Edgar Filing: APPLERA CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

1934

For the quarterly period ended March 31, 2007

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

1934

Commission file number: 001-04389

APPLERA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Delaware		06-1534213
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

301 Merritt 7, Norwalk, Connecticut		06851-1070
(Address of Principal Executive Offices)		(Zip Code)

(203) 840-2000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No x

As of the close of business on May 4, 2007, there were 184,950,314 shares of Applera Corporation-Applied Biosystems Group Common Stock and 78,849,191 shares of Applera Corporation-Celera Group Common Stock outstanding.

APPLERA CORPORATION

INDEX


Part I. Financial Information		Page

Item 1.	Financial Statements – (unaudited)

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2007 and 2006	1

	Condensed Consolidated Statements of Financial Position at March 31, 2007 and June 30, 2006	2

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2007 and 2006	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4-26

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

	Discussion of Applera Corporation	27-39

	Discussion of Applied Biosystems Group	40-45

	Discussion of Celera Group	46-48

	Market Risks	49

	Outlook	49-51

	Forward-Looking Statements and Risk Factors	51-64

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	65

Part II. Other Information

Item 1.	Legal Proceedings	66

Item 1A.	Risk Factors	66-69

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70-71

Item 6.	Exhibits	72

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

APPLERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(Dollar amounts in thousands except per share amounts)


	Three Months Ended March 31,						Nine Months Ended March 31,
	2007			2006			2007			2006
Products	$	438,585		$	399,197		$	1,272,513		$	1,140,835
Services		61,816			54,162			180,738			161,618
Other		38,651			44,402			113,059			107,223

Total Net Revenues		539,052			497,761			1,566,310			1,409,676

Products		203,432			190,718			609,893			553,794
Services		27,571			24,566			78,708			73,137
Other		5,137			3,720			11,019			10,779

Total Cost of Sales		236,140			219,004			699,620			637,710

Gross Margin		302,912			278,757			866,690			771,966

Selling, general and administrative		157,258			148,937			454,485			425,421
Research, development and engineering		67,268			67,326			187,330			210,100
Amortization of purchased intangible assets		2,841			1,281			8,420			3,000
Employee-related charges, asset impairments and other					19,995			6,013			21,226
Asset dispositions and legal settlements					1,629			(1,058	)		28,170
Acquired research and development					3,400			114,251			3,400

Operating Income		75,545			36,189			97,249			80,649

Gain on investments, net					3,125			209			7,628
Interest expense		(456	)		(153	)		(760	)		(318	)
Interest income		11,070			9,486			30,932			28,476
Other income (expense), net		2,405			845			4,861			3,553

Income before Income Taxes		88,564			49,492			132,491			119,988

Provision (benefit) for income taxes		17,666			(51,038	)		53,116			(19,806	)

Net Income	$	70,898		$	100,530		$	79,375		$	139,794

Applied Biosystems Group (see Note 4)
Net Income per Share
Basic	$	0.41		$	0.67		$	0.50		$	1.05
Diluted	$	0.39		$	0.65		$	0.48		$	1.02

Dividends Declared per Share	$	0.0850		$	0.0425		$	0.1700		$	0.1275

Celera Group (see Note 4)
Net Loss per Share
Basic and diluted	$	(0.06	)	$	(0.31	)	$	(0.15	)	$	(0.77	)

See accompanying notes to the Applera Corporation unaudited condensed consolidated financial statements.

APPLERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(unaudited)

(Dollar amounts in thousands)


	At March 31, 2007		At June 30, 2006

Assets

Current assets
Cash and cash equivalents	$ 332,346		$ 434,191
Short-term investments	680,757		509,252
Accounts receivable, net	412,241		382,509
Inventories, net	152,376		137,651
Prepaid expenses and other current assets	166,727		163,362
Total current assets	1,744,447		1,626,965
Property, plant and equipment, net	394,531		396,436
Goodwill and intangible assets, net	309,051		322,097
Other long-term assets	653,123		667,477

Total Assets	$3,101,152		$3,012,975

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable	$ 166,202		$ 201,691
Accrued salaries and wages	87,047		98,938
Current deferred tax liability	15,077		17,560
Accrued taxes on income	28,923		50,944
Other accrued expenses	251,491		239,157
Total current liabilities	548,740		608,290
Other long-term liabilities	213,555		200,351

Total Liabilities	762,295		808,641

Stockholders’ Equity

Capital stock
Applera Corporation–Applied Biosystems Group	2,134		2,132
Applera Corporation–Celera Group	787		773
Capital in excess of par value	2,234,841		2,192,559
Retained earnings	773,923		714,137
Accumulated other comprehensive income	51,491		40,947
Treasury stock, at cost	(724,319	)	(746,214	)

Total Stockholders’ Equity	2,338,857		2,204,334

Total Liabilities and Stockholders’ Equity	$3,101,152		$3,012,975

See accompanying notes to the Applera Corporation unaudited condensed consolidated financial statements.

APPLERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollar amounts in thousands)


	Nine months ended March 31,
	2007			2006
Operating Activities of Continuing Operations

Net income	$	79,375		$	139,794
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		64,361			68,051
Asset impairments		3,000			8,366
Employee-related charges and other		3,013			5,066
Share-based compensation programs		14,361			8,623
Deferred income taxes		7,658			(44,895	)
Sale of assets and legal settlements, net		(209	)		51,885
Acquired research and development		114,251			3,400
Changes in operating assets and liabilities:
Accounts receivable		(22,674	)		23,658
Inventories		(11,565	)		(9,387	)
Prepaid expenses and other assets		(5,485	)		(4,942	)
Accounts payable and other liabilities		(36,300	)		(71,136	)

Net Cash Provided by Operating Activities of Continuing Operations		209,786			178,483

Investing Activities of Continuing Operations
Additions to property, plant and equipment, net		(45,477	)		(36,058	)
Proceeds from maturities of available-for-sale investments		205,952			139,373
Proceeds from sales of available-for-sale investments		339,832			326,066
Purchases of available-for-sale investments		(714,001	)		(356,746	)
Acquisitions and investments, net of cash acquired		(121,673	)		(278,881	)
Proceeds from the sale of assets, net		372			7,910

Net Cash Used by Investing Activities of Continuing Operations		(334,995	)		(198,336	)

Financing Activities
Net change in loans payable					(49	)
Dividends		(23,241	)		(16,128	)
Purchases of common stock for treasury		(68,540	)		(457,120	)
Proceeds from stock issued for stock plans and other		111,135			124,571

Net Cash Provided (Used) by Financing Activities		19,354			(348,726	)

Effect of Exchange Rate Changes on Cash		4,010			(7,979	)

Net Change in Cash and Cash Equivalents		(101,845	)		(376,558	)

Cash and Cash Equivalents Beginning of Period		434,191			779,401

Cash and Cash Equivalents End of Period	$	332,346		$	402,843

See accompanying notes to the Applera Corporation unaudited condensed consolidated financial statements.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Interim Condensed Consolidated Financial Statements

Basis of Presentation

We prepare our unaudited interim condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, or GAAP. In preparing these statements, we are required to use estimates and assumptions. While we believe we have considered all available information, actual results could affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The results for the interim periods are not necessarily indicative of trends or future financial results. When used in these notes, the terms “Applera,” “Company,” “we,” “us,” or “our” mean Applera Corporation and its subsidiaries.

Through December 31, 2005, we were comprised of three business segments: the Applied Biosystems group, the Celera group, and Celera Diagnostics, a 50/50 joint venture between the Applied Biosystems group and the Celera group. Effective January 1, 2006, the Celera group acquired the Applied Biosystems group’s 50 percent interest in the Celera Diagnostics joint venture such that it now owns 100 percent of Celera Diagnostics. Effective December 1, 2006, we changed the name of our Celera Genomics group to Celera group to better reflect the Celera group’s focus and business strategy.

We consistently applied the accounting policies described in our 2006 Annual Report to Stockholders in preparing these unaudited interim financial statements. We made all adjustments that are necessary, in our opinion, for a fair statement of the results for the interim periods. These adjustments are of a normal recurring nature. We condensed or omitted from these interim financial statements several notes and other information included in our 2006 Annual Report to Stockholders. You should read these unaudited interim condensed consolidated financial statements in conjunction with our consolidated financial statements presented in our 2006 Annual Report to Stockholders. We have reclassified some prior year amounts in the condensed consolidated financial statements and notes for comparative purposes.

Recently Issued Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115,” which permits entities to measure some financial assets and liabilities at fair value on an instrument-by-instrument basis. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. SFAS No. 159 also establishes additional disclosure requirements. The provisions of SFAS No. 159 are effective for our 2009 fiscal year beginning July 1, 2008. We are currently evaluating the provisions of SFAS No. 159 and the resulting impact of adoption on our financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur through comprehensive income. The recognition and disclosure provisions of SFAS No. 158 are effective for our fiscal year ending June 30, 2007. Since we measure plan assets and obligations on an annual basis, we cannot estimate the impact of SFAS No. 158 in advance of our June 30, 2007 measurement date. The amount we will record in our statement of financial position related to this Statement depends on numerous future events and circumstances, such as the assumptions used to value our pension plan liabilities.

Also in September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for our 2009 fiscal year beginning July 1, 2008, and interim periods within that fiscal year. We do not believe that the adoption of SFAS No. 157 will have a material impact on our financial statements.

Also in September 2006, the Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 established an approach that requires quantification of financial statement errors based on the

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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effects of an error on a company’s balance sheet and income statement and related disclosures. Historically, we have used the “rollover approach” for quantifying identified financial statement misstatements. This approach quantifies misstatements based on the amount of the error originating in the current year. We are required to apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for our fiscal year ended June 30, 2007. We have evaluated the provisions of SAB 108 and determined that the adoption will not have a material impact on our financial statements.

Note 2 – Events Impacting Comparability

We are providing the following information on some actions taken by us or events that occurred in the periods indicated:


Income/(charge)	Three months ended March 31,			Nine months ended March 31,
(Dollar amounts in millions)	2007	2006		2007		2006
Severance and benefit costs	$ -	$(10.7	)	$ -		$(12.2	)
Asset impairments		(8.0	)	(3.0	)	(9.1	)
Excess lease space		(0.8	)			(0.8	)
Other		(1.4	)	(3.6	)	(1.4	)
Reduction of expected costs		0.9		0.6		2.3
Total employee-related charges, asset impairments and other	$ -	$(20.0	)	$ (6.0	)	$(21.2	)
Other events impacting comparability:
Revenue from sale of small molecule program	$ -	$ -		$ 2.5		$ -
Asset dispositions and legal settlements		(1.6	)	1.1		(28.2	)
Acquired research and development		(3.4	)	(114.3	)	(3.4	)
Investment gains		3.1				7.6
Tax items	8.4	63.3		18.2		48.8

Employee-Related Charges, Asset Impairments and Other

The following items have been recorded in the condensed consolidated statements of operations in employee-related charges, asset impairments and other, except as noted.

Celera group

Fiscal 2007

During the second quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $2.5 million, which was primarily comprised of a $3.0 million pre-tax charge for the write-down of the carrying amount of an owned facility that was impaired initially in fiscal 2006, partially offset by a pre-tax benefit of $0.6 million for a reduction in anticipated employee-related costs associated with severance and benefit charges recorded in the third and fourth quarters of fiscal 2006. Both of these items are discussed below.

During the first quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $3.5 million for its estimated share of a damage award in continuing litigation between Abbott Laboratories, our alliance partner, and Innogenetics N.V. In September 2006, a jury found that the sale of hepatitis C virus (“HCV”) genotyping analyte specific reagents (“ASRs”) products by Abbott willfully infringed a U.S. patent owned by Innogenetics and awarded Innogenetics $7.0 million in damages. In January 2007, the U.S. District Court for the Western District of Wisconsin ruled in favor of Innogenetics’ request for a permanent injunction, and as such, ordered Abbott to withdraw its products from the market. The Court also reversed the jury verdict of willful infringement and ruled that Abbott did not willfully infringe Innogenetics’ patent and denied Innogenetics’ request for enhanced damages and attorneys’ fees. Innogenetics did not name the Celera group as a party in this lawsuit, but the Celera group has an interest in these products and in the outcome of the litigation because the enjoined products are manufactured by the Celera group and sold through its alliance with Abbott. Also, as these products are part of its alliance with Abbott, the Celera group has agreed to share the cost of this litigation, including the damage award described above. Abbott is appealing the judgment as both Abbott and the Celera group

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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believe that Innogenetics’ patent is invalid and that the alliance’s HCV genotyping ASRs do not infringe Innogenetics’ patent. On March 8, 2007, the Court of Appeals for the Federal Circuit issued an order denying Abbott’s motion for a stay of the permanent injunction during the appeal process.

Fiscal 2006

During fiscal 2006, the Celera group recorded pre-tax charges related to its decision to exit its small molecule drug discovery and development programs and the integration of Celera Diagnostics into the Celera group. These charges consisted of the following components:


(Dollar amounts in millions)	Employee- Related Charges	Asset Impairments	Excess Lease Space	Other Disposal Costs	Total
Third quarter	$10.7	$8.0	$0.8	$1.4	$20.9
Fourth quarter	2.1	1.8	0.4	1.2	5.5
Total charges	12.8	9.8	1.2	2.6	26.4
Cash payments	7.9		0.2	2.4	10.5
Non-cash activity		9.3		0.2	9.5
Balance at June 30, 2006	4.9	0.5	1.0		6.4
Additional charge		3.0			3.0
Non-cash activity		3.0			3.0
Cash payments	4.2		0.7		4.9
Reduction of expected costs	0.6				0.6
Balance at March 31, 2007	$ 0.1	$0.5	$0.3	$ -	$ 0.9

The employee-related charges were severance costs primarily for staff reductions in small molecule drug discovery and development. All of the affected employees were notified and terminated by September 30, 2006. In the second quarter of fiscal 2007, the Celera group recorded a pre-tax benefit of $0.6 million for a reduction in anticipated employee-related costs associated with the severance and benefit charges recorded in the third and fourth quarters of fiscal 2006.

