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased (decreased) by 17.4 million, ($871,000) and $6.2 million during the years ended December 31, 2002, 2001 and 2000, respectively.

Utilization of the federal and state net operating losses and credits may be subject to a substantial limitation due to the change in ownership provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

In May 1998, Caliper executed a collaboration agreement with Hewlett-Packard Company (“Hewlett-Packard”) to create a line of commercial research products based on LabChip technologies. In November 1999, Hewlett-Packard transferred this collaboration to its subsidiary, Agilent Technologies, Inc. (“Agilent”). In this collaboration, Caliper primarily focuses on developing core technology and LabChip applications. Caliper also manufactures the chips and supplies the chips and reagents to Agilent. If Caliper elects, however, not to manufacture chips for a LabChip application or is unable to meet minimum mutually agreed supply commitments, Agilent would have the right to manufacture those chips. Agilent primarily focuses on developing instruments and software, manufacturing instruments, and marketing, selling and supporting complete systems.

Agilent funds Caliper’s product development efforts under the collaboration, reimburses Caliper’s costs of supplying chips and reagents, and pays Caliper a share of the gross margin on all components of LabChip systems. The gross margin share varies depending on the type of collaboration product, whether Caliper or Agilent manufacture the collaboration product, and whether such collaboration product is sold during the collaboration or after the collaboration has terminated. Under this agreement, Hewlett-Packard purchased 534,188 shares of Caliper’s redeemable convertible preferred stock Series E with an aggregate cost of $5.0 million.

The term of the Agilent agreement is eight years, beginning in May 1998. After three years, Agilent could have elected not to meet certain annual funding requirements, in which case either party could have terminated the agreement. Agilent elected to continue the annual funding requirements in May 2001. Either party could also terminate the agreement after five years.

In May 2002, Caliper notified Agilent of its election to terminate the agreement between the companies, effective as of May 2003. If Caliper does not enter into a new agreement before that time, then under the existing agreement the parties’ relationship would change, including as follows: Caliper may cease to receive development funding for new products; Caliper will grant Agilent a non-exclusive royalty-bearing license to use the lab-on-a-chip technologies as then developed for Agilent to develop, make and sell products in the field that applied during the collaboration; Caliper may be required to transfer chip manufacturing know-how and receive royalties on Agilent’s sales of systems that employ Caliper’s technologies; and beginning in November 2003, Caliper will have the right to market and sell collaboration products, with reciprocal supply arrangements with Agilent.

In its collaboration with Agilent, Caliper has primarily focused on developing core LabChip technology and product applications. Caliper has also manufactured the chips and supplied the chips and reagents to Agilent. Agilent has primarily focused on developing instruments and software, manufacturing instruments and marketing, selling and supporting complete systems. Agilent and Caliper have worked in a collaborative manner to identify new applications for development and distribution. Historically Agilent has also provided product development funding to Caliper. This funding could cease at any time after the termination of the formal agreement in May 2003.

Under the collaboration, Agilent reimburses Caliper’s costs of manufacturing chips and reagents and pays us a share of the gross margin on all components of LabChip systems, including instruments. This general structure for existing products will survive termination of the agreement. The gross margin share varies depending on the type of collaboration product, and on whether Agilent or Caliper manufactures the collaboration product. After the collaboration agreement terminates in May 2003, Caliper’s gross margin share for existing products will remain the same until November 2004. In November 2004, Caliper’s gross margin share for such chips and reagents will decrease, and in May 2006 Caliper’s gross margin share for such chips and reagents will decrease again. Caliper’s gross margin share for existing instruments will also decrease in the

same time periods, although at somewhat different rates. Upon termination of the agreement in May 2003, Agilent will have a non-exclusive license in the field of the collaboration to certain of Caliper’s LabChip technology to develop, manufacture and sell new products in that field. Agilent will be required to pay royalties to Caliper based on its net revenue from sales of such products at the established royalty rates set forth in the termination provisions of the collaboration agreement.

Upon termination of the agreement, Caliper will be obligated to continue to supply existing chips and reagents to Agilent for a three-year period. Agilent will also have a non-exclusive license to manufacture chips for Agilent LabChip applications, in each case subject to gross margin sharing or royalty payments to Caliper as described above. During the six-month period following termination, Caliper will also be obligated to train Agilent personnel with respect to the manufacturing of chips, subject in certain circumstances to reimbursement by Agilent of Caliper’s incurred expenses. Agilent will be similarly obligated to train Caliper personnel regarding the manufacturing of instruments, and upon Caliper’s request, to transfer to Caliper all Agilent know-how incorporated into collaboration products. Caliper will retain its entire license rights to Agilent’s technology granted during the term of the collaboration.

After a six-month period following termination of the agreement with Agilent, Caliper will be entitled to market, sell and support, either independently or with other third parties, all products developed during the collaboration. For a three-year period following termination, Caliper will be required to purchase its requirements for such products from Agilent, on the terms set forth in the termination provisions of the agreement.

In prior years and through the majority of 2001, Caliper maintained a Technology Access Program which provided customers with early access to new products, and offered technical training, support and customization services. Technology Access Program customers had non-exclusive access to all of the drug discovery products Caliper offered during the term of the agreement. These agreements generally provided for customers to pay an up-front license fee and annual subscription fees, and to reimburse Caliper for its costs of providing development and support services. Instruments and chips were generally sold separately on a product-by-product basis, although some agreements establish prices for initial instruments or estimates of per data point charges for sipper chips. In August 2001, Caliper began to amend these agreements with continuing Technology Access Program customers to transition them to a products and services based customer for commercially available drug discovery products. Caliper proposed to each customer, and they agreed, that the remaining technology access and subscription fees due Caliper under their agreement would be converted to credits toward the purchase of products and services. These credits had to be utilized in the eight to fifteen months after August 2001.

Caliper had four Technology Access Program customers for its drug discovery systems: Eli Lilly and Company (“Eli Lilly”), Millennium Pharmaceuticals, Inc. (“Millennium”), Amgen, Inc. (“Amgen”) and Hoffmann-La Roche Inc. (“Roche”).

Eli Lilly. Caliper signed a technology access agreement with Eli Lilly in August 1999. The term was three years. In August 2001, the agreement was amended to include terms for commercially available products and continuing assay development services through August 2002. There were no further technology access fees or subscription fees with products and services purchased by Eli Lilly after August 2001. Subsequently, Caliper recognizes revenues upon shipment and transfer of title to products sold to Eli Lilly or when the assay development service has been provided by Caliper.

Millennium. Caliper signed a broad technology access and application development collaboration with Millennium in March 2000. The term is two years with an option to renew in the third year. In December 2001, the agreement was amended to include terms for commercially available products and continuing assay

development services through March 2003. There were no further technology access fees or subscription fees with products and services purchased by Millennium after December 2001. Subsequently, Caliper recognizes revenues upon shipment and transfer of title to products sold to Millennium or when the assay development service has been provided by Caliper.

Amgen. Caliper entered into a three year technology access agreement with Amgen in December 1998. In December 2001, the agreement was amended to include terms for commercially available products and continuing assay development services and extended through to December 2002. Under the amended agreement Caliper agreed to convert technology access fees still available towards the purchase of products and services that Amgen utilized in December 2001. There were no further technology access fees or subscription fees with products and services purchased by Amgen after December 2001. Subsequently, Caliper recognizes revenues upon shipment and transfer of title to products sold to Amgen or when the assay development service has been provided by Caliper.

Hoffmann-La Roche. Caliper entered into a technology access agreement with Roche in November 1998, which expired in July 2000. This agreement superseded an earlier agreement under which Roche funded early development of the high throughput screening technology in exchange for certain exclusive rights to an ultra high throughput screening system. Under this earlier agreement, Roche purchased 854,701 shares of Caliper’s redeemable convertible preferred stock Series C with an aggregate cost of $4.0 million. Roche now has non-exclusive rights to purchase high throughput products that are offered to other Technology Access Program and commercial customers. Caliper did not receive an up-front license fee or annual subscription fee from Roche.

Caliper’s Value Added Screening Collaboration program offered high throughput screening services using Caliper’s LabChip systems. Caliper’s first Value Added Screening Collaboration agreement was established with Neurocrine Biosciences in December 1998. Caliper received screening fees on a per data point basis, preclinical milestones and royalties on Neurocrine products emerging from the collaboration. This agreement had a three-year term, but could have been terminated by either party under certain circumstances after the first year. In 2001, when Caliper decided to transition its business to product-based revenues, this program was eliminated. Of the two Value Added Screening Collaboration collaborations, the contract with Neurocrine Biosciences and SUGEN expired in December 2001. SUGEN became a commercial products customer in December 2001.

Revenue from the alliance and programs discussed above were approximately $16.0 million and $17.8 million in 2001 and 2000 respectively. Revenue earned from reimbursement of development and support activities approximated actual costs incurred.

In September 1998, Caliper received a grant from the Advanced Technology Program of the National Institute of Standards and Technology (“NIST”) to develop a Reference Laboratory DNA Diagnostics System based on Caliper’s “lab-on-a-chip” technology of approximately $2 million over three years. The grant period began in January 1999 and concluded in December 2001, and no revenues will be recognized after 2001.

In September of 2001, Caliper completed the spin out of a new company, Amphora Discovery Corp., to create and commercialize a comprehensive database of chemical genomics information. Venture capitalists invested $25 million in Amphora, and entered into agreements to invest up to an additional $10 million if requested by Amphora, causing Amphora to be a separate, independent company from Caliper with its own management team and board of directors. Caliper’s ownership interest in Amphora was approximately 28%.

These venture capitalist include ARCH Venture Partners and Venrock Associates. One of Caliper’s directors, Robert T. Nelsen, is a Managing Director of ARCH Venture Partners, and another of Caliper’s directors, Anthony B. Evnin, is a General Partner of Venrock Associates. Caliper’s investment in Amphora is accounted for under the equity method of accounting. As Caliper’s investment in Amphora has no basis for accounting purposes and, because Caliper does not guarantee debt or have commitments to fund losses of Amphora, Caliper has not recorded its proportionate share of Amphora’s operating losses in its financial statements since the completion of Amphora’s financing.

Caliper has had two representatives on Amphora’s six-member board of directors. Michael R. Knapp, Caliper’s Chief Executive Officer, and James L. Knighton, Caliper’s President and Chief Financial Officer, had served on Amphora’s board of directors since September 2001. Mr. Knighton resigned from Amphora’s board of directors in February 2002 and was replaced by Daniel L. Kisner, Caliper’s Board Chairman. Mr. Knighton also served as Amphora’s acting Chief Financial Officer from September 2001 until January 2002. In connection with the formation of Amphora, Dr. Knapp and Mr. Knighton received 900,000 and 450,000 shares of restricted common stock, respectively, at a share value of $0.10 per share. Dr. Knapp and Mr. Knighton paid $0.01 per share of the purchase price in cash, with the remainder of the purchase price paid by the cancellation of all amounts owed by Amphora to Dr. Knapp and Mr. Knighton for services provided by them to Amphora prior to the issuance of such common shares to them. Initially, 100% of such shares were subject to a repurchase option in favor of Amphora. 50% of such shares were released from this repurchase option when Amphora completed its initial third party financing in September 2001. The remaining 50% of such shares will be ratably released from Amphora’s repurchase option over an eight-year period on a monthly basis with respect to each of Dr. Knapp or Mr. Knighton for so long as they serve on Amphora’s board or remain available to provide advisory services to Amphora pursuant to existing consulting contracts. Additionally, Dr. Knapp participated as a private investor in Amphora’s initial September 2001 financing, wherein he purchased 50,000 shares of Amphora’s preferred stock. Dr. Kisner did not receive any shares of restricted Amphora common stock or options to buy Amphora common stock in connection with his appointment to Amphora’s board.

In December 2002, Amphora completed a second private placement of securities with third party investors. After the completion of this financing, Caliper’s ownership in Amphora was reduced to approximately 13% from 28% on a fully diluted basis. Over time Caliper expects that its ownership in Amphora will be further diluted, as Caliper has no plans to make any future equity investments in Amphora. On March 17, 2003, one of Caliper’s two representatives, Dr. Knapp, resigned from Amphora’s board of directors. Due to the reduction in its percentage ownership of Amphora, Caliper now has the right to appoint only one member to Amphora’s board. Dr. Kisner continues to be a member of Amphora’s board of directors.

In September 2001, Caliper and Amphora entered into a LabChip Solutions Agreement and an Intellectual Property Agreement. The LabChip Solutions Agreement provided for the ongoing supply of Caliper automated drug discovery systems and chips to Amphora, and for the provision of related services by Caliper to Amphora. Under this agreement, Amphora agreed to purchase a minimum of eleven Caliper 250 Drug Discovery instruments by December 31, 2001 and at least eleven additional Caliper 250 Drug Discovery instruments by December 31, 2002. Amphora also agreed to purchase datapoints at a fixed amount of $2 million in the first year and a minimum of $4 million to a maximum based on volume of $6 million in the second year of the agreement. The LabChip Solutions Agreement also contains certain intellectual property licensing provisions pertaining to the parties’ independent and collaborative efforts to develop new drug discovery systems based on Caliper’s microfluidic technologies. Under the Intellectual Property Agreement, Caliper has granted Amphora certain exclusive rights to use Caliper’s drug discovery products in a chemical genomics database business.

agreement, the Companies agreed to restructure the $4 million minimum datapoint payment for 2002 as follows: Amphora agreed to purchase a minimum of $1.8 million of datapoints during the second year of the agreement beginning in December 2002 and over time to make up to $2.2 million of deferred payments to Caliper. These deferred payments are contingent upon Amphora’s future revenue generation, datapoint production and other conditions and can be satisfied by Amphora under three methods: i) quarterly payments to Caliper based on Amphora’s revenues; ii) commissions earned by Amphora as they provide certain marketing assistance to Caliper for Caliper’s instruments; and iii) additional datapoint payments if Amphora exceeds the certain minimum datapoint levels. We also agreed to defer to December 31, 2003 Amphora’s obligation to purchase the one remaining Caliper 250 instrument of the 11 originally scheduled to be purchased by Amphora before December 31, 2002. In consideration for our agreement to this restructuring, Amphora issued to Caliper 2.5 million shares of Amphora preferred stock. We ascribed a nominal value of $25,000 to these shares as Amphora is a privately held research and development company.

In 2002, Caliper sold a total of $6.2 million in Caliper 250 Drug Discovery system products, chips, datapoints and assay development services to Amphora recording the sale of products and services as related party revenue in Caliper’s financial statements. In 2001 by comparison, subsequent to Amphora’s third-party financing, Caliper sold a total of $3.9 million in Caliper 250 Drug Discovery system products, chips, datapoints and assay development services. Of the $6.2 million in total 2002 sales, $3.3 million related to drug discovery system products and, under the equity method of accounting, Caliper deferred 28% of the gross profit of these sales, or $333,000, that reflects its retained ownership interest in the products sold to Amphora in 2002. The remaining $2.9 million of revenue recognized in 2002 consisted of $1.7 million in datapoints, $900,000 in assay development services and deferred gross profit revenue from Caliper 250 Drug Discovery system product sales in 2002 and 2001. In 2002, Caliper recognized a total of $177,000 of this deferred gross profit as revenue of which $121,000 related to drug discovery system products sold in 2001 and $56,000 related to products sold in 2002. Caliper expects to recognize the remaining $499,000 as revenue ratably over the next 36 months as Amphora records depreciation on its Caliper 250 Drug Discovery systems. As all drug discovery system sales to Amphora occurred prior to Amphora’s December 2002 third part financing, all future drug discovery system sales will be deferred at Caliper’s then retained ownership interest level which is approximately 13% currently. The completion of Amphora’s second financing in December 2002 did not have any impact on Caliper’s method of accounting for Amphora.

In December 2002, Amphora assumed full service responsibility for all of the 21 Caliper 250 Drug Discovery instruments purchased from Caliper including instruments still within their 12-month warranty period. In return, Caliper provided a $55,000 warranty rebate on the 10 Caliper 250 Drug Discovery instruments purchased earlier in 2002 and will provide a discount on future sales of instruments purchased without a warranty. Caliper has no remaining warranty or service responsibility on instruments purchased now or in the future by Amphora.

In September 2001, Amphora entered into a three-year Sublease Agreement with Caliper for the rent of approximately 5,700 square feet in one of Caliper’s Mountain View, CA leased buildings for Amphora’s research and development use. Amphora is obligated for monthly rent based on local market rates with a 3% per annum escalation and Caliper, as landlord, is obligated to provide certain facilities maintenance services. In December 2002, in connection with the completion of Amphora’s second financing, Caliper agreed to an early termination of this Sublease Agreement as of March 31, 2003. Caliper recorded both the subtenant rental income and maintenance service costs as part of its overall facilities costs.

In September 2001, Amphora entered into an Administrative Services Agreement with Caliper for certain financial accounting, purchasing and human resource services to be provided by Caliper’s personnel. Caliper charged for these services monthly at an hourly rate based on a cost plus mark-up basis recording the corresponding payments from Amphora as part of its overall employee costs. Amphora terminated this agreement at its option in June 2002 when it achieved adequate staffing to fulfill these functions.

Caliper has a 401(k) plan qualified under section 401(k) of the Internal Revenue code that is available to all eligible employees as defined in the plan. Caliper does not match employee contributions.

On March 22, 1999, Caliper filed a lawsuit in California Superior Court for the County of Santa Clara against Aclara Biosciences, Inc. and Caliper’s former patent counsel, a patent attorney named Bertram Rowland, and his former law firm, Flehr, Hohbach, Test, Albritton and Herbert alleging that all the defendants misappropriated certain of Caliper’s trade secrets relating to Caliper business plans, patents and intellectual property strategy. The suit also alleges that Caliper’s former patent counsel committed a breach of the duties they owed to Caliper as its former attorneys. On September 14, 2000, Caliper reached a settlement agreement with Dr. Rowland and Flehr, Hohbach, Albritton, Test and Herbert in this case. The settlement provided Caliper with a $12.0 million cash payment from these defendants as well as other terms. This settlement has no effect on Caliper’s lawsuits with Aclara. In this same case, on October 27, 2000, the jury returned a verdict in favor of Caliper and against Aclara on Caliper’s claims for misappropriation of trade secrets and conversion of property. The jury awarded Caliper $52.6 million for damages to Caliper and unjust enrichment to Aclara, which the court reduced to $35.6 million.

On January 7, 2001, Caliper announced a comprehensive settlement agreement with Aclara Biosciences, Inc. of all pending litigation between the two companies. Under the terms of the settlement both companies agreed to dismiss all suits and countersuits in the federal and state court actions and to cross-license selected patents. The settlement provides Caliper with freedom to operate under Aclara’s “022 family of patents, which includes the “015 and other patents, for its glass chips and related instruments through a fully paid, royalty-free license. Under the terms of the agreement, Aclara agreed to pay Caliper $37.5 million due in 2002 over a three-year period in a combination of stock, cash, and committed minimum royalties. Caliper also agreed to license to Aclara the “Ramsey” family of patents for use with Aclara’s polymer chips and related instruments in exchange for license fees and royalties. The two companies have also agreed to an alternative dispute resolution procedure for handling potential future patent disagreements out of court.

On March 22, 2001, in connection with the settlement agreement mentioned above, Caliper received 900,000 shares of Aclara’s common stock with a then current fair value of $4.3 million. The common stock was restricted from sale for a period of 18 months from the date of the settlement agreement. As a component of the settlement agreement, Aclara guaranteed the value of the Aclara common stock to be $32.5 million at the time of Caliper’s sale of the stock, provided that such sale occurs in the period from 18 months to 24 months from the effective date of the settlement agreement. Aclara entered into a fully-funded $32.5 million standby letter of credit in favor of Caliper to secure its performance under this potential obligation. Accordingly, Caliper recognized the entire $32.5 million settlement in the quarter ended March 31, 2001. Caliper recognized $5.0 million of license fee revenue and $27.5 million of litigation settlement in the income statement pursuant to the terms contained in the settlement agreement. Caliper will also receive royalties on certain Aclara product sales commencing in 2002 through 2008 with a minimum annual royalty payment of $2.5 million by December 31st in each of years 2002 and 2003. Caliper does not have any further obligations under the agreement. On December 30, 2002, Caliper received $2.5 million in cash from Aclara for the minimum annual royalty payment for 2002.

Caliper had accounted for this arrangement by initially recording $4.3 million in Aclara stock at fair market value, with a note receivable with a corresponding face value of $28.2 million including other receivable for the fully funded letter of credit which was reduced by the initial fair value ($2.7 million) of an embedded derivative. The latter two elements in combination represent the guarantee. The receivable will be accreted to its face value of $28.2 million over the life of the receivable using the level-yield method. The embedded derivative was accounted for as discussed in Note 2. On October 15, 2002, Caliper received

$32.5 million in cash from Aclara upon delivering 900,000 shares of Aclara common stock to Aclara in accordance with the terms of the comprehensive settlement agreement between the companies.

Commencing on June 7, 2001, Caliper and three of its officers and directors (David V. Milligan, Daniel L. Kisner and James L. Knighton) were named as defendants in three securities class action lawsuits filed in the United States District Court for the Southern District of New York. The cases have been consolidated under the caption In re Caliper Technologies Corp. Initial Public Offering Securities Litigation, 01 Civ. 5072 (SAS) (GBD). Similar complaints were filed in the same Court against hundreds of other public companies that conducted IPOs of their common stock since the late 1990s (the “IPO Lawsuits”). On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Together, those cases are denominated In re Initial Public Offering Securities Litigation, 21 MC 92(SAS). On April 19, 2002, a Consolidated Amended Complaint was filed alleging claims against Caliper and the individual defendants under Sections 11 and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder. The Consolidated Amended Complaint also names certain underwriters of Caliper’s December 1999 initial public offering of common stock. The Complaint alleges that these underwriters charged excessive, undisclosed commissions to investors and entered into improper agreements with investors relating to aftermarket transactions. The Complaint seeks an unspecified amount of money damages. Caliper and the other issuers named as defendants in the IPO Lawsuits moved on July 15, 2002 to dismiss all claims on multiple grounds. By Stipulation and Order dated October 9, 2002, the claims against Messrs. Milligan, Kisner and Knighton were dismissed without prejudice. On February 19, 2003, the Court granted Caliper’s motion to dismiss all claims against it. Plaintiffs were not given the right to replead the claims against Caliper; the time to appeal the dismissal has not yet expired.

On April 16, 2002, Caliper filed a lawsuit against Molecular Devices Corporation in the United States District Court for the Northern District of California. In that case, Caliper Technologies Corp. v. Molecular Devices Corporation, No. C-02-1837 (N.D. Cal.), Caliper asserts that Molecular Devices Corp.’s IMAP and Reagent Assay Kits infringe one or more claims of United States Patent No. 6,287,774, which Caliper owns. Caliper’s complaint seeks both injunctive relief precluding further infringement of the patent and damages. The answer to the Complaint was filed on May 8, 2002 and asserts a counterclaim seeking a declaratory judgment that the patent is not infringed and is invalid. Caliper believes the counterclaim to be without merit. In late 2002, Caliper successfully moved the court to add a newly-issued patent, U.S. Patent No. 6,472,141 to the lawsuit, alleging that the same accused devices infringe one or more of the claims of that patent. The answer to Caliper’s First Amended Complaint was filed on December 17, 2002, and asserts a counterclaim seeking a declaratory judgment that both Caliper patents are invalid and not infringed. Caliper believes the Amended Counterclaim to be without merit. On January 28, 2003, Caliper filed a motion for preliminary injunction, which is scheduled to be heard by the court in May 2003. In that motion, Caliper has asked the court to preliminarily enjoin Molecular Devices from making, using, selling, and offering to sell its infringing IMAP kits for kinase assays. Discovery is underway, and no trial date has been set by the Court.

The table below presents Caliper’s activities by geographical location. Caliper attributes revenues to geographic locations based upon customer service and business development activities.


(1)	Includes litigation settlement of $27.5 million from Aclara recorded in March 2001.


	(1)	Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1, as amended, File No. 333-88827, filed on October 12, 1999 and incorporated by reference herein.

	(2)	Previously filed as Exhibit 3.4 to our Registration Statement on Form S-1, as amended, File No. 333-88827, filed on October 12, 1999 and incorporated by reference herein.

