Edgar Filing: APPLERA CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

1934

For the quarterly period ended March 31, 2007

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

1934

Commission file number: 001-04389

APPLERA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


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

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

(203) 840-2000

(Registrant’s Telephone Number, Including Area Code)

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

Yes x No

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

Large accelerated filer x Accelerated filer Non-accelerated filer

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

Yes No x

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

APPLERA CORPORATION

INDEX


Part I. Financial Information		Page

Item 1.	Financial Statements – (unaudited)

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

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

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

	Notes to Unaudited Condensed Consolidated Financial Statements	4-26

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

	Discussion of Applera Corporation	27-39

	Discussion of Applied Biosystems Group	40-45

	Discussion of Celera Group	46-48

	Market Risks	49

	Outlook	49-51

	Forward-Looking Statements and Risk Factors	51-64

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	65

Part II. Other Information

Item 1.	Legal Proceedings	66

Item 1A.	Risk Factors	66-69

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

Item 6.	Exhibits	72

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

APPLERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(Dollar amounts in thousands except per share amounts)


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

APPLERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(unaudited)

(Dollar amounts in thousands)


	At March 31, 2007		At June 30, 2006

Assets

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

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

Liabilities and Stockholders’ Equity

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

Total Liabilities	762,295		808,641

Stockholders’ Equity

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

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

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

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

APPLERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollar amounts in thousands)


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

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

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

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

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

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

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

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

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

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

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Interim Condensed Consolidated Financial Statements

Basis of Presentation

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

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

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

Recently Issued Accounting Pronouncements

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

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

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 2 – Events Impacting Comparability

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


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

Employee-Related Charges, Asset Impairments and Other

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

Celera group

Fiscal 2007

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Fiscal 2006

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


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

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

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

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

Charges prior to fiscal 2006

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

Applied Biosystems group

Fiscal 2006

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

APPLERA CORPORATION

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

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

Charges prior to fiscal 2006

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

Other Events Impacting Comparability

Revenue from sale of small molecule program

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

Asset dispositions and legal settlements

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

Fiscal 2007

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

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

Fiscal 2006

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

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

APPLERA CORPORATION

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

Acquired research and development

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

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

Investment gains

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

Tax items

Fiscal 2007

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

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

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

Fiscal 2006

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Note 3 – Acquisition

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

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


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

Intangible asset – workforce	1.5
Acquired IPR&D	114.3

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

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

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

Instruments	$ 66.6	$10.0	35%

Reagents	47.7	6.0	25%

Total	$114.3	$16.0

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

Note 4 – Earnings (Loss) per Share

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


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

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

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

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

⁽¹⁾ Amounts represent actual dividends per share distributed.

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

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

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

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

⁽¹⁾ Amounts represent actual dividends per share distributed.

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


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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 5 – Comprehensive Gain

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


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

Note 6 – Inventories

Inventories included the following components:


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

Note 7 – Assets Held for Sale

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 8 – Goodwill and Intangible Assets

The carrying amounts of our intangible assets were as follows:

March 31, 2007

June 30, 2006

(Dollar amounts in millions)

Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
Amortization

Amortized intangible assets

Acquired technology

$ 83.5

$54.6

$ 83.3

$44.5

Patents

29.9

24.6

29.9

22.9

Customer relationships

27.1

4.2

27.1

1.6

Other

1.8

0.6

0.3

Total amortized intangible assets

$142.3

$84.0

$140.6

$69.3

Unamortized intangible assets

Trade name

4.9

4.9

Total

$147.2

$84.0

$145.5

$69.3

Aggregate amortization expense was as follows:


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

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


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

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

Note 9 – Supplemental Cash Flow Information

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


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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 10 – Guarantees

Leases

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

Pension Benefits

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

Indemnifications

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

Product Warranties

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

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


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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Note 11 – Pension and Other Postretirement Benefits

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


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

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

Note 12 – Contingencies

Legal Proceedings

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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

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

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

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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

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

Note 13 – Segment and Consolidating Information

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

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

The following table summarizes revenues earned between segments:


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

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Financial Position at March 31, 2007


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

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

Condensed Consolidating Statement of Financial Position at June 30, 2006


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

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

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

APPLERA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

continued

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


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

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

APPLERA CORPORATION

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

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

We have reclassified some prior year amounts for comparative purposes.

Overview

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

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

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

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

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

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

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

APPLERA CORPORATION

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

OPERATIONS continued

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

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

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

Business Developments:

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

Applied Biosystems Group

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

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

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

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

Celera Group

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

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

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

APPLERA CORPORATION

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

OPERATIONS continued

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

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

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

Critical Accounting Estimates

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

Events Impacting Comparability

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


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

APPLERA CORPORATION

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

OPERATIONS continued

Acquisition

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

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

Acquired Research and Development

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

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

At Acquisition Date

At March 31, 2007

(Dollar amounts in millions)

Fair
Value

Estimated Costs
to Complete

Approximate
Percentage
Completed

Estimated Costs
to Complete

Approximate
Percentage
Completed

Instruments

$ 66.6

$10.0

$ 8.0

Reagents

47.7

6.0

4.5

Total

$114.3

$16.0

$12.5

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

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

APPLERA CORPORATION

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

OPERATIONS continued

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

Employee-Related Charges, Asset Impairments and Other

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

Celera group

Fiscal 2007

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

Fiscal 2006


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

APPLERA CORPORATION

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

OPERATIONS continued

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

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

Charges prior to fiscal 2006

Applied Biosystems group

Fiscal 2006

Charges prior to fiscal 2006

Other Events Impacting Comparability

Revenue from sale of small molecule program

Asset dispositions and legal settlements

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

APPLERA CORPORATION

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

OPERATIONS continued

Fiscal 2007

Fiscal 2006

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

Investment gains

Tax items

Fiscal 2007

APPLERA CORPORATION

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

OPERATIONS continued

Fiscal 2006

APPLERA CORPORATION

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

OPERATIONS continued

Discussion of Applera Corporation’s Consolidated Operations

Three Months Ended
March 31,

Nine Months Ended
March 31,

(Dollar amounts in millions)

2007

2006

%
Increase/

(Decrease)

2007

2006

%
Increase/

(Decrease)

Net revenues

$539.0

$497.8

8.3%

$1,566.3

$1,409.7

11.1%

Cost of sales

236.1

219.0

7.8%

699.6

637.8

9.7%

Gross margin

302.9

278.8

8.6%

866.7

771.9

12.3%

SG&A expenses

157.3

148.9

5.6%

454.5

425.4

6.8%

R&D

67.2

67.4

(0.3%

)

187.3

210.1

(10.9%

)

Amortization of purchased intangible assets

2.8

1.3

115.4%

8.4

3.0

180.0%

Employee-related charges, asset impairments
and other

20.0

(100.0%

)

