Edgar Filing: APPLERA CORP

For the quarterly period ended December 31, 2007

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 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 February 4, 2008, there were 167,377,025 shares of Applera Corporation-Applied Biosystems Group Common Stock and 79,645,950 shares of Applera Corporation-Celera Group Common Stock outstanding.

APPLERA CORPORATION

INDEX


		Page
Part I. Financial Information

Item 1.	Financial Statements – (unaudited)

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

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

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

	Notes to Unaudited Condensed Consolidated Financial Statements	4-30

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

	Discussion of Applera Corporation	31-44

	Discussion of Applied Biosystems Group	45-51

	Discussion of Celera Group	52-54

	Market Risks	55

	Outlook	55-57

	Forward-Looking Statements and Risk Factors	57-75

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	76

Item 4.	Controls and Procedures	76

Part II. Other Information

Item 1.	Legal Proceedings	77

Item 1A.	Risk Factors	77-79

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80-81

Item 4.	Submission of Matters to a Vote of Security Holders	81-82

Item 6.	Exhibits	83

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 December 31,				Six Months Ended December 31,
	2007		2006		2007		2006
Products	$467,727		$442,846		$ 875,219		$ 833,928
Services	90,911		60,782		155,284		118,922
Other	42,724		38,221		87,532		74,408

Total Net Revenues	601,362		541,849		1,118,035		1,027,258
Products	204,858		209,802		397,437		406,461
Services	36,723		26,539		65,470		51,137
Other	4,675		3,055		7,576		5,882

Total Cost of Sales	246,256		239,396		470,483		463,480

Gross Margin	355,106		302,453		647,552		563,778

Selling, general and administrative	175,071		154,842		331,565		297,227
Research and development	54,641		62,160		115,450		120,062
Amortization of purchased intangible assets	4,716		2,842		7,328		5,579
Employee-related charges, asset impairments and other	3,285		2,513		3,285		6,013
Asset dispositions and legal settlements			(10,145	)	(7,556	)	(1,058	)
Acquired research and development							114,251

Operating Income	117,393		90,241		197,480		21,704

Gain on investments, net	2,611				2,611		209
Interest expense	(3,845	)	193		(5,201	)	(304	)
Interest income	8,095		10,152		20,264		19,862
Other income (expense), net	1,405		1,039		2,192		2,456

Income before Income Taxes	125,659		101,625		217,346		43,927

Provision for income taxes	39,061		27,136		69,058		35,450
Net Income	$ 86,598		$ 74,489		$ 148,288		$ 8,477

Applied Biosystems Group (see Note 4)
Net Income per Share
Basic	$ 0.50		$ 0.41		$ 0.83		$ 0.09
Diluted	$ 0.49		$ 0.39		$ 0.81		$ 0.08

Dividends Declared per Share	$ 0.0425		$ 0.0425		$ 0.0850		$ 0.0850

Celera Group (see Note 4)
Net Income (Loss) per Share
Basic and diluted	$ 0.00		$ (0.01	)	$ 0.01		$ (0.10	)

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 December 31, 2007		At June 30, 2007

Assets
Current assets
Cash and cash equivalents	$ 403,568		$ 323,203
Short-term investments	294,713		732,757
Accounts receivable (net of allowances for doubtful accounts of $14,344 and $7,422 respectively)	440,319		452,873
Inventories, net	167,339		140,349
Prepaid expenses and other current assets	187,075		189,405
Total current assets	1,493,014		1,838,587
Property, plant and equipment, net	386,613		390,810
Goodwill and intangible assets, net	534,893		297,961
Other long-term assets	624,223		625,182
Total Assets	$ 3,038,743		$3,152,540

Liabilities and Stockholders’ Equity
Current liabilities
Loans payable	$ 225,082		$ -
Accounts payable	161,733		162,665
Accrued salaries and wages	78,517		108,552
Current deferred tax liability	16,475		15,633
Accrued taxes on income	20,617		66,701
Other accrued expenses	298,592		269,623
Total current liabilities	801,016		623,174
Other long-term liabilities	278,266		213,312
Total Liabilities	1,079,282		836,486

Stockholders’ Equity
Capital stock
Applera Corporation–Applied Biosystems Group	2,134		2,133
Applera Corporation–Celera Group	795		790
Capital in excess of par value	2,264,459		2,248,372
Retained earnings	1,027,022		854,721
Accumulated other comprehensive income	20,394		11,363
Treasury stock, at cost	(1,355,343	)	(801,325	)
Total Stockholders’ Equity	1,959,461		2,316,054
Total Liabilities and Stockholders’ Equity	$ 3,038,743		$3,152,540

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)


	Six Months Ended December 31,
	2007			2006
Operating Activities of Continuing Operations
Net income	$	148,288		$	8,477
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		43,326			42,646
Asset impairments					3,000
Employee-related charges and other		3,592			3,013
Share-based compensation and pension		12,973			8,895
Deferred income taxes		37,628			709
Sale of assets and legal settlements, net		(2,611	)		(209	)
Acquired research and development					114,251
Changes in operating assets and liabilities:
Accounts receivable		51,863			(2,538	)
Inventories		(23,207	)		(11,033	)
Prepaid expenses and other assets		(29,180	)		(13,500	)
Accounts payable and other liabilities		(13,510	)		(45,144	)
Net Cash Provided by Operating Activities of Continuing Operations		229,162			108,567
Net Cash Provided by Discontinued Operations		12,900
Investing Activities of Continuing Operations
Additions to property, plant and equipment, net		(21,521	)		(28,451	)
Proceeds from maturities of available-for-sale investments		63,919			130,745
Proceeds from sales of available-for-sale investments		456,877			277,608
Purchases of available-for-sale investments		(82,713	)		(487,771	)
Acquisitions and investments, net of cash acquired		(214,616	)		(121,403	)
Proceeds from the sale of assets, net		3,725			322
Net Cash Provided (Used) by Investing Activities of Continuing Operations		205,671			(228,950	)
Financing Activities
Net change in revolving credit line		125,000
Proceeds from loan payable		100,000
Payments on loans payable and debt		(10,560	)
Dividends		(15,539	)		(15,411	)
Purchases of common stock for treasury		(601,505	)		(59,856	)
Proceeds from stock issued for stock plans and other		44,276			74,584
Net Cash Used by Financing Activities of Continuing Operations		(358,328	)		(683	)
Effect of Exchange Rate Changes on Cash		(9,040	)		6,220
Net Change in Cash and Cash Equivalents		80,365			(114,846	)

Cash and Cash Equivalents Beginning of Period		323,203			434,191
Cash and Cash Equivalents End of Period	$	403,568		$	319,345

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.

We consistently applied the accounting policies described in our 2007 Annual Report to Stockholders in preparing these unaudited interim financial statements, except for the adoption of FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” and FIN 48-1, “Definition of Settlement in FASB Interpretation No 48” as discussed below. 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 2007 Annual Report to Stockholders. You should read these unaudited interim condensed consolidated financial statements in conjunction with our consolidated financial statements presented in our 2007 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 December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations,” which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141R establishes the principles and requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, the goodwill acquired and any noncontrolling interest in the acquiree. SFAS No. 141R also establishes the disclosure requirements for a business combination. The provisions of SFAS No. 141R are effective for our 2010 fiscal year, beginning July 1, 2009.

Also in June 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends or dividend equivalents on nonvested equity shares, nonvested equity share units, and outstanding equity share options charged to retained earnings as an increase in capital in excess of par value. The amount recognized in capital in excess of par value should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The provisions of EITF 06-11 are effective for our 2009 fiscal year, beginning July 1, 2008. We are currently evaluating the provisions of EITF 06-11 and the resulting impact of adoption on our financial statements.

Adoption of FIN 48

We adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” and FIN 48-1, “Definition of Settlement in FASB Interpretation No 48” on July 1, 2007. FIN 48 addresses the recognition and measurement of uncertain income tax positions using a “more-likely-than-not” threshold and also requires enhanced disclosures in the financial statements. FIN 48-1 amends FIN 48 to provide guidance on how companies should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

As a result of our adoption, we recognized a $36.7 million increase in our opening retained earnings relating to our uncertain tax positions. The total amount of unrecognized tax benefits at July 1, 2007 was $67.9 million, of which $33.3 million would affect the effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in our provision for income taxes. Although our tax filings are under continual examination by the tax authorities and we regularly assess our tax uncertainties, tax examinations are inherently uncertain.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

It is reasonably possible that our unrecognized tax benefits will decrease by as much as $41 million during the next twelve months depending on the outcome of discussions with the IRS to settle our open fiscal years 2001 through 2005. This possible outcome could have as much as a $15 million benefit to our tax provision and an immaterial impact to our cash flow. Audit outcomes and the timing of audit settlements are subject to significant uncertainties.

The U.S. statutes of limitation are open for the fiscal tax years 2004 forward. Our major foreign jurisdictions are subject to examination for the tax years 2002 forward. Due to the complex and uncertain examination process, the resolution of such examinations could have a material impact on our results of operations.

Revenues

In conjunction with the acquisition of Berkeley HeartLab, Inc. (“BHL”), we have updated our revenue recognition policy as follows:

We record revenue on entering into a final agreement with the customer that includes the specific nature and terms of the revenue-generating activity and for which collectibility is reasonably assured, which is generally at the time of shipment of products or performance of services. Concurrently, we record provisions for warranty, returns, and installation based on historical experience and anticipated product performance. Discounts are recorded as sales reductions concurrently with the applicable sale. Cash discounts are recorded as sales reductions on our receipt of the sales proceeds. Deferred revenues consist of prepayments for trade-ins and service contracts. Revenue is not recognized at the time of shipment of products in situations where risks and rewards of ownership are transferred to the customer at a point other than shipment due to the shipping terms, the existence of an acceptance clause, the achievement of milestones, or some return or cancellation privileges. Revenue is recognized once customer acceptance occurs or the acceptance provisions lapse. Service revenue is recognized over the period services are performed. Amounts billed to customers related to shipping and handling are included in net revenues, whereas shipping and handling costs are included in cost of sales.

In revenue arrangements with multiple deliverables, we record revenue as the separate elements are delivered to the customer if the delivered item is determined to represent a separate earnings process, there is objective and reliable evidence of the fair value of the undelivered item, and delivery or performance of the undelivered item is probable and substantially in our control. For instruments where installation is determined to be a separate earnings process, the portion of the sales price allocable to the fair value of the installation is deferred and recognized when installation is complete. We determine the fair value of the installation process based on technician labor billing rates, the expected number of hours to install the instrument based on historical experience, and amounts charged by third parties.