The asset impairment charges primarily related to a write-down of the carrying amount of an owned facility to its current estimated market value less estimated selling costs, as well as write-offs of leasehold improvements and equipment. This facility was reclassified into assets held for sale in fiscal 2006. In the second quarter of fiscal 2007, the Celera group recorded an additional $3.0 million pre-tax, non-cash charge to write-down the carrying amount of this facility.

Cash expenditures for these charges were funded by available cash. The remaining cash expenditures related to these charges are expected to be disbursed by December 31, 2007.

Charges prior to fiscal 2006

During the first nine months of fiscal 2007, the Celera group made net cash payments of approximately $1.1 million related to an excess facility lease space charge that was recorded prior to fiscal 2006. The remaining net cash expenditures of approximately $3.1 million related to this charge, which reflected an adjustment in the second quarter of fiscal 2007, are expected to be disbursed by fiscal 2011.

Applied Biosystems group

Fiscal 2006

In the second quarter of fiscal 2006, the Applied Biosystems group recorded pre-tax charges of $1.5 million for employee terminations related to the Applied Biosystems/MDS Sciex Instruments joint venture, a 50/50 joint venture between the Applied Biosystems group and MDS Inc. MDS recorded a restructuring charge for a reduction in workforce as part of its strategy to focus on the life sciences market. The $1.5 million represented the Applied Biosystems group’s share of the restructuring charge.

APPLERA CORPORATION

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The Applied Biosystems group recorded pre-tax benefits of $1.4 million in the first nine months of fiscal 2006 for reductions in anticipated employee-related costs associated with severance and benefit charges recorded in fiscal 2005.

In the first quarter of fiscal 2006, the Applied Biosystems group recorded a $1.1 million pre-tax impairment charge to write-down the carrying amount of its San Jose, California facility to its estimated market value at that time less estimated selling costs. This charge was in addition to a charge recorded in fiscal 2005. In the third quarter of fiscal 2006, the Applied Biosystems group entered into an agreement to sell the facility and recognized a $0.9 million pre-tax favorable adjustment to the charges previously recorded based on the sales price per the agreement. In the fourth quarter of fiscal 2006, the Applied Biosystems group completed the sale of the facility.

Charges prior to fiscal 2006

During the first nine months of fiscal 2007, the Applied Biosystems group made cash payments of $1.1 million for severance and employee benefits and office closures related to charges recorded prior to fiscal 2006. The remaining cash payments of $1.2 million as of March 31, 2007 are expected to be disbursed by fiscal 2011.

Other Events Impacting Comparability

Revenue from sale of small molecule program

In the second quarter of fiscal 2007, the Celera group recorded a pre-tax gain of $2.5 million in net revenues from the sale of a small molecule drug discovery and development program to Schering AG, which represented the remaining balance for this transaction. The Celera group recorded $2.5 million in the fourth quarter of fiscal 2006 when the agreement for the sale of the program was executed.

Asset dispositions and legal settlements

The following items have been recorded in the condensed consolidated statements of operations in asset dispositions and legal settlements.

Fiscal 2007

In the second quarter of fiscal 2007, the Applied Biosystems group recorded a $4.8 million pre-tax benefit related to the settlement of a patent infringement claim and a $3.0 million pre-tax benefit related to our collection from a third party of a portion of its liability relative to our settlement of a prior legal dispute. Additionally in the second quarter of fiscal 2007, the Celera group recorded a $2.4 million pre-tax benefit related to the settlement of a litigation matter associated with the former Online/Information Business, an information products and service business.

In the first quarter of fiscal 2007, the Applied Biosystems group recorded a $9.1 million pre-tax charge related to a settlement agreement entered into with another company which resolved outstanding legal disputes with that company.

Fiscal 2006

In the third quarter of fiscal 2006, we recorded a pre-tax charge of $35.0 million as a result of a settlement to resolve all outstanding legal disputes with Beckman Coulter regarding claims to some patented capillary electrophoresis technology and heated cover instrumentation technology. The Applied Biosystems group made a payment of $35 million to Beckman Coulter in the fourth quarter of fiscal 2006 for rights to some Beckman Coulter technology and for the release of any and all claims of infringement relating to DNA sequencer and thermal cycler products.

Also in the third quarter of fiscal 2006, we recorded a benefit of $33.4 million related to a settlement agreement involving patent infringement claims brought by us against Bio-Rad Laboratories, Inc. and MJ Research, Inc. (acquired by Bio-Rad after the commencement of litigation.) The settlement also resolved litigation brought by Bio-Rad against us for patent and trademark infringement, and counterclaims by us against Bio-Rad. By March 31, 2006, we had received all amounts related to the Bio-Rad settlement.

APPLERA CORPORATION

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past damages based on an increase in royalty rates for some of its DNA sequencing enzymes and kits that contain those enzymes, plus interest, fees, and other costs. As a result of this decision, the Applied Biosystems group recorded a pre-tax charge of $20.4 million in the first quarter of fiscal 2006, $19.5 million of which was recorded in asset dispositions and legal settlements. In the second quarter of fiscal 2006, we recorded an additional pre-tax charge of $3.1 million at the Applied Biosystems group as a result of the final determination of interest related to the arbitration award. We paid all amounts related to the arbitration matter in January 2006.

Acquired research and development

In the first quarter of fiscal 2007, the Applied Biosystems group recorded a $114.3 million charge to write off the value of acquired in-process research and development (“IPR&D”) in connection with the acquisition of Agencourt Personal Genomics, Inc. (“APG”). As of the acquisition date, the technological feasibility of the acquired project had not been established, and it was determined that the acquired project had no future alternative use. The determination of the amount attributed to acquired IPR&D took into consideration an independent appraisal performed by an outside consultant. See Note 3 for more information on this acquisition.

In the third quarter of fiscal 2006, the Applied Biosystems group recorded a $3.4 million charge to write off the value of acquired IPR&D in connection with the acquisition of the Research Products Division of Ambion, Inc., which was effective March 1, 2006. As of the acquisition date, the technological feasibility of the related projects had not been established, and it was determined that the acquired projects had no future alternative uses. The amount attributed to acquired IPR&D was based on an independent appraisal.

Investment gains

The Celera group recorded pre-tax gains of $4.5 million in the first quarter and $3.1 million in the third quarter of fiscal 2006 in the condensed consolidated statements of operations in gain on investments, net from the sale of non-strategic minority equity investments.

Tax items

Fiscal 2007

In the third quarter of fiscal 2007, we recorded a tax benefit of $8.4 million, primarily resulting from a $6.1 million valuation allowance release. The valuation allowance release was due to management’s reassessment of the future realization of foreign tax credits. Tax benefits identified during the tax return preparation accounted for the remaining tax benefits of $2.3 million. $8.0 million of the tax benefit was recorded at the Applied Biosystems group and $0.4 million was recorded at the Celera group.

In December 2006, the President of the United States signed the Tax Relief and Health Care Act of 2006, which extended the R&D tax credit from January 1, 2006 through December 31, 2007. The Applied Biosystems group and the Celera group included the estimated benefit of the current year R&D tax credit in the second quarter of fiscal 2007 estimated annual effective tax rate. In addition, the Celera group recorded a tax benefit of $1.0 million in the second quarter of fiscal 2007 related to the R&D tax credit generated between January 1, 2006 to June 30, 2006.

In the first quarter of fiscal 2007, the Applied Biosystems group recorded a tax benefit of $8.8 million related to a reduction in the valuation allowance for some German net operating loss carryforwards.

Fiscal 2006

In the third quarter of fiscal 2006, the Applied Biosystems group recorded tax benefits of $63.3 million related to a completed Internal Revenue Services (“IRS”) exam, state valuation allowance reversal, and R&D credits. The IRS completed the audit of Applera for the fiscal years 1996 through 2003 and, as a result, the Applied Biosystems group recorded favorable adjustments of $32.2 million to existing tax liabilities. A net of federal tax $24.8 million increase in the net state deferred tax assets primarily related to a reduction in valuation allowance and the write-off of some state deferred tax assets. The reduction in the valuation allowance was due to management’s reassessment of the future realization of deferred tax assets based on revised forecasted taxable income which includes the impact of a change in the apportionment of income to California, a reduction in R&D spending, and increased revenues and profits from our

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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worldwide operations. Also, Applera completed its assessment of fiscal years 2001 through 2004 R&D activities and, as a result, the Applied Biosystems group recorded a net benefit of $6.3 million for additional R&D credits.

During the second quarter of fiscal 2006, the Applied Biosystems group recorded estimated tax charges of $28.0 million related to repatriation of cash balances held outside the U.S. In the first quarter of fiscal 2006, the Applied Biosystems group recorded a tax benefit of $13.5 million related to the resolution of transfer pricing matters in Japan.

Note 3 – Acquisition

In July 2006, we acquired APG for approximately $121 million in cash, including transaction costs. At the time of the purchase, APG was a privately-held developer of next-generation genetic analysis technology. APG’s proprietary technology was based on stepwise ligation, a novel and very high throughput approach to DNA analysis.

In accordance with SFAS No. 141, “Business Combinations,” we accounted for this transaction as a purchase of assets rather than a business combination since APG did not meet the definition of a business as defined by Emerging Issues Task Force (“EITF”) Abstracts Issue 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.” The key considerations impacting our accounting determination were that APG was primarily focused on research and development activities, had not commenced principal operations, and did not have products, customers or revenues. We allocated the purchase price as follows:


(Dollar amounts in millions)	Fair Value
Property, plant and equipment	$ 1.4

Intangible asset – workforce	1.5
Acquired IPR&D	114.3

Deferred tax asset	4.7
Deferred tax liability	(0.5	)
Total purchase price	$121.4

We allocated this transaction to the Applied Biosystems group. The estimated fair value attributed to the workforce was determined based on the estimated cost to recruit, hire, and train a workforce comparable to that in existence at APG at the time of our purchase of its assets. At the time of the acquisition, approximately 20 employees of APG became employees of the Applied Biosystems group. The recorded fair value of the workforce intangible asset is being amortized over its expected period of benefit of 3 years.

At the time of the acquisition, APG was in the process of prosecuting certain patents, but none had been issued. Any licenses APG had were not exclusive and did not provide it a measurable technological advantage. As a result, neither the patents or licenses were deemed to be identifiable assets and no value was assigned.

As of the acquisition date, the technological feasibility of the acquired IPR&D project had not been established, and it was determined that the project had no future alternative use. The amount attributed to acquired IPR&D took into consideration an independent appraisal performed by an outside consultant and was developed using an income approach. The project was valued using a discounted cash flow model and a discount rate of 30%. This discount rate was based on an estimated weighted average cost of capital given APG’s stage and development lifecycle. The projected cash flows from the project were based on an estimate of future revenues and expenses attributable to the project. The valuation assumptions were made solely for the purpose of calculating projected cash flows and valuing the intangible assets acquired at the date of acquisition. Additionally, the amount of purchase price which was in excess of the identifiable assets was allocated to IPR&D, as goodwill could not result from an acquisition of assets. Actual results may vary from the projected results.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

The following table briefly describes the APG IPR&D project.


(Dollar amounts in millions)	At Acquisition Date
(Dollar amounts in millions)	Fair Value	Estimated Costs to Complete	Approximate Percentage Completed

Instruments	$ 66.6	$10.0	35%

Reagents	47.7	6.0	25%

Total	$114.3	$16.0

The instruments and reagents being developed are intended for very high throughput genetic analysis applications, including DNA sequencing and expression profiling. The initial instrument and reagents are expected to begin generating revenue in fiscal 2008. Enhanced platforms are expected to begin generating revenues in fiscal 2010 and fiscal 2013.

Note 4 – Earnings (Loss) per Share

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three months ended March 31:


	Applied Biosystems Group				Celera Group
(Dollar amounts in millions, except per share amounts)	2007		2006		2007		2006
Net income (loss)	$75.5		$124.4		$(4.5	)	$(23.3	)
Allocated intercompany sale of assets	0.1
Allocated interperiod taxes	(0.2	)	(0.6	)
Total net income (loss) allocated	75.4		123.8		(4.5	)	(23.3	)
Less dividends declared on common stock	15.7		7.9
Undistributed earnings (loss)	$59.7		$115.9		$(4.5	)	$(23.3	)

Allocation of basic earnings (loss) per share
Basic distributed earnings per share⁽¹⁾	$0.09		$0.04		$ -		$ -
Basic undistributed earnings (loss) per share	0.32		0.63		(0.06	)	(0.31	)
Total basic earnings (loss) per share	$0.41		$0.67		$(0.06	)	$(0.31	)

Allocation of diluted earnings (loss) per share
Diluted distributed earnings per share⁽¹⁾	$0.08		$0.04		$ -		$ -
Diluted undistributed earnings (loss) per share	0.31		0.61		(0.06	)	(0.31	)
Total diluted earnings (loss) per share	$0.39		$0.65		$(0.06	)	$(0.31	)

Weighted average number of common shares
Basic	183.8		183.5		78.5		75.8
Common stock equivalents	7.4		7.0
Diluted	191.2		190.5		78.5		75.8

⁽¹⁾ Amounts represent actual dividends per share distributed.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the nine months ended March 31:


	Applied Biosystems Group				Celera Group
(Dollar amounts in millions, except per share amounts)	2007		2006		2007		2006
Net income (loss)	$91.6		$198.4		$(12.0	)	$(57.4	)
Allocated intercompany sale of assets	(0.2	)	0.1
Allocated interperiod taxes			(1.3	)
Total net income (loss) allocated	91.4		197.2		(12.0	)	(57.4	)
Less dividends declared on common stock	31.3		24.0
Undistributed earnings (loss)	$60.1		$173.2		$(12.0	)	$(57.4	)

Allocation of basic earnings (loss) per share
Basic distributed earnings per share⁽¹⁾	$0.17		$0.13		$ -		$ -
Basic undistributed earnings (loss) per share	0.33		0.92		(0.15	)	(0.77	)
Total basic earnings (loss) per share	$0.50		$1.05		$(0.15	)	$(0.77	)

Allocation of diluted earnings (loss) per share
Diluted distributed earnings per share⁽¹⁾	$0.16		$0.13		$ -		$ -
Diluted undistributed earnings (loss) per share	0.32		0.89		(0.15	)	(0.77	)
Total diluted earnings (loss) per share	$0.48		$1.02		$(0.15	)	$(0.77	)

Weighted average number of common shares
Basic	183.1		188.3		78.2		75.0
Common stock equivalents	7.5		4.7
Diluted	190.6		193.0		78.2		75.0

⁽¹⁾ Amounts represent actual dividends per share distributed.