6.0

21.2

(71.7%

)

Asset dispositions and legal settlements

1.6

(100.0%

)

(1.1

)

28.2

(103.9%

)

Acquired research and development

3.4

(100.0%

)

114.3

3.4

Operating income

75.6

36.2

108.8%

97.3

80.6

20.7%

Gain on investments, net

3.1

(100.0%

)

0.2

7.6

(97.4%

)

Interest income, net

10.6

9.3

14.0%

30.2

28.2

7.1%

Other income (expense), net

2.4

0.9

166.7%

4.8

3.6

33.3%

Income before income taxes

88.6

49.5

79.0%

132.5

120.0

10.4%

Provision (benefit) for income taxes

17.7

(51.0

)

(134.7%

)

53.1

(19.8

)

(368.2%

)

Net income

$ 70.9

$100.5

(29.5%

)

$ 79.4

$ 139.8

(43.2%

)

Percentage of net revenues:

Gross margin

56.2%

56.0%

55.3%

54.8%

SG&A expenses

29.2%

29.9%

29.0%

30.2%

R&D

12.5%

13.5%

12.0%

14.9%

Operating income

14.0%

7.3%

6.2%

5.7%

Effective income tax (benefit) rate

20%

(103%

)

40%

(17%

)

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


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

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

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

APPLERA CORPORATION

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

OPERATIONS continued

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

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

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

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

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

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

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

APPLERA CORPORATION

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

OPERATIONS continued

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

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

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

Applera Corporation

Discussion of Condensed Consolidated Financial Resources and Liquidity

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

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

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

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


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

APPLERA CORPORATION

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

OPERATIONS continued

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

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


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

Operating activities:

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

Investing activities:

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

Financing activities:

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

APPLERA CORPORATION

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

OPERATIONS continued

Contractual Obligations

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

Payments by Period

(Dollar amounts in millions)

Total

2007

^(a)

2008 -
2009

2010 -
2011

Thereafter

Minimum operating lease payments ^(b)

$126.3

$ 9.5

$ 59.0

$32.4

$25.4

Purchase obligations ^(c)

142.5

68.3

55.4

18.8

Other long-term liabilities ^(d)

37.7

1.4

2.8

1.5

32.0

Total

$306.5

$79.2

$117.2

$52.7

$57.4

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

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

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

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

APPLERA CORPORATION

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

OPERATIONS continued

Discussion of Segments’ Operations, Financial Resources and Liquidity

Applied Biosystems Group

Three Months Ended March 31,

Nine Months Ended
March 31,

(Dollar amounts in millions)

2007

2006

%
Increase/
(Decrease

)

2007

2006

%
Increase/
(Decrease

)

Net revenues

$529.9

$490.7

8.0%

$1,536.2

$1,388.1

10.7%

Cost of sales

231.3

214.9

7.6%

687.5

627.7

9.5%

Gross margin

298.6

275.8

8.3%

848.7

760.4

11.6%

SG&A expenses

150.2

140.6

6.8%

432.8

398.4

8.6%

R&D

54.4

48.0

13.3%

150.4

134.0

12.2%

Amortization of purchased intangible assets

2.8

1.3

115.4%

8.4

1.9

342.1%

Employee-related charges, asset impairments
and other

(0.9

)

(100.0%

)

0.3

(100.0%

)

Asset dispositions and legal settlements

1.6

(100.0%

)

1.3

27.5

(95.3%

)

Acquired research and development

3.4

(100.0%

)

114.3

3.4

Operating income

91.2

81.8

11.5%

141.5

194.9

(27.4%

)

Gain on investments, net

0.2

Interest income, net

3.2

4.1

(22.0%

)

9.3

11.8

(21.2%

)

Other income (expense), net

2.3

0.8

187.5%

4.5

3.7

21.6%

Income before income taxes

96.7

86.7

11.5%

155.5

210.4

(26.1%

)

Provision (benefit) for income taxes

21.2

(37.7

)

(156.2%

)

63.9

12.0

432.5%

Net income

$ 75.5

$124.4

(39.3%

)

$ 91.6

$ 198.4

(53.8%

)

Percentage of net revenues:

Gross margin

56.4%

56.2%

55.2%

54.8%

SG&A expenses

28.3%

28.7%

28.2%

28.7%

R&D

10.3%

9.8%

9.8%

9.7%

Operating income

17.2%

16.7%

9.2%

14.0%

Effective income tax (benefit) rate

22%

(43%

)

41%

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


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

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

APPLERA CORPORATION

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

OPERATIONS continued

Revenues – overall summary

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


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

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

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

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

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

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

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

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

Real-Time PCR/Applied Genomics:

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

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

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

Mass Spectrometry:

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

DNA Sequencing:

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

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

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Core PCR & DNA Synthesis

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

Revenue by sources

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


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

Instruments

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

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

Consumables

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

Other sources

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

Revenues by geographic area

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

Three Months Ended
March 31,

Nine Months Ended
March 31,

(Dollar amounts in millions)

2007

2006

% Increase/
(Decrease)

2007

2006

% Increase/
(Decrease)

United States

227.4

218.1

4.3%

662.4

624.4

6.1%

Europe

182.8

157.1

16.4%

528.2

458.8

15.1%

Asia Pacific

97.6

96.3

1.3%

280.1

252.0

11.2%

Latin America and other markets

22.1

19.2

15.1%

65.5

52.9

23.8%

Total

529.9

490.7

8.0%

1,536.2

1,388.1

10.7%

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

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

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

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

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

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

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

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OPERATIONS continued

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

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

Applied Biosystems Group

Discussion of Financial Resources and Liquidity

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

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

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


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

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

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OPERATIONS continued


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

Operating activities:

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

Investing activities:

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

Financing activities:

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Celera Group


	Three Months Ended March 31,						Nine Months Ended March 31,
(Dollar amounts in millions)	2007		2006		% Increase/ (Decrease	)	2007		2006		% Increase/ (Decrease	)
Net revenues	$ 9.8		$ 8.9		10.1%		$ 33.2		$ 28.4		16.9%
Cost of sales	5.4		4.9		10.2%		13.6		14.5		(6.2%	)
Gross margin	4.4		4.0		10.0%		19.6		13.9		41.0%
R&D	13.0		20.4		(36.3%	)	38.2		78.6		(51.4%	)
SG&A expenses	7.1		8.3		(14.5%	)	21.7		27.0		(19.6%	)
Amortization of purchased intangible assets									1.1		(100.0%	)
Employee-related charges, asset impairments and other			20.9		(100.0%	)	6.0		20.9		(71.3%	)
Asset dispositions and legal settlements							(2.4	)	0.7		(442.9%	)
Operating loss	(15.7	)	(45.6	)	(65.6%	)	(43.9	)	(114.4	)	(61.6%	)
Gain on investments, net			3.1		(100.0%	)			7.6		(100.0%	)
Interest income, net	7.4		5.2		42.3%		20.9		16.4		27.4%
Other income (expense), net	0.1						0.3		(0.2	)	(250.0%	)
Loss before income taxes	(8.2	)	(37.3	)	(78.0%	)	(22.7	)	(90.6	)	(74.9%	)
Benefit for income taxes	3.7		14.0		(73.6%	)	10.7		33.2		(67.8%	)
Net loss	$ (4.5	)	$(23.3	)	(80.7%	)	$(12.0	)	$ (57.4	)	(79.1%	)