We recognize royalty revenues when earned over the term of the agreement in exchange for the grant of licenses to use our products or on technologies for which we hold patents. We recognize revenue for estimates of royalties earned during the applicable period, based on historical activity, and make revisions for actual royalties received in the following quarter. For those arrangements where royalties cannot be reasonably estimated, we recognize revenue on the receipt of cash or royalty statements from our licensees. In addition, we recognize up-front nonrefundable license fees when due under contractual agreement, unless we have specific continuing performance obligations requiring deferral of all or a portion of such fees.

A portion of the Celera group’s reported net revenues include equalization payments from Abbott Laboratories resulting from a profit and loss sharing arrangement between the Celera group and Abbott. All revenues, costs and expenses of the alliance are shared equally by both parties. At the end of each reporting period the two companies compare a statement of revenues and expenses for alliance activities recorded by each party. A calculation is made to determine the amount that needs to be paid by a party to evenly split both the revenue and expenses. Payments to the Celera group are recorded as revenue by the Celera group. The timing and nature of equalization payments can lead to fluctuations in both reported revenues and gross margins from period to period due to changes in end-user revenues of alliance products and differences in relative operating expenses between the alliance partners.

Also, a portion of the Celera group’s reported net revenues include patient test service revenues associated with BHL’s operations. We recognize patient test service revenues upon completion of the testing process and when the test results

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

are sent to the ordering physicians. Billings for services reimbursed by third-party payors, including Medicare, are recorded net of allowances for differences between amounts billed and the estimated receipts from such payors. For the second quarter of fiscal 2008, revenue from Medicare patients represented approximately 39% of the total BHL patient test service revenues. Payment arrangements with third parties, such as Medicare and some insurance companies, include predetermined rates for patient tests. Adjustments to the estimated receipts, based on final settlement with the third-party payors, including Medicare, are recorded in revenue upon settlement.

With regard to patient test services, the Celera group has an established process to estimate and review the collectibility of its receivables based on the period of time the receivables have been outstanding. The Celera group’s process for determining the appropriate level of the allowance for doubtful accounts involves judgment, and considers such factors as the age of the underlying receivables, historical and projected collection experience, and other external factors that could affect the collectibility of its receivables. The process includes the close monitoring of billings and the collection experience, which helps reduce the risks of material revisions to allowance estimates.

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 December 31,				Six months ended December 31,
(Dollar amounts in millions)	2007		2006		2007		2006
Severance and benefit costs	$(3.7	)	$ -		$(3.7	)	$ -
Asset impairments			(3.0	)			(3.0	)
Other	0.4		(0.1	)	0.4		(3.6	)
Reduction of expected costs			0.6				0.6
Total employee-related charges, asset impairments and other	$(3.3	)	$ (2.5	)	$(3.3	)	$ (6.0	)
Other events impacting comparability:
Revenue from sale of small molecule program	$ -		$ 2.5		$ -		$ 2.5
Asset dispositions and legal settlements			10.2		7.6		1.1
Acquired research and development							(114.3	)
Investment gains	2.6				2.6
Tax items	(0.5	)	1.0		(2.3	)	9.8

Employee-Related Charges, Asset Impairments and Other

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

Applied Biosystems group

Fiscal 2008

During the second quarter of fiscal 2008, the Applied Biosystems group recorded a pre-tax charge of $2.9 million for severance costs for 41 employees. The charge resulted from the realignment of the Applied Biosystems group’s organization to support market dynamics and it plans on redirecting the savings into other strategic initiatives. All of the affected employees were notified as of December 31, 2007, and are expected to be terminated by June 30, 2008. During the second quarter of fiscal 2008, we made cash payments of $0.8 million related to this charge. Cash expenditures were funded by cash provided by operating activities. The remaining cash expenditures of $2.1 million are expected to be paid by June 30, 2008.

Charges prior to fiscal 2007

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

reduction for future estimated sublease rentals for the property. A sublease rental was not obtained for the property and over the course of the lease, additional charges of $0.6 million were recorded in operating expenses. Additionally, in the second quarter of fiscal 2007, a charge of $0.5 million was recorded in operating expenses to reserve for additional estimated costs under the lease.

Celera group

Fiscal 2008

During the second quarter of fiscal 2008, the Celera group recorded a pre-tax charge of $0.4 million related to a reduction in the Celera group’s proteomic-based activities. This charge was in addition to a charge recorded in the fourth quarter of fiscal 2007, as described below. The charge was primarily comprised of a $0.8 million charge for severance costs for approximately 20 employees, partially offset by a gain of $0.4 million from the disposal of equipment related to proteomic-based activities. All of the affected employees were notified by October 31, 2007, and are expected to be terminated by the end of the third quarter of fiscal 2008. During the second quarter of fiscal 2008, we made net cash payments of $0.5 million related to this charge. Cash expenditures were funded by available cash. The remaining cash expenditures of $0.3 million are expected to be paid by the third quarter of fiscal 2008.

Fiscal 2007

During the fourth quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $0.5 million for severance costs for approximately 20 employees. The charge resulted from a reduction in the Celera group’s proteomics-based activities. All of the affected employees were notified as of June 30, 2007, and were terminated by October 31, 2007. During the first six months of fiscal 2008, we made cash payments of $0.5 million, which represent the remaining payments related to this charge. Cash expenditures were funded by available cash.

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.

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 appealed the judgment. On January 17, 2008, the United States Court of Appeals for the Federal Circuit vacated the permanent injunction granted by the lower court for Innogenetics against Abbott in selling HCV genotyping products. Since the jury’s damage award included an upfront entry fee, the Court remanded to the lower court to determine the terms of a compulsory license for Abbott’s future sales. In addition, the Court remanded for a new trial on the validity of the Innogenetics patent in view of a prior-issued patent. The Court also affirmed the judgment of infringement and the judgment of no willful infringement.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Charges prior to fiscal 2007

During fiscal 2006, the Celera group recorded pre-tax charges of $26.4 million 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 $12.8 million of employee-related charges, $9.8 million of asset impairments, $1.2 million of excess lease space, and $2.6 million of other disposal costs. The remaining required cash expenditures of $0.8 million as of December 31, 2007, the majority of which related to the asset impairment of an owned facility, are expected to be disbursed by December 31, 2008.

During the first six months of fiscal 2008, the Celera group made net cash payments of approximately $0.4 million related to an excess facility lease space charge that was recorded in fiscal 2005. The remaining net cash expenditures of approximately $2.3 million as of December 31, 2007 related to this charge 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 $2.5 million in net revenues from the sale of a small molecule drug discovery and development program to Schering AG. The Celera group had recorded an initial $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 interim condensed consolidated statements of operations in asset dispositions and legal settlements.

Fiscal 2008

In the first quarter of fiscal 2008, the Applied Biosystems group recorded a $7.6 million pre-tax gain primarily related to a settlement and licensing agreement entered into with Stratagene Corporation and Agilent Technologies, Inc. (which acquired Stratagene), which resolved outstanding legal disputes with Stratagene.

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 the 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.

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.

Investments

The Applied Biosystems group recorded a pre-tax gain of $2.6 million in gain on investments in the second quarter of fiscal 2008 from the sale of a non-strategic minority equity investment.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Tax items

Fiscal 2008

In the second quarter of fiscal 2008, the Applied Biosystems group recorded tax charges of $0.5 million primarily related to foreign tax settlements. In the first quarter of fiscal 2008, the Applied Biosystems group recorded tax charges of $1.8 million primarily related to the recalculation of deferred tax assets as a result of a decrease in the statutory tax rate in Germany.

Fiscal 2007

In December 2006, the President of the U.S. 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 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 and 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 German net operating loss carryforwards.

Note 3 – Acquisitions

Berkeley HeartLab, Inc.

In October 2007, we acquired BHL for $193.2 million in cash, including transaction costs. BHL, a privately held company with operations in Burlingame and Alameda, California, is a cardiovascular healthcare company with a Clinical Laboratory Improvement Amendments (“CLIA”)-certified laboratory that provides a broad portfolio of testing and disease management services focused on the secondary prevention market. We believe that the acquisition will provide the Celera group with a commercial infrastructure to bring its new genetic tests to the U.S. cardiovascular market. Additionally, BHL is expected to provide opportunities for the Celera group to commercialize new tests and technologies and to gain economies of scale and improve its margins as a consequence of the vertical integration with BHL’s clinical laboratory service business. The net assets and results of operations of BHL will be allocated to the Celera group.

We allocated the purchase price of $193.2 million to tangible net assets and intangible assets as follows:


(Dollar amounts in millions)
Current assets, including deferred tax asset of $5.2	$	43.6
Long-term assets		6.2
Current liabilities		(18.2	)
Long-term liabilities, including deferred tax liability of ($42.4)		(47.9	)
Tangible net liabilities assumed, at approximate fair value		(16.3	)
Goodwill		104.6
Customer relationships		67.4
Trademark and trade name		21.8
Existing technology		14.9
Internally developed software		0.8
Total intangible assets		209.5
Total purchase price	$	193.2

We are amortizing the recorded values of the intangible assets, other than the trademark and trade name, over their expected period of benefit, which on a weighted-average basis is approximately 12 years. An established client list, a recognized company name and a broad portfolio of testing and disease management services focused on the secondary prevention market were among the factors that resulted in the recognition of goodwill. The goodwill, trademark and trade name are reviewed for impairment as part of our annual impairment tests. In the second quarter of fiscal 2008, we recorded a $5.2 million deferred tax asset, included in current assets, and a $42.4 million deferred tax liability, included in long-term liabilities, for net operating loss carryforwards and other temporary differences of BHL. The goodwill recognized is not deductible for federal income tax purposes. The net assets and results of operations of BHL have been included in our consolidated financial statements since the date of the acquisition.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

In connection with the acquisition, we assumed $10.8 million of floating and fixed rate debt (see Note 9). As of December 31, 2007, $0.2 million in unsecured debt remained outstanding.

Atria Genetics Inc.

In late October 2007, we acquired substantially all of the assets of Atria Genetics Inc. (“Atria”), a privately held company based in South San Francisco, CA, for $33.3 million in cash, including transaction costs. Atria has a line of human leukocyte antigen (“HLA”) testing products that are used for identifying potential donors in the matching process for bone marrow transplantation. The acquisition is a strategic fit for the Celera group providing direct access to the niche market of tissue typing in the transplantation and bone marrow registry market. The net assets and results of operations of Atria will be allocated to the Celera group.