Options to purchase shares at exercise prices greater than the average market prices of our two classes of common stock were excluded from the computation of diluted earnings per share because the effect was antidilutive. Additionally, options to purchase shares of Applera Corporation-Celera Group Common Stock (“Applera-Celera stock”) were excluded from the computation of diluted loss per share because the effect was antidilutive. The following table presents the number of shares excluded from the diluted earnings and loss per share computations at March 31:


(Shares in millions)	2007	2006
Applera-Applied Biosystems stock	6.1	5.9
Applera-Celera stock	7.5	9.1

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 5 – Comprehensive Gain

The components of comprehensive gain (loss) are reflected net of tax, except for foreign currency translation adjustments, which are generally not adjusted for income taxes as they relate to indefinite investments in non–U.S. subsidiaries. Comprehensive gain was as follows:


	Three months ended March 31,				Nine months ended March 31,
(Dollar amounts in millions)	2007		2006		2007		2006
Net income	$70.9		$100.5		$79.4		$139.8
Other comprehensive gain (loss):
Net unrealized gains (losses) on investments	(0.7	)	0.2		2.5		0.1
Net unrealized gains on investments reclassified into earnings					(0.3	)
Net unrealized gains (losses) on hedge contracts	(0.5	)	(2.2	)			4.8
Net unrealized (gains) losses on hedge contracts reclassified into earnings	0.5		(5.8	)	1.0		(6.8	)
Foreign currency translation adjustments	0.9		4.1		7.3		(10.4	)
Total other comprehensive gain (loss)	0.2		(3.7	)	10.5		(12.3	)
Total comprehensive gain	$71.1		$ 96.8		$89.9		$127.5

Note 6 – Inventories

Inventories included the following components:


(Dollar amounts in millions)	March 31, 2007	June 30, 2006
Raw materials and supplies	$ 60.0	$ 44.3
Work-in-process	6.1	12.8
Finished products	86.3	80.6
Total inventories, net	$152.4	$137.7

Note 7 – Assets Held for Sale

In connection with the Celera group’s decision to exit its small molecule drug discovery and development programs during the third quarter of fiscal 2006, the Celera group decided to pursue the sale of its South San Francisco, California facility. See Note 8 to our consolidated financial statements included in our 2006 Annual Report to Stockholders. As a result of this decision, we reclassified $11.5 million of property, plant and equipment into assets held for sale in the third quarter of fiscal 2006 and recorded a $5.8 million pre-tax charge that represented the write-down of the carrying amount of this facility to its then current estimated market value less estimated selling costs. As discussed in Note 2, the Celera group recorded an additional $3.0 million pre-tax impairment charge for this facility during the second quarter of fiscal 2007. The sale of this facility is expected to occur by December 31, 2007.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 8 – Goodwill and Intangible Assets

The carrying amounts of our intangible assets were as follows:

March 31, 2007

June 30, 2006

(Dollar amounts in millions)

Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
Amortization

Amortized intangible assets

Acquired technology

$ 83.5

$54.6

$ 83.3

$44.5

Patents

29.9

24.6

29.9

22.9

Customer relationships

27.1

4.2

27.1

1.6

Other

1.8

0.6

0.3

Total amortized intangible assets

$142.3

$84.0

$140.6

$69.3

Unamortized intangible assets

Trade name

4.9

4.9

Total

$147.2

$84.0

$145.5

$69.3

Aggregate amortization expense was as follows:


	Three months ended March 31,		Nine months ended March 31,
(Dollar amounts in millions)	2007	2006	2007	2006
Applied Biosystems group	$4.4	$3.1	$13.4	$6.6
Celera group	0.6	0.6	1.7	2.8
Consolidated	$5.0	$3.7	$15.1	$9.4

We record amortization expense in cost of sales. However, amortization of acquisition-related intangible assets is recorded in the amortization of purchased intangible assets in the condensed consolidated statements of operations. At March 31, 2007, we estimated annual amortization expense of our intangible assets for each of the next five fiscal years as shown in the following table. Future acquisitions or impairment events could cause these amounts to change.


(Dollar amounts in millions)	Applied Biosystems Group	Celera Group	Consolidated
Remainder of fiscal 2007	$ 4.0	$0.4	$ 4.4
2008	14.4	0.6	15.0
2009	13.1	0.2	13.3
2010	10.4	0.2	10.6
2011	6.6	0.2	6.8

The carrying amount of goodwill at March 31, 2007 and June 30, 2006, was $245.9 million, of which $243.2 million was allocated to the Applied Biosystems group and $2.7 million was allocated to the Celera group.

Note 9 – Supplemental Cash Flow Information

Significant non-cash financing activity for the nine months ended March 31 was as follows:


(Dollar amounts in millions)	2007	2006
Dividends declared but not paid	$15.7	$ 7.9
Tax benefit related to employee stock options	21.8	11.9

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 10 – Guarantees

Leases

We provide lease-financing options to our customers through third party financing companies. For some leases, the financing companies have recourse to us for any unpaid principal balance on default by the customer. The leases typically have terms of two to three years and are secured by the underlying instrument. In the event of default by a customer, we would repossess the underlying instrument. We record revenues from these transactions on the completion of installation and acceptance of products and maintain a reserve for estimated losses on all lease transactions with recourse provisions based on historical default rates and current economic conditions. At March 31, 2007, the financing companies’ outstanding balance of lease receivables with recourse to us was $5.9 million. We believe that we could recover the entire balance from the resale of the underlying instruments in the event of default by all customers.

Pension Benefits

As part of the divestiture of our Analytical Instruments business in fiscal 1999, the purchaser of the Analytical Instruments business is paying for the pension benefits for employees of a former German subsidiary. However, we guaranteed payment of these pension benefits should the purchaser fail to do so, as these payment obligations were not transferable to the buyer under German law. The guaranteed payment obligation, which approximated $58.6 million at March 31, 2007, is not expected to have a material adverse effect on our condensed consolidated statement of financial position.

Indemnifications

In the normal course of business, we enter into some agreements under which we indemnify third parties for intellectual property infringement claims or claims arising from breaches of representations or warranties. In addition, from time to time, we provide indemnity protection to third parties for claims relating to past performance arising from undisclosed liabilities, product liabilities, environmental obligations, representations and warranties, and other claims. In these agreements, the scope and amount of remedy, or the period in which claims can be made, may be limited. It is not possible to determine the maximum potential amount of future payments, if any, due under these indemnities due to the conditional nature of the obligations and the unique facts and circumstances involved in each agreement. Historically, payments made related to these indemnifications have not been material to our consolidated financial position.

Product Warranties

We accrue warranty costs for product sales at the time of shipment based on historical experience as well as anticipated product performance. Our product warranties extend over a specified period of time ranging up to two years from the date of sale depending on the product subject to warranty. The product warranty accrual covers parts and labor for repairs and replacements covered by our product warranties. We periodically review the adequacy of our warranty reserve, and adjust, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred.

The following table provides an analysis of the warranty reserve for the nine months ended March 31:


(Dollar amounts in millions)		2007			2006
Balance beginning of period	$	10.6		$	14.0
Accruals for warranties		9.8			13.3
Usage of reserve		(10.0	)		(13.6	)
Other*		0.1			(2.5	)
Balance at March 31	$	10.5		$	11.2

* Other consists of accrual adjustments to reflect actual experience and currency translation.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 11 – Pension and Other Postretirement Benefits

The components of net pension and postretirement benefit expenses for the three and nine month periods ended March 31 were as follows:


	Three months ended March 31,				Nine months ended March 31,
(Dollar amounts in millions)	2007		2006		2007		2006
Pension
Service cost	$ 0.8		$ 0.9		$ 2.5		$ 2.4
Interest cost	11.1		8.9		32.9		27.0
Expected return on plan assets	(11.8	)	(9.5	)	(35.0	)	(28.7	)
Amortization of prior service cost	0.2		0.2		0.6		0.2
Amortization of losses	1.4		2.1		4.0		6.0
Net periodic expense	$ 1.7		$ 2.6		$ 5.0		$ 6.9
Postretirement Benefit
Service cost	$ -		$ 0.1		$ 0.1		$ 0.2
Interest cost	0.9		0.5		2.7		2.1
Amortization of (gains) losses	(0.1	)			(0.3	)	0.1
Net periodic expense	$ 0.8		$ 0.6		$ 2.5		$ 2.4

We contributed approximately $2 million to our foreign and non-qualified domestic plans during the nine months ended March 31, 2007, and expect to contribute an additional $1 million during the remainder of fiscal 2007. Based on the level of our contributions to the qualified U.S. pension plan during fiscal 2006 and previous years, combined with the performance of the assets invested in the plan, we do not expect to have to fund our qualified U.S. pension plan in fiscal 2007 in order to meet minimum statutory funding requirements. We made benefit payments of approximately $5 million under the postretirement plan during the nine months ended March 31, 2007, and we expect to make approximately $2 million of additional benefit payments during the remainder of fiscal 2007.

Note 12 – Contingencies

Legal Proceedings

We are involved in various lawsuits, arbitrations, investigations, and other legal actions from time to time with both private parties and governmental entities. These legal actions currently involve, for example, commercial, intellectual property, antitrust, environmental, securities, and employment matters. The following is a description of some claims we are currently defending, including some counterclaims brought against us in response to claims filed by us against others. We believe that we have meritorious defenses against the claims currently asserted against us, including those described below, and intend to defend them vigorously.

The company and some of its officers are defendants in a lawsuit brought on behalf of purchasers of Applera-Celera stock in our follow-on public offering of Applera-Celera stock completed on March 6, 2000. In the offering, we sold an aggregate of approximately 4.4 million shares of Applera-Celera stock at a public offering price of $225 per share. The lawsuit, which was commenced with the filing of several complaints in April and May 2000, is pending in the U.S. District Court for the District of Connecticut, and an amended consolidated complaint was filed on August 21, 2001. The consolidated complaint generally alleges that the prospectus used in connection with the offering was inaccurate or misleading because it failed to adequately disclose the alleged opposition of the Human Genome Project and two of its supporters, the governments of the U.S. and the U.K., to providing patent protection to our genomic-based products. Although the Celera group has never sought, or intended to seek, a patent on the basic human genome sequence data, the complaint also alleges that we did not adequately disclose the risk that the Celera group would not be able to patent this data. The consolidated complaint seeks monetary damages, rescission, costs and expenses, and other relief as the court deems proper. On March 31, 2005, the court certified the case as a class action.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

We filed a patent infringement action against Bio-Rad Laboratories, Inc., MJ Research, Inc., and Stratagene Corporation in the U.S. District Court for the District of Connecticut on November 9, 2004. The complaint alleges that the defendants infringe U.S. Patent No. 6,814,934. The complaint specifically alleges that the defendants’ activities involving instruments for real-time PCR detection result in infringement. We are seeking monetary damages, costs, expenses, injunctive relief, and other relief as the court deems proper. Bio-Rad and MJ Research answered the complaint and counterclaimed for declaratory relief that the ’934 patent was invalid and not infringed, but we settled all of these claims with Bio-Rad and MJ Research in February 2006. Stratagene also answered the complaint and counterclaimed for declaratory relief that the ’934 patent is invalid and not infringed. Stratagene is seeking dismissal of our complaint, a judgment that the ’934 patent is invalid and not infringed, costs and expenses, and other relief as the court deems proper.

On-Line Technologies, Inc. (since acquired by MKS Instruments, Inc.) filed claims for patent infringement, trade secret misappropriation, fraud, breach of contract and unfair trade practices against PerkinElmer, Inc., Sick UPA, GmbH, and us in the U.S. District Court for the District of Connecticut on or about November 3, 1999. The complaint alleged that products called the Spectrum One and the MCS100E manufactured by former divisions of the Applied Biosystems group, which divisions were sold to the co-defendants in this case, were based on allegedly proprietary information belonging to On-Line Technologies and that the MCS100E infringed U.S. Patent No. 5,440,143. On-Line Technologies was seeking monetary damages, costs, expenses, injunctive relief, and other relief. On April 2, 2003, the U.S. District Court for the District of Connecticut granted our summary judgment motion and dismissed all claims brought by On-Line Technologies. On-Line Technologies filed an appeal with the U.S. Court of Appeals for the Federal Circuit seeking reinstatement of its claims, and on October 13, 2004, the Court of Appeals upheld dismissal of all claims except for the patent infringement claim, which was to be decided by the District Court in subsequent proceedings. However, the parties settled all of these claims under an agreement that was effective January 18, 2007, and the District Court formally dismissed the case on January 26, 2007.

Enzo Biochem, Inc., Enzo Life Sciences, Inc., and Yale University filed a patent infringement action against us in the U.S. District Court for the District of Connecticut on June 8, 2004. The complaint alleges that we are infringing six patents. Four of these patents are assigned to Yale University and licensed exclusively to Enzo Biochem, i.e., U.S. Patent No. 4,476,928, entitled “Modified Nucleotides and Polynucleotides and Complexes Formed Therefrom,” U.S. Patent No. 5,449,767, entitled “Modified Nucleotides and Polynucleotides and Methods of Preparing Same,” U.S. Patent No. 5,328,824 entitled “Methods of Using Labeled Nucleotides,” and U.S. Patent No. 4,711,955, entitled “Modified Nucleotides and Polynucleotides and Methods of Preparing and Using Same.” The other two patents are assigned to Enzo Life Sciences, i.e., U.S. Patent No. 5,082,830 entitled “End Labeled Nucleotide Probe” and U.S. Patent No. 4,994,373 entitled “Methods and Structures Employing Compoundly – Labeled Polynucleotide Probes.” The allegedly infringing products include the Applied Biosystems group’s sequencing reagent kits, its TaqMan^® genotyping and gene expression assays, and the gene expression microarrays used with its Expression Array System. Enzo Biochem, Enzo Life Sciences, and Yale University are seeking monetary damages, costs, expenses, injunctive relief, and other relief as the court deems proper.