Effective income tax benefit rate	45%		38%				47%		37%

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


	Three Months Ended March 31,		Nine Months Ended March 31,
(Dollar amounts in millions)	2007	2006	2007	2006
Charge included in loss before income taxes	$ -	$(17.8)	$(1.1)	$(14.0)
Benefit for income taxes	(0.4)	(6.2)	(1.9)	(4.8)

The lower net loss in the third quarter and first nine months of fiscal 2007 compared to the prior year periods resulted primarily from the previously described events impacting comparability, lower R&D and SG&A expenses, higher net revenues, and a higher effective income tax benefit rate.

Reported revenues for the Celera group are comprised of product sales, equalization payments, and license and collaboration revenues. Product sales consist primarily of shipments to our partner, Abbott Laboratories, at cost. Revenue from items that are outside of the alliance with Abbott is also reported in this category. Equalization payments result from an equal sharing of alliance profits and losses between the alliance partners and vary each period depending on the relative income and expense contribution of each partner.

Reported revenues increased for the third quarter of fiscal 2007 compared to the third quarter of fiscal 2006 primarily due to higher diagnostic-related licensing and royalty revenues, including $2.0 million of licensing revenue from Beckman Coulter, partially offset by lower equalization payments from Abbott.

Reported revenues increased for the first nine months of fiscal 2007 compared to the prior year period primarily due to $6.0 million of licensing revenue from Beckman Coulter, $2.5 million of revenue from the sale of a small molecule program, and higher product sales, partially offset by lower equalization payments from Abbott. The first nine months of fiscal 2006 included $4.1 million of revenues from the discontinued Online/Information and Paracel businesses.

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OPERATIONS continued

The increase in gross margin in the third quarter and first nine months of fiscal 2007 was primarily attributable to increased licensing and royalty revenues and revenue from the sale of a small molecule program, all of which had no associated cost of sales.

Both R&D and SG&A expenses decreased in the third quarter and first nine months of fiscal 2007 compared to the prior year periods primarily due to the decision to exit small molecule drug discovery and development in the third quarter of fiscal 2006.

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

The increase in the effective income tax benefit rate for the third quarter of fiscal 2007 compared to the third quarter of fiscal 2006 was primarily attributable to the tax benefit of $0.4 million for R&D tax credits. The increase in the effective income tax benefit rate for the first nine months of fiscal 2007 compared to the prior year period was primarily attributable to the extension of the R&D tax credit, which included a tax benefit of $1.0 million related to the recognition of the prior fiscal year R&D tax credit, as a result of the Tax Relief and Health Care Act of 2006.

Supplemental Information

Three Months Ended
March 31,

Nine Months Ended
March 31,

(Dollar amounts in millions)

2007

2006

2007

2006

Equalization revenue, net

$ 3.7

$ 4.7

$11.6

$12.4

End-user revenues

24.3

20.0

73.3

57.0

End-user revenues included products sold through the alliance with Abbott and revenues from our unpartnered new genetic tests. Increased sales of HCV RealTime™ and Human Immunodeficiency Virus (“HIV”) viral load assays used on the m2000™ system, high resolution human leukocyte antigen (“HLA”) products, the ViroSeq^™ HIV-1 Genotyping System, and sales of Fragile X ASRs all contributed to the year-over-year growth in end-user revenues for both the quarter and first nine months. These increases were partially offset by lower sales of our HCV Genotyping ASRs due to the injunction against sales of these products as previously described. Also favorably impacting the nine month increase was sales of thrombosis ASRs and cystic fibrosis ASRs. The first nine months of fiscal 2006 included $3.6 million of end-user revenues from a low resolution HLA product line that was removed from the alliance in December 2005.

Celera Group

Discussion of Financial Resources and Liquidity

The Celera group had cash and cash equivalents and short-term investments of $564.6 million at March 31, 2007, and $569.5 million at June 30, 2006. We maintain a $200 million unsecured revolving credit agreement with four banks that matures on April 15, 2010, under which there were no borrowings outstanding at March 31, 2007.

We believe that existing funds and existing sources of debt financing are more than adequate to satisfy the Celera group’s normal operating cash flow needs and planned capital expenditures for the next twelve months and for the foreseeable future.

Our board of directors has authorized the repurchase of shares of Applera-Celera stock from time to time to replenish shares issued under our employee stock benefit plans. This authorization has no set dollar or time limits and delegates to our 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 have no current plans to repurchase shares of Applera-Celera stock under this authorization.

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

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OPERATIONS continued


(Dollar amounts in millions)	March 31, 2007	June 30, 2006
Cash and cash equivalents	$ 26.5	$ 60.3
Short-term investments	538.1	509.2
Total cash and cash equivalents and short-term investments	$564.6	$569.5
Working capital	576.1	578.9

Cash and cash equivalents decreased from June 30, 2006, as the amount expended on operations, the purchase of capital assets, and the purchases of available for sale investments, net of sales and maturities, exceeded proceeds from stock issuances. Net cash flows for the nine months ended March 31 were as follows:


(Dollar amounts in millions)		2007			2006
Net cash from operating activities	$	(20.9	)	$	(85.1	)
Net cash from investing activities		(27.3	)		112.2
Net cash from financing activities		14.5			(5.7	)

Operating activities:

Net cash used by operating activities for the first nine months of fiscal 2007 was $64.2 million lower than the first nine months of fiscal 2006. The lower use of cash resulted primarily from lower net cash operating losses and lower working capital requirements in fiscal 2007. Fiscal 2007 included cash received of $13.7 million primarily from licensing revenue from Beckman Coulter, the sale of a small molecule drug discovery and development program, and the legal settlement related to the Online/Information Business. Working capital benefited primarily from higher proceeds from accounts receivable and a lower decrease in accounts payable and other liabilities, partially offset by a higher increase in prepaid expenses and other assets in fiscal 2007. The lower decrease in accounts payable and other liabilities was primarily due to the decisions to exit small molecule drug discovery and development and discontinue the Online/Information business. The higher proceeds in accounts receivable was primarily due to the higher collection of licensing receivables in fiscal 2007. The higher use of cash in prepaid expenses and other assets resulted primarily from higher funding of the alliance with Abbott in fiscal 2007.