We allocated the purchase price of $33.3 million to tangible net assets and intangible assets as follows:


(Dollar amounts in millions)
Current assets	$	0.6
Long-term assets		0.2
Current liabilities		(0.5	)
Long-term liabilities		(0.2	)
Tangible net assets acquired, at approximate fair value		0.1
Goodwill		10.6
Customer relationships		17.8
Trademark and trade name		2.0
Existing technology		2.7
Internally developed software		0.1
Total intangible assets		33.2
Total purchase price	$	33.3

We are amortizing the recorded values of the intangible assets, other than the trademark and trade name, over their expected period of benefit, which on a weighted-average basis is approximately 12 years. The relationship with end user customers, line of HLA testing products, core technology and an established name were among the factors that resulted in the recognition of goodwill. The goodwill, trademark and trade name are reviewed for impairment as part of our annual impairment tests. The entire amount of goodwill is deductible for federal income tax purposes. The net assets and results of operations of Atria have been included in our consolidated financial statements since the date of the acquisition.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Pro Forma Financial Information

The following selected pro forma financial information, which includes the combined results of operations of BHL and Atria, has been prepared assuming the acquisitions had occurred at the beginning of fiscal 2007 and gives effect to purchase accounting adjustments:


	Three months ended December 31,		Six months ended December 31,
(Dollar amounts in millions except per share amounts)	2007	2006	2007			2006
Applera Corporation
Net revenues	$601.5	$565.7	$	1,139.0		$	1,071.5
Net income	86.4	76.9		145.2			11.5
Celera Group
Net revenues	$ 40.4	$ 37.1	$	77.5		$	67.6
Net income (loss), as allocated	0.1	0.3		(3.7	)		(7.7	)
Basic earnings (loss) per share	$ 0.00	$ 0.00	$	(0.05	)	$	(0.10	)
Diluted earnings (loss) per share	0.00	0.00		(0.05	)		(0.10	)

There was no financial impact to the Applied Biosystems group related to these acquisitions.

In the second quarter of fiscal 2008, we recorded $2.1 million of amortization of intangible assets related to these acquisitions.

This pro forma data is for informational purposes only and may not be indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of fiscal 2007 or of the future operations of the combined companies.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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 December 31:


	Applied Biosystems Group				Celera Group
(Dollar amounts in millions, except per share amounts)	2007		2006		2007	2006
Net income (loss)	$86.3		$74.8		$ 0.3	$ (0.5	)
Allocated intercompany sale of assets	(0.1	)	(0.1	)
Allocated interperiod taxes	0.1		0.3
Total net income (loss) allocated	86.3		75.0		0.3	(0.5	)
Less dividends declared on common stock	7.2		7.8
Undistributed earnings (loss)	$79.1		$67.2		$ 0.3	$ (0.5	)
Allocation of basic earnings (loss) per share
Basic distributed earnings per share⁽¹⁾	$0.04		$0.04		$ -	$ -
Basic undistributed earnings (loss) per share	0.46		0.37		0.00	(0.01	)
Total basic earnings (loss) per share	$0.50		$0.41		$0.00	$(0.01	)
Allocation of diluted earnings (loss) per share
Diluted distributed earnings per share	$0.04		$0.04		$ -	$ -
Diluted undistributed earnings (loss) per share	0.45		0.35		0.00	(0.01	)
Total diluted earnings (loss) per share	$0.49		$0.39		$0.00	$(0.01	)
Weighted average number of common shares
Basic	171.6		183.5		79.3	78.2
Common stock equivalents	5.8		7.9		1.7
Diluted	177.4		191.4		81.0	78.2

⁽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 six months ended December 31:


	Applied Biosystems Group				Celera Group
(Dollar amounts in millions, except per share amounts)	2007		2006		2007	2006
Net income (loss)	$147.2		$16.1		$ 1.0	$ (7.5	)
Allocated intercompany sale of assets	(0.1	)	(0.2	)
Allocated interperiod taxes	0.2		0.1
Total net income (loss) allocated	147.3		16.0		1.0	(7.5	)
Less dividends declared on common stock	15.0		15.6
Undistributed earnings (loss)	$132.3		$ 0.4		$ 1.0	$ (7.5	)
Allocation of basic earnings (loss) per share
Basic distributed earnings per share	$ 0.08		$0.09		$ -	$ -
Basic undistributed earnings (loss) per share	0.75				0.01	(0.10	)
Total basic earnings (loss) per share	$ 0.83		$0.09		$0.01	$(0.10	)
Allocation of diluted earnings (loss) per share
Diluted distributed earnings per share	$ 0.08		$0.08		$ -	$ -
Diluted undistributed earnings (loss) per share	0.73				0.01	(0.10	)
Total diluted earnings (loss) per share	$ 0.81		$0.08		$0.01	$(0.10	)
Weighted average number of common shares
Basic	177.3		182.8		79.2	78.0
Common stock equivalents	5.6		7.5		1.5
Diluted	182.9		190.3		80.7	78.0

⁽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, for the three months and six months ended December 31, 2006, 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 for the three months and six months ended December 31:


	Three months ended December 31,		Six months ended December 31,
(Shares in millions)	2007	2006	2007	2006
Applera Corporation-Applied Biosystems Group Common Stock	5.8	4.4	5.9	4.6
Applera-Celera stock	2.6	7.0	2.6	6.9

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 5 – Comprehensive Gain

The components of comprehensive gain 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 December 31,				Six months ended December 31,
(Dollar amounts in millions)	2007		2006		2007		2006
Net income	$86.6		$74.5		$148.3		$ 8.5
Other comprehensive gain:
Net unrealized gains on investments	3.3		1.1		2.7		3.2
Net unrealized (gains) losses on investments reclassified into earnings	(0.1	)	(0.1	)	0.1		(0.3	)
Net unrealized gains (losses) on hedge contracts	(4.7	)	(1.5	)	(14.5	)	0.5
Net unrealized losses on hedge contracts reclassified into earnings	4.6		0.5		4.1		0.5
Foreign currency translation adjustments	1.7		3.9		15.5		6.4
Pension and postretirement benefits	0.5				1.1
Total other comprehensive gain	5.3		3.9		9.0		10.3
Total comprehensive gain	$91.9		$78.4		$157.3		$18.8

Note 6 – Inventories

Inventories included the following components:


(Dollar amounts in millions)	December 31, 2007	June 30, 2007
Raw materials and supplies	$ 55.4	$ 49.9
Work-in-process	13.4	6.3
Finished products	98.5	84.1
Total inventories, net	$167.3	$140.3

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 7 – Additional Information

Selected Accounts

The following table provides the major components of selected accounts of the Condensed Consolidated Statements of Financial Position:


(Dollar amounts in millions)	December 31, 2007	June 30, 2007
Other Current Assets
Current deferred tax asset	$ 43.3	$ 26.0
Other	143.8	163.4
Total other current assets	$187.1	$189.4
Other Long-Term Assets
Noncurrent deferred tax asset	$438.6	$499.1
Prepaid pension benefit cost	41.8	38.6
Other	143.8	87.5
Total other long-term assets	$624.2	$625.2
Other Accrued Expenses
Deferred revenue	$111.0	$107.9
Other	187.6	161.7
Total other accrued expenses	$298.6	$269.6
Other Long-Term Liabilities
Accrued postretirement benefits	$ 56.3	$ 56.3
Accrued pension benefits	63.6	59.4
Noncurrent deferred tax liability	0.8	0.8
Other	157.6	96.8
Total other long-term liabilities	$278.3	$213.3

Assets Held for Sale

In connection with the Celera group’s decision to exit its small molecule drug discovery and development programs during fiscal 2006, the Celera group decided to pursue the sale of its South San Francisco, California facility. As a result of this decision, we reclassified $11.5 million of property, plant and equipment into assets held for sale in 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 estimated market value less estimated selling costs. In fiscal 2007, we recorded an additional $6.8 million pre-tax charge for the facility. The sale of this facility is expected to occur by December 31, 2008.

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:


	December 31, 2007		June 30, 2007
(Dollar amounts in millions)	Gross Carrying Amount	Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization
Amortized intangible assets
Acquired technology	$ 52.5	$17.1	$32.8	$13.3
Patents	30.1	25.7	29.9	25.1
Customer relationships	112.3	8.7	27.1	5.2
Other	2.7	1.0	1.7	0.7
Total amortized intangible assets	$197.6	$52.5	$91.5	$44.3

Unamortized intangible assets
Trade name	28.7		4.9
Total	$226.3	$52.5	$96.4	$44.3

Aggregate amortization expense was as follows:

Three months ended

December 31,

Six months ended

December 31,

(Dollar amounts in millions)

2007

2006

2007

2006

Applied Biosystems group

$3.1

$3.3

$6.1

$6.5

Celera group

2.1

Consolidated

$5.2

$3.3

$8.2

$6.5

We record amortization expense in cost of sales, except for amortization of acquisition-related intangible assets which is recorded in the amortization of purchased intangible assets in the interim condensed consolidated statements of operations. At December 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 2008	$ 6.2	$ 5.1	$11.3
2009	12.0	10.2	22.2
2010	9.5	10.3	19.8
2011	6.2	10.2	16.4
2012	5.0	10.1	15.1

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

The carrying amount of goodwill was as follows:


(Dollar amounts in millions)	Applied Biosystems Group	Celera Group	Consolidated
Balance as of June 30, 2007	$243.2	$ 2.7	$245.9
Goodwill acquired		115.2	115.2
Balance as of December 31, 2007	$243.2	$117.9	$361.1

Refer to Note 3 for information on the goodwill we acquired in connection with the Berkeley HeartLab, Inc. and Atria Genetics, Inc. acquisitions.

Note 9 – Debt and Lines of Credit

We maintain a $250 million unsecured revolving credit agreement with four banks that matures on May 25, 2012. This amount was increased from $200 million effective August 27, 2007, at our request in accordance with the terms of the agreement. Borrowings under this agreement may be made in U.S. dollars and other currencies, and bear interest at a fluctuating rate generally equal to Citibank, N.A.’s base rate or at a periodic fixed rate equal to LIBOR plus a margin of between 15 and 32.5 basis points based on our long-term senior unsecured non-credit enhanced debt ratings. Commitment and facility fees are also based on our long-term senior unsecured non-credit enhanced debt ratings. As of December 31, 2007, there was $125 million outstanding under this agreement, classified as loans payable in the interim condensed consolidated statement of financial position. There were no borrowings outstanding under this agreement at June 30, 2007.

On August 27, 2007, we entered into a $100 million unsecured term loan agreement with Bank of America, N.A. that matures on September 4, 2008. Upon the satisfaction of various conditions, we have the option to extend the maturity date on this agreement to September 4, 2010. If we exercise this option, we would then be required to make partial repayments each quarter, commencing after the original maturity date, equal to 3 percent of the original principal amount of the loan. Borrowings under this agreement bear interest at a fluctuating rate generally equal to Bank of America, N.A.’s base rate or at a periodic fixed rate equal to LIBOR plus a margin of between 20 and 40 basis points based on our long-term senior unsecured non-credit enhanced debt ratings. There was $100 million outstanding under this agreement, classified as loans payable in the interim condensed consolidated statement of financial position, at December 31, 2007.