Molecular Diagnostics Laboratories filed a class action complaint against us and Hoffmann-La Roche, Inc. in the U.S. District Court for the District of Columbia on September 23, 2004, and filed an amended complaint on July 5, 2006. The amended complaint alleges anticompetitive conduct in connection with the sale of Taq DNA polymerase. The anticompetitive conduct is alleged to arise from the prosecution and enforcement of U.S. Patent No. 4,889,818. This patent is assigned to Hoffmann-La Roche, with whom we have a commercial relationship covering, among other things, this patent and the sale of Taq DNA polymerase. The complaint seeks monetary damages, costs, expenses, injunctive relief, and other relief as the court deems proper. On July 5, 2006, the court certified the case as a class action.

We are involved in several legal actions with Thermo Electron Corporation and its subsidiary Thermo Finnigan LLC. These legal actions commenced when we, together with MDS, Inc. and our Applied Biosystems/MDS Sciex Instruments joint venture with MDS, filed a patent infringement action against Thermo Electron in the U.S. District Court for the District of Delaware on September 3, 2004. The complaint alleges infringement by Thermo Electron of U.S. Patent No. 4,963,736, and seeks monetary damages, costs, expenses, and other relief as the court deems proper. Thermo Electron has answered the complaint and counterclaimed for declaratory relief that the ’736 patent is invalid, not infringed, and unenforceable, and is seeking dismissal of our complaint, a judgment that the ’736 patent is invalid, not

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

infringed, and unenforceable, costs and expenses, and other relief as the court deems proper. After the filing of the action against Thermo Electron, on December 8, 2004, Thermo Finnigan filed a patent infringement action against us in the U.S. District Court for the District of Delaware. The complaint alleges that we have infringed U.S. Patent No. 5,385,654 as a result of, for example, our Applied Biosystems group’s commercialization of the ABI PRISM^{^®} 3700 Genetic Analyzer. Thermo Finnigan is seeking monetary damages, costs, expenses, and other relief as the court deems proper. We have answered the complaint and counterclaimed for declaratory relief that the ’654 patent is invalid, not infringed, and unenforceable, and are seeking dismissal of Thermo Finnigan’s complaint, a judgment that the ’654 patent is invalid, not infringed, and unenforceable, costs and expenses, and other relief as the court deems proper. Thermo Finnigan subsequently filed a second patent infringement action against us, MDS, and the Applied Biosystems/MDS Sciex Instruments joint venture, in the U.S. District Court for the District of Delaware on February 23, 2005. The complaint alleges that we and the other defendants have infringed U.S. Patent No. 6,528,784 as a result of, for example, our commercialization of the API 5000™ LC/MS/MS system. Thermo Finnigan is seeking monetary damages, costs, expenses, and other relief as the court deems proper. We have answered the complaint and counterclaimed for declaratory relief that the ’784 patent is invalid and not infringed, and are seeking dismissal of Thermo Finnigan’s complaint, a judgment that the ’784 patent is invalid and not infringed, costs and expenses, and other relief as the court deems proper.

Other than for items deemed not material, we have not accrued for any potential losses in the legal proceedings described above because we believe that an adverse determination is not probable, and potential losses cannot be reasonably estimated, in any of these proceedings. However, the outcome of legal actions is inherently uncertain, and we cannot be sure that we will prevail in any of the proceedings described above or in our other legal actions. An adverse determination in some of our current legal actions, particularly the proceedings described above, could have a material adverse effect on us and our consolidated financial statements.

Note 13 – Segment and Consolidating Information

Presented below is our segment and consolidating financial information, including the allocation of expenses between our segments in accordance with our allocation policies, as well as other related party transactions, such as sales of products between segments. Our board of directors approves the method of allocating earnings to each class of common stock for purposes of calculating earnings per share. This determination is generally based on net income or loss amounts of the corresponding group calculated in accordance with GAAP, consistently applied.

See Note 16 to our consolidated financial statements included in our 2006 Annual Report to Stockholders for a detailed description of the segments and the management and allocation policies applicable to the attribution of assets, liabilities, revenues and expenses to the segments (which information is incorporated in this quarterly report by reference).

The following table summarizes revenues earned between segments:


	Three months ended March 31,			Nine months ended March 31,
(Dollar amounts in millions)	2007	2006		2007	2006
Applied Biosystems Group
Sales to the Celera group (a)	$0.7	$ 1.9		$3.1	$4.8
Celera Group
Royalties from the Applied Biosystems group (b)	$ -	$(0.1	)	$ -	$2.0

^(a)The Applied Biosystems group recorded net revenues from leased instruments and sales of consumables and project materials to the Celera group.

^(b) The Celera group recorded net revenues primarily for royalties generated from sales by the Applied Biosystems group of products integrating the Celera Discovery System^TM and some other genomic and biological information under a marketing and distribution agreement. The Celera group forgave future royalties related to this agreement as discussed in Note 15 to our consolidated financial statements included in our 2006 Annual Report to Stockholders.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Additionally, the Applied Biosystems group received, without reimbursement, $0.5 million in the first nine months of fiscal 2007 and $46.3 million in the first nine months of fiscal 2006 of tax benefits generated by the Celera group in accordance with our tax allocation policy. The fiscal 2007 tax benefits were reduced by $22.1 million for adjustments relating to the capitalization of fiscal 2006 research and development costs identified during the tax return preparation.

In the following consolidating financial information, the “Eliminations” column represents the elimination of intersegment activity.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Operations for the Three Months Ended March 31, 2007


(Dollar amounts in thousands)	Applied Biosystems Group	Celera Group		Eliminations		Consolidated

Products	$436,209	$ 2,376		$ -		$438,585
Services	61,806	10				61,816
Other	31,276	7,375				38,651
Net revenues from external customers	529,291	9,761		-		539,052
Intersegment revenues	682			(682	)
Total Net Revenues	529,973	9,761		(682	)	539,052
Products	200,494	3,432		(494	)	203,432
Services	27,648			(77	)	27,571
Other	3,217	1,920				5,137
Cost of Sales	231,359	5,352		(571	)	236,140
Gross Margin	298,614	4,409		(111	)	302,912
Selling, general and administrative	137,082	5,351		14,825		157,258
Corporate allocated expenses	13,111	1,720		(14,831	)
Research, development and engineering	54,378	13,041		(151	)	67,268
Amortization of purchased intangible assets	2,841					2,841
Operating Income (Loss)	91,202	(15,703	)	46		75,545
Interest income, net	3,263	7,351				10,614
Other income (expense), net	2,277	128				2,405
Income (Loss) before Income Taxes	96,742	(8,224	)	46		88,564
Provision (benefit) for income taxes	21,210	(3,772	)	228		17,666
Net Income (Loss)	$ 75,532	$ (4,452	)	$ (182	)	$ 70,898

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Operations for the Nine Months Ended March 31, 2007


(Dollar amounts in thousands)	Applied Biosystems Group	Celera Group		Eliminations		Consolidated

Products	$1,264,893	$ 7,620		$ -		$1,272,513
Services	180,728	10				180,738
Other	87,481	25,578				113,059
Net revenues from external customers	1,533,102	33,208		-		1,566,310
Intersegment revenues	3,124			(3,124	)
Total Net Revenues	1,536,226	33,208		(3,124	)	1,566,310
Products	599,775	11,473		(1,355	)	609,893
Services	78,939			(231	)	78,708
Other	8,843	2,176				11,019
Cost of Sales	687,557	13,649		(1,586	)	699,620
Gross Margin	848,669	19,559		(1,538	)	866,690
Selling, general and administrative	394,856	16,555		43,074		454,485
Corporate allocated expenses	38,011	5,082		(43,093	)
Research, development and engineering	150,369	38,197		(1,236	)	187,330
Amortization of purchased intangible assets	8,420					8,420
Employee-related charges, asset impairments, and other		6,013				6,013
Asset dispositions and legal settlements	1,299	(2,357	)			(1,058	)
Acquired research and development	114,251					114,251
Operating Income (Loss)	141,463	(43,931	)	(283	)	97,249
Gain on investments, net	209					209
Interest income, net	9,284	20,888				30,172
Other income (expense), net	4,518	343				4,861
Income (Loss) before Income Taxes	155,474	(22,700	)	(283	)	132,491
Provision (benefit) for income taxes	63,882	(10,711	)	(55	)	53,116
Net Income (Loss)	$ 91,592	$(11,989	)	$ (228	)	$ 79,375

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Financial Position at March 31, 2007


(Dollar amounts in thousands)	Applied Biosystems Group	Celera Group	Eliminations		Consolidated
Assets
Current assets
Cash and cash equivalents	$ 305,821	$ 26,525	$ -		$ 332,346
Short-term investments	142,696	538,061			680,757
Accounts receivable, net	406,810	5,774	(343	)	412,241
Inventories, net	145,181	7,514	(319	)	152,376
Prepaid expenses and other current assets	136,846	31,835	(1,954	)	166,727
Total current assets	1,137,354	609,709	(2,616	)	1,744,447
Property, plant and equipment, net	386,872	7,892	(233	)	394,531
Goodwill and intangible assets, net	304,822	4,229			309,051
Other long-term assets	503,186	149,887	50		653,123
Total Assets	$2,332,234	$771,717	$(2,799	)	$3,101,152

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$ 164,722	$ 3,217	$(1,737	)	$ 166,202
Accrued salaries and wages	80,562	6,485			87,047
Current deferred tax liability	15,077				15,077
Accrued taxes on income	14,489	14,434			28,923
Other accrued expenses	242,744	9,520	(773	)	251,491
Total current liabilities	517,594	33,656	(2,510	)	548,740
Other long-term liabilities	208,307	5,474	(226	)	213,555
Total Liabilities	725,901	39,130	(2,736	)	762,295

Total Stockholders’ Equity	1,606,333	732,587	(63	)	2,338,857
Total Liabilities and Stockholders’ Equity	$2,332,234	$771,717	$(2,799	)	$3,101,152

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended March 31, 2007


(Dollar amounts in thousands)	Applied Biosystems Group		Celera Group		Eliminations		Consolidated
Operating Activities of Continuing Operations
Net income (loss)	$ 91,592		$ (11,989)		$ (228)		$ 79,375
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization	59,294		5,302		(235	)	64,361
Asset impairments			3,000				3,000
Employee-related charges and other			3,013				3,013
Share-based compensation programs	12,042		2,319				14,361
Deferred income taxes	20,507		(10,850	)	(1,999	)	7,658
Sale of assets and legal settlements, net	(209	)					(209	)
Acquired research and development	114,251						114,251
Nonreimbursable utilization of intergroup tax benefits	481		(481	)
Changes in operating assets and liabilities:
Accounts receivable	(26,139	)	3,852		(387	)	(22,674	)
Inventories	(12,604	)	720		319		(11,565	)
Prepaid expenses and other assets	2,584		(4,624	)	(3,445	)	(5,485	)
Accounts payable and other liabilities	(30,960	)	(11,188	)	5,848		(36,300	)
Net Cash Provided (Used) by Operating Activities of Continuing Operations	230,839		(20,926	)	(127	)	209,786
Investing Activities of Continuing Operations
Additions to property, plant and equipment, net	(43,808	)	(1,796	)	127		(45,477	)
Proceeds from maturities of available-for-sale investments			205,952				205,952
Proceeds from sales of available-for-sale investments	55,672		284,160				339,832
Purchases of available-for-sale investments	(198,368	)	(515,633	)			(714,001	)
Acquisitions and investments, net of cash acquired	(121,673	)					(121,673	)
Proceeds from the sale of assets, net	372						372
Net Cash Used by Investing Activities of Continuing Operations	(307,805	)	(27,317	)	127		(334,995	)
Financing Activities
Dividends	(23,241	)					(23,241	)
Purchases of common stock for treasury	(68,540	)					(68,540	)
Proceeds from stock issued for stock plans and other	96,637		14,498				111,135
Net Cash Provided by Financing Activities	4,856		14,498		-		19,354
Effect of Exchange Rate Changes on Cash	4,010						4,010
Net Change in Cash and Cash Equivalents	(68,100	)	(33,745	)	-		(101,845	)
Cash and Cash Equivalents Beginning of Period	373,921		60,270				434,191
Cash and Cash Equivalents End of Period	$ 305,821		$ 26,525		$ -		$ 332,346

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Operations for the Three Months Ended March 31, 2006


(Dollar amounts in thousands)	Applied Biosystems Group		Celera Group		Eliminations		Consolidated

Products	$396,595		$ 2,602		$ -		$399,197
Services	54,152		10				54,162
Other	37,993		6,409				44,402
Net revenues from external customers	488,740		9,021		-		497,761
Intersegment revenues	1,968		(60	)	(1,908	)
Total Net Revenues	490,708		8,961		(1,908	)	497,761
Products	188,194		3,376		(852	)	190,718
Services	24,096		578		(108	)	24,566
Other	2,670		1,050				3,720
Total Cost of Sales	214,960		5,004		(960	)	219,004
Gross Margin	275,748		3,957		(948	)	278,757
Selling, general and administrative	128,540		6,308		14,089		148,937
Corporate allocated expenses	12,022		2,074		(14,096	)
Research, development and engineering	47,974		20,324		(972	)	67,326
Amortization of purchased intangible assets	1,281						1,281
Employee-related charges, asset impairments and other	(875	)	20,870				19,995
Asset dispositions and legal settlements	1,629						1,629
Acquired research and development	3,400						3,400
Operating Income (Loss)	81,777		(45,619	)	31		36,189
Gain on investments, net			3,125				3,125
Interest income, net	4,103		5,230				9,333
Other income (expense), net	862		(17	)			845
Income (Loss) before Income Taxes	86,742		(37,281	)	31		49,492
Benefit for income taxes	37,607		13,975		(544	)	51,038
Net Income (Loss)	$124,349		$(23,306	)	$ (513	)	$100,530