Investing activities:

Net cash from investing activities for the first nine months of fiscal 2007 decreased compared to the first nine months of fiscal 2006 primarily due to higher purchases, net of sales and maturities, of available for sale investments in the first nine months of fiscal 2007 and proceeds of $7.6 million received from sales of non-strategic investments in fiscal 2006.

Financing activities:

In the first nine months of fiscal 2006, we received proceeds of $9.2 million from the exercise of options held by The Institute for Genomic Research (“TIGR”). TIGR received these options in fiscal 1999 in connection with the formation of the Celera group. In the first nine months of fiscal 2006, we paid $30 million to the Applied Biosystems group as partial consideration for its interest in the Celera Diagnostics joint venture.

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

OPERATIONS continued

Market Risks

Our foreign currency risk management strategy uses derivative instruments to hedge various foreign currency forecasted revenues and intercompany transactions and to offset the impact of changes in currency rates on various foreign currency-denominated assets and liabilities. The principal objective of this strategy is to minimize the risks and/or costs associated with our global financing and operating activities. We use forward, option, and range forward contracts to manage our foreign currency exposures. At March 31, 2007, we recorded in our condensed consolidated financial statements a net asset of $1.8 million related to these forward and option contracts, compared with a net liability of $0.2 million at June 30, 2006. This increase was primarily attributed to the fluctuations in currency rates. We do not use derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives.

We performed a sensitivity analysis as of March 31, 2007 based on a hypothetical 10% adverse change in foreign currency rates relative to the U.S. dollar. This analysis included the change in fair value of all derivative financial instruments used to hedge our forecasted third party and intercompany sales. In addition, this analysis excluded both the impact of translation on foreign currency-denominated assets and liabilities as well as the change in fair value of all derivative financial instruments used to hedge these balance sheet items as the resulting amounts would largely offset each other. As of March 31, 2007, we calculated a hypothetical after-tax loss of $21.6 million, which is not materially different from the hypothetical after-tax loss calculated on the same basis at June 30, 2006. If currency rates actually change in a manner similar to the assumed change in the foregoing calculation, the hypothetical calculated loss would be more than offset by the recognition of higher U.S. dollar equivalent foreign revenues. Actual gains and losses in the future could, however, differ materially from this analysis, based on changes in the timing and amount of currency rate movements and actual exposures and hedges.

For further information on our market risks, refer to the discussion contained in the management’s discussion and analysis section of our 2006 Annual Report to Stockholders (which discussion is incorporated in this quarterly report by reference).

Recently Issued Accounting Pronouncements

See Note 1 to our condensed consolidated financial statements for a description of the effect of recently issued accounting pronouncements.

Outlook

The outlook below for the Applied Biosystems group contains non-GAAP financial measures, both historical and forward-looking, and including earnings per share and operating margin adjusted to exclude some costs, expenses, gains and losses and other specified items. These measures are not in accordance with, or an alternative for, generally accepted accounting principles, or GAAP, and may be different from non-GAAP financial measures used by other companies. Among the items included in GAAP earnings but excluded for purposes of determining adjusted earnings or other non-GAAP financial measures that we present are: gains or losses from sales of operating assets and investments; restructuring charges, including severance charges; charges and recoveries relating to significant legal proceedings; asset impairment charges; write-offs of acquired in-process research and development; amortization of acquired intangibles; and tax adjustments, including settlements and the impact of new tax legislation. In addition, for non-GAAP financial measures, we have also excluded the allocation of interperiod taxes and intercompany sales. We believe the presentation of non-GAAP financial measures provides useful information to management and investors regarding various financial and business trends relating to our financial condition and results of operations, and that when GAAP financial measures are viewed in conjunction with non-GAAP financial measures, investors are provided with a more meaningful understanding of our ongoing operating performance. In addition, these non-GAAP financial measures are among the primary indicators we use as a basis for evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting future periods. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for GAAP financial measures. To the extent this report contains historical non-GAAP financial measures, we have also provided corresponding GAAP financial measures for comparative purposes. However, in the case of forward-looking non-GAAP financial measures, we have not provided corresponding forward-looking GAAP financial measures because these measures are not accessible to us. We cannot predict the occurrence, timing, or amount of all non-GAAP items that we exclude from our non-GAAP financial measures but which could potentially be significant to the calculation of our GAAP financial measures for future fiscal periods.

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Applied Biosystems Group

The Applied Biosystems group believes that its fiscal year 2007 outlook and financial performance will be affected by, among other things: the introduction and adoption of new products; the level of commercial investments in life science R&D; the level of government funding for life science research; competitive product introductions and pricing; and the continued integration of Ambion-related products. The Applied Biosystems group also believes that its fiscal year 2007 outlook and financial performance could be affected by the outcome of pending litigation matters.

Subject to the inherent uncertainty associated with these factors, the Applied Biosystems group has the following expectations for fiscal 2007.

The Applied Biosystems group expects high single digit to low double digit revenue growth for fiscal 2007 assuming current exchange rates. This outlook includes the full fiscal year impact from the March 2006 acquisition of Ambion.

The Applied Biosystems group anticipates revenue growth in the DNA Sequencing, Real-Time PCR/Applied Genomics, Mass Spectrometry and Other Product Lines product categories and a revenue decline in the Core PCR and DNA Synthesis category. Quarterly year-over-year revenue changes may be different from our annual expectations due to a variety of factors, including the timing of customer orders and disbursements of government funding.

The Applied Biosystems group expects the effective annual tax rate used to calculate non-GAAP financial measures to be approximately 30%.

The Applied Biosystems group expects non-GAAP EPS to increase at a rate equal to, or slightly above, the annual revenue growth rate. This includes the incremental impact of the Agencourt expenses, the incremental impact of stock based compensation, and the increase in the effective annual tax rate from 29% in fiscal 2006. The total impact of these three items on fiscal 2007 non-GAAP EPS is expected to be approximately $0.10.

The total pre-tax impact of SFAS No. 123R (accounting for stock based compensation) in fiscal 2007 is expected to be approximately $14 million, with an EPS impact of approximately $0.05.

Other risks and uncertainties that may affect the Applied Biosystems group’s financial performance are detailed in the Forward-Looking Statements and Risk Factors section of this report.

Celera Group

The Celera group anticipates that its fiscal 2007 financial performance will be affected by, among other things, demand for current and new diagnostic products, timing of the anticipated approval of the m2000™ system in the U.S., and potential revenue from technology licenses and collaborations. Subject to the inherent uncertainty associated with these factors, the Celera group has the following expectations regarding its financial performance for fiscal 2007:

Total reported revenues are anticipated to be unchanged from the previous outlook of $43 - $48 million. This includes revenues from licensing and collaborations, which are anticipated to be $10 - $15 million.