Both the revolving credit agreement and the term loan agreement require that we maintain a debt to total capital ratio, as defined in each agreement, of not more than 0.50:1:00.

The amounts borrowed under these agreements were used to fund the repurchase of shares of Applera Corporation-Applied Biosystems Common Stock (“Applera-Applied Biosystems stock”) and were allocated entirely to the Applied Biosystems group. In August 2007, we entered into an agreement with Morgan Stanley & Co. Incorporated for the accelerated repurchase of $600 million of the Applera-Applied Biosystems stock. During the first quarter of fiscal 2008, we paid Morgan Stanley approximately $602 million for this transaction, of which $275 million was funded by loans payable and the balance with cash. In October 2007, 16 million shares were delivered to us. In January 2008, Morgan Stanley exercised its option to settle the accelerated share repurchase transaction and delivered to us 1.9 million shares of Applera-Applied Biosystems stock, which supplements the shares that were received in October 2007.

The weighted average interest rate on all amounts outstanding under these agreements at December 31, 2007 was 5.40%.

In connection with the acquisition of BHL, we assumed approximately $10.8 million of floating and fixed rate debt, mostly secured by BHL’s accounts receivable and other certain fixed assets. As of December 31, 2007, approximately $0.2 million in unsecured debt remains. See Note 3 for additional information on the BHL acquisition.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 10 – Supplemental Cash Flow Information

Significant non-cash financing activity for the six months ended December 31 was as follows:


(Dollar amounts in millions)	2007	2006
Dividends declared but not paid	$7.2	$ 7.8
Tax benefit related to employee stock options	8.4	14.0
Issuances of restricted stock	2.5	2.4

Note 11 – 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 December 31, 2007, the financing companies’ outstanding balance of lease receivables with recourse to us was $5.3 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 $63 million at December 31, 2007, is not expected to have a material adverse effect on our interim 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.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

The following table provides an analysis of the warranty reserve for the six months ended December 31:


(Dollar amounts in millions)	2007		2006
Balance beginning of period	$12.1		$10.6
Accruals for warranties	7.7		8.0
Usage of reserve	(8.8	)	(8.2	)
Other*	(0.3	)
Balance at December 31	$10.7		$10.4

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

Note 12 – Pension and Other Postretirement Benefits

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


	Three months ended December 31,				Six months ended December 31,

(Dollar amounts in millions)	2007		2006		2007		2006
Pension
Service cost	$ 0.9		$ 0.8		$ 1.8		$ 1.8
Interest cost	11.2		10.9		22.5		21.8
Expected return on plan assets	(12.2	)	(11.7	)	(24.5	)	(23.3	)
Amortization of prior service cost	0.2		0.2		0.5		0.4
Amortization of losses	0.7		1.4		1.4		2.6
Net periodic expense	$ 0.8		$ 1.6		$ 1.7		$ 3.3
Postretirement Benefit
Service cost	$ 0.1		$ -		$ 0.1		$ 0.1
Interest cost	0.7		0.9		1.4		1.8
Amortization of gains			(0.1	)			(0.2	)
Net periodic expense	$ 0.8		$ 0.8		$ 1.5		$ 1.7

We contributed approximately $1 million to our foreign and non-qualified domestic plans during the six months ended December 31, 2007, and expect to contribute an additional $2 million during the remainder of fiscal 2008. Based on the level of our contributions to the qualified U.S. pension plan during 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 2008 in order to meet minimum statutory funding requirements. We made benefit payments of approximately $3 million under the postretirement plan during the six months ended December 31, 2007, and we expect to make approximately $3 million of additional benefit payments during the remainder of fiscal 2008.

Note 13 – 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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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.

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.” These four patents have since expired. 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. In August and September, 2007, the court issued a series of orders favorable to Applera and dismissing all of these claims, but those orders may be appealed by Enzo to the United States Court of Appeals for the Federal Circuit.

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 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,

APPLERA CORPORATION

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continued

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.

We filed a complaint for patent infringement against Michigan Diagnostics LLC on March 26, 2007, in the U.S. District Court for the District of Massachusetts. We amended the complaint on April 5, 2007. The amended complaint alleges infringement by Michigan Diagnostics of U.S. Patent Nos. 6,514,717, 6,322,727 and 6,107,024, which are related to chemiluminescent products and methods, and seeks monetary damages, costs, expenses, injunctive, and other relief as the court deems proper. Michigan Diagnostics filed an answer and counterclaims to our complaint on January 7, 2008, seeking a declaratory judgment of non-infringement, invalidity, and unenforceability of approximately 60 patents related to chemiluminescent products and methods, and including antitrust claims based on our alleged misconduct in our alleged enforcement of those patents. Previously, on May 14, 2007, Michigan Diagnostics filed a separate complaint against Applera in the U.S. District Court for the Eastern District of Michigan, which was transferred to U.S. District Court for the District of Massachusetts in November 2007. This transferred complaint made substantially the same allegations as in the answer and counterclaims described above and sought substantially the same relief. However, on January 29, 2008, the court terminated this transferred case.

We filed a complaint on May 31, 2007, in the U.S. District Court for the Northern District of California against Illumina, Inc., Solexa Inc., and a former chief patent counsel to our company, seeking an injunction restoring to us patents and patent applications that were filed by the former chief patent counsel but are on their face assigned to Solexa, which was acquired by Illumina in January 2007. The complaint also seeks a declaration of our rights and duties regarding infringement of these patents, in addition to monetary damages, costs, expenses, and other relief as the court deems proper. We previously filed a related complaint, on December 26, 2006, in the Superior Court of the State of California (Santa Clara County), also seeking restoration of these patents and patent applications to us. Pursuant to a joint stipulation of the parties, the California state court action was dismissed on August 7, 2007. On August 13, 2007, Solexa filed its answer to the federal complaint and counterclaimed that we make, use, sell, and offer for sale DNA sequencing products that infringe the patents, U.S. Patent Nos. 5,750,341, 5,969,119, 6,306,597. Solexa is seeking monetary damages, costs, expenses, injunctive relief, 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 14 – Discontinued Operations

During fiscal year 2008, in the first quarter, we received $12.9 million in cash related to the settlement of German tax audits related to one of our former German affiliates.

Note 15 – Segment and Consolidating Information

Business Segments

We are organized based on the products and services that we offer. We operate in the life science and healthcare industries through two reportable segments: the Applied Biosystems group and the Celera group. We collectively refer to the Applied Biosystems group and the Celera group as the groups. 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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

response to the threat of biological terrorism and other malicious, accidental, and natural biological dangers; and quality and safety testing, such as testing required for food and pharmaceutical manufacturing. The Celera group is a diagnostics business delivering personalized disease management through a combination of products and services incorporating proprietary discoveries. BHL, a subsidiary of the Celera group, offers clinical laboratory testing services to characterize cardiovascular disease risk and optimize patient management. The Celera group also commercializes a wide range of molecular diagnostic products through its strategic alliance with Abbott Laboratories and has licensed its diagnostic technologies to clinical laboratories to provide personalized disease management in cancer and liver diseases.

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 2007 Annual Report to Stockholders for 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).

Transactions between Segments

The following table presents net revenue recorded by the Applied Biosystems group from leased instruments and sales of consumables and project materials to the Celera group:


	Three months ended December 31,		Six months ended December 31,
(Dollar amounts in millions)	2007	2006	2007	2006
Applied Biosystems Group
Sales to the Celera group	$0.8	$1.3	$1.5	$2.4

Additionally, in accordance with our tax allocation policy, the Applied Biosystems group received, without reimbursement to the Celera group, $7.3 million in the first six months of fiscal 2008 and $13.3 million in the first six months of fiscal 2007, some of the tax benefits generated by the Celera group.

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 December 31, 2007


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

Products	$463,153		$ 4,574		$ -		$467,727
Services	69,761		21,150				90,911
Other	28,103		14,621				42,724
Net revenues from external customers	561,017		40,345		-		601,362
Intersegment revenues	823				(823	)
Total Net Revenues	561,840		40,345		(823	)	601,362
Products	202,218		2,860		(220	)	204,858
Services	30,061		6,703		(41	)	36,723
Other	2,932		1,743				4,675
Cost of Sales	235,211		11,306		(261	)	246,256
Gross Margin	326,629		29,039		(562	)	355,106
Selling, general and administrative	142,230		17,878		14,963		175,071
Corporate allocated expenses	12,726		2,244		(14,970	)
Research and development	44,444		10,575		(378	)	54,641
Amortization of purchased intangible assets	2,611		2,105				4,716
Employee-related charges, asset impairments and other	2,878		407				3,285
Operating Income (Loss)	121,740		(4,170	)	(177	)	117,393
Gain on investments, net	2,611						2,611
Interest income (expense), net	(227	)	4,477				4,250
Other income (expense), net	1,240		165				1,405
Income before Income Taxes	125,364		472		(177	)	125,659
Provision for income taxes	39,049		164		(152	)	39,061
Net Income	$ 86,315		$ 308		$ (25	)	$ 86,598

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Operations for the Six Months Ended December 31, 2007


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

Products	$ 868,200		$ 7,019		$ -		$ 875,219
Services	134,134		21,150				155,284
Other	59,215		28,317				87,532
Net revenues from external customers	1,061,549		56,486		-		1,118,035
Intersegment revenues	1,537				(1,537	)
Total Net Revenues	1,063,086		56,486		(1,537	)	1,118,035
Products	391,884		5,951		(398	)	397,437
Services	58,862		6,703		(95	)	65,470
Other	5,771		1,805				7,576
Cost of Sales	456,517		14,459		(493	)	470,483
Gross Margin	606,569		42,027		(1,044	)	647,552
Selling, general and administrative	279,385		24,499		27,681		331,565
Corporate allocated expenses	24,003		3,691		(27,694	)
Research, development and engineering	94,991		21,296		(837	)	115,450
Amortization of purchased intangible assets	5,223		2,105				7,328
Employee-related charges, asset impairments, and other	2,878		407				3,285
Asset dispositions and legal settlements	(7,556	)					(7,556	)
Operating Income (Loss)	207,645		(9,971	)	(194	)	197,480
Gain on investments, net	2,611						2,611
Interest income, net	3,453		11,610				15,063
Other income (expense), net	2,310		(118	)			2,192
Income before Income Taxes	216,019		1,521		(194	)	217,346
Provision for income taxes	68,762		548		(252	)	69,058
Net Income	$ 147,257		$ 973		$ 58		$ 148,288

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Financial Position at December 31, 2007