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Operations for the Nine Months Ended March 31, 2006


(Dollar amounts in thousands)	Applied Biosystems Group	Celera Group		Eliminations		Consolidated

Products	$1,132,598	$ 8,237		$ -		$1,140,835
Services	160,577	1,041				161,618
Other	90,047	17,176				107,223
Net revenues from external customers	1,383,222	26,454		-		1,409,676
Intersegment revenues	4,867	1,964		(6,831	)
Total Net Revenues	1,388,089	28,418		(6,831	)	1,409,676
Products	548,902	8,987		(4,095	)	553,794
Services	70,628	2,895		(386	)	73,137
Other	8,107	2,672				10,779
Total Cost of Sales	627,637	14,554		(4,481	)	637,710
Gross Margin	760,452	13,864		(2,350	)	771,966
Selling, general and administrative	365,804	20,959		38,658		425,421
Corporate allocated expenses	32,601	6,068		(38,669	)
Research, development and engineering	133,982	78,575		(2,457	)	210,100
Amortization of purchased intangible assets	1,909	1,091				3,000
Employee-related charges, asset impairments and other	356	20,870				21,226
Asset dispositions and legal settlements	27,495	675				28,170
Acquired research and development	3,400					3,400
Operating Income (Loss)	194,905	(114,374	)	118		80,649
Gain on investments, net		7,628				7,628
Interest income, net	11,758	16,400				28,158
Other income (expense), net	3,767	(214	)			3,553
Income (Loss) before Income Taxes	210,430	(90,560	)	118		119,988
Provision (benefit) for income taxes	12,052	(33,175	)	1,317		(19,806	)
Net Income (Loss)	$ 198,378	$ (57,385	)	$ (1,199	)	$ 139,794

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Financial Position at June 30, 2006


(Dollar amounts in thousands)	Applied Biosystems Group	Celera Group	Eliminations		Consolidated
Assets
Current assets
Cash and cash equivalents	$ 373,921	$ 60,270	$ -		$ 434,191
Short-term investments		509,252			509,252
Accounts receivable, net	373,613	9,626	(730	)	382,509
Inventories, net	129,417	8,234			137,651
Prepaid expenses and other current assets	135,711	32,966	(5,315	)	163,362
Total current assets	1,012,662	620,348	(6,045	)	1,626,965
Property, plant and equipment, net	387,170	9,607	(341	)	396,436
Goodwill and intangible assets, net	316,269	5,828			322,097
Other long-term assets	529,671	137,895	(89	)	667,477
Total Assets	$2,245,772	$773,678	$(6,475	)	$3,012,975

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$ 200,591	$ 6,497	$(5,397	)	$201,691
Accrued salaries and wages	89,883	9,055			98,938
Current deferred tax liability	17,560				17,560
Accrued taxes on income	38,157	12,787			50,944
Other accrued expenses	227,001	13,089	(933	)	239,157
Total current liabilities	573,192	41,428	(6,330	)	608,290
Other long-term liabilities	194,844	5,817	(310	)	200,351
Total Liabilities	768,036	47,245	(6,640	)	808,641

Total Stockholders’ Equity	1,477,736	726,433	165		2,204,334
Total Liabilities and Stockholders’ Equity	$2,245,772	$773,678	$(6,475	)	$3,012,975

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended March 31, 2006


(Dollar amounts in thousands)	Applied Biosystems Group		Celera Group		Eliminations		Consolidated
Operating Activities of Continuing Operations
Net income (loss)	$ 198,378		$ (57,385	)	$(1,199	)	$ 139,794
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization	56,642		11,734		(325	)	68,051
Asset impairments	215		8,151				8,366
Employee-related charges and other	(1,409	)	6,475				5,066
Share-based compensation programs	7,632		991				8,623
Deferred income taxes	(64,077	)	18,621		561		(44,895	)
Sale of assets and legal settlements, net	58,829		(6,944	)			51,885
Acquired research and development	3,400						3,400
Nonreimbursable utilization of intergroup tax benefits	46,308		(46,308	)
Changes in operating assets and liabilities:
Accounts receivable	24,116		(1,006	)	548		23,658
Inventories	(9,277	)	(110	)			(9,387	)
Prepaid expenses and other assets	(4,508	)	706		(1,140	)	(4,942	)
Accounts payable and other liabilities	(52,543	)	(20,054	)	1,461		(71,136	)
Net Cash Provided (Used) by Operating Activities of Continuing Operations	263,706		(85,129	)	(94	)	178,483
Investing Activities of Continuing Operations
Additions to property, plant and equipment, net	(31,705	)	(4,516	)	163		(36,058	)
Proceeds from maturities of available-for-sale investments			139,373				139,373
Proceeds from sales of available-for-sale investments	104,877		221,189				326,066
Purchases of available-for-sale investments	(104,877	)	(251,869	)			(356,746	)
Acquisitions and investments, net of cash acquired	(278,881	)					(278,881	)
Proceeds from the sale of assets, net			7,979		(69	)	7,910
Net Cash Provided (Used) by Investing Activities of Continuing Operations	(310,586	)	112,156		94		(198,336	)
Financing Activities
Net change in loans payable	(49	)					(49	)
Dividends	(16,128	)					(16,128	)
Net cash funding from groups	25,644		(25,644	)
Purchases of common stock for treasury	(457,120	)					(457,120	)
Proceeds from stock issued for stock plans and other	104,628		19,943				124,571
Net Cash Used by Financing Activities	(343,025	)	(5,701	)	-		(348,726	)
Effect of Exchange Rate Changes on Cash	(7,979	)					(7,979	)
Net Change in Cash and Cash Equivalents	(397,884	)	21,326		-		(376,558	)
Cash and Cash Equivalents Beginning of Period	756,236		23,165				779,401
Cash and Cash Equivalents End of Period	$ 358,352		$ 44,491		$ -		$ 402,843

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

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of the following management’s discussion and analysis is to provide an overview of the business of Applera Corporation to help facilitate an understanding of significant factors influencing our historical operating results, financial condition, and cash flows and also to convey our expectations of the potential impact of known trends, events, or uncertainties that may impact our future results. You should read this discussion in conjunction with our consolidated financial statements and related notes included in this report and in our 2006 Annual Report to Stockholders. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. When used in this management discussion, the terms “Applera,” “Company,” “we,” “us,” or “our” mean Applera Corporation and its subsidiaries.

We have reclassified some prior year amounts for comparative purposes.

Overview

We conduct business through two business segments: the Applied Biosystems group and the Celera group.

The Applied Biosystems group serves the life science industry and research community by developing and marketing instrument-based systems, consumables, software, and services. Its customers use these tools to analyze nucleic acids (DNA and RNA), small molecules, and proteins to make scientific discoveries and develop new pharmaceuticals. The Applied Biosystems group’s products also serve the needs of some markets outside of life science research, which we refer to as “applied markets,” such as the fields of: human identity testing (forensic and paternity testing); “biosecurity,” which refers to products needed in response to the threat of biological terrorism and other malicious, accidental, and natural biological dangers; and quality and safety testing, for example in food and the environment.

The Celera group is primarily a molecular diagnostics business that is using proprietary genomics and proteomics discovery platforms to identify and validate novel diagnostic markers, and is developing diagnostic products based on these markers as well as other known markers. The Celera group maintains a strategic alliance with Abbott Laboratories for the development and commercialization of molecular, or nucleic acid-based, diagnostic products, and it is also developing new diagnostic products outside of this alliance. Through its genomics and proteomics research efforts, the Celera group is also discovering and validating therapeutic targets, and it is seeking strategic partnerships to develop therapeutic products based on these discovered targets.

From April 2001 through December 31, 2005, we operated a diagnostic business known as Celera Diagnostics. This business was a 50/50 joint venture between the Applied Biosystems group and the Celera group. Effective January 1, 2006, the Celera group acquired the Applied Biosystems group’s 50 percent interest in the Celera Diagnostics joint venture such that it now owns 100 percent of Celera Diagnostics. Effective December 1, 2006, we changed the name of our Celera Genomics group to Celera group to better reflect the Celera group’s focus and business strategy.

In fiscal 1999, as part of a recapitalization of our Company, we created two classes of common stock referred to as “tracking” stocks. Tracking stock is a class of stock of a corporation intended to “track” or reflect the relative performance of a specific business within the corporation.

Applera Corporation-Applied Biosystems Group Common Stock (“Applera-Applied Biosystems stock”) is listed on the New York Stock Exchange under the ticker symbol “ABI” and is intended to reflect the relative performance of the Applied Biosystems group. Applera Corporation-Celera Group Common Stock (“Applera-Celera stock”) is listed on the New York Stock Exchange under the ticker symbol “CRA” and is intended to reflect the relative performance of the Celera group. There is no single security that represents the performance of Applera as a whole.

Holders of Applera-Applied Biosystems stock and holders of Applera-Celera stock are stockholders of Applera. The Applied Biosystems group and the Celera group are not separate legal entities, and holders of these stocks are stockholders of a single company, Applera. As a result, holders of these stocks are subject to all of the risks associated with an investment in Applera and all of its businesses, assets, and liabilities. The Applied Biosystems group and the Celera group do not have separate boards of directors. Applera has one board of directors, which will make any decision

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

in accordance with its good faith business judgment that the decision is in the best interests of Applera and all of its stockholders as a whole.

More information about the risks relating to our capital structure, particularly our two classes of capital stock, is contained in our Annual Report on Form 10-K for fiscal 2006 filed with the Securities and Exchange Commission.

Our fiscal year ends on June 30. The financial information for both segments is presented in Note 13 to our condensed consolidated financial statements, Segment and Consolidating Information. Management’s discussion and analysis addresses the consolidated financial results followed by the discussions of our two segments.

Business Developments:

Listed below are significant business developments since the filing of our last Quarterly Report on Form 10-Q on February 7, 2007.

Applied Biosystems Group

In April, the Applied Biosystems group announced plans to commercialize a first-of-its-kind mass spectrometry workstation designed to help pharmaceutical companies accelerate the drug compound screening process. The FlashQuant^™ platform is a first-of-its-kind front-end MALDI ionization system designed to run with the 4000 triple quad and the 4000 Q Trap^® system. The FlashQuant platform promises to greatly speed up compound screening in drug discovery for small molecule analysis.

In March, the Applied Biosystems group announced the official opening of its Asia Pacific Application Support Center in Shanghai, China. The Center is expected to help drive China’s life sciences industry by providing a facility where researchers will have access to one of the region’s most comprehensive displays of life science tools under one roof. The facility features state-of-the-art instruments and applications that span the life science continuum, including pharmaceutical and biotech research, health care and clinical research, forensic analysis to aid criminal investigations, and environmental and food safety testing.

In February, the Applied Biosystems group announced a new reagent kit, the BigDye^® XTerminator^™ Purification Kit, to address the often cumbersome purification or ‘clean-up’ step in DNA sequencing workflows. The new kit produces higher quality DNA sequence data faster and with significantly fewer steps than other purification methods.

Also in February, the Applied Biosystems group announced the world’s first commercially available reagent kit for generating genetic profiles from aged, compromised, or damaged DNA samples. The new AmpFlSTR^® MiniFiler^™ PCR Amplification Kit is expected to enable an increase in the number of solved criminal cases, in addition to aiding in the investigation of missing persons.

Celera Group

In April, the Celera group and Laboratory Corporation of America^® Holdings (“LabCorp”) announced that they signed an agreement granting LabCorp a license to the Celera group’s breast cancer metastasis and estrogen/progesterone receptor discoveries. The license agreement allows LabCorp to select from among the Celera group’s genomic findings to develop and commercialize two molecular oncology laboratory service tests. This follows the presentation of data by the Celera group scientists in February at the 24th annual Miami Breast Cancer Conference in Miami Beach, Florida, supporting the Celera group’s multi-gene expression prognostic constellation as a predictor of distant metastasis in Tamoxifen-treated breast cancer patients.

In April, scientists at the Celera group and various collaborators published data from the Atherosclerosis Risk in Communities Study on the prediction of coronary heart disease (“CHD”) risk using a genetic risk score in the American Journal of Epidemiology. This study demonstrated the concept of aggregating information from multiple single nucleotide polymorphisms into a risk score and indicates that this risk score can improve prediction of incident CHD.

In April, scientists from the Celera group and Seattle Genetics presented data from two studies on CD133/prominin-1 at the annual American Association for Cancer Research meeting in Los Angeles, CA. CD133 is a cell-surface marker for blood stem/progenitor cells that has also been identified as a cancer stem cell marker in various cancers. Both studies showed the potential therapeutic use of antibody drug conjugates (“ADCs”) targeted to CD133 utilizing Seattle Genetics’ ADC technology in the treatment of various solid tumors. Seattle Genetics selected CD133 for further investigation in August 2005 as part of the collaboration between the two companies that was started in July 2004.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

In April, Abbott received CE marking for a real-time PCR (“polymerase chain reaction”) test for monitoring hepatitis B (“HBV”) viral load in patients, allowing the test to be marketed in the European Union. This test detects nearly all known forms of HBV genotypes and enables physicians to better manage patient therapy. The Abbott RealTime HBV assay has been developed for use on the Abbott m2000 system, an automated instrument for DNA and RNA testing in molecular laboratories.

In February, the Celera group published data in Human Molecular Genetics from its research studies identifying several candidate genetic markers associated with late-onset Alzheimer’s disease (“LOAD”), including markers in multiple genes that have never been associated with LOAD. Two of these genes are PCK1, a gene that regulates blood glucose levels, and GALP, a gene that is modulated by insulin and regulates food intake, suggesting a link between Alzheimer’s disease and irregular glucose/insulin levels.