	(3)	Previously filed as the like-numbered Exhibit to our Registration Statement on Form S-1, as amended, File No. 333-88827, filed on October 12, 1999 and incorporated by reference herein.

	(4)	Management contract or compensatory plan or arrangement.

	(5)	Confidential treatment has been granted for a portion of this exhibit.

	(6)	Filed as the like-numbered exhibit to Annual Report of Form 10-K for the year ended December 31, 1999 and incorporated by reference herein.

	(7)	Previously filed as Exhibit 10.26 to Form 10-Q for the quarterly period ended March 31, 2000 and incorporated by reference herein.

	(8)	Previously filed as the like-numbered Exhibit to our Registration Statement on Form S-1, as amended, File No. 333-45942, filed on September 15, 2000, and incorporated by reference herein.

	(9)	Previously filed as the liked-numbered an Exhibit to Form 10-K/ A for the year ended December 31, 2000 and incorporated by reference herein.


(10)	Previously filed as the like-numbered Exhibit to Form 10-Q for the quarterly period ended March 31, 2001 and incorporated by reference herein.

(11)	Previously filed as the like-numbered Exhibit to Form 10-Q for the quarterly period ended September 30, 2001 and incorporated by reference herein.

(12)	Previously filed as Exhibit 99.1 to Current Report on Form 8-K filed December 19, 2001 and incorporated by reference herein.

(13)	Previously filed as Exhibit 99.1 to our Registration Statement on Form S-8, File No. 333-76636, filed January 11, 2002 and incorporated by reference herein.

(14)	Previously filed as the like-numbered Exhibit to Form 10-K for the year ended December 31, 2001 and incorporated by reference herein.

(15)	Previously filed as the like-numbered Exhibit to Form 10-Q for the quarterly period ended June 30, 2002 and incorporated by reference herein.

(16)	Previously filed as the like-numbered Exhibit to Form 10-Q for the quarterly period ended September 30, 2002 and incorporated by reference herein.

(17)	Designates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 15(c) of this report.

(18)	Confidential treatment has been requested for a portion of this exhibit.

EX-3.4 3 f88175exv3w4.txt EXHIBIT 3.4 EXHIBIT 3.4 CALIPER TECHNOLOGIES CORP. AMENDMENT NO. 1 TO BYLAWS The Bylaws of Caliper Technologies Corp. (the "Company") are amended as follows: 1. Article V, Section 28 of the Bylaws of the Company is hereby amended in its entirety to read as follows: "SECTION 28. TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. If there is no Chief Executive Officer or President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraphs (b) and (c) of this Section 28. (c) DUTIES OF THE CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The Chief Executive Officer shall preside at all meetings of the stockholders unless the Chairman of the Board of Directors has been appointed and is present. The Chief Executive Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (d) DUTIES OF THE PRESIDENT. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. (e) DUTIES OF THE VICE PRESIDENT. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) DUTIES OF THE SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (g) DUTIES OF THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time." 2. Except as modified by this Amendment No. 1, the Bylaws of the Company shall remain in full force and effect. EX-10.50 4 f88175exv10w50.txt EXHIBIT 10.50 EXHIBIT 10.50 November 13, 2001 Susan Evans Ph.D. Dear Sue: We are pleased to formally extend to you an offer of employment for the position of Vice President Product Development with Caliper Technologies Corp. (Caliper). In this position you will report to me. The primary responsibilities of this position include: developing the infrastructure and directing the technical activities of the product development function from product conception through transition to manufacturing. These activities include instrument engineering, software engineering, assay development and product microfluidics through all the stages of the product lifecycle for successful delivery. In this position you will be a company officer and a member of the executive team with additional responsibility for contributing to the strategic planning and management of the company To compensate you for your efforts in this position, you will receive a compensation package including base salary, performance bonus, stock options and a comprehensive benefits plan. BASE SALARY: your base salary will be $20,417 per month (equivalent to $245,004 per annum), subject to standard payroll deductions and withholdings. This position is classified as exempt. PERFORMANCE BONUS: you will be eligible for an annual bonus under the Caliper performance bonus plan beginning January 1, 2002. In the position you have been offered, your annual bonus opportunity would be equal to 40% of your annualized base salary. Actual payment of this bonus is subject to your performance and the performance of the company during the year. EQUITY: I will be recommending to the board of directors the approval of a stock option grant for 175,000 shares of Common Stock of Caliper. The price per share for this option will be fixed based on the closing sales price (or closing bid, if no sales are reported) on the last trading day prior to the date of grant. It is our intent to have your date of grant be your first day of employment. The shares subject to this option will vest over a four-year period with 25% of the shares vesting one (1) year from your start date, and thereafter the shares shall vest at a rate of 1/48th of the shares per month at the end of each of the remaining 36 months. The option will be granted pursuant to the Company's 1999 Equity Incentive Plan. EMPLOYEE STOCK PURCHASE PLAN: Based on an anticipated start date after November 20, 2001, you will be eligible to participate in Caliper's Employee Stock Purchase Plan effective June 1, 2002. Susan Evans November 13, 2001 Page 2 BENEFITS: you will receive all the employment benefits available to full time, regular exempt employees of the Caliper. These benefits include medical, dental, vision and life insurance plans including a term executive life insurance policy with a benefit of $500,000 and an executive life insurance benefit of an additional $500,000, for which the premiums are paid 100% by the Company, accrual of fifteen days vacation during the year, eleven paid holidays, five days flexible time off, five days sick leave and a 401(k) plan. RELOCATION: It is our understanding that you have not completed your relocation to the San Francisco Bay Area. To assist you in this activity, the company will provide you with relocation assistance. Please see the attached summary of Caliper Technologies Corp. Relocation Coverage Your relocation must occur within four years of date of employment. CHANGE OF CONTROL: In this position, you will be eligible for compensation protection should your employment terminate due to a Change of Control. The terms of this protection are: Severance Pay: If your employment is terminated (including a Constructive Termination) during the 13 months following a Change of Control for any reason other than for Cause, then if you execute an effective waiver and release of all claims, you will receive monthly consulting payments equal to your base salary at time of termination for 12 months or until employed by another company, whichever is less, and to the extent and for so long as (but not to exceed 12 months) you are not eligible to receive comparable health insurance coverage from another employer, Caliper Technologies Corp. will provide you and your eligible dependents with COBRA continuation of coverage, at its expense provided that you completes the requisite forms to elect and obtain such continued coverage in timely manner. Equity: In addition to the vesting acceleration provisions stated in the Company's 1999 Stock Option Plan if your employment is terminated (including without limitation Constructive Termination) during the 13 months following a Change of Control for any reason except for Cause, then on the date of termination you will receive accelerated vesting of 30 months for all outstanding stock options. Acceleration of vesting will not be available or provided, however, if the Change of Control is to be a "pooling of interests" transaction and the Company's outside auditors determine that such acceleration of vesting would prevent the Company from participating in a "pooling of interests" transaction. In accordance with the Immigration Reform & Control Act of 1986, employment in the United States is conditional upon proof of eligibility to legally work in the United States. On your first day of employment, you will need to provide us with this proof. If you do not have these documents, please contact me prior to your first day of employment. Your employment with Caliper is voluntarily entered into and you are free to resign at any time. Similarly, Caliper is free to conclude an employment relationship where it believes it is in its interest at any time. While we hope our relationship will be mutually beneficial, it should be recognized that neither you, nor we have entered into any contract of employment expressed or implied. Our relationship is and always will be one of voluntary employment "at will". Susan Evans November 13, 2001 Page 3 As an employee of Caliper you will have access to confidential information and you may, during the course of your employment, develop information or inventions that will be the property of Caliper. To protect the interests of Caliper, you will be required to sign the Company's Proprietary Information and Inventions Agreement as a condition of your starting employment. We wish to impress upon you that we do not wish you to bring with you any confidential or proprietary material of any former employer or to violate any other obligations you may have to your former employer. This offer letter is an offer of employment and is not intended and shall not be construed as a contract proposal or contract of employment. This written offer constitutes all conditions and agreements made on behalf of Caliper Technologies Corp. and supersedes any previous verbal commitments by the Company. No representative other than myself has any authority to alter or add to any of the terms and conditions herein. Please contact Richard Butts or me if you have any questions and/or to indicate your response to this offer. Upon your acceptance please sign and return the original while retaining the copy of this offer for your records. You may also send your signed copy to our confidential fax number: 650-623-0504. I have also enclosed a Proprietary Information and Inventions Agreement. This employment offer expires on November 20, 2001 at 5:00 pm PST. We believe we are far along in the process of assembling a "world class" team and a broad and deep technology and product portfolio. Your experience and talents will be a strong addition. We hope that you will join us in building a preeminent company. Regards, /s/ Daniel L. Kisner - --------------------- Daniel L. Kisner, M.D. Chief Executive Officer & President Accepted: /s/ Sue Evans Date: 12/13/01 -------------------- -------------------------------------- Enclosures CALIPER TECHNOLOGIES CORP. RELOCATION COVERAGE The following information concerning moving procedures is intended to assist you in arranging for the relocation of your household effects. - - MOVING - GENERAL - Caliper Technologies Corp. will pay for packing and transporting your household goods. Unpacking, storage, delivery from storage, and replacement value insurance coverage are included in the service. - Household goods will be moved from one location at origin to one location at destination with allowance for thirty (30) days of temporary storage. - Household goods include such items as furniture, linen, bedding, china, silverware, rugs, appliances, kitchen utensils, clothing and hand tools. - Maximum amount of weight for the movement of household effects shall be limited to 50,000 pounds and two drivable cars. - - ARRANGEMENTS - Caliper Technologies Corp. has a selected moving company, Ace Relocation Systems/Atlas Van Lines (carrier) will establish dates for packing, loading and deliver in conjunction with you. Normally, the carrier needs two weeks notice to schedule a move. - Please advise Human Resources Department of your moving date and where you may be reached after the date. - If a problem should arise with your move, immediately call Human Resources for assistance. - - INSURANCE COVERAGE - Ace Relocation Systems/Atlas Van Lines will provide replacement value insurance coverage to completely protect your household goods while en route or in temporary storage. (Coverage is based on $3.50 per pound of actual weight shipped). - Antiques and articles of high or special value requiring special handling or additional insurance will be your responsibility. - - PACKING AND UNPACKING - The carrier must pack your furnishings and provide crating where necessary. Items packed by you may not be covered by the carrier's liability. If you wish to pack certain items, we suggest you discuss liability coverage for those items with the carrier. - A responsible member of your family should be present during packing and loading. The carrier and Caliper. are liable only for articles included on the carrier's inventory. The carrier and Caliper are not responsible for any articles left in your residence. - A responsible member of your family should be present when the carrier's van is unloaded. If there are noticeable shortages or damage caused by the carrier upon delivery, such notations should be noted on the bill of lading or inventory list at the time of unloading. Claims against the carrier are more difficult to support if damage or missing items are not reported at the time of delivery. - The carrier will unpack all cartons packed by them at your request. - It is the carrier's responsibility to place the furniture and cartons in your new residence as indicated. - - STORAGE - If necessary, Caliper will pay for one month's storage normally at or near the Destination City. Storage includes warehouse handling, one month's storage, and a single delivery to the new residence. - - MISCELLANEOUS - Appliances - Due to age and wear of parts, household appliances (including televisions, radios, etc.) are susceptible to damage from vibration in transit. Therefore, neither Caliper nor the carrier can assume responsibility for malfunctioning of any appliances except where there is observable damage to the appliance. Appliance removal and installation at origin and destination will be paid by the employee. - Freezers, frozen food and refrigerators. - Please discuss the proper handling of these items with the carrier. Carriers will not normally transport a loaded freezer, not only because of potential food spoilage, but also because of potential contamination of the freezer. - Caliper will not assume special charges for handling a loaded freezer. Neither the carrier nor Caliper will assume liability for food spoilage. - Refrigerators must be cleaned and dried inside before moving to prevent contamination (24 hours prior to loading is recommended). - - Articles not acceptable by carriers. - Carriers will not accept for transportation: flammable materials, explosives, acids, or any other article liable to impregnate or otherwise damage carrier's equipment or other property loaded in the carrier's van. Aerosol containers cannot be shipped. - Carriers will not accept items which cannot be taken from the employee's premises without causing damage to the premises or to the item itself. - Consult the carrier on items likely to fall within these exclusions. - - INCOME TAX - Moving costs paid by Caliper on behalf of an employee are not considered taxable income. However, these IRS Regulations are subject to change. Therefore, questions regarding taxable income should be referred to your tax consultant. Items that are determined by our accounting department to be taxable will be grossed up by 65 percent. - - NON - REIMBURSABLE EXPENSES - Expenses incurred for the following items will not be reimbursed by Caliper Technologies Corp.: - House Cleaning - Removing or installing drapery rods, et cetera - Transporting boats, major recreation or hobby equipment, machine tools (except as noted in B. HOUSEHOLD GOODS), building supplies, automobile parts, firewood, live plants, wine collections and other items not usually considered household furnishings - Dismantling gym sets or removing permanently installed gym sets. - Transporting or boarding of animals or livestock. - Lifting or installing wall to wall carpeting - Rug cleaning - Hanging mirrors, pictures or other items involving special charges by the carrier. - Removing or installing television antennas and dishes. - Expedited service or exclusive use of carrier's van. - Any other services for which a carrier may assess a special charge. - - BILLING CHARGES - The carrier will bill Caliper for all allowable transportation and packing charges incurred in relocating your household goods. - - CLOSING COSTS - SELLER - Broker's commission and or sale discounts to buyer up to 6% of the selling price for both. - Attorney's fees. - Transfer fees. - Title fees. - Termite inspection. - Property survey. - - CLOSING COSTS - BUYER - Loan origination fees, discounts, etc. not to exceed 2.0 points based on the loan amount. - Appraisal, inspection, document preparation, tax service, express courier service, wire, notary fees and the like. - Credit report. - Title insurance, search, etc. - Inspections - Attorney's fees not to exceed 1% of sale price. Requests for further information or assistance should be addressed to: Richard Butts Human Resources Department 605 Fairchild Drive Mountain View, CA 94043 650 623 0520 Richard.butts@calipertech.com November 28, 2001 Susan Evans Ph.D. Re: Addendum to offer of employment from Caliper Technologies Corp. Dear Sue: In addition to the terms and conditions stated in our offer of employment dated November 13, 2001, we add the following. BENEFITS - You will accrue vacation leave at the rate of 1.6667 days per month. - At the start of your employment, your vacation leave balance will be set up with 10 days of leave prior to the above accrual. However, your maximum leave accrual at the end of 2002 will be 20 days. - It is understood and agreed that you will be taking two weeks vacation leave for a family vacation commitment in late April or early May. RELOCATION - Temporary Living As part of your relocation the company will reimburse you for up to six months of temporary living expenses covering apartment and furniture rental. Until your personal automobile is shipped from Lake Forest a we will reimburse you for the cost of a rental car. Arrangements will be made to ship your automobile shortly after the start of employment. Upon your start of e or transportation of my personal vehicle to the area. - House Hunting Travel The company will arrange for air transportation for your husband to travel from Chicago to San Francisco for the purpose of two (if needed) house hunting. - Trips to Lake Forest, Illinois If needed, the company will reimburse you for the cost air transportation to and from your home in Lake Forest until your home is sold and your husband has relocated to the San Francisco Bay Area. This is limited to one trip per month for up to six months. - Moving Expenses We are waiving the household goods weight limit. If an additional cost is incurred for the use of secondary moving trucks due to access restrictions to your new house this will be reimbursed as part of your relocation package. Susan Evans Employment Offer Addendum November 28, 2001 Page two - Income Tax Gross Up Moving costs paid by Caliper on behalf of an employee are not considered taxable income. However, these IRS Regulations are subject to change. Therefore, questions regarding taxable income should be referred to your tax consultant. Items that are determined by our accounting department to be taxable will be grossed up by 75 percent. - Duel Mortgage Protection Based on your taking all reasonable steps to sell your home in Lake Forest at a reasonable market price the company will provide reimbursement for the actual cost of your Lake Forest mortgage and property taxes for up to three months following the start of any mortgage commitment for a primary residence in the San Francisco Bay Area. The maximum for this protection is capped at $3,500 per month. SEVERANCE If your employment with Caliper Technologies Corp. is terminated involuntarily within 12 month of the start of your employment severance payments are agreed as follows: Termination for Cause, No severance; Constructive discharge or involuntary termination, base salary for 12 months or until you are employed by another company as a regular employee or consultant, whichever is less. If your termination is connected with a change of control, severance payments will be as stated in your original offer letter. START DATE As I am sure you are aware we are anxious for you to join our team. However, we recognize issue of completing the work you have started, the holidays and the economics of leaving your current employer just prior to qualification for your bonus. We could agree with a start date of February 4, 2002 if you would be amenable to reviewing some background, planning and project information under Confidentiality Agreement prior to this start date. If you have any questions regarding this addendum please contact Richard Butts or myself. Once again, we believe your addition to our management team will great for you and Caliper Technologies. Regards, /s/ Daniel L. Kisner - ----------------------- Daniel L. Kisner, M.D. Chief Executive Officer & President Accepted: /s/ Sue Evans Date: 12/13/01 -------------------------------- ---------------------------------- EX-10.51 5 f88175exv10w51.txt EXHIBIT 10.51 EXHIBIT 10.51 November 1, 2002 Sue Evans Dear Sue: This letter sets forth the substance of the separation agreement (the "Agreement") that Caliper Technologies Corp. (the "Company") is offering to you to aid in your employment transition. 1. SEPARATION. Your last day of work with the Company and your employment termination date will be November 1, 2002 (the "Separation Date"). 2. TRANSITION PERIOD. From September 19, 2002 until the Separation Date (the "Transition Period"), you will continue to perform services for the Company in any area of your expertise as requested by Mike Knapp, to ensure a smooth transition of your job duties. You shall perform your job duties from home or at the Company's office upon the reasonable request of Mike Knapp. Although you will be providing services to the Company on a reduced schedule, you will be paid your full base salary during the Transition Period. You will have no authority, in the absence of the express written consent of the Chief Executive Officer of the Company ("CEO"), to bind the Company (or to represent that you have authority to bind the Company) to any contractual obligations, whether written, oral or implied. During the Transition Period, you will be paid your base salary, and you will be eligible for Company benefits, including the accrual of paid time off and flex leave, in accordance with Company policies and benefit plans. 3. ACCRUED SALARY AND PAID TIME OFF. On the Separation Date, the Company will pay you all accrued salary and all accrued and unused flex leave and vacation earned through the Separation Date, subject to standard payroll deductions and withholdings. 4. SEVERANCE PAYMENTS. Upon completion of the Transition Period, the Company will make severance payments to you in the form of continuation of your current base salary of $245,004 per annum until September 18, 2003 (the "Severance Payments"). As a condition of receiving the Severance Payments, on the Separation Date you must execute and allow to become effective the general release of claims attached hereto as Exhibit A (the "Separation Date Release"). The Severance Payments will be made via wire transfer on the last Friday of each calendar month commencing on November 29, 2002, provided that the final Severance Payment will be made on September 18, 2003. The Severance Payments will not be subject to standard payroll deductions and withholdings. You understand and agree that these Severance Payments and the other consideration provided herein are in lieu of any severance benefits or change of control payments or accelerated vesting specified in your November 13, 2001 offer letter as amended by the November 28, 2001 offer letter addendum (the "Offer Letter"). The Company will pay you the full amount of the Severance Payments regardless of whether or when you obtain any future employment. 5. STOCK OPTIONS. Pursuant to the terms of your stock option grant agreement and the Company's applicable stock option plan, vesting of your stock options will cease on the last date of your employment. As part of this Agreement, your stock options will continue vesting subject to your continued employment through the Separation Date. Your right to exercise any vested shares and all other rights and obligations with respect to your stock options, will be as set forth in your stock option grant agreement and the Company's stock option plan. 6. HEALTH INSURANCE. Your group health insurance coverage will terminate November 30, 2002. To the extent provided by the federal COBRA law and by the Company's current group health insurance policies, you will be eligible to continue your group health insurance benefits at your own expense. Later, you may be able to convert to an individual policy through the provider of the Company's health insurance, if you wish. After the termination of your group health insurance coverage, if you timely elect continued coverage under COBRA and execute and allow to become effective the Separation Date Release, the Company will pay the COBRA premiums necessary to continue your current health care coverage through September 30, 2003. 7. ACCESS TO VOICEMAIL. From the Separation Date until February 28, 2003, the Company will allow you to maintain your Company voicemail account. You agree and acknowledge that your continued use of Company voicemail is subject to the Company's policies regarding voicemail. You also agree that after the Separation Date you will not identify yourself as employed by or affiliated with the Company in your use of the Company's voicemail. 8. EMAIL FORWARDING. From the Separation Date until September 30, 2003, the Company agrees to implement an email forwarding process to forward emails received at your Company email account to your new email account. You will not have access to Company email after the Separation Date. You agree and acknowledge that your receipt and transmission of email with your Company email address is subject to the Company's policies regarding use of email. You agree and acknowledge that email sent to your Company email address is the property of the Company and the Company may monitor the email to ensure that business issues are being addressed. You also agree to forward to the Company any emails relating to Company business matters. 9. USE OF TECHNICAL PRESENTATION MATERIALS. After the Separation Date, you may continue to use those certain technical presentation materials that contained publicly disclosed Company information which you used in previous professional and industry presentations. Because your presentation of those materials may be mutually beneficial, we will work together to update those materials with additional publicly disclosed information, as and when you and the Company mutually deem it appropriate. 10. OTHER COMPENSATION OR BENEFITS. You acknowledge that, except as expressly provided in this Agreement, you will not receive any additional compensation, bonus, severance or benefits after the Separation Date. 11. EXPENSE REIMBURSEMENTS; INDEMNIFICATION. You agree that, within ten (10) days of the Separation Date, you will submit your final documented expense reimbursement statement reflecting all business expenses you incurred through the Separation Date, if any, for which you seek reimbursement. The Company will reimburse you for these expenses pursuant to its regular business practice. Any expenses submitted beyond ten (10) days after the Separation Date will not be reimbursed. You shall be and remain covered under the Company's directors' and officers' liability and other applicable insurance policies for any acts or omissions in the course and scope of your duties performed on behalf of the Company while employed by it. The Company agrees that it shall, to the maximum extent provided in the Company's by-laws and certificate of incorporation, indemnify, defend, and hold you harmless from and against any and all actions, claims, liabilities, fees and expenses relating to any acts or omissions in the course and scope of your duties performed on behalf of the Company while employed by it. To the extent that the Company settles any claims relating to any acts or omissions in the course and scope of your duties performed on behalf of the Company while employed by it, the Company shall cause you to be fully released and receive a covenant not to sue from the claimant(s) involved. 12. RETURN OF COMPANY PROPERTY. You agree that, by the Separation Date, you will return to the Company all Company documents (and all copies thereof) and other Company property in your possession or control, including, but not limited to: Company files, notes, memoranda, correspondence, agreements, draft documents, notebooks, logs, drawings, records, plans, proposals, reports, forecasts, financial information, sales and marketing information, research and development information, personnel information, specifications, computer-recorded information, tangible property and equipment, credit cards, entry cards, identification badges and keys; and any materials of any kind that contain or embody any proprietary or confidential information of the Company (and all reproductions thereof in whole or in part). You agree to make a diligent search to ensure that you have returned all such property, wherever it is located. The Company will allow you to retain the laptop computer belonging to the Company and currently in your possession until the Separation Date for the purpose of performing your duties during the Transition Period. YOUR TIMELY RETURN OF ALL SUCH COMPANY DOCUMENTS AND OTHER PROPERTY IS A CONDITION PRECEDENT TO YOUR RECEIPT OF THE BENEFITS PROVIDED UNDER THIS AGREEMENT. 13. PROPRIETARY INFORMATION OBLIGATIONS. You acknowledge your continuing obligations under your Proprietary Information and Inventions Agreement a copy of which is attached hereto as Exhibit B. 14. CONFIDENTIALITY. The provisions of this Agreement will be held in strictest confidence by you and the Company and will not be publicized or disclosed in any manner whatsoever; provided, however, that: (a) the parties may disclose this Agreement in confidence to their respective attorneys, accountants, auditors, tax preparers, and financial advisors; (b) the Company may disclose this Agreement as necessary to fulfill standard or legally required corporate reporting or disclosure requirements; and (c) the parties may disclose this Agreement insofar as such disclosure may be necessary to enforce its terms or as otherwise required by law. By way of example, and without limitation, you agree not to disclose the terms of this Agreement to any current or former Company employee. 15. NONDISPARAGEMENT; REFERENCE/PUBLIC STATEMENT. Both you and the Company, through its officers and directors, agree not to disparage the other party, and the other party's officers, directors, employees, shareholders and agents, in any manner likely to be harmful to them or their business, business reputation or personal reputation; provided that both you and the Company may respond accurately and fully to any question, inquiry or request for information when required by legal process. 16. NO ADMISSIONS. You understand and agree that the promises and payments in consideration of this Agreement shall not be construed to be an admission of any liability or obligation by the Company to you or to any other person, and that the Company makes no such admission. 17. RELEASE. In exchange for the consideration under this Agreement to which you would not otherwise be entitled, except for (a) the Company's breach of this Agreement, (b) your rights to indemnification under applicable law, the Company's by-laws and any directors and officers insurance policies maintained by the Company, and (c) your vested rights under the Company's applicable stock option plans, 401(k) and/or other retirement plans, you hereby generally and completely release the Company and its directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring prior to your signing this Agreement. This general release includes, but is not limited to: (1) all claims arising out of or in any way related to your employment with the Company or the termination of that employment; (2) all claims related to your compensation or benefits from the Company, including salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership interests in the Company; (3) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing, including but not limited to claims arising under or related to the Offer Letter; (4) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (5) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys' fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990, the federal Age Discrimination in Employment Act of 1967 (as amended) ("ADEA"), and the California Fair Employment and Housing Act (as amended). In exchange for the consideration under this Agreement to which the Company would not otherwise be entitled, except for your breach of this Agreement, and except for any Unknown Misconduct (as defined below), if any, the Company hereby generally and completely releases you and your agents, attorneys, heirs, successors, insurers, affiliates, and assigns from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring prior to your signing this Agreement. This general release includes, but is not limited to: (1) all claims arising out of or in any way related to your employment with the Company or the termination of that employment; (2) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing, including but not limited to claims arising under or related to the Offer Letter; (3) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (4) all federal, state, and local statutory claims. As used herein, the term "Unknown Misconduct" shall mean willful misconduct by you in the course of or during the term of your employment with the Company, or other action by you outside the scope of your authority on behalf of the Company, which misconduct or action results in material liability of the Company to a third party, including but not limited to any governmental agency, and of which no other officer or director of the Company had or has knowledge as of the date of this Agreement. 18. RELEASE OF ADEA CLAIMS. You acknowledge that you are knowingly and voluntarily waiving and releasing any rights you may have under the ADEA and acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which you were already entitled. You further acknowledge that you have been advised by this writing, as required by the ADEA, that: (a) your waiver and release do not apply to any rights or claims that may arise after the execution date of this Agreement; (b) you should consult with an attorney prior to executing this Agreement (although you may choose not to do so); (c) you have twenty-one (21) days to consider this Agreement (although you may voluntarily execute this Agreement earlier); (d) you have seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (e) this Agreement shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Agreement is executed by you (the "Effective Date"). 19. SECTION 1542 WAIVER. In granting the release herein, which includes claims which may be unknown to you at present, both parties acknowledge that they have read and understand Section 1542 of the California Civil Code: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Both Parties hereby expressly waive and relinquish all rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction with respect to the releases granted herein, including but not limited to the release of unknown and unsuspected claims granted in this Agreement. 20. SEPARATION DATE RELEASE. In exchange for consideration under this Agreement to which you would otherwise not be entitled, on the Separation Date, you agree to execute and allow to become effective the Separation Date Release attached as Exhibit B as a condition of receipt of Severance Payments and COBRA reimbursement as provided in this Agreement. Upon its acceptance of the Separation Date Release, the Company shall be deemed to have re-executed its release of you contained herein, effective through and including the Separation Date. 21. MISCELLANEOUS. The Company shall reimburse you for your reasonable attorney's fees incurred in connection with this Agreement, up to a maximum of $2,000. This Agreement, including Exhibits A and B, constitutes the complete, final and exclusive embodiment of the entire agreement between you and the Company with regard to this subject matter. It is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein, and it supersedes any other such promises, warranties or representations, including but not limited to the Offer Letter. This Agreement may not be modified or amended except in a writing signed by both you and a duly authorized officer of the Company. This Agreement will bind the heirs, personal representatives, successors and assigns of both you and the Company, and inure to the benefit of both you and the Company, their heirs, successors and assigns. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination will not affect any other provision of this Agreement and the provision in question will be modified by the court so as to be rendered enforceable. This Agreement will be deemed to have been entered into and will be construed and enforced in accordance with the laws of the State of California as applied to contracts made and to be performed entirely within California. If this Agreement is acceptable to you, please sign below and return the original to me. On the Separation Date, please sign the Separation Date Release and return the original to me. I wish you good luck in your future endeavors. Sincerely, CALIPER TECHNOLOGIES CORP. By: /s/ James L. Knighton ----------------------------------------------------------- James L. Knighton President Exhibit A - Separation Date Release Exhibit B - Proprietary Information and Inventions Agreement Agreed and Accepted: /s/ Sue Evans - -------------------------------------------------------------- Sue Evans EXHIBIT A SEPARATION DATE RELEASE I understand that, pursuant to the separation letter agreement between me and the Company, which I signed on November 19, 2002 (the "Agreement"), I am required to sign this Separation Date Release ("Release") as a condition for receiving the Severance Payments, COBRA reimbursement, and other consideration under the Agreement to which I am not otherwise entitled. I further understand that, regardless of whether I sign this Release, the Company will pay me all accrued salary, vacation and flex leave earned through my termination date, to which I am entitled by law. Except for (a) the Company's breach of the Agreement, (b) my rights to indemnification under applicable law, the Company's by-laws and any directors and officers insurance policies maintained by the Company, and (c) my vested rights under the Company's 401(k) or other retirement plans, I hereby generally and completely release the Company and its directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring prior to my signing this Agreement. This general release includes, but is not limited to: (1) all claims arising out of or in any way related to my employment with the Company or the termination of that employment; (2) all claims related to my compensation or benefits from the Company, including salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership interests in the Company; (3) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (4) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (5) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys' fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967 ("ADEA"), and the California Fair Employment and Housing Act (as amended). I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA, as amended. I also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (a) my waiver and release do not apply to any rights or claims that may arise after the execution date of this Release; (b) I have been advised hereby that I have the right to consult with an attorney prior to executing this Release; (c) I have has at least twenty-one (21) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (d) I have seven (7) days following the execution of this Release by the parties to revoke the Release; and (e) this Release will not be effective until the date upon which the revocation period 1 has expired, which will be the eighth day after this Release is executed by me, provided that the Company has also executed this Release by that date ("Separation Date Release Effective Date"). I UNDERSTAND THAT THIS RELEASE INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. In giving this release, which includes claims that may be unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any unknown or unsuspected claims I may have against the Company. HAVING READ AND UNDERSTOOD THE FOREGOING, I HEREBY AGREE TO THE TERMS AND CONDITIONS STATED ABOVE. /s/ Sue Evans November 19, 2002 - ----------------------- -------------------------------------------- Sue Evans Date 2 EXHIBIT B PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT 3 CALIPER TECHNOLOGIES CORP. EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by CALIPER TECHNOLOGIES CORP. (the "COMPANY"), and the compensation now and hereafter paid to me, I hereby agree as follows: NONDISCLOSURE 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "PROPRIETARY INFORMATION" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "PROPRIETARY INFORMATION" includes (a) trade secrets, inventions, ideas, processes, formulas, products, formulations, developmental or experimental work, publications, clinical data, test data, methods, samples, media and/or call lines, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "INVENTIONS"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("THIRD PARTY INFORMATION") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with their work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "PROPRIETARY RIGHTS" shall mean all trade secret, patent, copyright, mask work and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit B (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "PRIOR INVENTIONS"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit B but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that 1 full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit B for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "COMPANY INVENTIONS." 2.4 NONASSIGNABLE INVENTIONS. This Agreement does not apply to an Invention which qualifies fully as a nonassignable Invention under Section 2870 of the California Labor Code (hereinafter "SECTION 2870"). I have reviewed the notification on Exhibit A (Limited Exclusion Notification) and agree that my signature acknowledges receipt of the notification. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection under Section 2870; and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that qualify fully for protection under the provisions of Section 2870. I will preserve the confidentiality of any Invention that does not fully qualify for protection under Section 2870. 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such Proprietary Rights to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be 2 available to and remain the sole property of the Company at all times. 4. ADDITIONAL ACTIVITIES. I agree that during the period of my employment by the Company I will not, without the Company's express written consent, engage in any employment or business activity which is competitive with, or would otherwise conflict with, my employment by the Company. I agree further that for the period of my employment by the Company and for one (l) year after the date of termination of my employment by the Company I will not induce any employee of the Company to leave the employ of the Company. 5. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 6. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all drawings, notes, memoranda, specifications, devices, formulas, and documents, together with all copies thereof, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 7. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. 8. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 9. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 10. GENERAL PROVISIONS. 10.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in San Diego County, California for any lawsuit filed there against me by Company arising from or related to this Agreement. 10.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 10.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 10.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 10.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 10.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 3 10.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: _____________, 200__. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT. Dated: ------------------------------ - ------------------------------------------------ SIGNATURE - ------------------------------------------------ (PRINTED NAME) ACCEPTED AND AGREED TO: CALIPER TECHNOLOGIES CORP. By: ----------------------------------------------------- Title: -------------------------------------------------- - ---------------------------------------------------------- (Address) 4 EXHIBIT A LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and the Company does not require you to assign or offer to assign to the Company any invention that you developed entirely on your own time without using the Company's equipment, supplies, facilities or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company; (2) Result from any work performed by you for the Company. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between the Company and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By: ------------------------------------ (Printed Name of Employee) Date: ----------------------------------- WITNESSED BY: - ------------------------------------- (Printed Name of Representative) Dated: ----------------------------------------------- A-1 EXHIBIT B TO: CALIPER TECHNOLOGIES CORP. FROM: -------------------------- DATE: -------------------------- SUBJECT: PREVIOUS INVENTIONS 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by Caliper Technologies Corp. (the "COMPANY") that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company: [ ] No inventions or improvements. [ ] See below: ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- [ ] Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):