Both R&D and SG&A expenses are anticipated to be at or slightly below the previous outlook of $50 - $55 million for R&D expenses, and $30 - $35 million for SG&A expenses.

Net loss from operations is anticipated to be at or slightly below the previous outlook of $18 - $25 million.

The Celera group expects cash used to fund operations, anticipated growth in placements of the m2000 system, and cash costs related to the fiscal 2006 restructuring to be at or slightly below the previous outlook of $10 - $20 million. This does not include any proceeds that might be received from the sale of the Celera group’s small molecule facilities in South San Francisco, CA.

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Total end-user revenues recognized through the Celera group’s alliance with Abbott and total revenue from unpartnered new genetic tests are anticipated to be at or near the lower end of the previous outlook of $105 - $115 million, depending on the timing of the approval, and consequent uptake, of the m2000 system in the U.S. If the m2000 system is not approved for marketing in the U.S. in the fourth quarter of fiscal 2007, end-user revenues are anticipated to be below this range.

Other risks and uncertainties that may affect the Celera group’s financial performance are detailed in the Forward-Looking Statements and Risk Factors section of this report.

Forward-Looking Statements and Risk Factors

Some statements contained in, or incorporated by reference in, this report, including the Outlook section, are forward-looking and are subject to a variety of risks and uncertainties. Similarly, the press releases we issue and other public statements we make from time to time may contain language that is forward-looking. These forward-looking statements may be identified by the use of forward-looking words or phrases such as “forecast,” “believe,” “expect,” “intend,” “anticipate,” “should,” “plan,” “estimate,” and “potential,” among others. The forward-looking statements contained in this report are based on our current expectations, and those made at other times will be based on our expectations when the statements are made. We cannot guarantee that any forward-looking statements will be realized.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. To comply with the terms of the safe harbor, we note that a variety of factors could cause actual results and experience to differ materially from anticipated results or other expectations expressed in forward-looking statements. We also note that achievement of anticipated results or expectations in forward-looking statements is subject to the possibility that assumptions underlying forward-looking statements will prove to be inaccurate. Investors should bear this in mind as they consider forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, and results of our Applied Biosystems group and Celera group businesses include, but are not limited to, those described below under the headings “Risks Relating to the Applied Biosystems Group” and “Risks Relating to the Celera Group.” We note that our businesses could be affected by other factors that we have not disclosed because we think they are immaterial. Also, there may be additional risks and uncertainties that could affect our businesses but which are not currently known to us.

Owners of Applera-Applied Biosystems stock and Applera-Celera stock are also subject to risks arising from their ownership of common stock of a corporation with two separate classes of common stock. The risks and uncertainties that arise from our capital structure, particularly our two separate classes of common stock, include, but are not limited to, those described in Item 1A of Part I of our 2006 Annual Report on Form 10-K under the heading “Risks Factors – Risks Relating to a Capital Structure with Two Separate Classes of Common Stock.”

Risks Relating to the Applied Biosystems Group

Rapidly changing technology in life sciences could make the Applied Biosystems group’s product line obsolete unless it continues to develop and manufacture new and improved products and services, and pursue new market opportunities. A significant portion of the net revenues for the Applied Biosystems group each year is derived from products and services that did not exist in the prior year. We sell our products in several industries that are characterized by rapid and significant technological changes, frequent new product and service introductions and enhancements, and evolving industry standards. The Applied Biosystems group’s future success depends on its ability to continually improve its current products and services, develop and introduce, on a timely and cost-effective basis, new products and services that address the evolving needs of its customers, and pursue new market opportunities that develop as a result of technological and scientific advances in life sciences. These new market opportunities may be outside the scope of the Applied Biosystems group’s proven expertise or in areas which have unproven market demand, and the utility and value of new products and services developed by the Applied Biosystems group may not be accepted in the markets served by the new products. This includes, for example, new products under development for the clinical diagnostics market, which are described in the immediately following paragraph. The inability to gain market acceptance of new products and services could harm the Applied Biosystems group’s future operating results. The Applied Biosystems group’s future success also depends on its ability to manufacture these improved and new products to meet customer demand in a timely and cost-effective manner, including its ability to resolve in a timely manner manufacturing issues that may arise from time to time as the Applied Biosystems group commences production of these complex products. Unanticipated difficulties or

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delays in replacing existing products and services with new products and services or in manufacturing improved or new products in sufficient quantities to meet customer demand could diminish future demand for the Applied Biosystems group’s products and services and its future operating results.

The Applied Biosystems group may not successfully develop instruments for use in the clinical diagnostics market, and even if it does develop these products they may not receive needed regulatory clearances or approvals and the Applied Biosystems group may not be able to manufacture these products in accordance with regulatory requirements. The Applied Biosystems group intends to commit significant resources to the development of instruments for use in the clinical diagnostics market. Although the Applied Biosystems group has experience in developing and commercializing instrumentation for the life science research market, the Applied Biosystems group has only limited prior experience with products of any type for use in the regulated clinical diagnostics market. This is an emerging business area for the Applied Biosystems group, and the Applied Biosystems group may not have or be able to obtain the necessary expertise to successfully develop instruments for use in this market. In addition, in the U.S. and other countries, instruments cannot be marketed for clinical diagnostics use until they first receive regulatory clearance or approval. The regulatory review and clearance or approval process can be time consuming and require substantial expense and may not be successful. Even if the Applied Biosystems group obtains regulatory clearance or approval for an instrument for use in the clinical diagnostics market, the manufacture, sale, and distribution of that product may be subject to ongoing regulatory requirements. The inability to comply with these requirements could cause the Applied Biosystems group to suspend the manufacture or sale of these products and delay or prevent the Applied Biosystems group from generating revenues from the sale of these products.

The Applied Biosystems group relies on other companies for the manufacture of some of its products and also for the supply of some components of the products it manufactures on its own. Although the Applied Biosystems group has contracts with most of these manufacturers and suppliers, their operations could be disrupted. These disruptions could be caused by conditions unrelated to the business or operations of the Applied Biosystems group, including the bankruptcy of the manufacturer or supplier. Although the Applied Biosystems group has its own manufacturing facilities, and generally believes it might be able to manufacture some of the products and components currently sourced from other companies, it also believes that it could take considerable time and resources to establish the capability to do so. Accordingly, if these other manufacturers or suppliers are unable or fail to fulfill their obligations to the Applied Biosystems group, the Applied Biosystems group might not be able to satisfy customer demand in a timely manner, and its business could be harmed.