Innogenetics N.V., Ghent, Belgium, brought a patent infringement suit against Abbott in September 2005 covering the U.S. sale of hepatitis C virus (“HCV”) genotyping products. Innogenetics did not name the Celera group as a party in this lawsuit, but the Celera group has an interest in these products and in the outcome of the litigation because the products are manufactured by the Celera group and sold through its alliance with Abbott. In September 2006, a jury in Madison, Wisconsin found that the sale of these products willfully infringed a U.S. patent owned by Innogenetics. In January 2007, the U.S. District Court for the Western District of Wisconsin ruled in favor of Innogenetics’ request for a permanent injunction, and as such, ordered Abbott to withdraw its products from the market. The court also reversed the jury verdict of willful infringement, ruled that Abbott did not willfully infringe Innogenetics’ patent, and denied Innogenetics’ request for enhanced damages and attorneys’ fees. Abbott is appealing the judgment as both Abbott and the Celera group believe that Innogenetics’ patent is invalid and that the alliance’s HCV genotyping analyte specific reagents (“ASRs”) do not infringe Innogenetics’ patent. On March 8, 2007, the Court of Appeals for the Federal Circuit issued an order denying Abbott’s motion for a stay of the permanent injunction during the appeal process.

Critical Accounting Estimates

There were no material changes to our critical accounting estimates during the first nine months of fiscal 2007. For further information on our critical accounting estimates, refer to the discussion contained in the management’s discussion and analysis section of our 2006 Annual Report to Stockholders (which discussion is incorporated in this quarterly report by reference).

Events Impacting Comparability

We are providing the following information on some actions taken by us or events that occurred in the periods indicated. We describe the effect of these items on our reported earnings for the purpose of providing you with a better understanding of our on-going operations. You should consider these items when making comparisons to past performance and assessing prospects for future results.


	Three months ended			Nine months ended
Income/(charge)	March 31,			March 31,
(Dollar amounts in millions)	2007	2006		2007		2006
Severance and benefit costs	$ -	$(10.7	)	$ -		$(12.2	)
Asset impairments		(8.0	)	(3.0	)	(9.1	)
Excess lease space		(0.8	)			(0.8	)
Other		(1.4	)	(3.6	)	(1.4	)
Reduction of expected costs		0.9		0.6		2.3
Total employee-related charges, asset impairments and other	$ -	$(20.0	)	$ (6.0	)	$(21.2	)
Other events impacting comparability:
Revenue from sale of small molecule program	$ -	$ -		$ 2.5		$ -
Asset dispositions and legal settlements		(1.6	)	1.1		(28.2	)
Acquired research and development		(3.4	)	(114.3	)	(3.4	)
Investment gains		3.1				7.6
Tax items	8.4	63.3		18.2		48.8

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Acquisition

In July 2006, we acquired Agencourt Personal Genomics, Inc. (“APG”) for approximately $121 million in cash, including transaction costs. At the time of the purchase, APG was a privately-held developer of next-generation genetic analysis technology. APG’s proprietary technology was based on stepwise ligation, a novel and very high throughput approach to DNA analysis. We allocated this transaction to the Applied Biosystems group.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” we accounted for this transaction as a purchase of assets rather than a business combination since APG did not meet the definition of a business as defined by Emerging Issues Task Force (“EITF”) Abstracts Issue 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.” The key considerations impacting our accounting determination were that APG was primarily focused on research and development activities, had not commenced principal operations, and did not have products, customers or revenues. For further information on the purchase of APG, see Note 3 to our condensed consolidated financial statements.

Acquired Research and Development

In the first quarter of fiscal 2007, the Applied Biosystems group recorded a $114.3 million charge to write off the value of acquired in-process research and development (“IPR&D”) in connection with the acquisition of APG. As of the acquisition date, the technological feasibility of the acquired IPR&D project had not been established, and it was determined that the project had no future alternative use. The project being developed, which consists of both an instrument and reagents, is intended for very high throughput genetic analysis applications, including DNA sequencing and expression profiling.

At the date of acquisition, the project was in the development stage and approximately 30% complete. The remaining efforts for the instrument are focused on developing and converting the prototype to an instrument that can be shipped globally. We expect the overall throughput of the instrument to be increased significantly from the prototype instrument prior to the commercial launch. The remaining efforts for the reagents are currently focused on developing reagents that can be manufactured at scale and produce results that can be reproduced in customer laboratories. The nature and timing of these remaining efforts are dependent on successful internal testing of both the instrument and the reagents. The following table briefly describes the APG project.

At Acquisition Date

At March 31, 2007

(Dollar amounts in millions)

Fair
Value

Estimated Costs
to Complete

Approximate
Percentage
Completed

Estimated Costs
to Complete

Approximate
Percentage
Completed

Instruments

$ 66.6

$10.0

$ 8.0

Reagents

47.7

6.0

4.5

Total

$114.3

$16.0

$12.5

The initial instrument and reagents are expected to begin generating revenue in fiscal 2008. Enhanced platforms are expected to begin generating revenues in fiscal 2010 and fiscal 2013. As of March 31, 2007, the total project costs are expected to be approximately $27 million. The increase in costs to complete the project is expected to be substantially offset by reductions to other planned R&D projects.

At the time of the filing of this report, we do not anticipate any delays in our development timeline; however, unanticipated difficulties or delays in developing and bringing this project to market could harm the Applied Biosystems group’s future operating results. At the time of the acquisition, we believed there was a reasonable chance of realizing the economic return expected from the acquired in-process technology. However, as there is risk associated with the realization of benefits related to commercialization of an in-process project due to, among other things, rapidly changing customer needs, the complexity of the technology, growing competitive pressures, and potentially conflicting intellectual property rights of third parties, there can be no assurance that any project will meet commercial success. Failure to successfully commercialize an in-process project would result in the loss of the expected economic return inherent in the fair value allocation.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

which was effective March 1, 2006. As of the acquisition date, the technological feasibility of the related projects had not been established, and it was determined that the acquired projects had no future alternative uses. The amount attributed to acquired IPR&D was based on an independent appraisal.

Employee-Related Charges, Asset Impairments and Other

The following items have been recorded in the condensed consolidated statements of operations in employee-related charges, asset impairments and other, except as noted.

Celera group

Fiscal 2007

During the first quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $3.5 million for its estimated share of a damage award in continuing litigation between Abbott Laboratories, our alliance partner, and Innogenetics N.V. In September 2006, a jury found that the sale of HCV genotyping ASR products by Abbott willfully infringed a U.S. patent owned by Innogenetics and awarded Innogenetics $7.0 million in damages. In January 2007, the U.S. District Court for the Western District of Wisconsin ruled in favor of Innogenetics’ request for a permanent injunction, and as such, ordered Abbott to withdraw its products from the market. The Court also reversed the jury verdict of willful infringement and ruled that Abbott did not willfully infringe Innogenetics’ patent and denied Innogenetics’ request for enhanced damages and attorneys’ fees. Innogenetics did not name the Celera group as a party in this lawsuit, but the Celera group has an interest in these products and in the outcome of the litigation because the enjoined products are manufactured by the Celera group and sold through its alliance with Abbott. Also, as these products are part of its alliance with Abbott, the Celera group has agreed to share the cost of this litigation, including the damage award described above. Abbott is appealing the judgment as both Abbott and the Celera group believe that Innogenetics’ patent is invalid and that the alliance’s HCV genotyping ASRs do not infringe Innogenetics’ patent. On March 8, 2007, the Court of Appeals for the Federal Circuit issued an order denying Abbott’s motion for a stay of the permanent injunction during the appeal process, and the alliance therefore will not receive any revenues from the sale of these HCV genotyping products for the foreseeable future. We believe the appeal process may take a year or more to conclude.

Fiscal 2006


(Dollar amounts in millions)	Employee- Related Charges	Asset Impairments	Excess Lease Space	Other Disposal Costs	Total
Third quarter	$10.7	$8.0	$0.8	$1.4	$20.9
Fourth quarter	2.1	1.8	0.4	1.2	5.5
Total charges	12.8	9.8	1.2	2.6	26.4
Cash payments	7.9		0.2	2.4	10.5
Non-cash activity		9.3		0.2	9.5
Balance at June 30, 2006	4.9	0.5	1.0		6.4
Additional charge		3.0			3.0
Non-cash activity		3.0			3.0
Cash payments	4.2		0.7		4.9
Reduction of expected costs	0.6				0.6
Balance at March 31, 2007	$ 0.1	$0.5	$0.3	$ -	$ 0.9

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

second quarter of fiscal 2007, the Celera group recorded a pre-tax benefit of $0.6 million for a reduction in anticipated employee-related costs associated with the severance and benefit charges recorded in the third and fourth quarters of fiscal 2006.

Cash expenditures for these charges were funded by available cash. These actions enabled the Celera group to focus on its molecular diagnostics and proteomics activities, reduce its cash consumption, and move toward profitability. The remaining cash expenditures related to these charges are expected to be disbursed by December 31, 2007.

Charges prior to fiscal 2006

Applied Biosystems group

Fiscal 2006

Charges prior to fiscal 2006

Other Events Impacting Comparability

Revenue from sale of small molecule program

Asset dispositions and legal settlements

The following items have been recorded in the condensed consolidated statements of operations in asset dispositions and legal settlements.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Fiscal 2007

Fiscal 2006

In the first quarter of fiscal 2006, we recorded a $23.5 million pre-tax charge related to a litigation matter and an award in an arbitration proceeding with Amersham Biosciences, now GE Healthcare. We recorded the pre-tax charge as follows: $22.8 million at the Applied Biosystems group and $0.7 million at the Celera group. The arbitrator awarded Amersham past damages based on an increase in royalty rates for some of its DNA sequencing enzymes and kits that contain those enzymes, plus interest, fees, and other costs. As a result of this decision, the Applied Biosystems group recorded a pre-tax charge of $20.4 million in the first quarter of fiscal 2006, $19.5 million of which was recorded in asset dispositions and legal settlements. In the second quarter of fiscal 2006, we recorded an additional pre-tax charge of $3.1 million at the Applied Biosystems group as a result of the final determination of interest related to the arbitration award. We paid all amounts related to the arbitration matter in January 2006.

Investment gains

Tax items

Fiscal 2007

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Fiscal 2006

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Discussion of Applera Corporation’s Consolidated Operations

Three Months Ended
March 31,

Nine Months Ended
March 31,

(Dollar amounts in millions)

2007

2006

%
Increase/

(Decrease)

2007

2006

%
Increase/

(Decrease)

Net revenues

$539.0

$497.8

8.3%

$1,566.3

$1,409.7

11.1%

Cost of sales

236.1

219.0

7.8%

699.6

637.8

9.7%

Gross margin

302.9

278.8

8.6%

866.7

771.9

12.3%

SG&A expenses

157.3

148.9

5.6%

454.5

425.4

6.8%

R&D

67.2

67.4

(0.3%

)

187.3

210.1

(10.9%

)

Amortization of purchased intangible assets

2.8

1.3

115.4%

8.4

3.0

180.0%

Employee-related charges, asset impairments
and other

20.0

(100.0%

)

6.0

21.2

(71.7%

)

Asset dispositions and legal settlements

1.6

(100.0%

)

(1.1

)

28.2

(103.9%

)

Acquired research and development

3.4

(100.0%

)

114.3

3.4

Operating income

75.6

36.2

108.8%

97.3

80.6

20.7%

Gain on investments, net

3.1

(100.0%

)

0.2

7.6

(97.4%

)

Interest income, net

10.6

9.3

14.0%

30.2

28.2

7.1%

Other income (expense), net

2.4

0.9

166.7%

4.8

3.6

33.3%

Income before income taxes

88.6

49.5

79.0%

132.5

120.0

10.4%

Provision (benefit) for income taxes

17.7

(51.0

)

(134.7%

)

53.1

(19.8

)

(368.2%

)

Net income

$ 70.9

$100.5

(29.5%

)

$ 79.4

$ 139.8

(43.2%

)

Percentage of net revenues:

Gross margin

56.2%

56.0%

55.3%

54.8%

SG&A expenses

29.2%

29.9%

29.0%

30.2%

R&D

12.5%

13.5%

12.0%

14.9%

Operating income

14.0%

7.3%

6.2%

5.7%

Effective income tax (benefit) rate

20%

(103%

)

40%

(17%

)

The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2007 and 2006:


	Three Months Ended March 31,				Nine Months Ended March 31,
(Dollar amounts in millions)	2007		2006		2007		2006
Charge included in income before income taxes	$ -		$(21.9	)	$(116.7	)	$(45.2	)
Benefit for income taxes	(8.5	)	(70.2	)	(19.1	)	(62.4	)

Net income decreased in the third quarter and first nine months of fiscal 2007 compared to prior year periods primarily due to the previously described events impacting comparability, in particular the events described under tax items, and higher SG&A expenses, partially offset by higher net revenues and lower R&D expenses. The net effect of foreign currency on our net income was a benefit of approximately $6 million during the third quarter of fiscal 2007 and approximately $15 million during the first nine months of fiscal 2007 as compared to the prior year periods. Read our discussion of segments for information on their financial results.

Net revenues, which include the favorable effects of foreign currency, increased in the third quarter and first nine months of fiscal 2007 compared with the prior year periods. Revenues included a favorable impact of approximately 3% for the third quarter and first nine months of fiscal 2007 related to the acquisition of the Research Products Division of Ambion, Inc., which was effective March 1, 2006. The effect of foreign currency increased net revenues by approximately 2% for the third quarter and first nine months of fiscal 2007 as compared to the prior year periods.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Net revenues increased for both the quarter and year to date periods at the Applied Biosystems group, driven by strength in the Real-Time PCR/Applied Genomics product category, primarily due to higher sales of consumables products, and in the Mass Spectrometry product category, led by sales of API triple quadrupole, or quad, MALDI TOF/TOF, and QSTAR^® systems and increased instrument service contract revenue. Favorably impacting the year to date results also were higher sales of Q TRAP^® systems. Higher sales of DNA sequencing consumables and increased instrument service contract revenue contributed to the growth in the DNA Sequencing product category.

Net revenues increased at the Celera group, primarily due to higher diagnostic-related licensing and royalty revenues, including licensing revenue from Beckman Coulter. Equalization payments from Abbott Laboratories were lower in both the third quarter and first nine months of fiscal 2007 compared to the prior year periods. Revenues for the first nine months of fiscal 2007 included $2.5 million from the sale of a small molecule program and higher product sales than in the first nine months of fiscal 2006.