[ ] Additional sheets attached. B-1 EX-10.52 6 f88175exv10w52.txt EXHIBIT 10.52 [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT 10.52 SOLE COMMERCIAL PATENT LICENSE AGREEMENT THIS AGREEMENT, made effective on the 1st day of November, 2002 (the "Effective Date"), by and between UT-Battelle, LLC (hereinafter "UT-Battelle"), a corporation organized and existing under the laws of the State of Tennessee and having a place of business at Post Office Box 2008, Oak Ridge, Tennessee 37831-6499, and Caliper Technologies Corp., (hereinafter "Licensee"), a corporation organized and existing under the laws of the State of Delaware and whose address for notices is 605 Fairchild Drive, Mountain View, California 94043-2234, both being hereinafter jointly referred to as the "Parties" or singly as "Party." W I T N E S S: A. Martin Marietta Energy Systems, Inc. (hereinafter "MMES"), a Delaware corporation, pursuant to Prime Contract No. DE-AC05-84OR21400 with the United States Government as represented by the Department of Energy (hereinafter "DOE") originally developed and/or obtained rights to the Original Proprietary Rights relating to Products subject to the DOE nonexclusive, nontransferable, irrevocable, paid-up license for the United States Government and certain march-in rights and any other conditions of waivers granted by the DOE; B. MMES and Caliper Microanalytic Systems, Inc. (hereinafter "Caliper Microanalytic"), a Maryland corporation, executed a sole commercial patent license agreement to the Original Proprietary Rights having an effective date of February 14, 1995; 1 C. MMES changed its name to Lockheed Martin Energy Systems, Inc. (hereinafter "LMES"), a Delaware corporation, when the former Lockheed Corporation and Martin Marietta Corporation merged; D. Caliper Microanalytic changed its name to Caliper Technologies, Corp. (hereinafter "Licensee") and reorganized under the laws of the State of Delaware; E. Caliper Microanalytic assigned its rights and delegated its duties with respect to the Original Proprietary Rights to Licensee and LMES consented to said assignment and delegation; F. The prior sole commercial patent license agreement between LMES and Licensee was superceded by two sole commercial patent license agreements identified as PLA 147 and PLA 148 having respective effective dates of September 1, 1995; G. LMES and Licensee amended PLA 147 by virtue of an Amendment A having an effective date of May 1, 1996; H. LMES and Licensee amended PLA 148 by virtue of an Amendment A having an effective date of May 1, 1996; I. Lockheed Martin Energy Research Corporation (hereinafter "LMER"), a Delaware corporation, succeeded LMES as the management and operating contractor of the Oak Ridge National Laboratory (hereinafter "ORNL") pursuant to Prime Contract No. DE-AC05-96OR22464 with the DOE; J. LMES, pursuant to Prime Contract No. DE-AC05-84OR21400 with the DOE, assigned its rights and delegated its duties with respect to the Original Proprietary Rights to LMER and Licensee consented to said assignment and delegation; K. LMER and Licensee amended PLA 147 by virtue of an Amendment B having an effective date of June 16, 1997; L. LMER and Licensee amended PLA 148 by virtue of an Amendment B having an effective 2 date of June 16, 1997; M. LMER, pursuant to Prime Contract No. DE-AC05-96OR22464 with the DOE originally developed and/or obtained rights to the New Proprietary Rights relating to Products subject to the DOE nonexclusive, nontransferable, irrevocable, paid-up license for the United States Government and certain march-in rights and any other conditions of waivers granted by the DOE; N. UT-Battelle, LLC (hereinafter "UT-Battelle"), a Tennessee limited liability company, succeeded LMER as the management and operating contractor of the ORNL pursuant to Prime Contract No. DE-AC05-00OR22725 with the DOE; O. LMER, pursuant to Prime Contract No. DE-AC05-96OR22464 with the DOE, assigned its rights and delegated its duties with respect to the Original Proprietary Rights and the New Proprietary Rights to UT-Battelle and Licensee consented to said assignment and delegation; P. UT-Battelle and Licensee amended PLA 147 by virtue of an Amendment C having an effective date of January 2, 2001; Q. UT-Battelle and Licensee amended PLA 148 by virtue of an Amendment C having an effective date of January 2, 2001; R. UT-Battelle and Licensee desire to replace all prior license agreements between the Parties relating to the Original Proprietary Rights and any and all amendments thereto (collectively, the "Prior Agreements") with a new amended and restated sole commercial license agreement to the Original Proprietary Rights; and S. UT-Battelle and Licensee desire to add New Proprietary Rights to the sole commercial license agreement regarding Original Proprietary Rights on the terms set forth in this Agreement. THEREFORE, in consideration of the foregoing premises and the respective covenants, 3 undertakings and agreements contained herein, the Parties hereto agree to be bound as follows: 1. DEFINITIONS 1.1 "Proprietary Rights" shall mean the U.S. and foreign patents and U.S. and foreign patent applications listed in Exhibits A1 and A2 (collectively referred to as "Exhibit A" elsewhere in this Agreement) attached hereto and hereby incorporated into this Agreement by reference and all United States and foreign patents and patent applications issuing from or corresponding to such United States and foreign patent applications including all continuations, continuations-in-part, divisions, reissues, reexaminations and temporal extensions of any of the foregoing. 1.2 "Original Proprietary Rights" shall mean the Proprietary Rights that were subject to the Prior Agreements, as listed in Exhibit A1 herein and all United States and foreign patents and patent applications issuing from or corresponding to those listed on Exhibit A1. 1.3 "New Proprietary Rights" shall mean all Proprietary Rights other than the Original Proprietary Rights, as listed in Exhibit A2 herein and all United States and foreign patents and patent applications issuing from or corresponding to those listed on Exhibit A2. 1.4 "Products" shall mean any and all products manufactured, used, sold or transferred by Licensee or manufactured, used or sold by Licensee's Affiliates or Sublicensee(s), covered by one or more Claims of the Proprietary Rights licensed hereunder. 1.5 "Other Field" shall mean the field of "Analysis of Nucleic Acids for Diagnostic Applications and Non-Electrophoretic Means of Gene Discovery." 1.6 "Net Sales" shall mean the total amounts received from purchasers during the accounting period in question for Products sold commercially by Licensee and Licensee's Affiliates, less allowances for returns of Products, discounts, commissions, allowances actually granted (including any allowances for bad debt), transportation and delivery charges, including insurance 4 premiums, and excise or other taxes on Products. Net Sales in the case of Products used by Licensee in a service business or other commercial enterprise (but not Licensee's or Sublicensees' internal research and development) shall mean the fair market value of Products as if they were sold to an unrelated third party in similar quantities. It is the Parties' intention that Net Sales will not include any transfer of Products to any Affiliate, unless the Affiliate is the end user of such Products. With respect to any product that is developed and sold by Licensee or its Affiliates and is comprised in part of one or more Products and of one or more other products or parts which could be sold separately (a "Combination Product"), Net Sales shall be determined by multiplying the amounts received by Licensee or its Affiliates attributable to Combination Products by a fraction, the numerator of which is the fair market value of the Product included in the Combination Product, and the denominator of which is the sum of the fair market value of such Product and the fair market value of the products or parts which are not Products. Whenever possible, the fair market value of the Product included in the Combination Product will be the market price at which such Product is sold on a stand-alone basis; provided that fair market value shall be determined reasonably and in good faith by Licensee in the event that no market price is available. 1.7 "Affiliate" shall mean any entity which controls, is controlled by or is under common control with Licensee, where "control" means beneficial ownership of more than fifty percent (50%) of the outstanding shares or securities. 1.8 "Sublicensee" shall mean third parties (other than Affiliates) to whom Licensee has granted a sublicense under the Proprietary Rights. 1.9 "Sublicensing Revenue" shall mean the amount actually paid to Licensee by a Sublicensee, in consideration for the sublicense, including any license fees, royalties and 5 milestone payments. Sublicensing Revenue shall not mean research and development support payments (other than in consideration for the Proprietary Rights) and any payments to Licensee by a Sublicensee to compensate Licensee for the grant of rights to any other intellectual property of Licensee. 1.10 "Claim" shall mean a claim of an issued and unexpired patent within the Proprietary Rights that has not been held unenforceable, unpatentable, or invalid by a decision of a court of competent jurisdiction, and that has not been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise. "Claim" shall also mean a pending claim of any patent application that is added to the Proprietary Rights after the Effective Date of this Agreement by amendment of this Agreement (i.e. that would not fall within the above definition of Proprietary Rights but for an amendment of this Agreement). 1.11 "Original Field of Use" shall mean all fields of application of the Proprietary Rights excluding "Analysis of Nucleic Acids for Diagnostic Applications and Non-Electrophoretic Means of Gene Discovery." 1.12 "All Fields of Use" shall mean all fields of application of the Proprietary Rights. 2. GRANTS 2.1 Subject to the terms and conditions of this Agreement, UT-Battelle hereby grants to Licensee and its Affiliates the exclusive (non-governmental) commercial right and license under the Original Proprietary Rights to manufacture, have manufactured for Licensee and its Affiliates, use, sell, offer for sale and import the Products in the Original Field of Use, including the exclusive (non-governmental) commercial right to grant sublicenses in the Original Field of Use under non-financial terms and conditions consistent with those set forth in this Agreement and subject to sublicense royalties as provided in Exhibit B. Licensee agrees to provide UT- 6 Battelle a copy of each sublicense within thirty (30) days of the effective date thereof. 2.2 Subject to the terms and conditions of this Agreement, UT-Battelle hereby grants to Licensee and its Affiliates the exclusive (non-governmental) commercial right and license under the New Proprietary Rights to manufacture, have manufactured for Licensee and its Affiliates, use, sell, offer for sale and import the Products in All Fields of Use, including the exclusive (non-governmental) right to grant sublicenses in All Fields of Use under non-financial terms and conditions consistent with those set forth in this Agreement and subject to sublicense royalties as provided in Exhibit B. Licensee agrees to provide UT-Battelle a copy of each sublicense within 30 days of the effective date thereof. 2.3 In the event that any rights under the Original Proprietary Rights in the Other Field revert to UT-Battelle, UT-Battelle shall so notify Licensee. If all of said rights revert to UT-Battelle and, thus, UT-Battelle can make said rights available to Licensee on an exclusive (non-governmental) commercial basis then Licensee shall have the right to include such rights in the Other Field in the license granted to Original Proprietary Rights under this Agreement, upon payment to UT-Battelle of an amount equal to the remaining installment of the up-front fee owed to UT-Battelle by a third party, and, by amendment of Exhibit B, the addition of the minimum royalty still owed to UT-Battelle by the third party, to the minimum royalty agreed to in this Agreement by Licensee. Such addition shall occur to the extent that the installment or minimum royalty payments owed UT-Battelle by the third party are reduced or eliminated. However, if less than all of said rights revert to UT-Battelle (e.g., the previous licensee retains non-exclusive rights) and, thus, UT-Battelle cannot make said rights available to Licensee on an exclusive (non-governmental) commercial basis, then: (1) UT-Battelle shall make said rights available to Licensee under the financial terms and conditions described in this Section to the maximum extent it is able to do so (e.g., by including such rights in the Other Field in the license granted to 7 Original Proprietary Rights under this Agreement, subject only to the prior licensee's retained, non-exclusive rights in the Other Field); (2) UT-Battelle shall not further license or make said rights available to any other third parties; and (3) the terms and conditions of Exhibit D shall apply to said rights. 2.4 UT-Battelle hereby agrees not to grant to any other party right and license to Proprietary Rights in accordance with the grants hereinabove, unless: (1) any grant described herein is converted to a nonexclusive grant or terminated consistent with the terms of this Agreement; or (2) UT-Battelle is required to so grant such right and license in accordance with Federal Statutory or Regulatory enactments conditioning the waiver of rights to UT-Battelle by the DOE, particularly as set forth in 10 CFR 784.12; 10 CFR Part 781; or 37 CFR Part 404. 2.5 Licensee agrees that any Products for use or sale in the United States shall be manufactured substantially in the United States, its territories and possessions. 2.6 Should Licensee fail to meet the developmental commitments described in Exhibit C herein with respect to the New Proprietary Rights, UT-Battelle shall have the option, to be exercised on [*] written notice anytime during [*] to convert the license grant under New Proprietary Rights set forth in Paragraph 2.2 to a nonexclusive license pursuant to the terms of Paragraph 2.9 below. 2.7 Licensee agrees to affix appropriate markings of the applicable UT-Battelle Proprietary Rights upon or in association with Licensee's Products or the packaging thereof, as required under 35 U.S.C. 287. Licensee further agrees to use commercially reasonable efforts to require that Licensee's Affiliates and future Sublicensees (excluding existing Sublicensees as of the Effective Date) also mark the Products consistent with the terms of this Agreement. 2.8 Licensee shall have the option, to be exercised at any time on [*] to convert the license grant set forth in Section 2.2 to nonexclusive with respect to any patents or patents applications 8 included in the New Proprietary Rights on the terms set forth in Section 2.9. 2.9 If the license to New Proprietary Rights granted under Section 2.2 is converted into a nonexclusive license with respect to any or all patents and patent applications pursuant to Sections 2.6 or 2.8, then as of the effective date of such conversion, with respect to such patents or patent applications (i) Licensee shall no longer be obligated to reimburse patent expenses under Article 20 (but UT-Battelle shall retain any reimbursements previously paid), (ii) royalties and sublicense royalties due under this Agreement shall be reduced by [*] (iii) Article 6 Infringement by Third Parties shall be replaced by the Article 6 set forth in Exhibit D attached hereto, and (iv) Licensee shall have no further rights to sublicense such patents or patent applications but previously granted sublicenses will continue pursuant to Paragraph 9.8. If the license is converted to non-exclusive with respect to all New Proprietary Rights, then in addition the developmental commitments of Exhibit C shall no longer apply. 3. ROYALTIES AND COMMERCIALIZATION PLAN 3.1 In consideration of the right and license granted herein, Licensee agrees to the provisions of Exhibit B and Exhibit C attached hereto and hereby incorporated herein by reference, as well as the provisions of Section 20.3 regarding New Proprietary Rights. 3.2 No royalties shall be owing on any Products produced for or under any Federal Governmental agency contract pursuant to the DOE nonexclusive license for Federal Governmental purposes but only to the extent that Licensee can show that the Federal Government received a discount on Product sales which discount is equivalent to or greater than the amount of any such royalty that would otherwise be due. Any sales for Federal Governmental purposes shall be reported under the Records and Reports Section hereinbelow by providing: (a) a Federal Government contract number; (b) identification of the Federal 9 government agency; and (c) a description as to how the benefit of the royalty free sale was passed onto the Federal Government. 3.3 The royalty provisions of Exhibit B shall be offset by any advances made by Licensee in Article 6, Infringement by Third Parties, hereinbelow. 3.4 Upon termination of this Agreement for any reason whatsoever, any royalties that remain unpaid, and any pro-rata portion that is due UT-Battelle per Article 9.7, shall be properly reported and paid to UT-Battelle within thirty (30) days of any such termination. 3.5 In the event that Licensee is required to withhold taxes under the laws of any foreign country for the account of UT-Battelle, then such payments will be made by Licensee on behalf of UT-Battelle to the appropriate governmental authority, and Licensee shall furnish proof of payment of such tax together with official or other appropriate evidence issued by the appropriate government authority. Any such tax actually paid on UT-Battelle's behalf shall be deducted from royalty payments then due and owing UT-Battelle. 3.6 Licensee shall make all payments to UT-Battelle in U.S. Dollars. In instances where Licensee receives Net Sales or Sublicensing Revenue in foreign currency, Licensee shall convert such currency to U.S. dollars for purposes of payments to UT-Battelle in a manner consistent with any commercially reasonable mechanism that Licensee employs for its own financial reporting purposes. 4. RECORDS AND REPORTS 4.1 Licensee agrees to keep for three (3) years adequate and sufficiently detailed records of utilization of the Proprietary Rights by Licensee, Licensee's Affiliates and Sublicensees to enable royalties and Sublicensing Revenue payable hereunder to be determined and to provide such records for inspection by authorized representatives of UT-Battelle at any time upon reasonable 10 advance notice during regular business hours of Licensee up to a maximum of two (2) times per calendar year. Licensee agrees that any additional available records of Licensee, Licensee's Affiliates and Sublicensees, as UT-Battelle may reasonably determine are necessary to verify the above records, shall also be made accessible to UT-Battelle for inspection during such three (3) year period. If the inspection discloses that UT-Battelle was underpaid royalties by at least five percent (5%) for any calendar year, then Licensee shall reimburse UT-Battelle for any documented and reasonable UT-Battelle costs associated with the inspection, together with an amount equal to the additional royalties to which UT-Battelle is entitled as disclosed by the inspection. 4.2 Within Ninety (90) calendar days after the close of each calendar year during the term of this Agreement (i.e. March 31), Licensee will furnish UT-Battelle a written report providing: (a) the aggregate amount of all domestic Net Sales in U.S. Dollars during the preceding calendar year period including sales to any Federal governmental agency under Section 3.2 hereinabove and the aggregate amount of all export Net Sales, and if none, Licensee will so indicate and (b) the aggregate amount of royalties due in U.S. Dollars for the preceding calendar year period pursuant to the provisions hereof; and (c) payment of the aggregate amount of the royalties due in U.S. Dollars for the preceding calendar year payable to the order of UT-Battelle, LLC, pursuant to the report to be transmitted to UT-Battelle in accordance with the Notices Section hereinbelow. If UT-Battelle wishes to contest the methods described in any royalty report to calculate royalties due, it shall do so in writing to Licensee no later than six (6) months after the date of receipt of such report by UT-Battelle. Promptly thereafter, the Parties shall confer and resolve any issues raised. Notwithstanding, this provision shall not prohibit UT-Battelle from later contesting any Net Sales or Sublicensing Revenue figures in such report to the extent such figures could only reasonably be verified through inspection of Licensee records not provided with the royalty report. With the exception of UT-Battelle's ongoing audit of Licensee's 11 litigation bills incurred during litigation activities conducted under the Prior Agreements (but not the analysis set forth in previous royalty reports regarding methods of calculating royalty credits for litigation expenses), these provisions regarding contesting any royalty report shall apply retroactively to all royalty reports delivered pursuant to the Prior Agreements. 4.3 Should Licensee fail to make any payment to UT-Battelle within the time period prescribed for such payment, then the unpaid amount shall bear interest at the lesser of: (i) the rate of one and one half percent (1.5%) per month or, (ii) the greatest amount permitted by law, from the date when payment was due until payment in full, with interest, is made. 5. TECHNICAL ASSISTANCE 5.1 UT-Battelle agrees, upon the written request of Licensee, to assist Licensee in seeking necessary DOE approvals for UT-Battelle to provide technical assistance to Licensee at UT-Battelle facilities under appropriate agreements. The cost of such technical assistance shall be paid for by the Licensee. 5.2 UT-Battelle agrees to permit its employees, within UT-Battelle corporate policy guidelines then in effect and subject to DOE requirements then in effect, to provide consulting services to Licensee with reference to Licensee's use and commercial exploitation of the Proprietary Rights as contemplated herein. Licensee shall make payment directly to the individual consultant(s) for all such services. 6. INFRINGEMENT BY THIRD PARTIES 6.1 Licensee shall give notice to UT-Battelle of any discovered third party infringement of the rights granted herein of which Licensee has actual knowledge. In the event that UT-Battelle does not take appropriate action to stop or prevent such infringement within ninety (90) days after receiving such notice and diligently pursue such action, Licensee has the right to take 12 appropriate action to stop and prevent the infringement, including the right to file suit. 6.2 Except for any liability resulting from any negligent acts or omissions of UT-Battelle, in the event that Licensee files suit to stop infringement or defends any action against the validity of the patent, Licensee shall indemnify and hold UT-Battelle harmless against all liability, expense and costs, including attorneys' fees incurred as a result of any such suit, except that Licensee may credit litigation expenses against royalties due to UT-Battelle as provided below in this Article 6. 6.3 Pursuant to sections 6.1 and 6.2 above, Licensee may file an action to stop alleged infringement of the Proprietary Rights by third parties, such actions including, by way of example and not limitation, litigation, arbitration, or other non-judicial dispute resolution activities (collectively referred to hereinafter as "Dispute Resolution"). The provisions of this Article 6 shall not apply, however, in the case of customary sublicense negotiations; they shall only apply after a formal filing has been made seeking third party Dispute Resolution of the matter. Licensee may deduct all costs and expenses for Dispute Resolution, including but not limited to fees of attorneys, experts, arbitrators and other third parties, taken against alleged infringers of the Proprietary Rights or challengers to the validity of the Proprietary Rights from any royalties (including sublicense royalties) that Licensee may owe to UT-Battelle during the term of Dispute Resolution or thereafter. Licensee shall only be permitted to retain all or a portion of a deduction as described in this Section upon conclusion of the Dispute Resolution if: (1) upon such conclusion Licensee receives a settlement, judgment, or compensatory recovery ("J" below), if any, that does not exceed the sum of said costs and expenses ("C(L)" below) plus Licensee's damages plead and proved ("D(PP)" below); and (2) Licensee either provides UT-Battelle with, or makes available to UT-Battelle upon request, verified bills of said costs and expenses that are actually incurred in accordance with the Records and Reports Section of this Agreement. Licensee shall deposit any royalties that Licensee may owe UT-Battelle during the 13 term of Dispute Resolution in an interest-bearing escrow account and shall provide UT-Battelle with quarterly statements of said escrow account in accordance with the Records and Reports Section of this Agreement. Upon conclusion of Dispute Resolution, the amount that shall immediately become due and payable to UT-Battelle by Licensee shall be calculated as follows: [*] wherein: R(UTB) = Amount owed to UT-Battelle; E(G) = Gross funds available in the interest bearing escrow account at the time that funds are distributed, said funds including royalties deposited plus interest; C(L) = Licensee's costs for Dispute Resolution as described herein; and J = Amount of the compensatory recovery, judgment, settlement, or the like to which Licensee is entitled as described herein, including but not limited to D(PP). Where "J" consists of payments made over time, each payment shall be counted for purposes of this Agreement only when it is actually received by Licensee. D(PP) = Actual or consequential Damages that Licensee pleads and proves during the course of the dispute resolution activity and which are accounted for in said settlement, judgment, or entitlement to compensatory recovery For purposes of this Article 6, a Dispute Resolution shall be considered "concluded" when the last costs or expenses have been incurred, the total amount of "J" above (recovery, etc.) has been finally determined, at least the first installment of "J" above has been received, and no appeal may be taken or the time period for any possible appeal has elapsed. If R(UTB) as calculated above is a negative number, then Licensee shall not be obliged to pay any amount to UT-Battelle upon conclusion of the Dispute Resolution and may apply any negative R(UTB) amount as a reduction of any royalties (including sublicense royalties) due to UT-Battelle thereafter. 14 6.4 If, on the other hand, upon conclusion of Dispute Resolution Licensee becomes entitled to receive a settlement, judgment, or compensatory recovery from Dispute Resolution that exceeds said costs and expenses, Licensee shall immediately owe UT-Battelle all funds accrued in the interest bearing escrow account described above plus [*] of the difference between: (1) any settlement, judgment, or entitlement to compensatory recovery resulting from Dispute Resolution; and (2) the costs and expenses that Licensee actually incurs for pursuing said Dispute Resolution plus any actual or consequential damages that Licensee pleads and proves during Dispute Resolution and which are accounted for in said settlement, judgment, or entitlement to compensatory recovery, as set forth in the following formula: [*] wherein: R(UTB) = Amount owed to UT-Battelle by Licensee; E(G) = Gross funds available in the interest bearing escrow account at the time that funds are distributed, said funds including royalties deposited plus interest; J = Amount of the compensatory recovery, judgment, settlement, or the like to which Licensee is entitled as described herein, including but not limited to D(PP); and C(L) = Licensee's costs for Dispute Resolution as described herein. D(PP) = Actual or consequential Damages that Licensee pleads and proves during the course of the dispute resolution activity and which are accounted for in said settlement, judgment, or entitlement to compensatory recovery 6.5 The Parties hereby agree to cooperate with each other in the prosecution of any such legal actions or settlement actions undertaken under this Section and each will provide to the other all pertinent data in its possession which may be helpful in the prosecution of such actions; provided, however, that the Party in control of such action shall reimburse the other Party for any and all costs and expenses in providing data and other information necessary to the conduct of 15 the action. 6.6 The Party having filed such action shall be in control of such action and shall have the right to dispose of such action in whatever reasonable manner consistent with the terms of this Agreement that it determines to be in the best interest of the Parties hereto, except that any settlement which affects or admits issues of patent validity shall require the advance written approval of UT-Battelle and any settlement which involves either (i) a grant of license rights within the scope of Licensee's licenses under this Agreement or (ii) a release of claims for past infringement within the scope of Licensee's licenses under this Agreement, shall require the advance written approval of Licensee. 6.7 In the event any Product becomes the subject of a claim for patent or proprietary-right infringement anywhere in the world by virtue of the incorporation of the Proprietary Rights herein, the Parties shall promptly give notice one to the other and meet to consider the claim and the appropriate course of action. Licensee shall have the right to conduct the defense of any such suit brought against Licensee and shall have the sole right and authority to settle any such suit, provided that any settlement which affects or admits issues of the validity of UT-Battelle's Proprietary Rights shall require advance written approval of UT-Battelle. UT-Battelle shall cooperate with Licensee, as reasonably requested by Licensee, in connection with defense of such claim, at Licensee's expense. 