A significant portion of sales depends on customers’ capital spending policies that may be subject to significant and unexpected decreases. A significant portion of the Applied Biosystems group’s instrument product sales are capital purchases by its customers. The Applied Biosystems group’s customers include pharmaceutical, environmental, research, biotechnology, and chemical companies, and the capital spending policies of these companies can have a significant effect on the demand for the Applied Biosystems group’s products. These policies are based on a wide variety of factors, including the resources available to make purchases, the spending priorities among various types of research equipment, and policies regarding capital expenditures during recessionary periods. Any decrease in capital spending or change in spending policies of these companies could significantly reduce the demand for the Applied Biosystems group’s products.

A substantial portion of the Applied Biosystems group’s sales is to customers at universities or research laboratories whose funding is dependent on both the amount and timing of funding from government sources. As a result, the timing and amount of revenues from these sources may vary significantly due to factors that can be difficult to forecast. Research funding for life science research has increased more slowly during the past several years compared to previous years and has declined in some countries, and some grants have been frozen for extended periods or otherwise become unavailable to various institutions, sometimes without advance notice. Budgetary pressures may result in reduced allocations to government agencies that fund research and development activities. If government funding necessary to purchase the Applied Biosystems group’s products were to become unavailable to researchers for any extended period of time, or if overall research funding were to decrease, the Applied Biosystems group’s business could be harmed.

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inherently uncertain, and the Applied Biosystems group cannot be sure that it will prevail in any of these actions. An adverse determination in some of the Applied Biosystems group’s current legal actions, particularly the cases described below, could harm our business and financial condition.

The Applied Biosystems group’s products are based on complex, rapidly developing technologies. These products could be developed without knowledge of previously filed patent applications that mature into patents that cover some aspect of these technologies. In addition, because patent litigation is complex and the outcome inherently uncertain, the Applied Biosystems group’s belief that its products do not infringe valid and enforceable patents owned by others could be successfully challenged. The Applied Biosystems group has from time to time been notified that it may be infringing patents and other intellectual property rights of others. Also, in the course of its business, the Applied Biosystems group may from time to time have access to confidential or proprietary information of others, and they could bring a claim against the Applied Biosystems group asserting that the Applied Biosystems group had misappropriated their technologies, which though not patented are protected as trade secrets, and had improperly incorporated those technologies into the Applied Biosystems group’s products. Due to these factors, there remains a constant risk of intellectual property litigation and other legal actions, which could include antitrust claims, affecting the Applied Biosystems group. The Applied Biosystems group has been made a party to litigation and has been subject to other legal actions regarding intellectual property matters, which have included claims of violations of antitrust laws. These actions currently include the legal proceedings described in the following paragraph, some of which, if determined adversely, could harm our business and financial condition. To avoid or settle legal claims, it may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future technologies, and the Applied Biosystems group may not be able to obtain these licenses or other rights on commercially reasonable terms, or at all. In some situations settlement of claims may require an agreement to cease allegedly infringing activities.

Several legal actions have been filed against us that could affect the intellectual property rights of the Applied Biosystems group and its products and services, including the following:

Enzo Biochem, Inc., Enzo Life Sciences, Inc., and Yale University have filed a lawsuit against us alleging that we are infringing six patents due to the sale of sequencing reagent kits, TaqMan^® genotyping and gene expression assays, and the gene expression microarrays used with the Applied Biosystems group’s Expression Array System.

Molecular Diagnostics Laboratories has filed a class action complaint against us and Hoffmann-La Roche, Inc. alleging 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.

In response to patent infringement claims made by us against Stratagene Corporation, Stratagene has filed counterclaims seeking declaratory judgment that our U.S. Patent No. 6,814,934 in the field of real-time PCR is invalid and not infringed.

In response to a claim that we, MDS, Inc., and our Applied Biosystems/MDS Sciex Instruments joint venture with MDS filed against Thermo Electron Corporation, Thermo Electron has filed a counterclaim seeking a declaratory judgment that our U.S. Patent No. 4,963,736 is invalid. After the filing of this action against Thermo Electron, its subsidiary Thermo Finnigan LLC filed a lawsuit against us alleging that we are infringing one of its patents as a result of, for example, the Applied Biosystems group’s commercialization of the ABI PRISM^{^®} 3700 Genetic Analyzer. Thermo Finnigan subsequently filed a second lawsuit against us, MDS, and the Applied Biosystems/MDS Sciex Instruments joint venture alleging that we and the other defendants have infringed one of Thermo Finnigan’s patents as a result of, for example, our commercialization of the API 5000™ LC/MS/MS system.

These cases are described in further detail in Part I, Item 3, of our 2006 Annual Report on Form 10-K under the heading “Legal Proceedings – Commercial Litigation,” as updated by the information in Part II, Item 1 of our subsequent Quarterly Reports on Form 10-Q, including Part II, Item 1 of this report. The cost of litigation and the amount of management time associated with these cases is expected to be significant. These matters might not be resolved favorably. If they are not resolved favorably, we could be enjoined from selling the products or services in question or other products or services as a result and monetary or other damages could be assessed against us. These outcomes could harm the business or financial condition of our company, the Applied Biosystems group, or the Celera group.

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Some of the intellectual property that is important to our business is owned by other companies or institutions and licensed to us, and legal actions against them could harm the Applied Biosystems group’s business. Even if the Applied Biosystems group is not a party to these legal actions, an adverse outcome could harm our business because it might prevent these other companies or institutions from continuing to license intellectual property that we may need for our business. Furthermore, an adverse outcome could result in infringement or other legal actions being brought directly against us. For example, on November 8, 2006, a patent interference proceeding was declared by the United States Patent and Trademark Office between Enzo Diagnostics, Inc. and the California Institute of Technology, or Caltech, concerning a patent application owned by Enzo and U.S. Patent No. 5,821,058, owned by Caltech. The ’058 patent is exclusively licensed to us and claims methods for DNA sequencing. The Patent Office has declared the interference in order to resolve competing claims to inventorship of the subject matter of the interference. Although we are not a party to this proceeding, as exclusive licensee we are involved in the prosecution of the interference, in cooperation with Caltech, and we are funding a substantial portion of the cost of the prosecution. If Enzo prevails in the interference, the Patent Office could revoke the claims of the ’058 patent from Caltech and award substantially similar claims to Enzo, which Enzo might then assert against our DNA sequencing products and possibly other products.

The Applied Biosystems group may become involved in legal proceedings to enforce its intellectual property rights. The intellectual property rights of biotechnology companies, including the Applied Biosystems group, involve complex factual, scientific, and legal questions. Even though the Applied Biosystems group may believe that it has a valid patent on a particular technology, other companies have from time to time taken, and may in the future take, actions that the Applied Biosystems group believes violate its patent rights. Although the Applied Biosystems group has licensing programs to provide industry access to some of its patent rights, other companies have in the past refused to participate in these licensing programs and companies may refuse to participate in them in the future, resulting in a loss of potential licensing revenue. Legal actions to enforce these patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of some of the Applied Biosystems group’s intellectual property rights.