(Dollar amounts in thousands)	Applied Biosystems Group	Celera Group	Eliminations		Consolidated
Assets
Current assets
Cash and cash equivalents	$ 355,866	$ 47,702	$ -		$ 403,568
Short-term investments		294,713			294,713
Accounts receivable, net	411,021	30,095	(797	)	440,319
Inventories, net	157,318	10,726	(705	)	167,339
Prepaid expenses and other current assets	147,573	40,620	(1,118	)	187,075
Total current assets	1,071,778	423,856	(2,620	)	1,493,014
Property, plant and equipment, net	374,782	11,965	(134	)	386,613
Goodwill and intangible assets, net	291,287	243,606			534,893
Other long-term assets	500,781	122,927	515		624,223
Total Assets	$2,238,628	$802,354	$(2,239	)	$3,038,743

Liabilities and Stockholders’ Equity
Current liabilities
Loans payable	$ 225,000	$ 82	$ -		$ 225,082
Accounts payable	155,234	8,058	(1,559	)	161,733
Accrued salaries and wages	71,550	6,967			78,517
Current deferred tax liability	16,475				16,475
Accrued taxes on income	19,610	1,007			20,617
Other accrued expenses	281,813	17,200	(421	)	298,592
Total current liabilities	769,682	33,314	(1,980	)	801,016
Other long-term liabilities	272,903	5,504	(141	)	278,266
Total Liabilities	1,042,585	38,818	(2,121	)	1,079,282

Total Stockholders’ Equity	1,196,043	763,536	(118	)	1,959,461
Total Liabilities and Stockholders’ Equity	$2,238,628	$802,354	$(2,239	)	$3,038,743

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Cash Flows for the Six Months Ended December 31, 2007


(Dollar amounts in thousands)	Applied Biosystems Group		Celera Group		Eliminations		Consolidated
Operating Activities of Continuing Operations
Net income	$ 147,257		$ 973		$ 58		$ 148,288
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	38,238		5,303		(215	)	43,326
Employee-related charges and other	3,719		(127	)			3,592
Share-based compensation and pension	10,182		2,791				12,973
Deferred income taxes	30,651		7,894		(917	)	37,628
Sale of assets and legal settlements, net	(2,611	)	(68	)	68		(2,611	)
Nonreimbursable utilization of intergroup tax benefits	7,348		(7,348	)
Changes in operating assets and liabilities:
Accounts receivable	53,895		(2,611	)	579		51,863
Inventories	(22,942	)	(399	)	134		(23,207	)
Prepaid expenses and other assets	(27,284	)	(963	)	(933	)	(29,180	)
Accounts payable and other liabilities	(12,483	)	(2,165	)	1,138		(13,510	)
Net Cash Provided by Operating Activities of Continuing Operations	225,970		3,280		(88	)	229,162
Net Cash Provided by Discontinued Operations	12,900						12,900
Investing Activities of Continuing Operations
Additions to property, plant and equipment, net	(20,077	)	(1,623	)	179		(21,521	)
Proceeds from maturities of available-for-sale investments			63,919				63,919
Proceeds from sales of available-for-sale investments	213,850		243,027				456,877
Purchases of available-for-sale investments	(12,553	)	(70,160	)			(82,713	)
Acquisitions and investments, net of cash acquired	(179	)	(214,437	)			(214,616	)
Proceeds from the sale of assets, net	3,331		485		(91	)	3,725
Net Cash Provided by Investing Activities of Continuing Operations	184,372		21,211		88		205,671
Financing Activities
Net change in revolving credit line	125,000						125,000
Proceeds from loan payable	100,000						100,000
Payments on loans payable and debt			(10,560	)			(10,560	)
Dividends	(15,539	)					(15,539	)
Purchases of common stock for treasury	(601,505	)					(601,505	)
Proceeds from stock issued for stock plans and other	40,541		3,735				44,276
Net Cash Used by Financing Activities of Continuing Operations	(351,503	)	(6,825	)			(358,328	)
Effect of Exchange Rate Changes on Cash	(9,040	)					(9,040	)
Net Change in Cash and Cash Equivalents	62,699		17,666				80,365
Cash and Cash Equivalents Beginning of Period	293,167		30,036				323,203
Cash and Cash Equivalents End of Period	$ 355,866		$ 47,702		$ -		$ 403,568

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

Products	$440,088		$ 2,758		$ -		$442,846
Services	60,782						60,782
Other	27,761		10,460				38,221
Net revenues from external customers	528,631		13,218		-		541,849
Intersegment revenues	1,349				(1,349	)
Total Net Revenues	529,980		13,218		(1,349	)	541,849
Products	205,905		4,397		(500	)	209,802
Services	26,622				(83	)	26,539
Other	2,956		99				3,055
Total Cost of Sales	235,483		4,496		(583	)	239,396
Gross Margin	294,497		8,722		(766	)	302,453
Selling, general and administrative	134,229		5,557		15,056		154,842
Corporate allocated expenses	13,295		1,768		(15,063	)
Research and development	50,876		11,935		(651	)	62,160
Amortization of purchased intangible assets	2,842						2,842
Employee-related charges, asset impairments and other			2,513				2,513
Asset dispositions and legal settlements	(7,788	)	(2,357	)			(10,145	)
Operating Income (Loss)	101,043		(10,694	)	(108	)	90,241
Interest income, net	3,391		6,954				10,345
Other income (expense), net	927		112				1,039
Income (Loss) before Income Taxes	105,361		(3,628	)	(108	)	101,625
Provision (benefit) for income taxes	30,579		(3,142	)	(301	)	27,136
Net Income (Loss)	$ 74,782		$ (486	)	$ 193		$ 74,489

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Operations for the Six Months Ended December 31, 2006


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

Products	$ 828,684	$ 5,244		$ -		$ 833,928
Services	118,922					118,922
Other	56,205	18,203				74,408
Net revenues from external customers	1,003,811	23,447		-		1,027,258
Intersegment revenues	2,442			(2,442	)
Total Net Revenues	1,006,253	23,447		(2,442	)	1,027,258
Products	399,281	8,041		(861	)	406,461
Services	51,291			(154	)	51,137
Other	5,626	256				5,882
Total Cost of Sales	456,198	8,297		(1,015	)	463,480
Gross Margin	550,055	15,150		(1,427	)	563,778
Selling, general and administrative	257,774	11,204		28,249		297,227
Corporate allocated expenses	24,900	3,362		(28,262	)
Research, development and engineering	95,991	25,156		(1,085	)	120,062
Amortization of purchased intangible assets	5,579					5,579
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)	50,261	(28,228	)	(329	)	21,704
Gain on investments, net	209					209
Interest income, net	6,021	13,537				19,558
Other income (expense), net	2,241	215				2,456
Income (Loss) before Income Taxes	58,732	(14,476	)	(329	)	43,927
Provision (benefit) for income taxes	42,672	(6,939	)	(283	)	35,450
Net Income (Loss)	$ 16,060	$ (7,537	)	$ (46	)	$ 8,477

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Financial Position at June 30, 2007


(Dollar amounts in thousands)	Applied Biosystems Group	Celera Group	Eliminations		Consolidated
Assets
Current assets
Cash and cash equivalents	$ 293,167	$ 30,036	$ -		$ 323,203
Short-term investments	201,297	531,460			732,757
Accounts receivable, net	446,833	6,258	(218	)	452,873
Inventories, net	132,094	8,826	(571	)	140,349
Prepaid expenses and other current assets	161,040	30,360	(1,995	)	189,405
Total current assets	1,234,431	606,940	(2,784	)	1,838,587
Property, plant and equipment, net	383,594	7,386	(170	)	390,810
Goodwill and intangible assets, net	295,298	2,663			297,961
Other long-term assets	473,281	151,694	207		625,182
Total Assets	$2,386,604	$768,683	$(2,747	)	$3,152,540

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$ 161,440	$ 3,016	$(1,791	)	$ 162,665
Accrued salaries and wages	99,694	8,858			108,552
Current deferred tax liability	15,633				15,633
Accrued taxes on income	51,212	15,489			66,701
Other accrued expenses	259,743	10,463	(583	)	269,623
Total current liabilities	587,722	37,826	(2,374	)	623,174
Other long-term liabilities	208,550	4,959	(197	)	213,312
Total Liabilities	796,272	42,785	(2,571	)	836,486

Total Stockholders’ Equity	1,590,332	725,898	(176	)	2,316,054
Total Liabilities and Stockholders’ Equity	$2,386,604	$768,683	$(2,747	)	$3,152,540

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Cash Flows for the Six Months Ended December 31, 2006


(Dollar amounts in thousands)	Applied Biosystems Group		Celera Group		Eliminations		Consolidated
Operating Activities
Net income (loss)	$ 16,060		$ (7,537	)	$ (46	)	$ 8,477
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization	39,405		3,391		(150	)	42,646
Asset impairments			3,000				3,000
Employee-related charges and other			3,013				3,013
Share-based compensation programs	7,422		1,473				8,895
Deferred income taxes	(3,960	)	6,134		(1,465	)	709
Sale of assets and legal settlements, net	(209	)					(209	)
Acquired research and development	114,251						114,251
Nonreimbursable utilization of intergroup tax benefits	13,309		(13,309	)
Changes in operating assets and liabilities:
Accounts receivable	(6,578	)	3,711		329		(2,538	)
Inventories	(11,270	)	(116	)	353		(11,033	)
Prepaid expenses and other assets	(5,892	)	(4,324	)	(3,284	)	(13,500	)
Accounts payable and other liabilities	(38,776	)	(10,585	)	4,217		(45,144	)
Net Cash Provided (Used) by Operating Activities	123,762		(15,149	)	(46	)	108,567
Investing Activities
Additions to property, plant and equipment, net	(27,283	)	(1,214	)	46		(28,451	)
Proceeds from maturities of available-for-sale investments			130,745				130,745
Proceeds from sales of available-for-sale investments	29,113		248,495				277,608
Purchases of available-for-sale investments	(76,334	)	(411,437	)			(487,771	)
Acquisitions and investments	(121,403	)					(121,403	)
Proceeds from the sale of assets, net	322						322
Net Cash Used by Investing Activities	(195,585	)	(33,411	)	46		(228,950	)
Financing Activities
Dividends	(15,411	)					(15,411	)
Purchases of common stock for treasury	(59,856	)					(59,856	)
Proceeds from stock issued for stock plans and other	63,463		11,121				74,584
Net Cash Provided (Used) by Financing Activities	(11,804	)	11,121				(683	)
Effect of Exchange Rate Changes on Cash	6,220						6,220
Net Change in Cash and Cash Equivalents	(77,407	)	(37,439	)			(114,846	)
Cash and Cash Equivalents Beginning of Period	373,921		60,270				434,191
Cash and Cash Equivalents End of Period	$ 296,514		$ 22,831		$ -		$ 319,345

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 2007 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, such as testing required for food and pharmaceutical manufacturing.