Net revenues increased approximately 16% in Europe in the third quarter of fiscal 2007 compared to the third quarter of fiscal 2006. The effect of foreign currency increased revenues by approximately 7% in Europe during the third quarter of fiscal 2007 as compared to the prior year quarter. Excluding the effects of foreign currency, revenues increased by approximately 9% in Europe. In the U.S., revenues increased by approximately 4% as compared to the prior year quarter. Revenues in Asia Pacific, other than Japan, increased by approximately 13% as compared to the prior year quarter. Revenues in Japan during the third quarter of fiscal 2007 decreased by approximately 6% relative to the prior year quarter, including an unfavorable impact from foreign currency of approximately 1%.

Net revenues increased approximately 15% in Europe in the first nine months of fiscal 2007 compared to the prior year period. The effect of foreign currency increased revenues by approximately 5% in Europe during the first nine months of fiscal 2007 as compared to the prior year period. Excluding the effects of foreign currency, revenues increased by approximately 10% in Europe. In the U.S., revenues increased by approximately 6% as compared to the prior year period. Revenues in Asia Pacific, other than Japan, increased by approximately 25% as compared to the prior year period. Revenues in Japan during the first nine months of fiscal 2007 increased by approximately 2% as compared to the prior year period.

The higher gross margin percentage for the third quarter of fiscal 2007 as compared to the prior year quarter was primarily due to improved vendor pricing related to enzymes and the favorable effects of foreign currency at the Applied Biosystems group, and higher revenues at the Celera group, partially offset by higher royalty costs and lower royalty income at the Applied Biosystems group. Included in gross margin for the third quarter and first nine months of fiscal 2006 was $7 million of licensing fees related to the Bio-Rad Laboratories settlement. The gross margin percentage increased for the first nine months of fiscal 2007 over the prior year period primarily due to the favorable effects of foreign currency, improved vendor pricing related to enzymes, and improved service margins, all at the Applied Biosystems group, and higher revenues at the Celera group, partially offset by increased royalty costs at the Applied Biosystems group as a result of recent legal settlements. The improvement in service margins at the Applied Biosystems group was primarily driven by improved efficiency of the field service organization and growth in the volume of service contracts.

SG&A expenses for the third quarter of fiscal 2007 increased compared to the prior year quarter primarily due to operating and integration costs of approximately $4 million related to our acquisition of Ambion, increased employee-related costs, including sales commissions, of approximately $2 million, and strategic investments of approximately $3 million to support growth in China, Europe and North America, all at the Applied Biosystems group. This increase was partially offset by lower legal expenses of approximately $2 million at the Applied Biosystems group.

SG&A expenses for the first nine months of fiscal 2007 increased compared to the prior year period primarily due to operating and integration costs of approximately $20 million related to our acquisition of Ambion, higher employee-related costs, including sales commissions, of approximately $17 million, and strategic investments of approximately $8 million to support growth in China, Europe and North America, all at the Applied Biosystems group. This increase was partially offset by lower legal expenses of approximately $15 million, including a reversal of a $5 million accrual related to settled litigation.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

R&D expenses decreased for both the third quarter and first nine months of fiscal 2007 compared to the prior year periods primarily as a result of the Celera group’s decision to exit small molecule drug discovery and development as well as costs incurred in fiscal 2006 for R&D projects that were not continued in fiscal 2007 at the Applied Biosystems group, both of which were partially offset by increased costs related to the acquisition of Ambion, the development of an advanced genetic analysis platform related to the APG acquisition, and the U.S. Department of Defense contract awarded to the Applied Biosystems group in August 2006.

Interest income, net increased during the third quarter and first nine months of fiscal 2007 compared to the same periods last year primarily due to higher average interest rates, partially offset by lower average cash and cash equivalents and short-term investments. The lower cash and cash equivalents and short-term investments were primarily the result of share repurchases in both fiscal 2007 and 2006, the acquisition of Ambion in March 2006, and the acquisition of APG in July 2006.

The effective tax rate in the third quarter and first nine months of fiscal 2007 was an expense compared to a benefit in the third quarter and first nine months of fiscal 2006. The changes in both the quarter and year to date periods were primarily due to the previously described events impacting comparability, including the events described under tax items.

Applera Corporation

Discussion of Condensed Consolidated Financial Resources and Liquidity

We had cash and cash equivalents and short-term investments of $1.0 billion at March 31, 2007, and $943.4 million at June 30, 2006. We maintain a $200 million unsecured revolving credit agreement with four banks that matures on April 15, 2010, under which there were no borrowings outstanding at March 31, 2007. Cash provided by operating activities has been our primary source of funds over the last fiscal year.

We believe that existing funds, cash generated from operations, and existing sources of debt financing are more than adequate to satisfy our normal operating cash flow needs, planned capital expenditures, acquisitions, ongoing share repurchases, and dividends for the next twelve months and for the foreseeable future. In view of the Applied Biosystems group’s strong cash flow performance during fiscal 2007 and its cash resources as of March 31, 2007, our board of directors determined that the Applied Biosystems group has sufficient financial resources to pursue internal and external investment opportunities as well as to repurchase shares.

In April 2007, we announced that our board of directors authorized the repurchase of up to an additional 10% of the outstanding shares of Applera-Applied Biosystems stock. This authorization has no time restrictions and delegates to management discretion to purchase shares at times and prices it deems appropriate through open market purchases, privately negotiated transactions, tender offers, exchange offers, or otherwise. It is anticipated that repurchases under this authorization will be made from time to time depending on market and business conditions and will be funded using the Applied Biosystems group’s U.S. cash reserves and cash generated from domestic operations, as well as funds to be borrowed under our revolving credit agreement or from other sources, if and when required.

In July 2005, we announced that our board of directors authorized the repurchase of up to 10% of the outstanding shares of Applera-Applied Biosystems stock, and in January 2006, we announced that our board of directors authorized the repurchase of up to an additional 5 million shares of Applera-Applied Biosystems stock. The repurchases announced in July 2005 and January 2006 were completed in fiscal 2006. The authorizations referred to in this and the preceding paragraph supplement the board’s standing authorization to replenish shares of Applera-Applied Biosystems stock issued under our employee stock benefit plans.


(Dollar amounts in millions)	March 31, 2007	June 30, 2006
Cash and cash equivalents	$ 332.3	$ 434.2
Short-term investments	680.8	509.2
Total cash and cash equivalents and short-term investments	$1,013.1	$ 943.4
Working capital	1,195.7	1,018.7

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Cash and cash equivalents decreased for the first nine months of fiscal 2007 from June 30, 2006, as cash expenditures for the acquisition of APG, share repurchases, the purchase of capital and other assets, net of sales and maturities, and the payment of dividends, exceeded cash generated from operating activities and proceeds from stock issuances.

Net cash flows from continuing operations for the nine months ended March 31 were as follows:


(Dollar amounts in millions)	2007		2006
Net cash from operating activities	$ 209.8		$ 178.5
Net cash from investing activities	(335.0	)	(198.3	)
Net cash from financing activities	19.4		(348.7	)
Effect of exchange rate changes on cash	4.0		(8.0	)

Operating activities:

The increase in net cash provided from operating activities for the first nine months of fiscal 2007 compared to the first nine months of fiscal 2006 resulted primarily from higher income-related cash flows and a lower use of cash in accounts payable and other liabilities, partially offset by a higher use of cash in accounts receivable. Fiscal 2007 included cash received of $13.7 million at the Celera group primarily from licensing revenue from Beckman Coulter, the sale of a small molecule drug discovery and development program, and the legal settlement related to the Online/Information Business. The lower use of cash in accounts payable and other liabilities resulted primarily from a voluntary contribution of approximately $31 million to our pension plans in fiscal 2006, and the payment of approximately $23 million related to the previously discussed Amersham arbitration matter also in fiscal 2006, partially offset by the timing of vendor and income tax payments at the Applied Biosystems group. At the Celera group, working capital benefited from the decisions to exit small molecule drug discovery and development in fiscal 2006 and discontinue the Online/Information business in fiscal 2005. The higher use of cash in accounts receivables at the Applied Biosystems group was due to increased sales, including sales of Ambion products. The Applied Biosystems group’s days sales outstanding was 57 days at March 31, 2007, compared to 54 days at June 30, 2006 and 56 days at March 31, 2006. The increase from June 30, 2006 resulted primarily from an increase in sales volume and lower cash collections in Europe.

Investing activities:

Capital expenditures, net of disposals, for the first nine months of fiscal 2007 were $9.4 million higher than in the prior year period primarily due to facility renovations in Foster City, CA, the opening of the new Asia Pacific Application Support Center in Shanghai, China, and purchases of production and laboratory equipment in fiscal 2007, all at the Applied Biosystems group. The first nine months of fiscal 2007 included higher purchases, net of sales and maturities, of available for sale investments. In July 2006, we acquired APG for approximately $121 million, including transaction costs, as described in Note 3 to our condensed consolidated financial statements. In March 2006, we acquired Ambion for approximately $279 million, including transaction costs. The first nine months of fiscal 2006 included proceeds of $7.6 million received from sales of non-strategic investments.

Financing activities:

The first nine months of fiscal 2007 included three dividend payments on Applera-Applied Biosystems stock compared to two dividend payments in the first nine months of fiscal 2006. During the first nine months of fiscal 2007, we repurchased approximately 1.8 million shares of Applera-Applied Biosystems stock for $68.5 million. During the first nine months of fiscal 2006, we repurchased approximately 19.5 million shares of Applera-Applied Biosystems stock for $457.1 million.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Contractual Obligations

Our significant contractual obligations at March 31, 2007, and the anticipated payments under these obligations were as follows:

Payments by Period

(Dollar amounts in millions)

Total

2007

^(a)

2008 -
2009

2010 -
2011

Thereafter

Minimum operating lease payments ^(b)

$126.3

$ 9.5

$ 59.0

$32.4

$25.4

Purchase obligations ^(c)

142.5

68.3

55.4

18.8

Other long-term liabilities ^(d)

37.7

1.4

2.8

1.5

32.0

Total

$306.5

$79.2

$117.2

$52.7

$57.4

^(a) Represents cash obligations for the remainder of fiscal 2007.

^(b) Refer to Note 10 to our consolidated financial statements in our 2006 Annual Report to Stockholders for further information.

^(c) Purchase obligations are entered into with various vendors in the normal course of business, and include commitments related to inventory, capital expenditures, R&D arrangements and collaborations, license agreements, and other services.

^(d) We have excluded deferred revenues as they have no impact on our future liquidity. We have also excluded deferred tax liabilities and obligations connected with our pension and postretirement plans and other foreign employee-related plans as they are not contractually fixed as to timing and amount. See Note 11 to our condensed consolidated financial statements contained in this report and Note 5 to our consolidated financial statements in our 2006 Annual Report to Stockholders for more information on these plans.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Discussion of Segments’ Operations, Financial Resources and Liquidity

Applied Biosystems Group

Three Months Ended March 31,

Nine Months Ended
March 31,

(Dollar amounts in millions)

2007

2006

%
Increase/
(Decrease

)

2007

2006

%
Increase/
(Decrease

)

Net revenues

$529.9

$490.7

8.0%

$1,536.2

$1,388.1

10.7%

Cost of sales

231.3

214.9

7.6%

687.5

627.7

9.5%

Gross margin

298.6

275.8

8.3%

848.7

760.4

11.6%

SG&A expenses

150.2

140.6

6.8%

432.8

398.4

8.6%

R&D

54.4

48.0

13.3%

150.4

134.0

12.2%

Amortization of purchased intangible assets

2.8

1.3

115.4%

8.4

1.9

342.1%

Employee-related charges, asset impairments
and other

(0.9

)

(100.0%

)

0.3

(100.0%

)

Asset dispositions and legal settlements

1.6

(100.0%

)

1.3

27.5

(95.3%

)

Acquired research and development

3.4

(100.0%

)

114.3

3.4

Operating income

91.2

81.8

11.5%

141.5

194.9

(27.4%

)

Gain on investments, net

0.2

Interest income, net

3.2

4.1

(22.0%

)

9.3

11.8

(21.2%

)

Other income (expense), net

2.3

0.8

187.5%

4.5

3.7

21.6%

Income before income taxes

96.7

86.7

11.5%

155.5

210.4

(26.1%

)

Provision (benefit) for income taxes

21.2

(37.7

)

(156.2%

)

63.9

12.0

432.5%

Net income

$ 75.5

$124.4

(39.3%

)

$ 91.6

$ 198.4

(53.8%

)

Percentage of net revenues:

Gross margin

56.4%

56.2%

55.2%

54.8%

SG&A expenses

28.3%

28.7%

28.2%

28.7%

R&D

10.3%

9.8%

9.8%

9.7%

Operating income

17.2%

16.7%

9.2%

14.0%

Effective income tax (benefit) rate

22%

(43%

)

41%

The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2007 and 2006:


	Three Months Ended March 31,				Nine Months Ended March 31,
(Dollar amounts in millions)	2007		2006		2007		2006
Charge included in income before income taxes	$ -		$ (4.1	)	$(115.6	)	$(31.2	)
Benefit for income taxes	(8.1	)	(64.0	)	(17.3	)	(58.0	)

Net income decreased in the third quarter and first nine months of fiscal 2007 compared to the prior year periods primarily due to the previously described events impacting comparability, in particular the events described under tax items, and higher operating expenses, partially offset by higher net revenues. The net effect of foreign currency on our net income was a benefit of approximately $6 million during the third quarter of fiscal 2007 and approximately $15 million during the first nine months of fiscal 2007 as compared to the prior year periods.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Revenues – overall summary

The following table sets forth the Applied Biosystems group’s revenues by product categories for the three and nine months ended March 31:


		Three Months Ended March 31,						Nine Months Ended March 31,
(Dollar amounts in millions)		2007		2006	% Increase/ (Decrease	)		2007		2006	% Increase/ (Decrease	)

DNA Sequencing	$	140.7	$	136.5	3%		$	419.0	$	402.1	4%
% of total revenues		*27%*		28%				*27%*		29%

Real-Time PCR/Applied Genomics		183.3		162.2	13%			512.0		430.7	19%
% of total revenues		*34%*		33%				*33%*		31%

Mass Spectrometry		127.3		113.9	12%			379.2		330.6	15%
% of total revenues		*24%*		23%				*25%*		24%

Core PCR & DNA Synthesis		46.9		51.7	(9%	)		142.3		146.7	(3%	)
% of total revenues		9%		11%				9%		10%

Other Product Lines		31.7		26.4	20%			83.7		78.0	7%
% of total revenues		6%		5%				6%		6%

Total	$	529.9	$	490.7	8%		$	1,536.2	$	1,388.1	11%

Revenues for the third quarter and first nine months of fiscal 2007 included a favorable impact of approximately 3% related to the Ambion acquisition, which was effective March 1, 2006. The effect of foreign currency increased net revenues in the third quarter and first nine months of fiscal 2007 by approximately 2% as compared to the prior year periods.