6.8 Each Party shall notify the other if at any time a Party becomes engaged in a patent proceeding wherein the issue is raised as to whether any of the Proprietary Rights have priority of invention over any third party intellectual property (a "Priority Action"), whether in the context of a patent interference declared by the USPTO, defense of a patent infringement action or any other context. The Parties recognize that such a challenge to the Proprietary Rights could result in the Proprietary Rights being invalidated, or dominated by third party intellectual property, to 16 the detriment of both Parties. Accordingly, the Parties shall cooperate in any such Priority Action as provided for other actions in this Article 6. If Licensee pays the costs and expenses of such a Priority Action, then Licensee may deduct all such costs and expenses, including but not limited to fees of attorneys, experts, arbitrators and other third parties, from any royalties (including sublicense royalties) that Licensee may owe to UT-Battelle during the term of such Priority Action or thereafter. Licensee shall only be permitted to retain all or a portion of a deduction as described in this Section upon conclusion of the Priority Action if: (1) upon such conclusion, Licensee receives a settlement, judgment, or compensatory recovery, if any, that does not exceed said costs and expenses; and (2) Licensee either provides UT-Battelle with, or makes available to UT-Battelle upon request, verified bills of said costs and expenses that are actually incurred in accordance with the Records and Reports Section of this Agreement. Licensee shall deposit any royalties that Licensee may owe UT-Battelle during the term of such Priority Action in an interest-bearing escrow account and shall provide UT-Battelle with quarterly statements of said escrow account in accordance with the Records and Reports Section of this Agreement. In the unlikely event that upon conclusion of such Priority Action Licensee receives a settlement, judgment, or compensatory recovery that exceeds said costs and expenses, then Licensee shall make payments to UT-Battelle in accordance with the formula set forth in Section 6.4 above. 7. REPRESENTATIONS AND WARRANTIES 7.1 UT-Battelle represents and warrants that Exhibit A contains a complete and accurate listing of all the Proprietary Rights licensed and that UT-Battelle has the right to grant the rights, licenses, and privileges granted herein. UT-Battelle also represents and warrants that as of the Effective Date of this Agreement, it has no other active licenses to practice Proprietary Rights in the Original Field of Use with parties other than Licensee and the Affiliates thereof. 7.2 UT-Battelle represents and warrants that UT-Battelle has no knowledge of any claims of 17 infringement filed against UT-Battelle for practicing the Exhibit A Proprietary Rights anywhere in the world. 7.3 Except as set forth hereinabove, UT-Battelle makes NO REPRESENTATIONS OR WARRANTIES, express or implied, with regard to the infringement of proprietary rights of any third party. 7.4 Licensee acknowledges that the export of any of the Proprietary Rights from the United States or the disclosure of any of the Proprietary Rights to a foreign national may require some form of license from the U.S. Government. Failure to obtain any required export licenses by Licensee may result in Licensee subjecting itself to criminal liability under U.S. laws. 8. DISCLAIMERS 8.1 Neither UT-Battelle, the DOE, nor any persons acting on their behalf shall be responsible for any injury to or death of persons or other living things or damage to or destruction of property or for any other loss, damage, or injury of any kind whatsoever resulting from the manufacture, manufacture for, use, sale, or offer for sale of any Products or Proprietary Rights hereunder by Licensee, Licensee's Affiliates, or any Sublicensee of Licensee or Licensee's Affiliates. In no event will UT-Battelle, the DOE, or any person acting on behalf of any of them be liable for any incidental, special or consequential damages resulting from the license granted pursuant to this Agreement or the use or commercial development of the Proprietary Rights. 8.2 EXCEPT AS SET FORTH HEREINABOVE, NEITHER UT-BATTELLE, THE DOE, NOR PERSONS ACTING ON THEIR BEHALF MAKE ANY WARRANTY, EXPRESS OR IMPLIED: (1) WITH RESPECT TO THE MERCHANTABILITY, ACCURACY, COMPLETENESS, OR USEFULNESS OF ANY SERVICES, MATERIALS, OR INFORMATION FURNISHED HEREUNDER; (2) THAT THE USE OF ANY SUCH SERVICES, MATERIALS, OR INFORMATION WILL NOT INFRINGE PRIVATELY 18 OWNED RIGHTS; (3) THAT THE SERVICES, MATERIALS, OR INFORMATION FURNISHED HEREUNDER WILL NOT RESULT IN INJURY OR DAMAGE WHEN USED FOR ANY PURPOSE; OR (4) THAT THE SERVICES, MATERIALS, OR INFORMATION FURNISHED HEREUNDER WILL ACCOMPLISH THE INTENDED RESULTS OR ARE SAFE FOR ANY PURPOSE, INCLUDING THE INTENDED OR PARTICULAR PURPOSE. FURTHERMORE, UT-BATTELLE AND THE DOE HEREBY SPECIFICALLY DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, FOR ANY PRODUCTS MANUFACTURED, MANUFACTURED FOR, USED, OR SOLD BY LICENSEE, Licensee's Affiliates, or any Sublicensee of Licensee or Licensee's Affiliates. NEITHER UT-BATTELLE NOR THE DOE SHALL BE LIABLE FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES IN ANY EVENT. 8.3 Licensee agrees to indemnify UT-Battelle, the DOE, and persons acting on their behalf for all damages, costs, and expenses, including attorney's fees, arising from Licensee's, it's Affiliates' or Sublicensees' manufacturing, manufacturing for, using, selling, or offering for sale of any Proprietary Rights or Products, in whatever form furnished hereunder by Licensee, Licensee's Affiliates, or any Sublicensee of Licensee or Licensee's Affiliates. 9. TERM OF AGREEMENT AND EARLY TERMINATION 9.1 This Agreement shall extend from the effective date of this Agreement to the date of expiration of the last-to-expire item in the Proprietary Rights of Exhibit A. This Agreement is subject to early termination as set forth hereinbelow. 9.2 Either Party shall have the right to terminate this Agreement without judicial resolution upon written notice to the other Party after any material breach of this Agreement by the other Party has gone uncorrected for sixty (60) days after the other Party has been notified in writing of 19 such breach. 9.3 This Agreement shall terminate automatically upon the extinguishment of all of the Exhibit A Proprietary Rights, for any reason, but only after the time for appealing said extinguishment has expired. 9.4 Any assignment of this Agreement by Licensee shall require prior written concurrence of UT-Battelle, which shall not be unreasonably withheld. The Parties agree that it would be unreasonable for UT-Battelle to withhold its concurrence to any assignment of this Agreement (particularly an assignment from Licensee to any of its Affiliates, any purchaser of all or substantially all of its assets or to any successor corporation, including a successor corporation resulting from any merger or consolidation of Licensee with or into such corporation) unless such assignment would: (1) cause UT-Battelle to breach any provision of its Prime Contract with the DOE; (2) be inconsistent with DOE policy that is in effect at the time such assignment request is received by UT-Battelle, made applicable to UT-Battelle, and relates to technology transfer and foreign owned or controlled individuals, organizations, or entities; or (3) materially alter any of UT-Battelle's rights or duties under this Agreement. Any assignee of Licensee must abide by the terms and conditions of this Agreement, in conformance with all UT-Battelle obligations to DOE under the Prime Contract. Upon written notice to Licensee, UT-Battelle may transfer its Administration of this Agreement to DOE or its designee, and UT-Battelle shall have no further responsibilities except for the confidentiality and/or non-disclosure obligations of this Agreement. 9.5 Licensee shall provide notice to UT-Battelle of its intention to file a voluntary petition in bankruptcy, or of another party's intention to file an involuntary petition in bankruptcy for Licensee to the extent Licensee is aware of such intent, said notice to be received by UT-Battelle at least twenty (20) days prior to filing such a petition. Licensee's failure to provide such notice 20 to UT-Battelle of such intentions shall be deemed a material, pre-petition, incurable breach of this Agreement. 9.6 Licensee agrees that it may only offer Licensee's rights under this Agreement as collateral to a third party with UT-Battelle's written consent, not to be unreasonably withheld. 9.7 The Parties agree that Licensee, if not then in breach of any portion of this Agreement, may voluntarily terminate this Agreement upon sixty (60) days notice to UT-Battelle and payment to UT-Battelle of a pro rata share of any minimum royalty due UT-Battelle in the year of such termination. 9.8 Termination under any of the provisions of this Article of the rights granted to Licensee under Articles 2.1 and 2.2 of this Agreement shall terminate all sublicenses which may have been granted by Licensee, provided that any Sublicensee may elect to continue its sublicense by advising UT-Battelle in writing, within sixty (60) days of the Sublicensee's receipt of written notice of such termination, of its election, and of its agreement to assume, in respect to UT-Battelle, all the obligations (including obligations for payment) contained in its sublicensing agreement with Licensee to the extent they pertain to the sublicense of Proprietary Rights. Any sublicense granted by Licensee shall contain provisions corresponding to those of this paragraph respecting termination and the conditions of continuance of sublicenses. 10. RIGHTS OF PARTIES AFTER TERMINATION 10.1 After expiration or termination of this Agreement, neither Party shall be relieved of any obligation or liability under this Agreement arising from any act or omission committed prior to the effective date of such termination. In the event of expiration of this Agreement or termination of this Agreement for any reason whatsoever, the rights and obligations of the Parties under Sections 9 and 18 shall survive any expiration or termination of this Agreement. 21 10.2 From and after any termination of this Agreement, Licensee shall have the right to sell any Products that Licensee had already manufactured or had manufactured for Licensee prior to termination, but not manufacture, nor have manufactured, use or import any further Products, provided that all royalties and reports required herein above shall be timely submitted to UT-Battelle. 10.3 The rights and remedies granted herein, and any other rights or remedies which the Parties may have, either at law or in equity, are cumulative and not exclusive of others. On any termination, Licensee shall duly account to UT-Battelle and transfer to it all rights to which UT-Battelle may be entitled under this Agreement. 11. FORCE MAJEURE 11.1 No failure or omission by UT-Battelle or by Licensee in the performance of any obligation under this Agreement shall be deemed a breach of this Agreement or create any liability if the same shall arise from acts of God, acts or omissions of any government or agency thereof, compliance with, rules, regulations, or orders of any governmental authority or any office, department, agency or instrumentality thereof, fire, storm, flood, earthquake, accident, acts of the public enemy, war, rebellion, insurrection, riot, sabotage, invasion, quarantine, restriction, transportation embargoes, or failures or delays in transportation. 12. NOTICES 12.1 All notices and reports shall be addressed to the Parties hereto as follows: If to UT-Battelle: Finance Manager-Technology Transfer Facsimile No. UT-Battelle, LLC (865) 576-9465 22 Post Office Box 2008 Verify No. Oak Ridge, Tennessee 37831-6499 (865) 241-2353 If to Licensee: General Counsel Facsimile No. Caliper Technologies Corp. (650) 623-0500 605 Fairchild Drive Verify No. Mountain View, California 94043-2234 (650) 623-0700 12.2 All minimum and royalty payments due UT-Battelle shall be sent to: UT-Battelle, LLC Royalty Account P. O. Box 888071 Knoxville, TN 37995-8071 12.3 Any notice, report or any other communication required or permitted to be given by one Party to the other Party by this Agreement shall be in writing and either (a) served personally on the other Party, (b) sent by express, registered or certified first-class mail, postage prepaid, addressed to the other Party at its address as indicated above, or to such other address as the addressee shall have previously furnished to the other Party by proper notice, (c) delivered by commercial courier to the other Party, or (d) sent by facsimile to the other Party at its facsimile number indicated above or to such other facsimile number as the Party shall have previously furnished to the other Party by proper notice, with machine confirmation of transmission. 13. NON-ABATEMENT OF ROYALTIES 13.1 UT-Battelle and Licensee acknowledge that certain of the Proprietary Rights may expire prior to the conclusion of the term of this Agreement; however, UT-Battelle and Licensee agree that the royalty rates provided for hereinabove shall be uniform and undiminished except as otherwise provided pursuant to this Agreement. 23 14. WAIVERS 14.1 The failure of either Party at any time to enforce any provisions of this Agreement or to exercise any right or remedy shall not be construed to be a waiver of such provisions or of such rights or remedy or the right of either Party thereafter to enforce each and every provision, right or remedy. 15. MODIFICATIONS 15.1 It is expressly understood and agreed by the Parties hereto that this instrument contains the entire agreement between the Parties with respect to the subject matter hereof and that all prior representations, warranties, or agreements relating hereto, including but not limited to the Prior Agreements, have been merged into this document and are thus superseded in totality by this Agreement. This Agreement may be amended or modified only by a written instrument signed by the duly authorized representatives of both of the Parties. 16. HEADINGS 16.1 The headings for the sections set forth in this Agreement are strictly for the convenience of the Parties hereto and shall not be used in any way to restrict the meaning or interpretation of the substantive language of this Agreement. 17. LAW 17.1 This Agreement shall be construed according to the laws of the State of Tennessee and the United States of America. 18 CONFIDENTIALITY 18.1 The Parties agree that during the term of this Agreement and for a period of three (3) 24 years after it terminates, a Party receiving information of the other Party, which is marked "Confidential," will not use or disclose such confidential information to any third party without prior written consent of the disclosing Party, except to those necessary to enable the Parties to perform under this Agreement or as may be required by the UT-Battelle Prime Contract with the DOE under the same restrictions as set forth herein. 18.2 A Party shall have no obligations with respect to any portion of such confidential information of the other Party which: a) is publicly disclosed through no fault of any Party hereto, either before or after it becomes known to the receiving Party; or b) was known to the receiving Party prior to the date of this Agreement which knowledge was acquired independently and not from the other Party; or c) is subsequently disclosed to the receiving Party in good faith by a third party which has a right to make such a disclosure; or d) has been published by a third party as a matter of right; or e) is subsequently independently invented or discovered by the receiving Party without reference to the other Party's confidential information. 19. SEVERABILITY 19.1 If any term, condition or provision of this Agreement is held to be unenforceable other than as provided in Article 11, all other terms, conditions, and provisions of this Agreement shall be deemed valid and enforceable to the extent possible. 20. PATENT PROSECUTION 20.1 UT-Battelle shall, during the term of this Agreement, seek patent protection for the 25 Proprietary Rights listed in Exhibit A. The securing of patent protection for all Proprietary Rights shall be the sole responsibility and at the sole discretion of UT-Battelle; provided, however that (i) Licensee shall have a reasonable opportunity to review and comment on patent filings in advance and to consult and cooperate with UT-Battelle in securing patent protection, and (ii) UT-Battelle will timely keep Licensee advised of the status of such prosecution and maintenance by providing Licensee with copies of all official communications, amendments and responses with respect to the patent applications and patents contained in the Proprietary Rights. Licensee may request and UT-Battelle, at its sole discretion, may seek patent extension for patents licensed under the Proprietary Rights listed in Exhibit A, under such applicable laws and regulations where such patent extension rights are available currently or are available in the future. In the event that UT-Battelle elects to abandon a patent application included in the Proprietary Rights or elects not to seek an extension of a patent included in the Proprietary Rights, it will so notify Licensee at least ninety (90) days prior to any applicable deadline. Upon receipt of such notice, and to the extent allowed by the UT-Battelle Prime Contract with DOE, Licensee may, following written notice to UT-Battelle, seek, at its own expense a waiver from DOE to continue the prosecution of such application or extend such application at Licensee's expense. 20.2 Reimbursement of all UT-Battelle's external costs and fees, and a reasonable allocation of internal costs, relating to the securing of patent protection for the Proprietary Rights after August 1, 2002 ("Patent Costs") shall be the responsibility of Licensee. UT-Battelle shall bill Licensee for Patent Costs on a bi-annual basis, and Licensee shall reimburse UT-Battelle within thirty (30) days of receipt of the invoice. 20.3 Licensee agrees to reimburse UT-Battelle a total of [*] as costs not previously reimbursed under the Prior Agreements related to patent protection of the Original and New Proprietary 26 Rights listed on Exhibits A1 and A2 incurred by UT-Battelle prior to August 1, 2002. Such payment will be made by Licensee to UT-Battelle within thirty (30) days of execution of this Agreement. UT-Battelle acknowledges receipt of payment from Licensee for UT-Battelle's last invoice for reimbursement of patent costs under Licensee's Prior Agreements. Such invoice was numbered 6329266 and was dated July 18, 2002. 21. CONTINUING RIGHTS AND DUTIES FROM PRIOR AGREEMENT(S) 21.1 The Parties agree that this Agreement, upon execution, shall supercede and terminate all Prior Agreements between the Parties. Prior Agreements include, but are not limited to, the license agreements identified as PLA 147 and 148. 21.2 Notwithstanding termination of Prior Agreements, the Parties hereto further agree that the rights and duties that accrued under Prior Agreements but which have not been fully performed as of the Effective Date shall survive until fully performed and shall be carried forward and applied pursuant to the terms of this Agreement. In particular, the Parties agree that (i) the royalty credit balance described in the most RECENT royalty report shall be carried forward and (ii) the $5 million license fee, and two subsequent $2.5 million minimum royalty payments, due from Aclara to Caliper under the litigation settlement agreements in effect on the Effective Date, shall be treated as Sublicense Revenue pursuant to the terms of this Agreement, when and if such payments are actually received. Should Aclara default on any such payment to Licensee, Licensee agrees to take timely legal and management action to enforce its litigation settlement agreements with Aclara. Caliper acknowledges that the first such payment was received by Caliper prior to the Effective Date. 27 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed in their respective names by their duly authorized representatives. "UT-Battelle" UT-BATTELLE, LLC By: /s/ Alexander R. Fischer ------------------------ Name: Alexander R. Fischer Title: Director, Technology Transfer & Economic Development Date: 11/13/02 "Licensee" CALIPER TECHNOLOGIES CORP. By: /s/ Michael R. Knapp -------------------- Name: Michael R. Knapp Title: CEO Date: 11/27/2002 [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 28 EXHIBIT A1, ORIGINAL PROPRIETARY RIGHTS 1) U.S. Patent 6,001,229; Issued December 14, 1999 (1401.0) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis" Inventor: J. M. Ramsey 2) U.S. Patent 6,342,142; Issued January 29, 2002 (1401.2) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis" Inventor: J. M. Ramsey 3) U.S. Patent Application Serial No. 09/909,638 filed at the USPTO July 20, 2001 on (1401.3) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis" Inventor: J. M. Ramsey 4) U.S. Patent 5,858,195; Issued January 12, 1999 (1781.0) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 5) U.S. Patent 6,033,546; Issued March 7, 2000 (1781.1) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 6) U.S. Patent 6,010,607; Issued January 4, 2000 (1781.2) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 7) U.S. Patent 6,010,608; Issued January 4, 2000 (1781.3) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 8) U.S. Patent Application Serial No. 09/477,585 filed at the USPTO January 4, 2000 (1781.4) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 9) Canadian Patent No. 2,196,429; Issued May 8, 2001 (1781) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 10) Australian Patent No. 701,348; Issued April 28, 1999 (1781) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 11) Chinese Patent No. 54022; Issued January 22, 2000 (1781) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey. 29 EXHIBIT A1, ORIGINAL PROPRIETARY RIGHTS CONTINUED 12) Mexican Patent No. 194,601; Issued December 13, 1999 (1781) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 13) Japanese Patent Application Serial No. 8-506614; filed August 1, 1995 (1781) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 14) Korean Patent Application Serial No. 700763/97; filed August 1, 1995 (1781) "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 15) EPO Patent Application Serial No. 95927492.9; filed August 1, 1995 (1781.10) and registered in Netherlands (NL). "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 16) EPO Patent Application Serial No. 95927492.9; filed August 1, 1995 (1781.11) and registered in France (FR). "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 17) EPO Patent Application Serial No. 95927492.9; filed August 1, 1995 (1781.12) and registered in Germany (DE). "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 18) EPO Patent Application Serial No. 95927492.9; filed August 1, 1995 (1781.6) and registered in Denmark (DK). "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 19) EPO Patent Application Serial No. 95927492.9; filed August 1, 1995 (1781.7) and registered in Italy (IT). "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 20) EPO Patent Application Serial No. 95927492.9; filed August 1, 1995 (1781.8) and registered in Sweden (SE). "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 21) EPO Patent Application Serial No. 95927492.9; filed August 1, 1995 (1781.9) and registered in Spain (ES). 30 "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey 22) EPO Patent Application Serial No. 01203481.5; filed September 14, 2001 (1781.5). "Apparatus and Method for Performing Microfluidic Manipulations for Chemical Analysis and Synthesis" Inventor: J. M. Ramsey [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 31 EXHIBIT A2, NEW PROPRIETARY RIGHTS 1) U. S. Patent 6,120,666; Issued September 19, 2000 (0504.0) "Microfabricated Device and Method for Multiplexed Electrokinetic Focusing of Fluid Streams and A Transport Cytometry Method Using Same" Inventors: S. C. Jacobson and J. M. Ramsey 2) Australian Patent application serial No 45696/99 filed June 16, 1999 (0504.2) "Microfabricated Device and Method for Multiplexed Electrokinetic Focusing of Fluid Streams and A Transport Cytometry Method Using Same" Inventors: S. C. Jacobson and J. M. Ramsey 3) Canadian Patent application serial No 2,334,749 filed June 16, 1999 (0504.3) "Microfabricated Device and Method for Multiplexed Electrokinetic Focusing of Fluid Streams and A Transport Cytometry Method Using Same" Inventors: S. C. Jacobson and J. M. Ramsey 4) European (EPO) Regional Patent application serial No 99928693.3 filed June 16, 1999 (0504.4) "Microfabricated Device and Method for Multiplexed Electrokinetic Focusing of Fluid Streams and A Transport Cytometry Method Using Same" Inventors: S. C. Jacobson and J. M. Ramsey 5) Japanese Patent application serial No 2000-555086 filed June 16, 1999 (0504.5) "Microfabricated Device and Method for Multiplexed Electrokinetic Focusing of Fluid Streams and A Transport Cytometry Method Using Same" Inventors: S. C. Jacobson and J. M. Ramsey 6) U.S. Patent Application Serial No. 09/759,590 filed at the USPTO January 12, 2001 on (0532.1) "A Microfluidic Device and Method for Focusing, Segmenting, and Dispensing of a Fluid Stream" Inventors: S. C. Jacobson and J. M. Ramsey 7) U.S. Patent 6,062,261; Issued May 16, 2000 (0270.0) "Microfluidic Circuit Designs for Performing Electrokinetic Manipulations that Reduce the Number of Voltage Sources and Fluid Reservoirs" Inventors: S. C. Jacobson and J. M. Ramsey 8) U.S. Patent 6,213,151B1; Issued April 10, 2001 (0270.2) "Microfluidic Circuit Designs for Performing Electrokinetic Manipulations that Reduce the Number of Voltage Sources and Fluid Reservoirs" Inventors: S. C. Jacobson and J. M. Ramsey 9) Australian Patent application serial No 28445/00 filed December 15, 1999 (0270.3) "Microfluidic Circuit Designs for Performing Electrokinetic Manipulations that Reduce the Number of Voltage Sources and Fluid Reservoirs" Inventors: S. C. Jacobson and J. M. Ramsey 32 EXHIBIT A2, NEW PROPRIETARY RIGHTS CONTINUED 10) Canadian Patent application serial No 2,355,084 filed December 15, 1999 (0270.4) "Microfluidic Circuit Designs for Performing Electrokinetic Manipulations that Reduce the Number of Voltage Sources and Fluid Reservoirs" Inventors: S. C. Jacobson and J. M. Ramsey 11) European (EPO) Regional Patent application serial No 99969278.3 filed December 15, 1999 (0270.5) "Microfluidic Circuit Designs for Performing Electrokinetic Manipulations that Reduce the Number of Voltage Sources and Fluid Reservoirs" Inventors: S. C. Jacobson and J. M. Ramsey 12) Japanese Patent application serial No 2000-588583 filed December 15, 1999 (0270.6) "Microfluidic Circuit Designs for Performing Electrokinetic Manipulations that Reduce the Number of Voltage Sources and Fluid Reservoirs" Inventors: S. C. Jacobson and J. M. Ramsey 13) U.S. Patent 5,858,187; Issued January 12, 1999 (1906.0) "Apparatus and Method for Performing Electrodynamic Focusing on a Microchip" Inventors: J. M. Ramsey and S. C. Jacobson 14) U.S. Patent 6,110,343; Issued August 29, 2000 (0216.0) "Material Transport Method and Apparatus" Inventors: J. M. Ramsey and R. S. Ramsey 15) U.S. Patent 6,231,737B1; Issued May 15, 2002 (0216.1) "Material Transport Method and Apparatus" Inventors: J. M. Ramsey and R. S. Ramsey 16) U.S. Patent Application Serial No. 09/408,060 filed at the USPTO on September 29, 1999 (0686.1) "Microfluidic Devices for the Controlled Manipulation of Small Volumes" Inventor: S. C. Jacobson and J. M. Ramsey 17) U.S. Patent Application Serial No. (To Be Assigned) filed at the USPTO on (Not Yet Filed) (0686.10) "Microfluidic Devices for the Controlled Manipulation of Small Volumes" Inventors: S. C. Jacobson and J. M. Ramsey 18) Australian Patent application serial No 77586/00 filed August 10, 2000 (0686.3) "Microfluidic Devices for the Controlled Manipulation of Small Volumes" Inventors: S. C. Jacobson and J. M. Ramsey 19) Canadian Patent application serial No 2,380,614 filed August 10, 2000 (0686.4) "Microfluidic Devices for the Controlled Manipulation of Small Volumes" Inventors: S. C. Jacobson and J. M. Ramsey 33 EXHIBIT A2, NEW PROPRIETARY RIGHTS CONTINUED 20) European Patent application serial No 00967377.3 filed August 10, 2000 (0686.6) "Microfluidic Devices for the Controlled Manipulation of Small Volumes" Inventors: S. C. Jacobson and J. M. Ramsey Initials UT-Battelle: /s/ ARF ----------- Date: 11/13/02 Licensee: /s/ MRK ----------- Date: 11/27/2002 [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 34 EXHIBIT B, EXECUTION FEE, EARNED ROYALTIES, SUBLICENSE ROYALTY AND MINIMUM ANNUAL ROYALTIES AMOUNTS (1) Execution Fees: In consideration of the rights and licenses granted herein with respect to New Proprietary Rights, Licensee agrees to pay UT-Battelle [*] according to the following schedule of payments: (i) [*] within thirty (30) days of the execution of this Agreement by the Parties; and (ii) [*] on or before March 31, 2003; and (iii) [*] on or before September 30, 2003 (2) Earned Royalties: The Running Royalty Rate for sales of Products shall be: (i) [*] of the Net Sales of Chips; provided however that if Licensee must pay royalties to one or more third parties on sales of Chips ("Third Party Payments"), then the royalty payable to UT-Battelle on Chips shall be reduced by [*] of the Third Party Payments but not lower than [*] of Net Sales of Chips in any quarter. "Chips" shall mean chips consisting of a glass or polymer base with reservoirs, microchannels or similar features and a glass or polymer cover, which chips are covered by one or more Claims of the Proprietary Rights licensed hereunder. (ii) [*] of the Net Sales of Products for Products other than Chips. N O T I C E THIS EXHIBIT CONTAINS FINANCIAL AND COMMERCIAL INFORMATION THAT IS BUSINESS CONFIDENTIAL AND THE PARTIES HEREBY AGREE NOT TO USE OR DISCLOSE THIS EXHIBIT TO ANY THIRD PARTY WITHOUT THE ADVANCE WRITTEN APPROVAL OF THE OTHER PARTY HERETO, EXCEPT TO THOSE NECESSARY TO ENABLE THE PARTIES TO PERFORM UNDER THIS AGREEMENT OR AS MAY BE REQUIRED BY THE UT-BATTELLE CONTRACT WITH THE DOE UNDER THE SAME RESTRICTIONS AS SET FORTH HEREIN. NOTWITHSTANDING THE FOREGOING, EITHER PARTY MAY DISCLOSE THE PROVISIONS OF THIS EXHIBIT UNDER STANDARD OBLIGATIONS OF CONFIDENTIALITY AND NON-USE ON A NEED-TO-KNOW BASIS, TO INVESTORS AND THEIR REPRESENTATIVES IN A PRIVATE OR PUBLIC EQUITY FINANCING TRANSACTION, OR TO POTENTIAL ACQUIRERS OR TARGETS AND THEIR REPRESENTATIVES IN A CORPORATE CHANGE OF CONTROL TRANSACTION, OR TO OTHER THIRD PARTIES IN CONNECTION WITH POTENTIAL COMMERCIAL TRANSACTIONS INVOLVING THE SUBJECT MATTER OF THIS AGREEMENT (E.G., COLLABORATION AGREEMENTS, DISTRIBUTION ARRANGEMENTS, ETC.). 