The Celera group is a diagnostics business delivering personalized disease management through a combination of products and services incorporating proprietary discoveries. Berkeley HeartLab, Inc. (“BHL”), a subsidiary of the Celera group, offers clinical laboratory testing services to characterize cardiovascular disease risk and optimize patient management. The Celera group also commercializes a wide range of molecular diagnostic products through its strategic alliance with Abbott Laboratories and has licensed its diagnostic technologies to clinical laboratories to provide personalized disease management in cancer and liver diseases.

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 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.

APPLERA CORPORATION

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

OPERATIONS continued

On August 8, 2007, we announced that our board of directors has retained Morgan Stanley & Co. Incorporated to explore alternatives to our current tracking stock structure, including the possibility of creating independent publicly-traded companies in place of our two business groups, the Applied Biosystems group and the Celera group. In January 2008, we reiterated a preference of our board of directors to dissolve the current tracking stock structure and create separate, publicly traded companies for the Applied Biosystems group and the Celera group. Although no final decision has been reached, we expect to file a registration statement with the Securities and Exchange Commission (“SEC”) by the end of the third quarter of fiscal 2008 in an effort to finalize a separation by June 30, 2008, the end of our 2008 fiscal year. We intend to update shareholders as the analysis is completed and the decision is finalized. No assurances can be given that the board will ultimately authorize such a transaction or that, if authorized, such a transaction will be consummated.

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 2007 filed with the Securities and Exchange Commission.

Our fiscal year ends on June 30. The financial information for both segments is presented in Note 15 to our interim 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 November 7, 2007.

Applied Biosystems Group

•

In January 2008, Morgan Stanley exercised its option to settle an accelerated share repurchase transaction and delivered to us 1.9 million shares of Applera-Applied Biosystems stock. These new shares supplement the 16 million shares that were received in October 2007. See Note 9 to our interim condensed consolidated financial statements for more information on the accelerated share repurchase.

•

Also in January 2008, the Applied Biosystems group launched its SOLiD system service provider program and named its first four participants. The program enables researchers who don’t own or can’t access SOLiD system technology an effective channel for generating high-quality genomic data at a reasonable cost and/or evaluating our next-generation sequencing technology prior to system purchase.

•

In December 2007, our board of directors named Mark P. Stevenson a Senior Vice President of Applera and President and Chief Operating Officer of the Applied Biosystems group.

•

Also in December, the Applied Biosystems group launched GeneMapper^® ID-X, a powerful new software application designed to help forensic laboratories deliver faster DNA results by automating routine DNA data analysis, facilitating more efficient manual review of complex samples and improving the overall workflow of forensic analysis. GeneMapper ID-X software is an expert system developed with feedback obtained from many of the more than a thousand forensic laboratories that the Applied Biosystems group supports worldwide.

•

In November 2007, the Applied Biosystems group announced an exclusive agreement and collaboration with BioTrove, Inc. to deploy and market TaqMan^® genotyping assays on BioTrove’s mid-density OpenArray platform, enabling customers to cost-effectively identify tens to hundreds of single nucleotide polymorphisms (SNPs) in thousands of samples. The product offering is expected to address commercial screening applications in human health and agriculture.

Celera Group

•

In January 2008, the Celera group published three papers in the Journal of the American College of Cardiology reporting that a variant of the gene encoding kinesin-like protein 6 (“KIF6”) is associated with up to a 55% increased risk of primary and recurrent coronary heart disease events. These research studies included a total of more than 30,000 individuals, among whom about 60% are carriers of this risk variant. The studies also showed that the excess risk associated with the KIF6 variant was virtually eliminated by pravastatin (Pravachol^®) therapy and that high-dose atorvastatin (Lipitor^®) therapy reduced risk in carriers of the KIF6 risk variant more effectively than moderate-dose pravastatin therapy in acute coronary syndrome patients.

APPLERA CORPORATION

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

OPERATIONS continued

•

In January 2008, the United States Court of Appeals for the Federal Circuit vacated the permanent injunction granted by the lower court for Innogenetics N.V., Ghent, Belgium against Abbott Laboratories in selling hepatitis C virus (“HCV”) genotyping products. Since the jury’s damage award included an upfront entry fee, the Court remanded to the lower court to determine the terms of a compulsory license for Abbott’s future sales. In addition, the Court remanded for a new trial on the validity of the Innogenetics patent in view of a prior-issued patent. 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 January 2008, Abbott received CE mark certification for a new Chlamydia Real Time PCR test. This is a newly formulated, and highly sensitive, molecular test, which is performed on the m2000 system, and is capable of detecting a recently identified new variant strain of Chlamydia trachomatis.

•

In January 2008, Laboratory Corporation of America^® Holdings (“LabCorp”) commenced the commercialization of the first of two breast cancer assays based on the Celera group’s estrogen/progesterone receptor discoveries. These assays were developed under a license agreement that allows LabCorp to select from among the Celera group’s genomic findings to develop and commercialize two molecular oncology laboratory service tests.

•

In January 2008, the Celera group restructured management to support the integration of the BHL and Atria Genetics Inc. (“Atria”) acquisitions. Michael Zoccoli, Ph.D., was promoted to the position of General Manager of the Celera group’s in vitro diagnostic product business. Dr. Zoccoli joined the Celera group in 2002, and in this new position he will oversee all product development, manufacturing, quality, regulatory and product support activities in the Celera group’s in vitro diagnostic product business.

•

In November 2007, the Celera group and Ipsen entered into a pharmacogenomics research collaboration to develop biomarker and pharmacogenomic tests for patients with growth failure.

Critical Accounting Estimates

There were no material changes to our critical accounting estimates during the first six months of fiscal 2008, except for our revenue recognition policy, as described below, due to the acquisition of BHL in October 2007. For further information on our critical accounting estimates, refer to the discussion contained in the management’s discussion and analysis section of our 2007 Annual Report to Stockholders (which discussion is incorporated in this quarterly report by reference).

Revenue Recognition

The following describes only the areas that are most subject to our judgment. Refer to Note 1, Accounting Policies and Practices, to our interim condensed consolidated financial statements for a more detailed discussion of our revenue recognition policy.

In the normal course of business, we enter into arrangements whereby revenues are derived from multiple deliverables. In these revenue arrangements, we record revenue as the separate elements are delivered to the customer if the delivered item is determined to represent a separate earnings process, there is objective and reliable evidence of the fair value of the undelivered item, and delivery or performance of the undelivered item is probable and substantially in our control. For instruments where installation is determined to be a separate earnings process, the portion of the sales price allocable to the fair value of the installation is deferred and recognized when installation is complete. We determine the fair value of the installation process based on technician labor billing rates, the expected number of hours to install the instrument based on historical experience, and amounts charged by third parties. We continually monitor the level of effort required for the installation of our instruments to ensure that appropriate fair values have been determined.

APPLERA CORPORATION

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

OPERATIONS continued

We recognize royalty revenues when earned over the term of the agreement in exchange for the grant of licenses to use our products or some technologies for which we hold patents. We recognize revenue for estimates of royalties earned during the applicable period, based on historical activity, and make revisions for actual royalties received in the following quarter. Historically, these revisions have not been material to our consolidated financial statements. For those arrangements where royalties cannot be reasonably estimated, we recognize revenue upon the receipt of cash or royalty statements from our licensees.

A portion of the Celera group’s reported net revenues include patient test service revenues associated with BHL’s operations. We recognize patient test service revenues upon completion of the testing process and when the test results are sent to the ordering physicians. Billings for services reimbursed by third-party payors, including Medicare, are recorded net of allowances for differences between amounts billed and the estimated receipts from such payors. For the second quarter of fiscal 2008, revenue from Medicare patients represented approximately 39% of the total BHL patient test service revenues. Payment arrangements with third parties, such as Medicare and some insurance companies, include predetermined rates for patient tests. Adjustments to the estimated receipts, based on final settlement with the third-party payors, including Medicare, are recorded in revenue upon settlement.

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.


Income/(charge)	Three months ended December 31,				Six months ended December 31,
(Dollar amounts in millions)	2007		2006		2007		2006
Severance and benefit costs	$(3.7	)	$ -		$(3.7	)	$ -
Asset impairments			(3.0	)			(3.0	)
Other	0.4		(0.1	)	0.4		(3.6	)
Reduction of expected costs			0.6				0.6
Total employee-related charges, asset impairments and other	$(3.3	)	$(2.5	)	$(3.3	)	$ (6.0	)
Other events impacting comparability:
Revenue from sale of small molecule program	$ -		$ 2.5		$ -		$ 2.5
Asset dispositions and legal settlements			10.2		7.6		1.1
Acquired research and development							(114.3	)
Investment gains	2.6				2.6
Tax items	(0.5	)	1.0		(2.3	)	9.8

Acquisitions

APPLERA CORPORATION

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

OPERATIONS continued

In late October 2007, we acquired substantially all of the assets of Atria, a privately held company based in South San Francisco, CA, for $33.3 million in cash, including transaction costs. Atria has a line of human leukocyte antigen (“HLA”) testing products that are used for identifying potential donors in the matching process for bone marrow transplantation. The acquisition is a strategic fit for the Celera group providing direct access to the niche market of tissue typing in the transplantation and bone marrow registry market.

The net assets and results of operations of BHL and Atria have been included in our condensed consolidated financial statements since their respective acquisition dates, and have been allocated to the Celera group. For further information on these acquisitions, see Note 3 to our interim 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 Agencourt Personal Genomics, Inc. (“APG”). As of the acquisition date, in July 2006, 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 work on this project was completed in September 2007. The following table briefly describes the APG project.


	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

In June 2007, we made our first placements of this next generation instrument system to early access customers. The initial instrument and reagents are expected to begin generating revenue in fiscal 2008. The total project costs were approximately $29 million, an increase of $13 million from the estimate as of the acquisition date. These additional R&D expenditures were for labor and materials required to accelerate the commercial launch of the platform and optimize features to better compete with other already commercialized next generation technologies. This increase in costs was offset by reductions in other planned R&D projects. Based on the performance of the system, the level of interest shown by our potential customers, and the progress in our manufacturing scale up, we accelerated the commercial release of the system to October 2007.

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. We remain optimistic about the 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.

APPLERA CORPORATION

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

OPERATIONS continued

Employee-Related Charges, Asset Impairments and Other

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

Applied Biosystems group

Fiscal 2008

Charges prior to fiscal 2007

During the first six months of fiscal 2008, the Applied Biosystems group made cash payments of approximately $0.7 million related to excess facility lease space charges recorded in fiscal 2005. The remaining cash payments of $1.0 million as of December 31, 2007 are expected to be disbursed by fiscal 2011. In accordance with Statement of Financial Accounting Standards (“SFAS”) 146, “Accounting for Costs Associated with Exit or Disposal Activities”, the excess facility lease space charge included a reduction for future estimated sublease rentals for the property. A sublease rental was not obtained for the property and over the course of the lease, additional charges of $0.6 million were recorded in operating expenses. Additionally, in the second quarter of fiscal 2007, a charge of $0.5 million was recorded in operating expenses to reserve for additional estimated costs under the lease.