Since the Applied Biosystems group’s business is dependent on foreign sales, fluctuating currencies will make revenues and operating results more volatile. Approximately 57% of the Applied Biosystems group’s net revenues for the nine months ended March 31, 2007 of our 2007 fiscal year were derived from sales to customers outside of the U.S. The majority of these sales were based on the relevant customer’s local currency. A significant portion of the related costs for the Applied Biosystems group are based on the U.S. dollar. As a result, the Applied Biosystems group’s reported and anticipated operating results and cash flows are subject to fluctuations due to material changes in foreign currency exchange rates that are beyond the Applied Biosystems group’s control.

The future growth of the Applied Biosystems group depends in part on its ability to acquire complementary technologies through acquisitions, investments, or other strategic relationships or alliances, which may absorb significant resources, may be unsuccessful, and could dilute holders of Applera-Applied Biosystems stock. Acquisitions, investments and other strategic relationships and alliances, if pursued, may involve significant cash expenditures, debt incurrence, and expenses that could have a material effect on the Applied Biosystems group’s financial condition and operating results. If these types of transactions are pursued, it may be difficult for the Applied Biosystems group to complete these transactions quickly and to integrate these acquired operations efficiently into its current business operations. Potential technological advances resulting from the integration of technologies may not be achieved as successfully or rapidly as anticipated, if at all. Any acquisitions, investments or other strategic relationships and alliances by the Applied Biosystems group may ultimately harm its business and financial condition. In addition, future acquisitions may not be as successful as originally anticipated and may result in impairment charges. We have incurred these charges in recent years in relation to acquisitions. For example, since fiscal 2002 we have incurred charges for impairment of goodwill, intangibles and other assets and other charges of $30.4 million related to the Celera group’s acquisition of Paracel, Inc. and $14.9 million related to the Applied Biosystems group’s acquisition of Boston Probes, Inc. Additionally, during our 2006 and 2007 fiscal years, we incurred charges totaling $28.8 million for severance and benefit costs and asset impairments relating to the Celera group’s acquisition of Axys Pharmaceuticals, Inc., and its subsequent decision to partner or sell its small molecule drug discovery and development programs, and the integration of Celera Diagnostics into the Celera group. In addition, acquisitions and other transactions may involve the issuance of a substantial amount of Applera-Applied Biosystems stock without the approval of the holders of Applera-Applied Biosystems stock. Any issuances of this nature could be dilutive to holders of Applera-Applied Biosystems stock.

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The Applied Biosystems group’s businesses, particularly those focused on developing and marketing information-based products and services, depend on the continuous, effective, reliable, and secure operation of its computer hardware, software, and Internet applications and related tools and functions. The Applied Biosystems group’s business requires manipulating and analyzing large amounts of data, and communicating the results of the analysis to its internal research personnel and to its customers via the Internet. Also, the Applied Biosystems group relies on a global enterprise software system to operate and manage its business. The Applied Biosystems group’s business therefore depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that the Applied Biosystems group’s hardware or software malfunctions or access to the Applied Biosystems group’s data by internal research personnel or customers through the Internet is interrupted, the Applied Biosystems group’s business could suffer.

The Applied Biosystems group’s computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. In addition, the Applied Biosystems group’s online products and services are complex and sophisticated, and as such, could contain data, design, or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If the Applied Biosystems group fails to maintain and further develop the necessary computer capacity and data to support its computational needs and its customers’ access to information-based product and service offerings, it could experience a loss of or delay in revenues or market acceptance. In addition, any sustained disruption in Internet access provided by other companies could harm the Applied Biosystems group.

The Applied Biosystems group’s operations involve the use, manufacture, sale, and distribution of hazardous materials, and the mishandling of these hazardous materials could result in substantial liabilities and harm to Applied Biosystems. The Applied Biosystems group’s research and development and manufacturing activities involve the controlled use of potentially hazardous materials, including biological materials, chemicals, and various radioactive compounds. Also, some of the Applied Biosystems group’s products are hazardous materials or include hazardous materials. The Applied Biosystems group cannot completely eliminate the risk of accidental or other contamination or injury from these materials, and the Applied Biosystems group could be held liable for resulting damages, which could be substantial. Under some laws and regulations, a party can be subject to “strict liability” for damages caused by some hazardous materials, which means that a party can be liable without regard to fault or negligence. In addition, the Applied Biosystems group is subject to federal, state, local, and foreign laws, regulations, and permits governing the use, storage, handling, and disposal of hazardous materials and specified waste products, as well as the shipment and labeling of materials and products containing hazardous materials. If the Applied Biosystems group fails to comply with any of these laws, regulations, or permits, we could be subject to substantial fine or penalty, payment of remediation costs, loss of permits, and/or other adverse governmental action. Any of these events could harm the Applied Biosystems group’s business and financial condition.

Earthquakes could disrupt operations in California. The headquarters and principal operations of the Applied Biosystems group are located in the San Francisco Bay area, a region near major California earthquake faults. The ultimate impact of earthquakes on the Applied Biosystems group, its significant suppliers, and the general infrastructure is unknown, but operating results could be harmed if a major earthquake occurs.

Applera-Applied Biosystems stock price may be volatile. The market price of Applera-Applied Biosystems stock has in the past been and may in the future be volatile due to the risks and uncertainties described in this section of this report, as well as other factors that may have affected or may in the future affect the market price, such as:

conditions and publicity regarding the genomics, biotechnology, pharmaceutical, or life sciences industriesgenerally;

price and volume fluctuations in the stock market at large which do not relate to Applied Biosystems’ operating performance; and

comments by securities analysts or government officials, including with regard to the viability or profitability of the biotechnology sector generally or with regard to intellectual property rights of life science companies, or the Applied Biosystems group’s ability to meet market expectations.

The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies. In the past, companies that have experienced volatility have sometimes been the subjects of securities class action litigation. If litigation was instituted on this basis, it could result in substantial costs and a diversion of management’s attention and resources.

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Risks Relating to the Celera Group

The Celera group has incurred net losses to date and may not achieve profitability. The Celera group has accumulated net losses of approximately $868 million as of March 31, 2007. These cumulative losses are expected to increase as the Celera group continues to make investments in new technology and diagnostic product discovery and development, and therapeutic target discovery. As an early stage business, the Celera group faces significant challenges in expanding its business operations. As a result, the Celera group may not be able to achieve profitable operations when expected, if at all.