35 EXHIBIT B, EXECUTION FEE, EARNED ROYALTIES, SUBLICENSE ROYALTY AND MINIMUM ANNUAL ROYALTIES AMOUNTS CONTINUED (3) Sublicense Royalties: In order to maximize the commercialization of the Products and UT-Battelle's overall income from this Agreement, in accordance with Articles 2.1 and 2.2 of this Agreement, Licensee may grant sublicenses to third parties under this Agreement. Licensee agrees to pay UT-Battelle a "Sublicense Royalty" of [*] of the total "Sublicensing Revenue" owed Licensee under said sublicenses. (4) Annual Minimum Royalties: If the Earned Royalties for a Calendar Year do not equal the Minimum Annual Royalty amount as shown below, Licensee shall pay UT-Battelle the difference between the amount of actual royalties paid and the Minimum Annual Royalty by March 31 of the following Calendar Year: Calendar Year Minimum Annual Royalty (U.S. Dollars) 2001 onward: [*] N O T I C E THIS EXHIBIT CONTAINS FINANCIAL AND COMMERCIAL INFORMATION THAT IS BUSINESS CONFIDENTIAL AND THE PARTIES HEREBY AGREE NOT TO USE OR DISCLOSE THIS EXHIBIT TO ANY THIRD PARTY WITHOUT THE ADVANCE WRITTEN APPROVAL OF THE OTHER PARTY HERETO, EXCEPT TO THOSE NECESSARY TO ENABLE THE PARTIES TO PERFORM UNDER THIS AGREEMENT OR AS MAY BE REQUIRED BY THE UT-BATTELLE CONTRACT WITH THE DOE UNDER THE SAME RESTRICTIONS AS SET FORTH HEREIN. NOTWITHSTANDING THE FOREGOING, EITHER PARTY MAY DISCLOSE THE PROVISIONS OF THIS EXHIBIT UNDER STANDARD OBLIGATIONS OF CONFIDENTIALITY AND NON-USE ON A NEED-TO-KNOW BASIS, TO INVESTORS AND THEIR REPRESENTATIVES IN A PRIVATE OR PUBLIC EQUITY FINANCING TRANSACTION, OR TO POTENTIAL ACQUIRERS OR TARGETS AND THEIR REPRESENTATIVES IN A CORPORATE CHANGE OF CONTROL TRANSACTION, OR TO OTHER THIRD PARTIES IN CONNECTION WITH POTENTIAL COMMERCIAL TRANSACTIONS INVOLVING THE SUBJECT MATTER OF THIS AGREEMENT (E.G., COLLABORATION AGREEMENTS, DISTRIBUTION ARRANGEMENTS, ETC.). Initials UT-Battelle: /s/ ARF ------- Date: 11/13/02 Licensee: /s/ MRK ------- Date: 11/27/2002 [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 36 EXHIBIT C, DEVELOPMENT AND COMMERCIALIZATION PLAN Licensee agrees to invest in the development of technology and market for Products practicing one or more Claims within the New Proprietary Rights by committing Licensee's resources, at a minimum, to achieving at least one of the following two requirements: 1) Funding minima for development of technology and markets for Products practicing one or more Claims within the New Proprietary Rights. 1st year after signing: [*] 2nd year after signing: [*] 3rd year after signing: [*] Excess amounts invested in one year may be carried forward and applied against future requirements. OR 2) Commence sales (and royalty payments) on at least one Product practicing one or more Claims within the New Proprietary Rights within [*] of the Effective Date. Progress and substantiation of Licensee meeting these requirements shall be provided to UT-Battelle in the form of a written report to be presented at a meeting between the Parties to be held at the mutual convenience of said Parties but no later than the first anniversary and each anniversary thereafter of the effective date thereof. N O T I C E THIS EXHIBIT CONTAINS FINANCIAL AND COMMERCIAL INFORMATION THAT IS BUSINESS CONFIDENTIAL AND THE PARTIES HEREBY AGREE NOT TO USE OR DISCLOSE THIS EXHIBIT TO ANY THIRD PARTY WITHOUT THE ADVANCE WRITTEN APPROVAL OF THE OTHER PARTY HERETO, EXCEPT TO THOSE NECESSARY TO ENABLE THE PARTIES TO PERFORM UNDER THIS AGREEMENT OR AS MAY BE REQUIRED BY THE UT-BATTELLE CONTRACT WITH THE DOE UNDER THE SAME RESTRICTIONS AS SET FORTH HEREIN. NOTWITHSTANDING THE FOREGOING, EITHER PARTY MAY DISCLOSE THE PROVISIONS OF THIS EXHIBIT UNDER STANDARD OBLIGATIONS OF CONFIDENTIALITY AND NON-USE ON A NEED-TO-KNOW BASIS, TO INVESTORS AND THEIR REPRESENTATIVES IN A PRIVATE OR PUBLIC EQUITY FINANCING TRANSACTION, OR TO POTENTIAL ACQUIRERS OR TARGETS AND THEIR REPRESENTATIVES IN A CORPORATE CHANGE OF CONTROL TRANSACTION, OR TO OTHER THIRD PARTIES IN CONNECTION WITH POTENTIAL COMMERCIAL TRANSACTIONS INVOLVING THE SUBJECT MATTER OF THIS AGREEMENT (E.G., COLLABORATION AGREEMENTS, DISTRIBUTION ARRANGEMENTS, ETC.). Initials UT-Battelle: /s/ ARF ------- Date: 11/13/02 Licensee: /s/ MRK ------- Date: 11/27/2002 [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 37 EXHIBIT D. INFRINGEMENT OF NONEXCLUSIVE RIGHTS BY THIRD PARTIES In the event any license granted to Proprietary Rights under this Agreement should be converted to non-exclusive in accordance with the terms of this Agreement, the following provisions shall apply to the nonexclusive grant. 6.1 Licensee shall give notice to UT-BATTELLE of any discovered third party infringement of the rights granted herein of which Licensee has actual knowledge. 6.2 UT-BATTELLE shall exercise its sole discretion to dispose of such infringement in whatever reasonable manner it determines to be in its best interest or to seek authorization for initiating litigation against such infringement from the DOE Contracting Officer. UT-BATTELLE shall not have any duty to consult with or confer with any of its licensees having a nonexclusive right to practice Proprietary Rights in UT-BATTELLE's disposition of such infringement. UT-BATTELLE's licensees having a nonexclusive right to practice Proprietary Rights shall not: (1) have any right to participate in or have access to any matters involving or relating to any disposition of infringement conducted by UT-BATTELLE consistent with this clause; and (2) share in any judgment, award, settlement, or the like that UT-BATTELLE may receive as a result of any disposition of infringement conducted by UT-BATTELLE consistent with this clause. 6.3 If authorization for initiating litigation to dispose of such infringement obtained from the DOE Contracting Officer then UT-BATTELLE, at its sole discretion, shall initiate such action in accordance with the Litigation and Claims section of its prime contract DE-AC05-00OR22725. UT-BATTELLE's licensees having a nonexclusive right to practice Proprietary Rights shall not: (1) have any right to participate in or have access to any matters involving or relating to litigation 38 conducted by UT-BATTELLE consistent with this clause; and (2) share in any judgment, award, settlement, or the like that UT-BATTELLE may receive as a result of said litigation conducted by UT-BATTELLE consistent with this clause. 6.4 If UT-BATTELLE obtains authorization to initiate litigation proceedings, but not at the expense of the Government, then UT-BATTELLE, at its sole discretion, may proceed with whatever actions it deems necessary to advance and resolve said litigation in UT-BATTELLE's best interests. UT-BATTELLE's licensees having a nonexclusive right to practice Proprietary Rights shall not: (1) have any right to participate in or have access to any matters involving or relating to litigation conducted by UT-BATTELLE consistent with this clause; and (2) share in any judgment, award, settlement, or the like that UT-BATTELLE may receive as a result of said litigation conducted by UT-BATTELLE consistent with this clause. 6.5 Licensee hereby agrees to cooperate with UT-BATTELLE in the prosecution of any such legal actions or settlement actions undertaken under this section and each will provide to the other all materially pertinent data in its possession which may be helpful in the prosecution of such actions. 6.6 UT-BATTELLE shall be in control of any such litigation proceedings and shall have the right to dispose of such proceedings at any time in whatever reasonable manner it determines to be in the best and sole interests of UT-BATTELLE. Initials UT-Battelle: /s/ ARF ------- Date: 11/26/02 Licensee: /s/ MRK ------- Date: 11/27/2002 [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 39 EX-10.53 7 f88175exv10w53.txt EXHIBIT 10.53 [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT 10.53 MODIFICATION AGREEMENT This MODIFICATION AGREEMENT ("Agreement"), dated as of December 12, 2002, is entered into by and between AMPHORA DISCOVERY CORP., a Delaware corporation ("Amphora"), and CALIPER TECHNOLOGIES CORP., a Delaware corporation ("Caliper"). BACKGROUND A. Caliper and Amphora have previously entered into a LabChip Solutions Agreement dated as of September 21, 2001 (the "LabChip Solutions Agreement") and an Intellectual Property Agreement dated as of September 21, 2001 (the "Intellectual Property Agreement", and together with the LabChip Solutions Agreement, the "Existing Agreements"). Any capitalized terms used in this Agreement but not defined herein shall have the meaning ascribed to them in the Existing Agreements. B. Amphora has requested that Caliper agree to (i) a modification of Amphora's obligation under the LabChip Solutions Agreement to make a minimum payment of $4,000,000 in respect of Datapoints generated during the second Production Year, (ii) a deferral of Amphora's obligation to purchase an additional Instrument System prior to December 31, 2002 to December 31, 2003, and (iii) a termination of the Sublease (as defined below) effective as of March 1, 2003, and Caliper is willing to agree to each such requested item on and subject to the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained in this Agreement, the parties agree as follows: 1. DEFINITIONS For purposes of this Agreement, the following terms shall be defined as follows: 1.1. "Amphora Financing" shall mean the issuance and sale by Amphora of (i) not less than [*] of Preferred Stock on or before December 31, 2002 (not including the Preferred Stock issued to Caliper pursuant to Section 2.1 below) and (ii) not less than an additional [*] of Preferred Stock on or before December 31, 2003. 1.2. "Datapoint Rate" shall mean the price per Datapoint to be paid by Amphora to Caliper pursuant to the terms of the LabChip Solutions Agreement and this Agreement. The parties agree that the Datapoint Rate for the second Production Year and third Production Year shall be [*] per Datapoint, [*] The parties shall negotiate in good faith prior to the end of the third Production Year to determine the Datapoint Rate that will be applicable for Datapoints generated by Amphora after the end of the third Production Year. 1.3. "Pilot Transaction" shall mean a trial transaction between Amphora and a potential customer involving equal to or less than [*] in revenue, as determined in accordance with GAAP. 1.4. "Preferred Stock" shall mean Amphora Series B Convertible Redeemable Preferred Stock issued by Amphora in connection with the Amphora Financing with rights, privileges and preferences substantially in accordance with the Amended and Restated Certificate of Incorporation of Amphora attached hereto as Schedule 1.4. 1.5. "Revenue" shall mean, with respect to any period of time, the amount of revenue recognized by Amphora for such period, as determined in accordance with GAAP; provided that for purposes of this Agreement, Revenue shall not include revenue recognized by Amphora in connection with Pilot Transactions until the total amount of revenue recognized by Amphora from Pilot Transactions during any rolling four-quarter period exceeds [*], in which event Revenue shall include all such revenue in excess of [*]. 1.6. "Sublease" shall mean that certain Sublease dated as of September 1, 2001 between Amphora and Caliper pursuant to which Amphora subleases from Caliper approximately 5,500 square feet of gross leasable area in the building commonly known as Cypress Business Park located at 665 Clyde Avenue in Mountain View, California. 2. MODIFICATION OF DATAPOINT PAYMENT OBLIGATION 2.1. MODIFICATION OF DATAPOINT OBLIGATION FOR THE SECOND PRODUCTION YEAR. Pursuant to Section 4.2.2.2 of the LabChip Solutions Agreement Amphora is obligated to pay to Caliper a one-time minimum price of US$4,000,000, and a maximum total aggregate price of US$6,000,000, for all Datapoints produced during the second Production Year. Upon the effectiveness of this Agreement pursuant to Section 8 below, Section 4.2.2.2 of the LabChip Solutions Agreement shall be of no further force or effect, and Amphora's rights and obligations with respect to Datapoints produced during the second Production Year under Section 4.2.2.2 of the LabChip Solutions Agreement shall be converted into the following rights and obligations: 2.1.1 Amphora shall pay to Caliper US$1,800,000 in cash in the second Production Year (which the parties agree began on December 1, 2002), in four equal installments of US$450,000, payable on each of February 28, 2003, May 31, 2003, August 31, 2003, and November 30, 2003. In consideration of such payments, Amphora shall be entitled to produce [*] Datapoints (either during or after the second Production Year) without making any further payment to Caliper on account of the generation of Datapoints. After Amphora has produced such [*] Datapoints, subject to Amphora's use of Datapoints credits as described in -2- Section 2.1.5 below, Amphora shall pay Caliper additional amounts, no later than the tenth (10th) business day of each quarter, equal to the product of (i) the Datapoint Rate multiplied by (ii) the number of Datapoints generated by Amphora during the immediately preceding quarter (excluding any such Datapoints included in the initial [*] Datapoints) (any such additional payments being referred to herein as "Additional Datapoint Payments"). Any payment required under this Section 2.1.1 that is not paid when due shall bear interest until paid in full in accordance with Section 4.5.1 of the LabChip Solutions Agreement. Until the Deferred Contingent Obligation (as defined below) is satisfied in full, Amphora shall be entitled to satisfy any Additional Datapoint Obligation for any quarter with Quarterly Revenue Payments relating to such quarter or, to the extent not already fully utilized, any previous quarter. 2.1.2 Amphora shall make a cumulative total of US$2,200,000 of deferred contingent payments (the "Deferred Contingent Obligation") to Caliper, which obligation shall be satisfied and reduced by Amphora by any combination of: (i) quarterly payments made by Amphora to Caliper in an amount which shall not be less than [*] of Amphora's Revenue for the immediately preceding quarter (such payments being referred to herein as "Quarterly Revenue Payments"); (ii) Sales Commission Credits received by Amphora from Caliper pursuant to Section 5 below; and (iii) Additional Datapoint Payments actually made by Amphora to Caliper (excluding any Additional Datapoint Payments satisfied pursuant to Section 2.1.5 below). Payments to Caliper in respect of the Deferred Contingent Obligation shall be made by Amphora on a quarterly basis (commencing with the calendar quarter beginning on January 1, 2003), no later than the tenth (10th) business day of the first month of each calendar quarter. In determining at the end of each quarter how much Amphora is obligated to pay Caliper in respect of the Deferred Contingent Obligation, satisfaction of the Deferred Contingent Obligation pursuant to Sales Commission Credits shall be considered first, satisfaction of the Deferred Contingent Obligation pursuant to Quarterly Revenue Payments shall be considered second, and satisfaction of the Deferred Contingent Obligation pursuant to Additional Datapoint Payments shall be considered last. In the event that Amphora seeks bankruptcy or any similar protection from its creditors, or Amphora's creditors initiate an involuntary bankruptcy proceeding against Amphora which is not dismissed within thirty (30) days, the then remaining unpaid balance of the Deferred Contingent Obligation shall be immediately due and payable to Caliper. 2.1.3 In the event that the full amount of the Contingent Deferred Payments has not been paid by Amphora to Caliper upon the earliest to occur of (i) the closing of Amphora's initial public offering, (ii) the closing of a sale of Amphora or substantially all of its stock or assets, or (iii) December 31, 2004, Amphora shall become obligated to issue Caliper that number of shares of Preferred Stock computed by dividing (x) the then outstanding amount of the Deferred Contingent Obligation by (y) [*] The Preferred Stock issued to Caliper pursuant to this Section 2.1.4 shall not constitute payment of the outstanding amount of the -3- Deferred Contingent Obligation, which shall remain outstanding for satisfaction as set forth in Section 2.1.2 above. Notwithstanding the foregoing, if prior to the date Amphora becomes obligated to issue Preferred Stock to Caliper pursuant to this Section 2.1.3, Amphora elects to pay the then outstanding amount of the Deferred Contingent Obligation to Caliper in full, (1) Amphora shall have no obligation to issue such Preferred Stock to Caliper and (2) Amphora shall receive a credit for future Additional Datapoint Payments equal to the then outstanding amount of the Deferred Contingent Obligation so paid. 2.1.4 In the event that (i) Amphora fails to close a second tranche of the Amphora Financing prior to December 31, 2003 (in which an aggregate $23,000,000 is raised, including amounts raised in the first tranche) and (ii) at such time the full amount of the Contingent Deferred Payments has not been paid by Amphora to Caliper, Amphora shall pay the then outstanding amount of the Deferred Contingent Obligation to Caliper no later than January 5, 2004. Amphora shall receive a credit for future Additional Datapoint Payments equal to the amount of the then outstanding amount of the Deferred Contingent Obligation so paid. 2.1.5 To the extent that the Deferred Contingent Obligation is satisfied by Amphora through Quarterly Revenue Payments and/or Sales Commission Credits, Amphora will receive a credit that can be applied to satisfy, to the extent of such credit, its obligation to make Additional Datapoint Payments to Caliper pursuant to Section 2.1.1 above. The amount of any such Datapoint credit created with respect to any quarter shall be equal to the quotient of (x) the total amount of Quarterly Revenue Payments made, and Sales Commission Credits received, by Amphora during such quarter, divided by (y) the then applicable Datapoint Rate being paid by Amphora. Any Datapoint credit created pursuant to this Section 2.1.5 shall be carried over to future quarters at no additional cost to Amphora until fully consumed. 2.1.6 Amphora shall issue to Caliper 2,500,000 shares of Preferred Stock contemporaneously with the closing of the Amphora Financing. 2.1.7 Amphora shall provide Caliper with the marketing support and assistance described in Section 4 below. 2.2. REVENUE INFORMATION REPORTING. Amphora shall deliver to Caliper, for each calendar quarter for which a payment in respect of the Deferred Contingent Obligation is potentially payable, a report setting forth in reasonable detail the Revenue of Amphora during such quarter and any revenue recognized by Amphora during such quarter from Pilot Transactions. Such report shall be delivered to Caliper at the time any such payment is made, or would have been made if Amphora had had Revenue during such quarter. Caliper shall review each such Revenue report upon receipt, and the Revenue set forth by Amphora therein shall be deemed correct for purposes of determining Amphora's payment obligation to Caliper unless Caliper provides Amphora with written notice describing a disagreement, in reasonable detail, within thirty (30) days after Caliper's receipt of such report. Amphora's obligations with respect to delivering -4- reports pursuant to this Section 2.2 shall be subject in all respects to the provisions of Section 4.5.4 of the LabChip Solutions Agreement. 2.3. DATAPOINT INFORMATION REPORTING. Amphora and Caliper are presently working on developing a system for reporting the number of Datapoints generated on each Instrument System operated by Amphora. Caliper and Amphora shall each use all commercially reasonable efforts to create and initiate a mutually acceptable Datapoint reporting system as promptly as practicable. 2.4. EXAMPLES. Attached hereto as Schedule 2.4 are illustrative examples of the parties' intent as to the operation of the modification of Section 4.2.2.2 of the LabChip Solutions Agreement set forth in paragraph 2.1 above. 3. MODIFICATION OF INSTRUMENT SYSTEM PURCHASE OBLIGATION Pursuant to Section 2.2.2 of the LabChip Solutions Agreement Amphora is obligated, among other things, to purchase an additional eleven Instrument Systems prior to December 31, 2002. Prior to the date of this Agreement, Amphora has purchased ten of such Instrument Systems. Upon the effectiveness of this Agreement pursuant to Section 8 below, Amphora's obligation to purchase the one remaining Instrument System shall be deferred to December 31, 2003, by which date Amphora shall be required to issue a purchase order for, and take delivery of, such Instrument System. 4. MARKETING OBLIGATIONS Upon the effectiveness of this Agreement pursuant to Section 8 below, Amphora shall provide Caliper with three to five "marketing stories" for [*] screening with a focus of on-chip approaches. Each of these marketing stories should have the following elements (as reasonably determined mutually by Amphora and Caliper): (i) graphic depictions of primary screening data that shows the general approach for assay development, as well as graphic depictions of a data set that demonstrates high data quality; (ii) a set of hit confirmation data that shows IC50 curves for the good hits, and examples of data where the IC50 curves show compounds not worth pursuing; and (iii) a selection of confirmed hits that are subjected to a realistic selectivity screen with specific and relevant [*] that demonstrate the ability to identify good potential compound leads as well as compounds that show enough cross reactivity to be eliminated from further work (without disclosing any proprietary information of third parties). Notwithstanding the foregoing, nothing herein in this Section 4 shall require Amphora to provide information that it reasonably deems to be confidential. In addition, Amphora shall agree to have representatives make a total of five presentations at Caliper sponsored symposia during the next 12 months. [*] will be made available (so long as he is an Amphora employee or consultant) to make three of the presentations (to the extent [*], other suitable Amphora employees or consultants reasonably agreeable to Caliper may make such presentations). Amphora shall also consult with Caliper, for up to 20 total hours, regarding the selection of the most relevant [*] for selectivity screening. -5- 5. SALES COMMISSIONS Upon the effectiveness of this Agreement pursuant to Section 8 below, until the Deferred Contingent Obligation has been paid in full to Caliper, Caliper shall credit Amphora with a sales commission of between [*] and [*] of actual revenue (excluding any revenue relating to freight, insurance, duties, taxes, or other similar items) received by Caliper with respect to sales of instruments in cases where Caliper reasonably determines that Amphora provided substantial assistance in making such sale (any such credit being referred to herein as a "Sales Commission Credit"). The amount of any such Sales Commission Credit shall vary between [*] and [*] depending on the amount of assistance provided by Amphora in making a sale of an instrument, as determined by Caliper in its reasonable discretion. Any Sales Commission Credit shall not be paid in cash to Amphora, but shall offset the then outstanding amount of the Deferred Contingent Obligation to the extent of the Sales Commission Credit. 6. [*] SERVICES Upon the effectiveness of this Agreement pursuant to Section 8 below, at [*] written request, [*] agrees to provide [*] with [*] services upon terms to be agreed upon in writing and which are mutually acceptable to the parties. Nothing in this Section shall require [*] to undertake any services that it [*]. 7. TERMINATION OF SUBLEASE Upon the effectiveness of this Agreement pursuant to Section 8 below, Caliper agrees that the Sublease shall terminate upon the later of (i) March 31, 2003 and (ii) the date that Amphora shall have surrendered the Leased Premises (as defined in the Sublease) in compliance with Section 12 of the Sublease; provided that on the effective date of any such termination of the Sublease Amphora shall not then be in default under any terms or provision of the Sublease. 8. CONDITIONS TO EFFECTIVENESS OF AGREEMENT 8.1. CONDITIONS PRECEDENT. The effectiveness of this Agreement, and the modification of Amphora's obligations and rights under the LabChip Solutions Agreement set forth in this Agreement, is subject to the fulfillment of each of the following conditions precedent: (a) Amphora shall have closed the first tranche of the Amphora Financing on or prior to December 31, 2002; and (b) Amphora shall have issued 2,500,000 shares of Preferred Stock to Caliper contemporaneously with the closing of the first tranche of the Amphora Financing, which Preferred Stock shall have the same rights, privileges and preferences as the Preferred Stock issued to other investors pursuant to the Amphora Financing. 8.2. CONDITION SUBSEQUENT. The continuing effectiveness of this Agreement after the satisfaction of the conditions precedent set forth in Section 8.1 above shall be subject to the condition subsequent that Amphora shall have paid all outstanding amounts owing to -6- Caliper as of the date of this Agreement (which the parties estimate to be approximately US$1,800,000) within five (5) business days after the closing of the first tranche of the Amphora Financing. In the event such payment is not made within such five (5) business day period, this Agreement shall be terminated without any further action of the parties, and be of no further force or effect, and Amphora's obligations under Section 4.2.2.2 of the LabChip Solutions Agreement shall be reinstated in full. 8.3. NON-COMPLIANCE WITH AND TERMINATION OF THIS AGREEMENT. Each of Amphora and Caliper agrees to use its best efforts to bring about the satisfaction of the conditions required to be performed by it hereunder as promptly as practicable. This Agreement may be terminated by Caliper at any time, upon written notice to Amphora, if Caliper reasonably determines that the first tranche of the Amphora Financing will not occur, or if the first tranche of the Amphora Financing has not closed on or prior to December 31, 2002. 9. TERMINATION OF EXCLUSIVITY Notwithstanding anything to the contrary set forth in the Existing Agreements, in the event that Amphora materially breaches its obligation to make payments for Datapoints set forth in Section 2 above, and such breach has not been cured within thirty (30) days after written notice of such default from Caliper to Amphora, Caliper may terminate the exclusivity provisions of Sections 2.1.2 and Article 3 of the Intellectual Property Agreement upon written notice to Amphora. In the event the exclusivity provisions are terminated, Amphora's obligations pursuant to the Minimum Aggregate Purchase Requirement provision of Section 3.4 of the Intellectual Property Agreement shall immediately terminate. Notwithstanding anything to the contrary contained in this Agreement, the Intellectual Property Agreement or the LabChip Solutions Agreement, all other rights and obligations of each of Amphora and Caliper under the Existing Agreements shall survive the termination of the exclusivity provisions set forth herein. Without limiting the generality of the foregoing sentence, the termination of the exclusivity provisions set forth herein shall not terminate the Exclusivity Period, for purposes of the definition of the Term, as defined in the LabChip Solutions Agreement. 10. EFFECT ON EXISTING AGREEMENTS Except as specifically modified pursuant to this Agreement, after the effectiveness of this Agreement pursuant to Section 8 above, each of the Existing Agreements, and the rights and obligations of each of Amphora and Caliper under the Existing Agreements, shall remain in full force and effect, except as specifically modified pursuant to this Agreement. 11. MISCELLANEOUS 11.1. SECTION HEADINGS, LANGUAGE AND CONSTRUCTION. The article and section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. This Agreement has been negotiated by the parties and their respective counsel. Accordingly, this Agreement will -7- be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either party. 11.2. GOVERNING LAW. THIS AGREEMENT, AND ALL DISPUTES ARISING OUT OF OR RELATING TO THIS AGREEMENT, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES OF CALIFORNIA OR ANY OTHER JURISDICTION. 11.3. ASSIGNMENT. Neither party may assign or otherwise transfer this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party hereto, except to a party that succeeds to all or substantially all of such party's business or assets, whether by sale of stock or assets, merger, operation of law or otherwise; provided that such assignee or transferee agrees in writing to be bound by the terms and conditions of this Agreement. Any other attempt by a party to assign or otherwise transfer this Agreement shall be null and void without the prior written consent of the other party. Subject to the foregoing, this Agreement will be binding upon and inure to the benefit of the parties and their successors and permitted assigns. 11.4. MODIFICATION. No amendment or modification of any provision of this Agreement shall be effective unless in writing signed by both parties. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by both parties. 11.5. SEVERABILITY. If any provision hereof should be held invalid, illegal or unenforceable in any jurisdiction, the parties shall negotiate in good faith a valid, legal and enforceable substitute provision that most nearly reflects the original intent of the parties and all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible. Such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. 