Celera group

Fiscal 2008

Fiscal 2007

APPLERA CORPORATION

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

OPERATIONS continued

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 appealed the judgment. On January 17, 2008, the United States Court of Appeals for the Federal Circuit vacated the permanent injunction granted by the lower court for Innogenetics against Abbott in selling HCV genotyping products. Since the jury’s damage award included an upfront entry fee, the Court remanded to the lower court to determine the terms of a compulsory license for Abbott’s future sales. In addition, the Court remanded for a new trial on the validity of the Innogenetics patent in view of a prior-issued patent. The Court also affirmed the judgment of infringement and the judgment of no willful infringement.

Charges prior to fiscal 2007

Other Events Impacting Comparability

Revenue from sale of small molecule program

Asset dispositions and legal settlements

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

Fiscal 2008

Fiscal 2007

APPLERA CORPORATION

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

OPERATIONS continued

Investments

The Applied Biosystems group recorded a pre-tax gain of $2.6 million in gain on investments in the second quarter of fiscal 2008 from the sale of a non-strategic minority equity investment.

Tax items

Fiscal 2008

Fiscal 2007

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
December 31,

Six Months Ended
December 31,

(Dollar amounts in millions)

2007

2006

%
Increase/

(Decrease)

2007

2006

%
Increase/

(Decrease)

Net revenues

$601.4

$541.9

11.0%

$1,118.0

$1,027.3

8.8%

Cost of sales

246.2

239.4

2.8%

470.4

463.5

1.5%

Gross margin

355.2

302.5

17.4%

647.6

563.8

14.9%

SG&A expenses

175.1

154.9

13.0%

331.6

297.2

11.6%

R&D

54.7

62.2

(12.1%

)

115.5

120.1

(3.8%

)

Amortization of purchased intangible

assets

4.7

2.9

62.1%

7.3

5.6

30.4%

Employee-related charges, asset

impairments and other

3.3

2.5

32.0%

3.3

6.0

(45.0%

)

Asset dispositions and legal settlements

(10.2

)

(100.0%

)

(7.6

)

(1.1

)

590.9%

Acquired research and development

114.3

(100.0%

)

Operating income

117.4

90.2

30.2%

197.5

21.7

810.1%

Gain on investments, net

2.6

0.2

Interest income, net

4.3

10.4

(58.7%

)

15.1

19.6

(23.0%

)

Other income (expense), net

1.4

1.0

40.0%

2.1

2.4

(12.5%

)

Income before income taxes

125.7

101.6

23.7%

217.3

43.9

395.0%

Provision for income taxes

39.1

27.1

44.3%

69.0

35.4

94.9%

Net income

$ 86.6

$ 74.5

16.2%

$ 148.3

$ 8.5

Percentage of net revenues:

Gross margin

59.1%

55.8%

57.9%

54.9%

SG&A expenses

29.1%

28.6%

29.7%

28.9%

R&D

9.1%

11.5%

10.3%

11.7%

Operating income

19.5%

16.6%

17.7%

2.1%

Effective income tax rate

31.1%

26.7%

31.8%

80.6%

The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2008 and 2007:


	Three Months Ended December 31,			Six Months Ended December 31,
(Dollar amounts in millions)	2007		2006	2007	2006
Income (charge) included in income before income taxes	$(0.7	)	$10.2	$6.9	$(116.7	)
Provision (benefit) for income taxes	0.3		2.3	4.5	(10.4	)

Net income increased in the second quarter and first six months of fiscal 2008 compared to the prior year periods primarily due to the previously described events impacting comparability, higher net revenues and gross margin, and lower R&D expenses, partially offset by higher SG&A expenses. The net effect of foreign currency on our net income was a benefit of approximately $9 million during the second quarter of fiscal 2008 and approximately $15 million during the first six months of fiscal 2008 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 second quarter and first six months of fiscal 2008 compared with the prior year periods. The effect of foreign currency increased net revenues by approximately 4% in the second quarter of fiscal 2008 and 3% in the first six months of fiscal 2008 as compared to the prior year periods.

APPLERA CORPORATION

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

OPERATIONS continued

•

Net revenues at the Applied Biosystems group increased for the second quarter and first six months of fiscal 2008, driven by strength in the Real-Time PCR/Applied Genomics product category, primarily due to higher sales of consumables products. The Mass Spectrometry product category slightly increased due to higher instrument service contract revenues, which were almost entirely offset by lower instrument revenues. Lower instrument sales in the DNA Sequencing product category were almost entirely offset by higher consumables sales in that category.

•

Net revenues at the Celera group increased for the second quarter and first six months of fiscal 2008 primarily due to the acquisitions of BHL and Atria and higher diagnostic-related licensing and royalty revenues. Also favorably impacting the second quarter of fiscal 2008 were higher equalization payments from Abbott compared to the prior year quarter.

In Europe, revenues increased approximately 13% during the second quarter of fiscal 2008 as compared to the prior year quarter, including the favorable effect of foreign currency of approximately 8%. Excluding the effects of foreign currency, revenues increased by approximately 5% in Europe, primarily as a result of sales of DNA sequencing consumables, TaqMan^® Gene Expression Assay products, sequence detection consumables, Q TRAP^® systems, Real-Time PCR instruments and human identification consumables. This growth was partially offset by lower sales of API triple quad systems and high throughput genetic analyzers. Sales in the U.S. in the second quarter of fiscal 2008 were essentially flat with the prior year quarter as higher sales of API triple quad systems and TaqMan Gene Expression Assay products were offset by lower sales of genetic analyzers and chromatography media consumables. Revenues in Asia Pacific, other than Japan, increased by approximately 15% as compared to the prior year quarter, including a favorable impact from foreign currency of approximately 2%. This growth was led by China. From a product perspective, revenue in Asia Pacific, other than Japan, increased due to higher sales of low to medium throughput genetic analyzers and API triple quad systems. Revenues in Japan during the second quarter of fiscal 2008 decreased by approximately 10% relative to the prior year quarter, including the favorable effect of foreign currency of approximately 5%. This decrease was primarily driven by lower sales of Q TRAP systems, API triple quad systems and genetic analyzers in the region. The Asia Pacific category includes revenues from India and other countries in West Asia, which had previously been managed by our Europe region. Revenues by geographic area for the second quarter of fiscal 2007 have been reclassified to reflect this change.

During the first six months of fiscal 2008, revenues in Europe increased approximately 12% as compared to the prior year period, including the favorable effect of foreign currency of approximately 7%. Excluding the effects of foreign currency, revenues increased by approximately 5% in Europe, primarily as a result of higher sales of DNA sequencing consumables, TaqMan Gene Expression Assay products, Q TRAP systems, sequence detection consumables and human identification consumables. This growth was partially offset by lower sales of genetic analyzers and Q Star systems. Sales in the U.S. increased primarily due to higher sales of API triple quad systems, TaqMan Gene Expression Assay products, and Real-Time PCR consumables. This increase was partially offset by lower sales of genetic analyzers, low end Real-Time PCR instruments, and chromatography media consumables in the first six months of fiscal 2008. Revenues in Asia Pacific, other than Japan, increased by approximately 12% during the first six months of fiscal 2008 as compared to the prior year period, including a favorable impact from foreign currency of approximately 2%. This growth was led by China and Australia. From a product perspective, revenue in Asia Pacific, other than Japan, increased due to higher sales of genetic analyzers, human identification consumables, and RNA kits and reagents. Revenues in Japan during the first six months of fiscal 2008 decreased by approximately 4% relative to the prior year period, including the favorable effect from foreign currency of approximately 4%. This decrease was primarily driven by lower sales of API triple quad and Q TRAP systems in the region. The Asia Pacific category includes revenues from India and other countries in West Asia, which had previously been managed by our Europe region. Revenues by geographic area for the first six months of fiscal 2007 have been reclassified to reflect this change.

The higher gross margin percentage for the second quarter of fiscal 2008 as compared to the prior year quarter was primarily due to lower costs for enzymes due to a combination of improved vendor pricing and lower manufacturing costs and the favorable impact of foreign currency, all at the Applied Biosystems group, higher margin products and services due to the acquisitions of BHL and Atria and higher licensing and royalty revenues at the Celera group. Gross margin, as a percentage of net revenues, increased for the first six months of fiscal 2008 compared to the prior year period primarily due to lower costs for enzymes due to a combination of improved vendor pricing and lower manufacturing costs, the favorable impact of foreign currency, and lower royalty costs due to a renegotiation of a supply agreement with Amersham, all at the Applied Biosystems group, and higher margin products and services due to the acquisitions of BHL and Atria and higher licensing and royalty revenues at the Celera group. Partially

APPLERA CORPORATION

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

OPERATIONS continued

offsetting these benefits was competitive pricing and higher inventory-related costs in the Mass Spectrometry product category at the Applied Biosystems group.

SG&A expenses for the second quarter of fiscal 2008 increased compared to the prior year quarter primarily due to the inclusion of BHL expenses of approximately $12 million at the Celera group, the unfavorable impact of foreign currency of approximately $6 million and higher employee-related costs, net of lower sales commissions, of approximately $5 million, at the Applied Biosystems group. The second quarter of fiscal 2007 included approximately $1 million of integration costs related to Ambion. The second quarter of fiscal 2008 for both the Applied Biosystems group and the Celera group also included expenses related to the review of our corporate structure.

SG&A expenses for the first six months of fiscal 2008 increased compared to the prior year period primarily due to: the inclusion of BHL expenses of approximately $12 million at the Celera group; the unfavorable impact of foreign currency of approximately $8 million; higher employee-related costs, net of reduced sales commissions, of approximately $8 million, regional investments, including additional headcount, of approximately $6 million in fiscal 2008 to support growth primarily in Europe and China; and the reversal in the first quarter of fiscal 2007 of a $5 million accrual related to settled litigation, all at the Applied Biosystems group. The first six months of fiscal 2007 included approximately $3 million of integration costs related to Ambion. The first six months of fiscal 2008 for both the Applied Biosystems group and the Celera group also included expenses related to the review of our corporate structure.

R&D expenses decreased for the second quarter and first six months of fiscal 2008 compared to the prior year periods primarily as a result of lower employee-related costs at the Applied Biosystems group, the termination in June 2007 of a U.S. Department of Defense contract awarded to the Applied Biosystems group in August 2006, the timing of expenses at the Applied Biosystems group, and reduced proteomic-based target discovery and validation related activities at the Celera group, partially offset by investments in the SOLiD system program, the next-generation DNA sequencing system.