Real-Time PCR/Applied Genomics:

Revenues in the Real-Time PCR/Applied Genomics product category increased primarily due to higher sales of consumables products, largely due to the acquisition of Ambion. Sales of TaqMan^® Gene Expression Assays products used in academic, clinical research and agricultural biotechnology settings, sequence detection systems consumables, and human identification products used in forensics also contributed to the product category growth. For the year to date period, revenues were favorably impacted by higher sales of low-throughput real-time PCR instruments.

License and royalty revenue decreased for the third quarter and first nine months of fiscal 2007 compared to the same periods last year due to the settlement with Bio-Rad Laboratories in fiscal 2006.

Real-time PCR continued to grow in all sectors as an application for both genotyping and gene expression. On the instrument side, the category grew in quality and safety testing applications within the applied markets, especially in food and environmental testing. Ambion revenues continue to increase above the market growth rate for RNA reagents.

Mass Spectrometry:

Mass Spectrometry revenue growth for the third quarter of fiscal 2007 was led by sales of API triple quad, MALDI TOF/TOF, and QSTAR^® systems, as well as increased instrument service contract revenue. Growth for the quarter was balanced across all application areas. For the year to date period, revenues were led by sales of Q TRAP^®, API triple quad, QSTAR, and MALDI TOF/TOF systems, as well as increased instrument service contract revenue.

DNA Sequencing:

Revenues in the DNA Sequencing product category increased due to higher sales of DNA sequencing consumables and instrument service contract revenue. Consumables growth was driven by the increased use of consumables by the Applied Biosystems group’s installed base of over 14,000 sequencers.

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Core PCR & DNA Synthesis

Our Core PCR and DNA Synthesis product category declined from the prior year quarter primarily as a result of the expected decline in PCR royalty revenues.

Revenue by sources

The following table sets forth the Applied Biosystems group’s revenues by sources for the three and nine month periods ended March 31:


		Three Months Ended March 31,					Nine Months Ended March 31,
(Dollar amounts in millions)		2007		2006	% Increase/ (Decrease)		2007		2006	% Increase/ (Decrease)
Instruments	$	215.6	$	207.1	4.1%	$	646.8	$	601.4	7.5%
Consumables		221.0		191.1	15.6%		620.5		535.1	16.0%
Other sources		93.3		92.5	0.9%		268.9		251.6	6.9%
Total	$	529.9	$	490.7	8.0%	$	1,536.2	$	1,388.1	10.7%

Instruments

For the third quarter of fiscal 2007, instrument revenues increased from the prior year quarter primarily due to higher sales in the Mass Spectrometry product category. This growth was driven by higher sales of the API triple quad, MALDI TOF/TOF, and QSTAR systems.

For the first nine months of fiscal 2007, instrument revenues increased as compared to the prior year period primarily due to higher sales in both the Mass Spectrometry and Real-Time PCR/Applied Genomics product categories. Contributing to the increased sales in the Mass Spectrometry category were sales of the Q TRAP, API triple quad, QSTAR, and MALDI TOF/TOF systems. The Real-Time PCR/Applied Genomics category increased primarily as a result of higher sales of low throughput real-time PCR instruments for core research and applied market applications.

Consumables

The increase in consumables sales in the third quarter and first nine months of fiscal 2007 primarily reflected the strength of Real-Time PCR/Applied Genomics consumable sales. These sales increased primarily as a result of the acquisition of Ambion, higher sales of TaqMan Gene Expression Assays products, and human identification products used in forensics. Also favorably impacting consumables revenues were higher sales of DNA sequencing consumables.

Other sources

Revenues from other sources, which included service and support, royalties, licenses, and contract research, increased for the third quarter and first nine months of fiscal 2007 due to higher service and support and contract research revenues, partially offset by lower royalty and licensing revenues due to the Bio-Rad Laboratories settlement in fiscal 2006.

Revenues by geographic area

The following table sets forth the Applied Biosystems group’s revenues by geographic area for the three and nine month periods ended March 31:

Three Months Ended
March 31,

Nine Months Ended
March 31,

(Dollar amounts in millions)

2007

2006

% Increase/
(Decrease)

2007

2006

% Increase/
(Decrease)

United States

227.4

218.1

4.3%

662.4

624.4

6.1%

Europe

182.8

157.1

16.4%

528.2

458.8

15.1%

Asia Pacific

97.6

96.3

1.3%

280.1

252.0

11.2%

Latin America and other markets

22.1

19.2

15.1%

65.5

52.9

23.8%

Total

529.9

490.7

8.0%

1,536.2

1,388.1

10.7%

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

The effect of foreign currency increased revenues by approximately 7% in Europe during the third quarter of fiscal 2007 as compared to the prior year quarter. Excluding the effects of foreign currency, revenues increased by approximately 9% in Europe primarily as a result of sales of Ambion products, low to medium throughput genetic analyzers, DNA sequencing consumables, Q TRAP systems, human identification products, and TaqMan Gene Expression Assay products. Sales in the U.S. increased primarily due to sales of Ambion products, API triple quad systems, human identification products, and a U.S. Department of Defense contract for an instrument system. This growth was partially offset by lower sales of Q TRAP systems. Revenues in Asia Pacific, other than Japan, increased by approximately 13% as compared to the prior year quarter primarily due to higher sales of low throughput real-time PCR instruments. Revenues in Japan during the third quarter of fiscal 2007 decreased by approximately 6% relative to the prior year quarter, including an unfavorable impact from foreign currency of approximately 1%.

The effect of foreign currency increased revenues by approximately 5% in Europe during the first nine months of fiscal 2007 as compared to the prior year period. Excluding the effects of foreign currency, revenues increased by approximately 10% in Europe, primarily as a result of sales of low to medium throughput genetic analyzers, Ambion products, DNA sequencing consumables, Q TRAP systems, API triple quad systems, TaqMan Gene Expression Assay products, and human identification products. Sales in the U.S. increased primarily due to sales of Ambion products, human identification products, low to medium throughput genetic analyzers, a U.S. Department of Defense contract for an instrument system, and TaqMan Gene Expression Assays products. This growth was partially offset by lower sales of high throughput genetic analyzers. During the first nine months of fiscal 2007, revenues in Asia Pacific, other than Japan, increased by approximately 25% as compared to the prior year period primarily due to higher sales of low throughput real-time PCR instruments and Q TRAP systems. Revenues in Japan during the first nine months of fiscal 2007 increased by approximately 2% as compared to the prior year period.

Gross margin, as a percentage of net revenues, increased for the third quarter of fiscal 2007 compared to the prior year quarter primarily due to improved vendor pricing related to enzymes and the favorable effects of foreign currency, partially offset by higher royalty costs and lower royalty income. Included in gross margin for the third quarter and first nine months of fiscal 2006 was $7 million of licensing fees related to the Bio-Rad Laboratories settlement. Gross margin, as a percentage of net revenues, increased for the first nine months of fiscal 2007 over the prior year period primarily due to the favorable effects of foreign currency, improved vendor pricing related to enzymes, and improved service margins, partially offset by increased royalty costs as a result of legal settlements. The improvement in service margins was primarily driven by improved efficiency in the field service organization and growth in the volume of service contracts.

SG&A expenses for the third quarter of fiscal 2007 increased compared to the prior year quarter primarily due to operating and integration costs of approximately $4 million related to our acquisition of Ambion, higher employee-related costs, including sales commissions, of approximately $2 million, and strategic investments of approximately $3 million to support growth primarily in China and North America. This increase was partially offset by lower legal expenses of approximately $2 million.

SG&A expenses for the first nine months of fiscal 2007 increased compared to the prior year period primarily due to operating and integration costs of approximately $20 million related to our acquisition of Ambion, higher employee-related costs, including sales commissions, of approximately $17 million, and strategic investments of approximately $8 million to support growth in China, Europe and North America. This increase was partially offset by lower legal expenses of approximately $15 million, including a reversal of a $5 million accrual related to settled litigation.

R&D expenses increased in both the third quarter and first nine months of fiscal 2007 from the prior year periods primarily as a result of the acquisition of Ambion, the development of an advanced genetic analysis platform related to the APG acquisition, and the U.S. Department of Defense contract awarded to the Applied Biosystems group in August 2006. Additionally impacting the year to date period were costs incurred in fiscal 2006 for R&D projects that were not continued in fiscal 2007.

Interest income, net decreased during the third quarter and first nine months of fiscal 2007 compared to the same periods in the prior year primarily due to lower average cash and cash equivalents and short-term investments, partially offset by higher average interest rates. The lower cash and cash equivalents and short-term investments

APPLERA CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

were primarily the result of share repurchases in both fiscal 2007 and 2006, the acquisition of Ambion in March 2006, and the acquisition of APG in July 2006.

The effective tax rate in the third quarter of fiscal 2007 was an expense compared to a benefit in the third quarter of fiscal 2006. The effective tax rate increased in the first nine months of fiscal 2007 compared to the same period last year. The changes in both the quarter and year to date periods were primarily due to the previously described events impacting comparability, including the events described under tax items.

Applied Biosystems Group

Discussion of Financial Resources and Liquidity

The Applied Biosystems group had cash and cash equivalents and short-term investments of $448.5 million at March 31, 2007, and $373.9 million at June 30, 2006. We maintain a $200 million unsecured revolving credit agreement with four banks that matures on April 15, 2010, under which there were no borrowings outstanding at March 31, 2007. Cash provided by operating activities has been our primary source of funds over the last fiscal year.

We believe that existing funds, cash generated from operations, and existing sources of debt financing are more than adequate to satisfy the Applied Biosystems group’s normal operating cash flow needs, planned capital expenditures, acquisitions, ongoing share repurchases, and dividends for the next twelve months and for the foreseeable future. In view of the Applied Biosystems group’s strong cash flow performance during fiscal 2007 and its cash resources as of March 31, 2007, our board of directors determined that the Applied Biosystems group has sufficient financial resources to pursue internal and external investment opportunities as well as to repurchase shares.

We manage the investment of surplus cash and the issuance and repayment of short and long-term debt for the Applied Biosystems group and the Celera group on a centralized basis and allocate activity within these balances to the group that uses or generates such resources.


(Dollar amounts in millions)	March 31, 2007	June 30, 2006
Cash and cash equivalents	$305.8	$373.9
Short-term investments	142.7
Total cash and cash equivalents and short-term investments	$448.5	$373.9
Working capital	619.8	439.5

Cash and cash equivalents decreased from June 30, 2006, as cash expenditures for the acquisition of APG, share repurchases, the purchase of capital and other assets, net of sales, and the payment of dividends, exceeded cash generated from operating activities and proceeds from stock issuances. Net cash flows of continuing operations for the nine months ended March 31 were as follows:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued


(Dollar amounts in millions)	2007		2006
Net cash from operating activities	$ 230.8		$ 263.8
Net cash from investing activities	(307.8	)	(310.6	)
Net cash from financing activities	4.9		(343.0	)
Effect of exchange rate changes on cash	4.0		(8.0	)

Operating activities:

Net cash from operating activities of continuing operations for the first nine months of fiscal 2007 was $33.0 million lower than in the first nine months of fiscal 2006. This decrease resulted primarily from a higher use of cash in accounts receivable and lower income-related cash flows, including the $33 million Bio-Rad settlement in fiscal 2006, partially offset by a lower use of cash in accounts payable and other liabilities in fiscal 2007. The higher use of cash in accounts receivables was due to increased sales, including sales of Ambion products. The lower use of cash in accounts payable and other liabilities resulted primarily from a voluntary contribution of approximately $31 million to our pension plans in fiscal 2006, the payment of approximately $23 million related to the previously discussed Amersham arbitration matter also in fiscal 2006, and lower severance and excess lease payments in fiscal 2007, partially offset by the timing of vendor and income tax payments. Within prepaid expenses and other assets, cash was provided by the collection of non-trade receivables related to joint venture activities in fiscal 2007. The Applied Biosystems group’s days sales outstanding was 57 days at March 31, 2007, compared to 54 days at June 30, 2006 and 56 days at March 31, 2006. The increase from June 30, 2006 resulted primarily from an increase in sales volume and lower cash collections in Europe. Inventory on hand was 3.2 months at March 31, 2007, compared to 2.4 months at June 30, 2006.

Investing activities:

Capital expenditures, net of disposals, for the first nine months of fiscal 2007 were $12.1 million higher than in the prior year period primarily due to facility renovations in Foster City, CA, the opening of the new Asia Pacific Application Support Center in Shanghai, China, and purchases of production and laboratory equipment in fiscal 2007. The first nine months of fiscal 2007 included higher purchases, net of sales, of available for sale investments. In July 2006, we acquired APG for approximately $121 million, including transaction costs, as described in Note 3 to our condensed consolidated financial statements. In March 2006, we acquired Ambion for approximately $279 million, including transaction costs.

Financing activities:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS continued

Celera Group

Three Months Ended
March 31,

Nine Months Ended
March 31,

(Dollar amounts in millions)

2007

2006

% Increase/
(Decrease

)

2007

2006

% Increase/
(Decrease

)

Net revenues

$ 9.8

$ 8.9

10.1%