11.6. NOTICES. Any notice or other communication required by this Agreement shall be made in accordance with the requirements of the Existing Agreements. 11.7. ENTIRE AGREEMENT. The parties acknowledge that this Agreement, the Existing Agreements, and the exhibits and schedules of each such agreement, set forth the entire agreement and understanding of the parties with respect to the subject matter hereof, and supersede all prior and contemporaneous discussions, agreements and writings in respect hereto. -8- 11.8. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed the Agreement as of the date first set forth above. CALIPER TECHNOLOGIES CORP. AMPHORA DISCOVERY CORP. By: /s/ Dan Kisner By: /s/ Martin Haslanger --------------------------- ---------------------------- Name: Daniel L. Kisner Name: Martin Haslanger Title: Chairman of the Board Title: President & CEO [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. -9- Schedule 1.4 Amended and Restated Certificate of Incorporation of Amphora [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. -10- AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF AMPHORA DISCOVERY CORP. Amphora Discovery Corp., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: A. The name of the corporation is Amphora Discovery Corp. The corporation was originally incorporated under the name of Amphora Discovery Sciences, Inc. The date of filing the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware is May 18, 2001. B. Pursuant to sections 242 and 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation amends and restates the provisions of the Certificate of Incorporation of this corporation. C. The Certificate of Incorporation of this corporation is hereby amended and restated to read as follows: ONE. The name of the corporation is Amphora Discovery Corp. (the "Corporation" or the "Company"). TWO. The address of the registered office of this Corporation in the State of Delaware is the Corporation Trust Company, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801 and the name of the registered agent at that address is The Corporation Trust Company. THREE. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. FOUR. This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is 777,345,000, of which 491,845,000 shares of which are designated Common Stock (the "Common Stock") and 285,500,000 shares are designated Preferred Stock (the "Preferred Stock"). Of the Preferred Stock, 36,000,000 shares are designated Series A Convertible Redeemable Preferred Stock (the "Series A Preferred"), 36,000,000 shares are designated as Series A-1 Convertible Redeemable Preferred Stock ("Series A-1 Preferred"), 36,000,000 shares are designated as Series A-2 Convertible Redeemable Preferred Stock (the "Series A-2 Preferred"), 88,750,000 shares are designated as Series B Convertible Redeemable Preferred Stock ("Series B Preferred") and 88,750,000 shares are designated as Series B-1 Convertible Redeemable Preferred Stock ("Series B-1 Preferred"). The Preferred Stock shall have a par value of $0.001 per share, and the Common Stock shall have a par value of $0.001 per share. The rights, preferences, privileges and restrictions granted to or imposed upon the Common Stock and the Preferred Stock are as follows: A. Dividends. 1. The holders of the Series A-1 Preferred and Series B Preferred shall be entitled to receive cumulative dividends, which shall accrue whether or not declared, out of funds legally available therefor, at the annual rate of $0.08 per share of Series A-1 Preferred and $0.032 per share of Series B Preferred, held by them, as adjusted for stock splits, stock dividends, recapitalizations, and similar events, prior and in preference to the declaration or payment of any dividend or other distribution (payable other than in Common Stock) with respect to the Common Stock, when, as and if declared by the Board of Directors. 2. The holders of the Series A, Series A-2 and Series B-1 Preferred shall be entitled to receive non-cumulative dividends, which may be declared out of funds legally available therefor, at the annual rate of $0.08 per share of Series A Preferred, $0.08 per share of Series A-2 Preferred and $0.032 per share of Series B-1 Preferred, held by them, as adjusted for stock splits, stock dividends, recapitalizations, and similar events, prior and in preference to the declaration or payment of any dividend or other distribution (payable other than in Common Stock) with respect to the Common Stock, when, as and if declared by the Board of Directors. 3. As long as any Shares of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred shall be outstanding, no dividends or other distributions shall be made with respect to the Common Stock, other than dividends payable solely in Common Stock, without the approval of 66 2/3% of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred, voting together as a single class. 4. Upon conversion of any shares of Preferred Stock pursuant to the provisions of Section C, the holder of any converted shares of Preferred Stock shall no longer be entitled to any and all dividends accrued up to the date of such conversion pursuant to this Section A. B. Liquidation Preference. 1. Preferred Stock Preference. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary (each a "Liquidation Event"), the holders of Series A-1 and Series B Preferred shall be entitled to receive, pari passu with each other but prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Series A Preferred, Series A-2 Preferred, Series B-1 Preferred and Common Stock by reason of their ownership thereof: the amount of $1.00 per share (as adjusted for Series A-1 Preferred stock splits, stock dividends, recapitalizations and similar events) for each share of Series A-1 Preferred (the "Original Series A-1 Issue Price") then held; the amount of $0.40 per share (as adjusted for Series B Preferred stock splits, stock dividends, recapitalizations and similar events) for each share of Series B Preferred (the "Original Series B Issue Price") then held; and, in addition, an amount equal to any unpaid dividends, whether accrued or declared, as applicable, on the Series A-1 and Series B Preferred. If the assets and funds thus distributed among the holders of the Series A-1 and Series B Preferred are insufficient to permit the payment to such holders of their full preferential amount, then the assets and funds of the Corporation legally available for distribution shall be distributed among the holders of Series A-1 and Series B Preferred in proportion to the number of shares of Series A-1 and Series B Preferred held by each such holder. After payment to the holders of Series A-1 and Series B Preferred the amounts set forth in the first sentence of this Section B(1), the holders of Series A, Series A-2 and Series B-1 Preferred shall be entitled to receive, pari passu with each other, but prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Common Stock by reason of their ownership thereof: the amount of $1.00 per share (as adjusted for Series A Preferred stock splits, stock dividends, recapitalizations and similar events) for each share of Series A Preferred (the "Original Series A Issue Price") then held; the amount of $1.00 per share (as adjusted for Series A-2 Preferred Stock splits, stock dividends, recapitalizations and similar events) for each share of Series A-2 Preferred (the "Original Series A-2 Issue Price") then held; the amount of $0.40 per share (as adjusted for Series B-1 Preferred stock splits, stock dividends, recapitalizations and similar events) for each share of Series B-1 Preferred (the "Original Series B-1 Issue Price") then held; and, in addition, an amount equal to any unpaid dividends declared, as applicable, on the Series A, Series A-2 and Series B-1 Preferred. If the assets and funds thus distributed among the holders of the Series A, Series A-2 and Series B-1 Preferred are insufficient to permit the payment to such holders of their full preferential amount, then the assets and funds of the Corporation remaining after the payment to the holders of Series A-1, Series A-2 and Series B-1 Preferred the amounts they are entitled to receive under this Section B(1) shall be distributed among the holders of Series A, Series A-2 and Series B-1 Preferred in proportion to the number of shares of Series A, Series A-2 and Series B-1 Preferred held by each such holder. Notwithstanding any other provision of this Section B(1), the holders of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred shall not receive pursuant to this Section B(1) more than an amount per share which, when added to all dividends previously paid on each share of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred, as applicable, is equal to 300% of the Original Series A Issue Price, the Original Series A-1 Issue Price, the Original Series A-2 Issue Price, the Original Series B Issue Price or the Original Series B-1 Issue Price, as applicable. No payment shall be made with respect to the Common Stock unless and until full payment has been made to the holders of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred of the amounts they are entitled to receive under this Subsection B(1). 2. Remaining Assets. After payment to the holders of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred the amounts set forth in Section B(1) above, the remaining assets and funds of the Corporation legally available for distribution, if any, to stockholders shall be distributed among the holders of Series A-1 and Series B Preferred and holders of Common Stock pro rata and based on the number of shares of Common Stock held by each (assuming conversion of all such Series A-1 and Series B Preferred), provided that the holders of Series A-1 and Series B Preferred shall not receive pursuant to Sections B(1) and (2), combined, more than an amount per share which, when added to all dividends previously paid on each share of Series A-1 and Series B Preferred, as applicable, is equal to 300% of the Original Series A-1 Issue Price or the Original Series B Issue Price, as applicable, and all remaining assets and funds after the maximum distribution to the holders of Series A-1 and Series B Preferred shall be distributed to the holders of Common Stock. 3. Reorganization or Merger. Except for bona fide financings for capital raising purposes approved by the Board of Directors and the holders of at least 66 2/3% of the then-issued and outstanding shares of Preferred Stock, voting together as a single class, a reorganization, merger or consolidation of the Corporation with or into any other corporation or entity, in which transaction or Series of related transactions the Corporation's stockholders immediately prior to such transaction own immediately after such transaction less than 50% of the equity securities of the surviving corporation or its parent, or a sale, conveyance or encumbrance of all or substantially all of the assets of the Corporation, shall be deemed to be a Liquidation Event within the meaning of this Section B. 4. Non-Cash Consideration. If any assets of the Corporation distributed to stockholders in connection with any Liquidation Event are other than cash, then the value of such assets shall be their fair market value as determined in good faith by the Board of Directors, except that any securities to be distributed to stockholders in a Liquidation Event shall be valued as follows: a. The method of valuation of securities not subject to investment letter or other similar restrictions on free marketability shall be as follows: (i) if the securities are then traded on a national securities exchange or the Nasdaq National Market (or a similar quotation system), then the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the 30-day period ending three (3) days prior to the distribution; and (ii) if actively traded over-the-counter, then the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) days prior to the distribution; and (iii) if there is no active public market, then the value shall be the fair market value thereof, as determined in good faith by the Board of Directors of the Corporation. b. The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make an appropriate discount from the market value determined as above in subsections (a)(i), (ii) or (iii) of this Section B(4) to reflect the approximate fair market value thereof, as determined in good faith by the Board of Directors. C. Conversion. The holders of Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): 1. Right to Convert. Except as provided in Section C(4)(d)(v) below, each share of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred shall be convertible, at the option of and without the payment of any additional consideration by the holder thereof, at any time into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Issuance Price (as defined below) by the Conversion Price (as defined below) in effect at the time of conversion. The Issuance Price for the Series A, Series A-1 and Series A-2 Preferred shall be $1.00. The Issuance Price for the Series B and Series B-1 Preferred shall be $0.40. The Conversion Price for the Series A Preferred shall initially be $1.00, subject to adjustment as provided below. The Conversion Price for the Series A-1 Preferred shall initially be $1.00, subject to adjustment as provided below. The Conversion Price for the Series A-2 shall initially be $0.40, subject to adjustment as provided below. The Conversion Price for the Series B and Series B-1 Preferred shall initially be $0.40, subject to adjustment as provided below. The number of shares of Common Stock into which a share of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred is convertible is hereinafter referred to as the "Conversion Rate" of the Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred, as appropriate. 2. Automatic Conversion. Each share of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred shall automatically be converted into shares of Common Stock at the then effective Conversion Rate (i) immediately prior to the closing of a firm commitment underwritten public offering pursuant to an effective registration statement on Form S-1 under the Securities Act of 1933, as amended (the "Act"), covering the offer and sale of Common Stock for the account of the Corporation to the public at a price per share of not less than $1.20 (as adjusted for stock splits, stock dividends, recapitalizations and similar events) with gross proceeds to the Corporation of not less than $20,000,000; or (ii) upon the consent of holders of at least 66 2/3% of the Preferred Stock then outstanding, voting together as a single class. 3. Mechanics of Conversion. Before any holder of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same; provided, however, that in the event of a conversion pursuant to Sections C(2), C(4)(d) or C(4)(e), the outstanding shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and, provided further, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the Corporation or its transfer agent, as provided above, or the holder notifies the Corporation or the Corporation's transfer agent that such certificates have been lost, stolen or destroyed and executes an affidavit to such effect, in a form reasonably satisfactory to the Corporation. The Corporation shall, as soon as practicable after such delivery, or such affidavit in the case of a lost certificate, issue and deliver at such office to such holder of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred to be converted, in the case of automatic conversion in connection with an underwritten public offering, immediately prior to the closing of the offering, or in the case of conversion in connection with the consent of the holders of at least 66 2/3% of the Preferred Stock then outstanding, immediately upon receipt of such consent, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. 4. Adjustments to Conversion Price of Preferred Stock for Dilutive Issues: a. Special Definitions. For purposes of this Section C(4), the following definitions shall apply: (i) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (ii) "Convertible Securities" shall mean any evidences of indebtedness, shares of capital stock (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. (iii) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section C(4)(b), deemed to be issued) by the Corporation, other than: (A) shares of the Corporation's capital stock issued upon any conversion of the Preferred Stock (including, without limitation, any conversion pursuant to Sections C(4)(d) and (e) below); (B) shares of the Corporation's capital stock issued pursuant to bona fide acquisitions, mergers, technology licenses or purchases, corporate partnering, agreements or other similar transactions, in each case unanimously approved by the Board of Directors; (C) 32,993,341 shares of the Corporation's capital stock (or related Options) ("Incentive Shares") issued to employees, officers, directors, consultants, or other persons performing services for the Corporation (including, but not by way of limitation, distributors and sales representatives) pursuant to any stock offering, plan, or arrangement approved by the Board of Directors, provided that, the number of Incentive Shares may be increased by the unanimous approval of the Board of Directors; (D) shares of the Corporation's capital stock issued to financial institutions in connection with the extension of credit to the Corporation, to lessors in connection with the lease of equipment or real property or in similar transactions, in each case approved unanimously by the Board of Directors; (E) shares of the Corporation's Common Stock issued in connection with any stock split, stock dividend, or stock combination thereof by the Corporation; (F) all shares of Common Stock issued or issuable upon conversion of Convertible Securities issued and outstanding on the date this document is filed with the Delaware Secretary of State; (G) shares of Common Stock issued on or prior to the earlier of December 16, 2004 or the Milestone Closing, as defined in Section C(4)(d)(v), in connection with the issuance and sale of Series B Preferred. (H) shares of capital stock issued in a public offering in which all of the Preferred Stock will be converted; or (I) except as otherwise provided in this Section C(4)(a)(iii), shares of capital stock of the Corporation, or securities convertible into shares of capital stock of the Corporation, the issuance of which is unanimously approved by the Board of Directors. b. Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the original issuance date for the Series A Preferred shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that, Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section C(4)(f) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series A-1 or Series B Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and, provided further, that in any such case in which Additional Shares of Common Stock are deemed to be issued: (i) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (ii) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (iii) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if; (A) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (B) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (iv) no readjustment pursuant to clause (ii) or (iii) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (A) the Conversion Price on the original adjustment date, or (B) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (v) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. c. Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event this Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section C(4)(b)) after the original issuance date for the Series A Preferred without consideration or for consideration per share less than the Conversion Price for the Series A-1 or Series B Preferred in effect on the date of and immediately prior to such issue (a "Dilutive Issuance"), then, and in such event, the Conversion Price for the Series A-1 and Series B Preferred shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) equal to the consideration per share for which Additional Shares of Common Stock are issued. If such Additional Shares of Common Stock are issued for no consideration then the consideration per share shall be deemed to be $0.01. d. Series B Offering Shadow Preferred. The provision of this Section C(4)(d) shall remain in effect until the Re-Conversion Date, as defined in Section C(4)(d)(v)below. (i) Series A Preferred Definitions. For purposes of Sections C(4)(d)(i), and (ii), the following terms shall have the meanings set forth below: (A) "Affiliate Group" shall mean a group of Affiliated Entities holding Series A Preferred. (B) "Affiliated Entity" shall mean, only for purposes of Sections C(4)(d)(i) and (ii), as to any entity, another entity that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such specified entity. (ii) Series A Preferred Mechanics of Issuance of Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series A Preferred a written notice of its intention, describing the type of new securities, the price and number of shares of such Dilutive Issuance, at least twenty-four (24) hours prior to the initial closing of such Dilutive Issuance. (B) Upon the purchase of shares issued and sold in a Dilutive Issuance by a holder of Series A Preferred or an Affiliate Group holding Series A Preferred, 2.0262 shares of Series A Preferred held by such holder or Affiliated Group shall be automatically converted into an equal number of shares of Series A-1 Preferred (rounded up to the nearest whole share) for each $1.00 of Series B Preferred issued and sold in such Dilutive Issuance purchased by such holder or Affiliate Group, up to a maximum total number of shares of Series A Preferred held by such holder or Affiliate Group. The number of shares of Series A Preferred held by each member of an Affiliate Group shall be converted to Series A-1 Preferred pro-rata, based on the proportion that the Series A Preferred held by such member of the Affiliate Group bears to the Series A Preferred held by all members of the Affiliate Group. A holder of Series A Preferred that has some or all of the shares of Series A Preferred converted to Series A-1 Preferred pursuant the terms of this Section C(4)(d)(ii) shall be referred to as a "Series A Participating Investor." (C) Upon the conversion of Series A Preferred held by a holder of Series A Preferred into shares of Series A-1 Preferred as set forth in this Section C(4)(d)(ii), such shares of Series A Preferred shall no longer be outstanding on the books of the Corporation, and to the extent of such Series A Participating Investor's holdings of Series A-1 Preferred, such Series A Participating Investor's shall be treated for all purposes as the record holder of such shares of Series A-1 Preferred acquired pursuant to the conversion of the Series A Preferred on the date of acquisition by such Series A Participating Investor of shares issued and sold in the Dilutive Issuance. (iii) Series B Preferred Definitions. For purposes of Sections C(4)d(iii), and (iv), the following terms shall have the meanings set forth below: (A) "Pro Rata B Share" with respect to each holder of Series B Preferred shall mean that portion of the total number of shares of the Dilutive Issuance equal to the number of shares of the Dilutive Issuance actually offered to all holders of Series B Preferred by the Board of Directors of the Corporation multiplied by a fraction, the numerator of which is the number of shares of Series B Preferred held by such holder as of the date of the B Issuance Notice, as defined below, and the denominator of which is the total number of shares of Series B Preferred outstanding as of such date. (B) "Participating B Investor" shall mean any holder of Series B Preferred that purchases at least its Pro Rata B Share of a Dilutive Issuance, provided however, that if a holder is a member of a group of Affiliated Entities holding Series B Preferred and the holders making up such group in the aggregate purchase a number of shares of such Dilutive Issuance at least equal to the aggregate Pro Rata B Share of all holders making up such group of Affiliated Entities, then all such holders in such group shall be deemed to be Participating B Investors. (C) "Nonparticipating B Investor" shall mean any holder of Series B Preferred that is not a Participating B Investor. (D) "Affiliated Entity" shall mean, only for purposes of this Section C(4)(d)(iii) and (iv), as to any entity, another entity that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such specified entity. (iv) Series B Preferred Mechanics of Issuance of Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series B Preferred a written notice (the "B Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities as well each Series B Preferred holder's Pro Rata B Share of such Dilutive Issuance, at least fifteen (15) days prior to the date of such Dilutive Issuance. Each holder of Series B Preferred may, within ten (10) days from the date of receipt by the holder (by electronic mail, fax or overnight delivery) of the Issuance Notice, provide written notice (by electronic mail, fax or overnight delivery) to the Corporation that such holder agrees to become a Participating B Investor for the price and upon the terms specified in the B Issuance Notice. In the event that such holder fails to purchase at least its Pro Rata B Share of the Dilutive Issuance (other than as a result of the Corporation failing to offer such holder an opportunity to purchase its Pro Rata B Share) on or prior to the Closing Date, as defined below, such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata B Share not purchased (the "Refused Percentage") by each Nonparticipating B Investor, that number of outstanding shares of Series B Preferred held by such Nonparticipating B Investor equal to the product of (x) the number of shares of Series B Preferred held by the Nonparticipating B Investor, multiplied by (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series B Preferred) into an equal number of shares of Series B-1 Preferred. (C) Upon the conversion of Series B Preferred held by a Nonparticipating Investor into shares of Series B-1 Preferred as set forth herein, such shares of Series B Preferred shall no longer be outstanding on the books of the Corporation, and may not be reissued, and to the extent of such Nonparticipating B Investor's holdings of Series B-1 Preferred, such Nonparticipating B Investor shall be treated for all purposes as the record holder of such shares of Series B-1 Preferred acquired pursuant to the conversion of the Series B Preferred on the Closing Date. (v) Series A-1 Preferred Clawback Mechanics. (A) For purposes of this Section C(4)(d), "Re-Conversion Date" shall mean with respect to each of the Prior Holders, as defined below, the earlier to occur of the following: (i) the Milestone Closing, as defined in the Series B Preferred Stock Purchase Agreement, dated as of December 13, 2002 (the "Milestone Closing"); (ii) the time and date that is immediately prior to a Liquidation Event and the conversion of any shares of Preferred Stock into Common Stock occurring in connection with such Liquidation Event; (iii) the time and date immediately prior to the conversion of shares of Series A-1 Preferred held by such Prior Holder into shares of Common Stock; (iv) time and date immediately prior to the initial closing date of a Dilutive Issuance; or (v) December 16, 2004. (B) For the purposes of this Section C(4)(d)(v), the "Re-Conversion Number" for any holder of Series A-1 Preferred Stock (each, a "Prior Holder") shall be a number equal to the total number of shares of Series A-1 Preferred then held by such Prior Holder multiplied by the quotient of: (i) the difference of (x) the number of shares of Series A-1 Preferred then held by such Prior Holder multiplied by 0.80, less (y) the number of shares of Series B Preferred then held by such Prior Holder multiplied by 0.40; divided by (ii) the number of shares of Series A-1 Preferred then held by such Prior Holder multiplied by 0.80, provided that, no Prior Holder shall be deemed to acquire any right to receive additional shares of Series A-1 Preferred and none of the shares of Series A-1 Preferred held by such Prior Holder shall re-convert to Series A Preferred if the calculation set forth in this Section C(4)(d)(v) results in a negative Re-Conversion Number. (C) Notwithstanding anything to the contrary in this Section C, upon the Re-Conversion Date a number of shares of Series A-1 Preferred held by a Prior Holder equal to the Re-Conversion Number such Prior Holder held by a Prior Holder shall convert into an equal number of shares of Series A Preferred, provided that if the Re-Conversion Date is triggered by the occurrence of the events set forth in Sections C(4)(d)(v)(A)(ii) or (iv) the Corporation shall have provided notice of such event to the Prior Holders at least five (5) days prior to the occurrence of such event. (D) Upon the conversion of Series A-1 Preferred held by a Prior Holder into shares of Series A Preferred as set forth herein, such shares of Series A-1 Preferred shall no longer be outstanding on the books of the Corporation and to the extent of such Prior Holder's holdings of Series A-1 Preferred, such Prior Holder shall be treated for all purposes as the record holder of such shares of Series A Preferred acquired pursuant to the conversion of the Series A-1 Preferred on the Re-Conversion Date. (E) The Corporation shall send notice that the Re-Conversion Date will be triggered in accordance with Section C(4)(d)(v)(A)(v) to the Prior Holders at least at least five (5) days prior to December 16, 2004 if the Re-Conversion Date has not occurred by the date of mailing of such notice. e. Post- Series B Offering Shadow Preferred. After the Re-Conversion Date, Section C(4)(d) shall no longer be in effect, and the provisions of this Section C(4)(e) shall control any conversion of Series A-1 or Series B Preferred into shares of Series A-2 or Series B-1 Preferred, as applicable. Prior to such Re-Conversion Date the provisions of this Section C(4)(e) shall not be in effect for any purpose. (i) Definitions. For purposes of this Section C(4)(e) the following terms shall have the meanings set forth below. (A) "Pro Rata Share" with respect to each holder of Series A-1 or Series B Preferred shall mean that portion of the total number of shares of the Dilutive Issuance equal to the number of shares of the Dilutive Issuance actually offered to all holders of Series A-1 and Series B Preferred Stock by the Corporation multiplied by a fraction, the numerator of which is the number of shares of Series A-1 and Series B Preferred held by such holder as of the date of the Issuance Notice, as defined below, and the denominator of which is the total number of shares of Series A-1 and Series B Preferred outstanding as of such date. (B) "Participating Investor" shall mean any holder of Series A-1 or Series B Preferred, as applicable that purchases at least its Pro Rata Share of a Dilutive Issuance, provided however, that if a holder is a member of a group of Affiliated Entities holding Series A-1 and Series B Preferred and the holders making up such group in the aggregate purchase a dollar amount of such Dilutive Issuance equal to the aggregate Pro-Rata Share of all holders making up such group of Affiliated Entities, then all such holders in such group shall be deemed to be Participating Investors. (C) "Nonparticipating Investor" shall mean any holder of Preferred Stock that is not a Participating Investor. (D) "Affiliated Entity" shall mean, only for purposes of this Section C(4)(e), as to any entity, another entity that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such specified entity. (ii) Mechanics of Issuance of Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series A-1 and Series B Preferred Stock a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least twenty-one (21) days prior to the date of such Dilutive Issuance. Each holder of Series A-1 and Series B Preferred may, within ten (10) days from the time of receipt by the holder (by mail, fax or overnight delivery) of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the ten (10) day period, or fails to actually purchase its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation failing to offer such holder an opportunity to purchase its Pro Rata Share) on or prior to the Closing Date, as defined below, such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by each Nonparticipating Investor, that number of outstanding shares of Series A-1 Preferred and that number of outstanding shares of Series B Preferred then held by such Nonparticipating Investor, as applicable, equal to the product of (x) the number of shares of Series A-1 Preferred or Series B Preferred, as applicable, then held by the Nonparticipating Investor, times (y) the Refused Percentage, shall each be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Preferred Stock) into an equal number of shares of Series A-2 Preferred and Series B-1 Preferred, as applicable. (C) Upon the conversion of Series A-1 and Series B Preferred held by a Nonparticipating Investor as set forth herein, such shares of Series A-1 and Series B Preferred shall no longer be outstanding on the books of the Corporation, and may not be reissued, and the Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series A-2 and Series B-1 Preferred, as applicable, acquired pursuant to the conversion of the Series A-1 and Series B Preferred on the Closing Date. f. Determination of Consideration. For purposes of this Section C(4), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (i) Cash and Property: Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation. (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (ii) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section C(4)(b), relating to Options and Convertible Securities, shall be determined by dividing: (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities; by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. 