Interest income, net decreased during the second quarter and first six months of fiscal 2008 compared to the same periods last year primarily due to interest expense incurred on our loans payable in fiscal 2008 combined with lower average cash and cash equivalents and short-term investments, partially offset by higher average interest rates. The loans, which originated in fiscal 2008, were used to fund the accelerated repurchase of shares of Applera-Applied Biosystems stock, as described below.

The increase in the effective tax rate for the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007 was primarily due to an increase in earnings. The decrease in the effective tax rate for the first six months of fiscal 2008 compared to the prior year period was primarily due to the previously described events impacting comparability; in particular, the tax item recorded in the first quarter of fiscal 2007 and the charge recorded for acquired IPR&D in the first quarter of fiscal 2007 which did not generate a tax benefit.

Applera Corporation

Discussion of Condensed Consolidated Financial Resources and Liquidity

We had cash and cash equivalents and short-term investments of $698.3 million at December 31, 2007, and $1,056.0 million at June 30, 2007. We maintain a $250 million unsecured revolving credit agreement with four banks that matures on May 25, 2012. This amount was increased from $200 million effective August 27, 2007, at our request in accordance with the terms of the agreement. There was $125 million outstanding under this agreement at December 31, 2007. On August 27, 2007, we entered into a $100 million unsecured term loan agreement with Bank of America, N.A. that matures on September 4, 2008. Upon the satisfaction of various conditions, we have the option to extend the maturity date on this agreement to September 4, 2010. There was $100 million outstanding under this agreement at December 31, 2007. Both the revolving credit agreement and the term loan agreement require that we maintain a debt to total capital ratio, as defined in each agreement, of not more than 0.50:1:00. See Note 9 to our interim condensed consolidated financial statements for more information on our loans payable. The amounts borrowed under these agreements were used to fund the repurchase of shares of Applera-Applied Biosystems group stock and were allocated entirely to the Applied Biosystems group. Cash provided by operating activities and our debt borrowings have been our primary source of funds over the last fiscal year.

APPLERA CORPORATION

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

OPERATIONS continued

In April 2007, we announced that our board of directors authorized the repurchase of up to 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. We repurchased 3.4 million shares of Applera-Applied Biosystems stock for approximately $100 million during the fourth quarter of fiscal 2007 under this authorization. Subsequently, on August 8, 2007, we announced that our board of directors increased this authorization to $1.2 billion in the aggregate, including the $100 million discussed above, which at market prices on that date represented approximately 20% of the outstanding shares of Applera-Applied Biosystems stock. Pursuant to this authorization, we entered into an agreement with Morgan Stanley in August 2007 for the accelerated repurchase of $600 million of Applera-Applied Biosystems stock. During the first quarter of fiscal 2008, we paid Morgan Stanley approximately $602 million for this transaction, of which $327 million was funded by cash and $275 million was funded by bank loans, and 16 million shares of Applera-Applied Biosystems stock were delivered to us in October 2007. In January 2008, Morgan Stanley exercised its option to settle the accelerated share repurchase transaction and delivered to us 1.9 million shares of Applera-Applied Biosystems stock. See Note 9 to our interim condensed consolidated financial statements for more information on the accelerated share repurchase. These authorizations supplement the board’s standing authorization to replenish shares of Applera-Applied Biosystems stock issued under our employee stock benefit plans.

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, authorized share repurchases, and dividends for the next twelve months and for the foreseeable future.


(Dollar amounts in millions)	December 31, 2007	June 30, 2007
Cash and cash equivalents	$403.6	$ 323.2
Short-term investments	294.7	732.8
Total cash and cash equivalents and short-term investments	$698.3	$1,056.0
Total debt	225.1
Working capital	692.0	1,215.4
Debt to total capitalization	10.3%

Cash and cash equivalents increased for the first six months of fiscal 2008 from June 30, 2007, as cash generated from operating activities, proceeds from bank loans, net of repayments, sales and maturities of investments, net of purchases, and stock issuances exceeded the payment to Morgan Stanley for the accelerated share repurchase transaction, cash expenditures for the acquisitions of BHL and Atria, capital spending and dividends paid.

Net cash flows of continuing operations for the six months ended December 31 were as follows:


(Dollar amounts in millions)	2007		2006
Net cash from operating activities	$ 229.2		$ 108.6
Net cash from investing activities	205.7		(229.0	)
Net cash from financing activities	(358.3	)	(0.7	)
Effect of exchange rate changes on cash	(9.0	)	6.2

APPLERA CORPORATION

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

OPERATIONS continued

Operating activities:

The increase in net cash provided from operating activities for the first six months of fiscal 2008 compared to the first six months of fiscal 2007 resulted primarily from higher income-related cash flows, a higher source of cash in accounts receivable, and a lower use of cash in accounts payable and other liabilities, partially offset by a higher use of cash in prepaid expenses and other assets. The higher source of cash in accounts receivable was primarily due to a decrease in the days sales outstanding, as described below. The lower use of cash in accounts payable and other liabilities resulted primarily from tax refunds received in the first six months of fiscal 2008 primarily due to the completion of foreign tax audits, partially offset by the timing of royalty payments. The higher use of cash in prepaid expenses and other assets resulted primarily from higher payments in the first six months of fiscal 2008, under license and collaboration agreements, including approximately $37 million made in the second quarter of fiscal 2008. The Applied Biosystems group’s days sales outstanding was 53 days at December 31, 2007, compared to 58 days at June 30, 2007 and 55 days at December 31, 2006. The decrease resulted primarily from strong collections in Europe, Japan, and other Asia Pacific countries. Inventory on hand was 3.5 months at December 31, 2007, compared to 2.7 months at June 30, 2007. The increase was primarily related to the SOLiD system product introduction.

Investing activities:

Capital expenditures, net of disposals, for the first six months of fiscal 2008 were $6.9 million lower than in the prior year period primarily due to expenditures for the Applied Biosystems Portal in the first half of fiscal 2007. The first six months of fiscal 2008 included higher proceeds, net of purchases, from sales and maturities of available for sale investments. In October 2007, we acquired BHL and Atria for approximately $214.4 million, including transaction costs and net of cash acquired. In July 2006, we acquired APG for approximately $121 million, including transaction costs.

Financing activities:

During the first six months of fiscal 2008, we paid Morgan Stanley approximately $602 million for the accelerated share repurchase transaction, of which $275 million was funded by bank loans and the balance with cash. In October 2007, 16 million shares of Applera-Applied Biosystems stock were delivered to us. In January 2008, Morgan Stanley exercised its option to settle the accelerated share repurchase transaction and delivered to us 1.9 million shares of Applera-Applied Biosystems stock. During the first quarter of fiscal 2008, we borrowed $175 million under our $250 million unsecured revolving credit agreement and $100 million under our unsecured term loan agreement. During the second quarter of fiscal 2008, we repaid $50 million of these borrowings. In connection with the acquisition of BHL, we assumed approximately $10.8 million of floating and fixed rate debt, of which $10.6 million was repaid in the second quarter of fiscal 2008. See Note 9 to our interim condensed consolidated financial statements for more information on our debt.

APPLERA CORPORATION

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

OPERATIONS continued

Contractual Obligations

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


	Payments by Period
(Dollar amounts in millions)	Total	2008 ^(a)	2009 - 2010	2011 - 2012	Thereafter
Minimum operating lease payments ^(b)	$138.2	$ 21.5	$63.0	$26.6	$27.1
Purchase obligations ^(c)	148.4	103.4	32.4	9.5	3.1
Other long-term liabilities ^(d)	41.0	3.2	3.9	2.4	31.5
Total	$327.6	$128.1	$99.3	$38.5	$61.7

We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” on July 1, 2007. The amount of unrecognized tax benefits at July 1, 2007 was $67.9 million. This amount has been excluded from the contractual obligations table because we are unable to reasonably predict the ultimate amount or timing of future tax payments.

^(a)

Represents cash obligations for the remainder of fiscal 2008.

^(b)

Refer to Note 10 to our consolidated financial statements in our 2007 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 12 to our interim condensed consolidated financial statements contained in this report and Note 5 to our consolidated financial statements in our 2007 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
December 31,

Six Months Ended
December 31,

(Dollar amounts in millions)

2007

2006

%
Increase/

(Decrease)

2007

2006

%
Increase/

(Decrease)

Net revenues

$561.9

$530.0

6.0%

$1,063.1

$1,006.3

5.6%

Cost of sales

235.2

235.5

(0.1%

)

456.5

456.2

0.1%

Gross margin

326.7

294.5

10.9%

606.6

550.1

10.3%

SG&A expenses

155.1

147.5

5.2%

303.5

282.6

7.4%

R&D

44.4

50.9

(12.8%

)

95.0

96.0

(1.0%

)

Amortization of purchased intangible

assets

2.6

2.9

(10.3%

)

5.2

5.6

(7.1%

)

Employee-related charges, asset

impairments and other

2.9

Asset dispositions and legal settlements

(7.8

)

(100.0%

)

(7.6

)

1.3

(684.6%

)

Acquired research and development

114.3

(100.0%

)

Operating income

121.7

101.0

20.5%

207.6

50.3

312.7%

Gain on investments, net

2.6

0.2

Interest income (expense), net

(0.1

)

3.4

(102.9%

)

3.5

6.0

(41.7%

)

Other income (expense), net

1.2

0.9

33.3%

2.3

2.2

4.5%

Income before income taxes

125.4

105.3

19.1%

216.0

58.7

268.0%

Provision for income taxes

39.1

30.5

28.2%

68.8

42.6

61.5%

Net income

$ 86.3

$ 74.8

15.4%

$ 147.2

$ 16.1

814.3%

Percentage of net revenues:

Gross margin

58.1%

55.6%

57.1%

54.7%

SG&A expenses

27.6%

27.8%

28.5%

28.1%

R&D

7.9%

9.6%

8.9%

9.5%

Operating income

21.7%

19.1%

19.5%

5.0%

Effective income tax rate

31.1%

29.0%

31.8%

72.6%

The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2008 and 2007:


	Three Months Ended December 31,			Six Months Ended December 31,
(Dollar amounts in millions)	2007		2006	2007	2006
Income (charge) included in income before income taxes	($0.3	)	$7.8	$7.3	$(115.6	)
Provision (benefit) for income taxes	0.5		2.5	4.7	(9.2	)

Net income increased at the Applied Biosystems group in the second quarter and first six months of fiscal 2008 compared to the prior year periods due to the previously described events impacting comparability, and higher net revenues and gross margin, partially offset by higher SG&A expenses. The net effect of foreign currency on our net income was a benefit of approximately $9 million during the second quarter of fiscal 2008 and approximately $15 million during the first six months of fiscal 2008 as compared to 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 six months ended December 31:


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

DNA Sequencing	$	146.8	$	146.8	-%	$	275.8	$	278.3	(1%	)
% of total revenues		*26%*		28%			*26%*		28%

Real-Time PCR/Applied Genomics