5. Fractional Shares. In lieu of any fractional shares to which the holder of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of one share of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred, as applicable, as determined in good faith by the Board of Directors of the Corporation. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred of each holder at the time converting into Common Stock and the number of shares of Common Stock issuable upon each such holder's aggregate conversion. 6. Adjustment of Conversion Price; Cash Dividends; Merger Consideration. a. The Conversion Price of each share of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred shall be subject to adjustment from time to time as follows: (i) if the number of shares of Common Stock outstanding at any time after the date hereof is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of any shares of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred shall be increased in proportion to such increase of outstanding shares; or (ii) if the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of any shares of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred shall be decreased in proportion to such decrease in outstanding shares. b. In case the Corporation shall declare a cash dividend upon its Common Stock payable otherwise than out of retained earnings or shall distribute to holders of its Common Stock shares of its capital stock (other than Common Stock), stock or other securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), then, in each such case, the holders of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred shall, concurrent with the distribution to holders of Common Stock, receive a like distribution based upon the number of shares of Common Stock into which such Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred is then convertible. c. In case at any time after the date hereof, there is any capital reorganization, or any reclassification of the stock of the Corporation (other than as a result of a stock dividend or subdivision, split-up or combination of shares), the shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation or otherwise to which such holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred into Common Stock. The provisions of this Section C(6)(d) shall similarly apply to successive reorganizations or reclassifications. d. All calculations under Section C(4) and this Section C(6) shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. 7. Minimal Adjustments. No adjustment in the Conversion Price for the Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred need be made if such adjustment would result in a change in the Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made as a result of the provisions of this Section C(7) shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Conversion Price. 8. No Impairment. The Corporation will not, without the consent of the holders of at least 66 2/3% of the outstanding Preferred Stock, through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section C and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation's right to amend its Certificate of Incorporation with the requisite stockholder consent. 9. Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Rate pursuant to Sections C(4), (6) or (7), the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred, as applicable, a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) all such adjustments and readjustments; (ii) the Conversion Rate at the time in effect; and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of such holder's shares of Series A, Series A-1, Series A-2 Series B or Series B-1 Preferred. 10. Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property or to receive any other right, the Corporation shall mail to each holder of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred at least twenty (20) days prior to such record date, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution or right, and the amount and character of such dividend, distribution or right. 11. Notices. Any notice required by the provisions of this Section C to be given to any holder of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred shall be deemed given or received if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the Corporation's books. D. Voting Rights. 1. Generally. The holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which each share of such Preferred Stock could be converted on the record date for the vote or written consent of stockholders and, except as otherwise required by law, shall have voting rights and powers equal to the voting rights and powers of the Common Stock. The holder of each share of Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Corporation and shall vote with holders of the Common Stock upon all matters submitted to a vote of stockholders, except with respect to those matters required pursuant to Section F or by law to be submitted to a class or Series vote. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares of Common Stock into which shares of Preferred Stock held by each holder could be converted) shall be disregarded. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. Notwithstanding the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware, the holders of Common Stock shall vote together with the holders of Preferred Stock as a single class with respect to any proposed amendment hereto that would increase the authorized number of shares of Common Stock, with each such share being entitled to such number of votes per share as is provided in this Article FOUR, and the holders of Common Stock shall not be entitled to a separate class vote with respect thereto unless otherwise required by law. 2. Directors. a. Number of Directors. Except as reduced by Section D(2)(c), there shall be seven (7) directors of the Corporation, provided that, such number of directors may be increased with the affirmative vote or written consent of the holders of a majority of Common Stock, voting as a separate class and the holders of at least 66 2/3% of the outstanding Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred, voting together as a single class. b. Election by Class. The directors shall be elected as follows: (i) Two (2) directors (the "Preferred Directors") shall be elected by the holders of a majority of the outstanding shares of Preferred Stock, voting together as a single class. (ii) One (1) director (the "Common Director") shall be elected by the holders of a majority of the outstanding shares of Common Stock, voting together as a single class. (iii) Any remaining directors (the "Joint Directors") shall be elected by the holders of a majority of the outstanding Common Stock and Preferred Stock, voting separately as separate classes, on an as-converted-to-Common-Stock basis. c. Removal of Directors, Reduction of Number of Directors. (i) If at any time there are fewer than 100,000 shares (appropriately adjusted for stock splits, stock dividends, recapitalizations and similar events) of Preferred Stock, combined, outstanding (i) the right of the holders of the shares of Preferred Stock to elect the Preferred Directors will terminate; (ii) a voting shift shall be effected and the term of office of the Preferred Directors will automatically terminate; and (iii) the authorized number of directors shall be reduced by two. In addition, the Preferred Directors may be removed by vote or written consent of a majority of the shares of Preferred Stock then outstanding, voting together as a single class on an as-converted basis. (ii) The Common Director may be removed by vote or written consent of a majority of the shares of Common Stock then outstanding, voting as a single class. (iii) The Joint Directors may be removed by vote or written consent of a majority of the shares of Common Stock and Preferred Stock then outstanding, voting separately as separate classes, on an as-converted basis. d. Vacancies. (i) In the event of a vacancy on the Board of Directors created by the resignation, death, or removal of a Preferred Director, such vacancy shall be filled: (i) by the Corporation's Board of Directors upon receipt by the Board of Directors of, and in accordance with, written consents specifying the new director to fill such vacancy and signed by the holders of a majority of the shares of the Preferred Stock then outstanding, voting together as a single class on an as-converted basis; or (ii) by vote or written consent of the holders of a majority of the Preferred Stock then outstanding, voting together as a single class. (ii) In the event of a vacancy on the Board of Directors created by the resignation, death, or removal of the Common Director, such vacancy shall be filled: (i) by the Corporation's Board of Directors upon receipt by the Board of Directors of, and in accordance with, a written consent specifying the new director to fill such vacancy and signed by the holders of a majority of the shares of Common Stock then outstanding; or (ii) by vote or written consent of the holders of a majority of the Common Stock then outstanding. (iii) In the event of a vacancy on the Board of Directors created by the resignation, death, or removal of a Joint Director, such vacancy shall be filled: (i) by the Corporation's Board of Directors upon receipt by the Board of Directors of, and in accordance with, a written consent specifying the new director to fill such vacancy and signed by the holders of a majority of the shares of Common Stock and Preferred Stock then outstanding, voting separately as separate classes, on an as-converted basis; or (ii) by vote or written consent of the holders of a majority of the Common Stock and Preferred Stock then outstanding, voting separately as separate classes, on an as-converted basis. E. Redemption. 1. Redemption Right. a. No Call by the Corporation. The Corporation shall not have the right to call for redemption all or any part of the Preferred Stock, but may, pursuant to the terms of this Section E have the obligation to redeem the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred. b. Redemption of Preferred Stock. Upon receipt of written notice, delivered to the Corporation on or after September 30, 2008, from the holders of at least a majority of the aggregate number of then outstanding shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred (the "Redemption Call"), voting together as a single class, the Corporation shall redeem such shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred, as provided in this Section E, by paying in cash therefor on the Redemption Date (as defined below) an amount per share of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred, as applicable, equal to the Original Series A, Series A-1, Series A-2, Series B or Series B-1 Issue Price, as applicable plus any unpaid dividends, whether accrued or declared, as applicable, (the "Series A Redemption Price," "Series A-1 Redemption Price," "Series A-2 Redemption Price", "Series B Redemption Price" or "Series B-1 Redemption Price," as applicable). c. Redemption Payments and Redemption Dates. The Corporation shall pay the Series A, Series A-1, Series A-2, Series B or Series B-1 Redemption Price, as applicable, to the holders of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred to be redeemed, and such shares shall be redeemed in three installments (each, a "Redemption Payment") with the first such Redemption Payment being paid no later than sixty (60) days following the receipt by the Corporation of the Redemption Call, (the "First Redemption Date"), and the remaining two Redemption Payments being paid no later than the first and second anniversaries of the First Redemption Date, respectively (the date on which each such Redemption Payment is made being herein referred to as a "Redemption Date"). Subject to the foregoing, on the first, second and third Redemption Dates the Corporation shall redeem 33%, 50% and 100%, respectively, of the number of shares of each of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred outstanding as of the date of each such Redemption Date. 2. Redemption Procedure. a. Redemption Notice. At least thirty (30) but no more than sixty (60) days prior to a Redemption Date, the Corporation shall mail a written notice (the "Redemption Notice"), first class, postage prepaid, to each holder of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred of record at the close of business on the business day preceding the day on which such notice is given (at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or, if no such address appears or is given, at the place where the principal executive office of the Corporation is located), notifying such holder of the proposed redemption of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred. The first Redemption Notice shall specify (i) the aggregate number of shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred that could be redeemed from such holder pursuant to Section E(1)(b), as applicable; (ii) the number of shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred that could be redeemed from such holder on the first specific Redemption Date; (iii) the Series A, Series A-1, Series A-2, Series B or Series B-1 Redemption Price, as applicable, to be paid on such Redemption Date; and (iv) the manner and the place for surrendering to the Corporation the certificate(s) representing any shares to be redeemed. Subsequent Redemption Notices shall specify (i) the number of shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred to be redeemed from such holder on the Redemption Date for which such Redemption Notice was sent; (ii) the Series A, Series A-1, Series A-2, Series B or Series B-1 Redemption Price, as applicable, to be paid on said Redemption Date; and (iii) the manner and the place for surrendering to the Corporation the certificates representing the shares to be redeemed on such Redemption Date. Except as provided in Section E(2)(b), on or after each Redemption Date, each holder of shares of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing the shares subject to redemption on such Redemption Date, in the manner and at the place designated in the Redemption Notice, and thereupon the Series A, Series A-1, Series A-2, Series B or Series B-1 Redemption Price, as applicable, in respect of each such share shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed on a particular Redemption Date, a new certificate shall be issued to the holder representing the unredeemed shares. b. Rights as Shareholder Terminate. From and after each Redemption Date, unless there shall have been a default in payment of the Series A, Series A-1, Series A-2, Series B or Series B-1 Redemption Price, as applicable, all rights and preferences pertaining to those shares of Preferred Stock designated for redemption on such Redemption Date (except the right to receive the Series A, Series A-1, Series A-2, Series B or Series B-1 Redemption Price, as applicable, without interest, upon surrender of the certificate or certificates therefor) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A, Series A-1, Series A-2, Series B or Series B-1 Preferred on any Redemption Date are insufficient to redeem the total number of shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible aggregate number of shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred ratably among the holders of such shares to be redeemed based upon their aggregate holdings of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the Corporation has become obligated to redeem on any Redemption Date, but which it has not redeemed (a "Remainder Redemption"). In any Remainder Redemption the maximum possible aggregate number of unredeemed shares of Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred shall be redeemed ratably among the holders of such Remainder Redemption shares based upon their aggregate holdings of the Series A, Series A-1, Series A-2, Series B and Series B-1 Preferred. F. Protective Provisions. In addition to any other rights provided by law, so long as 250,000 shares of Preferred Stock shall be outstanding, this Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of at least 66 2/3% of the then outstanding shares of Preferred Stock, voting together as a single class: 1. Amend the provisions of the Certificate of Incorporation or the Bylaws of the Corporation so as to materially and adversely change the rights, preferences, privileges or restrictions on the Preferred Stock; 2. Increase the authorized number of directors on the Corporation's Board of Directors; 3. authorize or create a new class of shares having rights, preferences or privileges senior to, or pari passu with, the Preferred Stock; 4. authorize (i) a merger or consolidation of the Company with another entity after which the stockholders of the Company shall own less than a majority of the outstanding voting stock of the surviving corporation or (ii) a sale of all or substantially all of the assets of the Company; 5. authorize a liquidation or dissolution of the Company; 6. declare or pay any dividend or redeem or repurchase any shares of capital stock of the Company (other than redemption or repurchase from terminated employees or service providers, consultants or founders pursuant to contractual rights of repurchase or redemption, or redemptions made pursuant to the provisions of Section E herein); and 7. as otherwise provided by applicable law. G. Status of Converted or Redeemed Stock. 1. In the event any shares of Preferred Stock shall be redeemed pursuant to Section E by payment of the Series A, Series A-1, Series A-2, Series B or Series B-1 Redemption Price, as applicable, on a Redemption Date, the shares so redeemed shall be canceled and shall not be issuable by the Corporation, and the Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. 2. In the event any shares of Preferred Stock shall be converted pursuant to Section C, other than shares of Series A Preferred converted to Series A-1 pursuant to the provisions of Section C(4)(d), the shares so converted shall be canceled and shall not be issuable by the Corporation, and the Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. 3. In the event any shares of Series A-1 Preferred Stock shall be converted pursuant to Section C into shares of Series A Preferred, the shares of Series A-1 Preferred so converted shall be canceled and shall not be issuable by the Corporation, and the Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. H. Reservation of Shares. The Corporation shall reserve and keep available at all times, so long as any shares of Preferred Stock remain outstanding, free from preemptive rights, out of its authorized but unissued shares of Common Stock, Series A Preferred, Series A-1 Preferred, Series A-2 Preferred and Series B-1 Preferred, solely for the purpose of effecting the conversion of the shares of Preferred Stock pursuant to any provision of this Certificate of Incorporation, sufficient shares of Common Stock, Series A Preferred, Series A-1 Preferred and Series B-1 Preferred to provide for the conversion of all outstanding shares of the Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock, Series A Preferred, Series A-1 Preferred, Series A-2 Preferred or Series B-1 Preferred shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock, Series A Preferred, Series A-1 Preferred, Series A-2 Preferred and Series B-1 Preferred to such number of shares as shall be sufficient for such purpose. I. Valid Issuance. All shares of Common Stock which may be issued upon conversion of the shares of Preferred Stock will, upon issuance by the Corporation, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. J. Payment of Taxes. The Corporation will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of the Preferred Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock so converted were registered. K. Residual Rights. All rights accruing to the outstanding shares of capital stock not expressly provided for to the contrary herein shall be vested in the Common Stock. FIVE. The Corporation is to have perpetual existence. SIX. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. SEVEN. The election of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. EIGHT. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provisions contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. NINE. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person or his or her testator or intestate is or was a director, officer or employee of the Corporation, or any predecessor of the Corporation, or serves or served at any other enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation. Neither any amendment nor repeal of this Article, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. TEN. Advance notice of new business and stockholder nomination for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the Corporation. ELEVEN. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. A. This Amended and Restated Certificate of Incorporation has been duly approved by the Board of Directors of this Corporation. B. This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware by the Board of Directors. [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. IN WITNESS WHEREOF, Amphora Discovery Corp. has caused this Amended and Restated Certificate of Incorporation to be signed by the President on December 13, 2002. Amphora Discovery Corp. By: /s/ Martin Haslanger ------------------------- President, Martin Haslanger ATTEST: By: /s/ Michael J. O'Donnell ---------------------------- Secretary, Michael J. O'Donnell [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. Schedule 2.4 Illustrative Examples of Modified Obligation 1. In 2003, Amphora generates [*] datapoints, has 1 deal of [*] realized in the year and gets credit for helping to sell 2 Caliper systems for a total of [*]. The $1.8 million pays for [*] datapoints. Amphora therefore owes and pays to Caliper [*] for the additional [*] datapoints. This [*], paid by a combination of a [*] payment from the [*] deal, [*] commission credit, and an additional cash payment of [*] will reduce the $2.2 contingent deferred payments to [*]. 2. Following the 2003 year described in 1 above, Amphora runs [*] datapoints in 2004, has 1 pharma deal of [*] and one of [*]. In 2004 Amphora would pay Caliper [*] for the [*] generated datapoints, which is more than what is required to satisfy the remaining [*] deferred contingent obligation. Accordingly, depending on the timing of when the revenue from the pharma deal is recognized by Amphora, the deferred obligation will be entirely satisfied either by datapoints alone or by a combination of [*] for the pharma deal plus a credit for Amphora's payment to Caliper for datapoints. 3. Same as case 2 above, except Amphora runs only [*] datapoints in 2004. In 2004 Amphora would pay Caliper $1.4 million for the [*] generated datapoints, which payment would be credited against the remaining [*] deferred contingent obligation, leaving [*] of such obligation outstanding. [*] of such [*] would represent [*] of the revenue from the [*] pharma deal. If not voluntarily paid by Amphora, at the end of 2004 Amphora would issue [*] of Series B preferred stock to Caliper, and the $450,000 deferred contingent obligation would remain outstanding. 4. Same as case 2 above, except Amphora runs only [*] datapoints in 2004. In 2004 Amphora would pay Caliper [*] ([*] of the revenue from the [*] pharma deal), [*] of which would be applied to satisfy Amphora's current payment obligation for the [*] generated datapoints and [*] of which would create a credit that could be applied to satisfy Amphora's payment obligation to Caliper for future generated datapoints. The [*] payment would be credited against the remaining [*] deferred contingent obligation, leaving [*] of such obligation outstanding. If not voluntarily paid by Amphora, at the end of 2004 Amphora would issue [*] of Series B preferred stock to Caliper, and the [*] deferred contingent obligation would remain outstanding. 5. In the case of 2 above, Caliper signs a deal on January 1, 2004 with [*] Therefore, the total cost for the [*] datapoints is [*]. Otherwise, the analysis is the same as paragraph 2 above. 6. Following 2003 as described in 1 above, Amphora goes public raising [*] in the first IPO of 2004 (January 1). If the [*] of deferred obligation is not voluntarily paid by Amphora, Amphora owes Caliper [*] in Series B preferred stock. [ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EX-23.1 8 f88175exv23w1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-95007, Form S-8 No. 333-40466, Form S-8 No. 333-69722, Form S-8 No. 333-76636 and Form S-8 No. 333-91276) pertaining to the 1996 Equity Incentive Plan, 1999 Equity Incentive Plan, 1999 Employee Stock Purchase Plan, 1999 Non-Employee Directors' Stock Option Plan and the 2001 Non-Statutory Stock Option Plan of Caliper Technologies Corp. and in the Registration Statement (Post-Effective Amendment No. 1 to Form S-1 on Form S-3 No. 333-45942) of our report dated January 28, 2002, with respect to the consolidated financial statements and schedule of Caliper Technologies Corp. included in the Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young LLP Palo Alto, California March 28, 2003 EX-99.1 9 f88175exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CALIPER TECHNOLOGIES CORP. AND SUBSIDIARIES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Caliper Technologies Corp. (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael R. Knapp, Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ MICHAEL R. KNAPP -------------------------- Michael R. Knapp Chief Executive Officer Date: March 28, 2003 - ------------------ A signed original of this written statement required by Section 906 has been provided to Caliper Technologies Corp. and will be retained by Caliper Technologies Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 10 f88175exv99w2.txt EXHIBIT 99.2 EXHIBIT 99.2 CALIPER TECHNOLOGIES CORP. AND SUBSIDIARIES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Caliper Technologies Corp. (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James L. Knighton, President and Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ JAMES L. KNIGHTON -------------------------- James L. Knighton President and Chief Financial Officer Date: March 28, 2003 - ------------------ A signed original of this written statement required by Section 906 has been provided to Caliper Technologies Corp. and will be retained by Caliper Technologies Corp. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----


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

		For the fiscal year ended December 31, 2002
or

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

		For the transition period from to .


Delaware		33-0675808
(State of Incorporation)		(I.R.S. Employer Identification Number)


PART 1
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
POWER OF ATTORNEY
CERTIFICATIONS
EXHIBIT INDEX
EXHIBIT 3.4
EXHIBIT 10.50
EXHIBIT 10.51
EXHIBIT 10.52
EXHIBIT 10.53
EXHIBIT 23.1
EXHIBIT 99.1
EXHIBIT 99.2


Product	Description	Status

Agilent 2100 Bioanalyzer	Desktop LabChip instrument and software	Marketed by Agilent

DNA 12000 LabChip Kit	Chips and reagents for analyzing large DNA fragments	Marketed by Agilent

DNA 7500 LabChip Kit	Chips and reagents for analyzing medium DNA fragments	Marketed by Agilent

DNA 1000 LabChip Kit	Chips and reagents for analyzing small DNA fragments	Marketed by Agilent

DNA 500 LabChip Kit	Chips and reagents for analyzing very small DNA fragments	Marketed by Agilent

Protein 200 Plus LabChip Kit	Chips and reagents for analyzing protein samples	Marketed by Agilent

Protein 50 LabChip Kit	Chips and reagents for analyzing small protein samples	Marketed by Agilent

RNA 6000 Nano LabChip Kit	Chips and reagents for analyzing RNA samples	Marketed by Agilent

RNA 6000 Pico LabChip Kit	Chips and reagents for analyzing very small amounts ofRNA	Marketed by Agilent

Cell Fluorescence LabChip Kit	Chips and reagents for analyzing cells	Marketed by Agilent


Product	Description	Status

Caliper 250	Drug discovery system	Marketed by Caliper

Off-Chip Mobility Shift LabChip device	4-sipper device for off-chip reactions	Marketed by Caliper

Off-Chip Mobility Shift LabChip device	12-sipper device for off-chip reactions	Marketed by Caliper

Fluorogenic LabChip device	4-sipper device for fluorogenic assays	Marketed by Caliper

Calcium Flux LabChip device	4-sipper device for measuring intracellular calcium	Marketed by Caliper on an “early release” basis

On-Chip Mobility Shift LabChip device	4-sipper device for on-chip reactions	Marketed by Caliper on an “early release” basis


		Page

PART I
Item 1.	Business		2
Item 2.	Properties		20
Item 3.	Legal Proceedings		20
Item 4.	Submission of Matters to a Vote of Security Holders		21
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		21
Item 6.	Selected Financial Data		22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		47
Item 8.	Financial Statements and Supplementary Data		48
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		48
PART III
Item 10.	Directors and Executive Officers of the Registrant		48
Item 11.	Executive Compensation		48
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		48
Item 13.	Certain Relationships and Related Transactions		48
Item 14.	Controls and Procedures		48
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		49
Signatures			54
Power of Attorney			54
Certifications			56
Financial Statements			F-1


Item 4.	*Submission of Matters to a Vote of Security Holders*


		High		Low

Fiscal 2002:
	First Quarter	$	18.07	$	10.97
	Second Quarter	$	12.58	$	6.00
	Third Quarter	$	6.80	$	3.90
	Fourth Quarter	$	4.51	$	2.96
Fiscal 2001:
	First Quarter	$	45.81	$	13.00
	Second Quarter	$	30.09	$	13.25
	Third Quarter	$	20.63	$	9.07
	Fourth Quarter	$	15.98	$	8.51



			Year Ended December 31,

			2002			2001			2000			1999			1998


			(In thousands, except per share data)
Statements of Operations Data:
Revenue:
	Product revenue		$	10,378		$	8,799		$	3,201		$	1,211		$	—
	Related party revenue			6,155			3,912			—			—			—
	License fees and contract revenue			9,300			16,877			15,363			10,876			8,155

		Total revenue		25,833			29,588			18,564			12,087			8,155
Costs and expenses:
	Cost of product revenue			7,906			4,784			2,519			921			—
	Cost of product revenue — related party			3,021			2,103			—			—			—
	Research and development			43,317			38,263			33,478			17,494			9,584
	Selling, general and administrative			17,534			15,545			9,787			5,312			2,932
	Amortization of deferred stock compensation, net(1)			378			2,540			4,545			3,885			—
	Restructuring charges			314			—			—			—			—

		Total costs and expenses		72,470			63,235			50,329			27,612			12,516

Operating loss				(46,637	)		(33,647	)		(31,765	)		(15,525	)		(4,361	)
Interest income, net				6,975			11,418			7,468			1,152			1,386
Other expense, net				(1,302	)		(1,448	)		—			—			—
Litigation settlement and reimbursement				—			27,500			13,274			—			—

Income (loss) before cumulative effect of change in accounting principle(3)				(40,964	)		3,823			(11,023	)		(14,373	)		(2,975	)
Cumulative effect of a change in accounting principle				—			—			(2,294	)		—			—

Net income (loss)				(40,964	)		3,823			(13,317	)		(14,373	)		(2,975	)
Accretion on redeemable convertible preferred stock(2)				—			—			—			(2,328	)		(2,174	)

Net income (loss) attributable to common stockholders			$	(40,964	)	$	3,823		$	(13,317	)	$	(16,701	)	$	(5,149	)

Net income (loss) per common share, basic:
Net income (loss) before cumulative effect of a change in accounting principle			$	(1.68	)	$	0.16		$	(0.50	)	$	(4.56	)	$	(2.39	)
Cumulative effect of a change in accounting principle				—			—		$	(0.11	)		—			—

Net income (loss) per share, basic			$	(1.68	)	$	0.16		$	(0.61	)	$	(4.56	)	$	(2.39	)



	December 31,

	2002		2001		2000		1999		1998


	(In thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	154,323	$	166,176	$	191,699	$	100,216	$	31,052
Working capital		155,583		195,310		187,475		95,234		21,604
Total assets		179,878		222,543		212,514		108,847		35,730
Long-term obligations, less current portion		1,986		3,749		3,534		3,906		2,008
Redeemable convertible preferred stock		—		—		—		—		48,716
Total stockholders’ equity (deficit)		167,558		206,564		196,457		97,863		(17,654	)



		Years Ended December 31,

		2002			2001		2000		1999

(1)	Amortization of deferred stock compensation, net, related to the following:
	Research and development	$	(315	)	$	610	$	1,601	$	1,094
	Selling, general and administrative		693			1,930		2,944		2,791

	Total	$	378		$	2,540	$	4,545	$	3,885


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


					Obligations Under
			Operating		Sale-Leaseback
			Leases		Arrangements


			(In thousands)
Years ending December 31:
	2003		$	5,367	$	2,806
	2004			5,520		1,750
	2005			5,624		385
	2006			5,768		—
	Thereafter			10,240		—

		Total minimum lease and principal payments	$	32,519	$	4,941


	Our LabChip Systems may not achieve market acceptance, which could cause our revenue to grow slowly or decline.


	If we do not successfully introduce new products and expand the range of applications for our drug discovery systems, we may experience a decline in revenue or slow revenue growth and may not achieve or maintain profitability.


Item 1.	*Business*


	*Features of LabChip Systems*


	*Personal Laboratory Systems*


	*Automated Systems*


	We must continue to develop applications for our drug discovery systems.


	We expect to incur future operating losses and may not achieve profitability.


	Our operating results fluctuate significantly and any failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our stock price.


	Because a small number of customers and Agilent have accounted for, and are likely to continue to account for, a substantial portion of our revenue, our revenue could decline due to the loss of one of these customers or the termination of our agreement with Agilent.


	We are still early in the process of converting some customers from Technology Access Program agreements to purchasers of products and support services, and our revenue could be adversely impacted by this conversion.


	We rely on Agilent to manufacture, market and distribute the Agilent 2100 Bioanalyzer. Our revenue from the Agilent 2100 Bioanalyzer and LabChip development funding is dependent on Agilent’s success and continued investment in this product line.


	Amphora Discovery Corp., a related party and key customer, is a development stage company and we have no assurance of its continued purchases of our products and services.


	To the extent that Agilent’s sales of the Agilent 2100 Bioanalyzer and LabChip products are reduced for any reason, including competition from us or any of our future commercial partners, the future revenue we receive from Agilent would be reduced.


	If Agilent determines that we may be violating a third-party patent, it may terminate sales of the Agilent 2100 Bioanalyzer, which will decrease our revenue.


	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.


	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.


	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.


	Agilent may compete with us if our collaboration terminates after May 2003, which could reduce the potential revenue from our independent product sales.


	We have limited experience in manufacturing our products and may encounter manufacturing problems or delays, which could result in lost revenue.


	We are dependent on a single-source supplier for our glass and if we are unable to buy this component on a timely basis, we will not be able to deliver our products to customers.


	We depend on our key personnel, the loss of whom would impair our ability to compete.


	If a natural disaster strikes our manufacturing facility we would be unable to manufacture our products for a substantial amount of time and we would experience lost revenue.


	Failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and result in lower revenue.


	Potential acquisitions may have unexpected consequences or impose additional costs on us.


	Our stock price is extremely volatile, and you could lose a substantial portion of your investment.