The Celera group’s diagnostics business is substantially dependent on a strategic alliance agreement with Abbott Laboratories. The Celera group entered into this agreement with Abbott for the joint discovery, development, manufacturing, and commercialization of nucleic acid-based, or molecular, diagnostic products. Although this is a long-term alliance, the alliance agreement contains provisions that could result in early termination for reasons that include the following: breach by either company; a change in control of either company; or either company’s dissatisfaction with the financial performance of the alliance according to specifically-agreed parameters and a measurement period set forth in the alliance agreement. In addition, the amount and timing of resources to be devoted to research, development, eventual clinical trials and commercialization activities by Abbott are generally not within the Celera group’s control. Future strategic alliances, if any, with other companies are likely to be subject to similar terms and conditions.

The Celera group’s diagnostic product business is dependent on entering into other collaborations, alliances, and similar arrangements with other companies. The Celera group’s strategy for the discovery, development, clinical testing, manufacturing and/or commercialization of most of its diagnostic product candidates includes entering into these types of arrangements with other companies, in addition to its strategic alliance with Abbott Laboratories. Although the Celera group has expended, and continues to expend, time and money on internal research and development programs, it may be unsuccessful in creating diagnostic product candidates that would enable it to form additional collaborations and alliances and, if applicable, receive milestone and/or royalty payments from collaborators. Other companies may not be interested in entering into these relationships with the Celera group, or may not be interested in doing so on terms that we consider acceptable.

The Celera group lacks the capability to develop or commercialize therapeutic products. Although the Celera group continues to conduct therapeutic target discovery research, it lacks the personnel or other resources necessary to develop any potential therapeutic products for those targets, to conduct clinical trials, or to manufacture, market or sell therapeutic products. As a result, for the foreseeable future the Celera group expects that it will be able to develop, or participate in the development of, therapeutic products for targets that it discovers and validates only by collaborating with other companies or by licensing validated targets to other companies. The Celera group may be unsuccessful in discovering and validating therapeutic targets to enable it to form these collaborations or enter into these licenses and, if applicable, receive license, milestone and/or royalty payments from collaborators or licensees. Other companies may not be interested in entering into these relationships with the Celera group, or may not be interested in doing so on terms that we consider acceptable.

The Celera group’s diagnostics business, and its commercialization of discovered therapeutic targets, could be harmed if collaborators or licensees fail to perform under their agreements with the Celera group or if they terminate those agreements. Each of the Celera group’s existing collaboration, license, and similar agreements with other companies for the development and commercialization of products may be canceled under some circumstances. In addition, the amount and timing of resources to be devoted to research, development, clinical trials, and commercialization activities by the Celera group’s collaborators and licensees are generally not within the Celera group’s control. The Celera group expects that collaboration, license, and similar agreements entered into in the future, if any, will have similar terms and limitations. Furthermore, even if these agreements contain commitments regarding these activities, the Celera group’s collaborators or licensees may not perform their obligations as expected. If collaborators or licensees terminate their agreements or otherwise fail to conduct their collaborative or licensed activities in a timely manner or at all, the development or commercialization of diagnostic or therapeutic products may be delayed or prevented. If the Celera group assumes responsibilities for continuing diagnostic programs on its own after termination of a collaboration, license, or similar agreement, the Celera group may be required to devote additional resources to product development and commercialization or the Celera group may need to cancel some development programs. If a collaboration, license, or other agreement for a therapeutic program is terminated, the Celera group would not be able to assume responsibility for the continued development

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of that program because it lacks the resources for therapeutic product development, and the only way it could continue that program would be to find another collaborator or licensee.

The Celera group’s efforts to discover diagnostic markers and therapeutic targets depend, in part, on the use of novel and unproven discovery methods. It is therefore possible that the Celera group’s discovery efforts will not result in any new diagnostic markers or therapeutic targets that could be developed into commercial diagnostic or therapeutic products. The Celera group and its collaborators are seeking to identify diagnostic markers that can be used to develop new diagnostic products based on information derived from the study of the genetic material of organisms, or genomics. This method carries inherent risks, as only a limited number of diagnostic products based on genomic discoveries have been developed and commercialized to date. Also, the Celera group is seeking to identify novel targets for the development of new treatments for disease through the use of technology in the field of proteomics, the study of proteins, and using disease association findings arising from its genomics research. To our knowledge, neither of these approaches to target discovery has to date been effectively used to develop a therapeutic product that has been commercialized, and therefore the potential benefit to the Celera group of its use of proteomics technology and disease association study information to support therapeutic target discovery is unknown.

For some of the Celera group’s diagnostic research and product development programs and therapeutic target discovery research programs, the Celera group needs access to human tissue and/or blood samples from diseased and healthy individuals, other biological materials, and related clinical and other information, which may be in limited supply. The Celera group may not be able to obtain or maintain access to these materials and information on acceptable terms, or may not be able to obtain needed consents from individuals providing tissue, blood, or other samples. In addition, government regulation in the U.S. and foreign countries could result in restricted access to, or use of, human tissue or blood samples or other biological materials. If the Celera group loses access to sufficient numbers or sources of tissue or blood samples or other required biological materials, or if tighter restrictions are imposed on the use of related clinical or other information or information generated from tissue or blood samples or other biological materials, these research and development programs and the Celera group’s business could be harmed.

Our diagnostic product candidates may never result in a commercialized product. Most of the Celera group’s diagnostic product candidates are in various stages of research and development and the ability to commercialize those product candidates, including through collaborators or licensees, is highly uncertain. Development of existing product candidates will require significant additional research and development efforts by the Celera group or its collaborators or licensees before they can be marketed. For potential diagnostic products, these efforts include extensive clinical testing to confirm the products are safe and effective and may require lengthy regulatory review and clearance or approval by the U.S. Food and Drug Administration and comparable agencies in other countries. Furthermore, even if these products are found to be safe and effective and receive necessary regulatory clearances or approvals, they may never be developed into commercial products due to considerations such as: inability to obtain needed licenses to intellectual property owned by others; market and competitive conditions; and manufacturing difficulties or cost considerations.

If the Celera group or its collaborators or licensees fail to satisfy regulatory requirements for any diagnostic product candidate, the Celera group or its collaborators or licensees may be unable to complete the development and commercialization of that product. The Celera group is currently developing its internal capability to move potential diagnostic products through clinical testing, manufacturing, and the approval processes of the U.S. Food and Drug Administration, and comparable agencies in other countries. In the U.S., either the Celera group or its collaborators or licensees must show through pre-clinical studies and clinical trials that each of the Celera group’s or its collaborators’ or licensees’ diagnostic product candidates is safe and effective for each indication before obtaining regulatory clearance or approval from the FDA for the commercial sale of that product as an in vitro diagnostic product with clinical claims. Outside of the U.S., the regulatory requirements for commercialization vary from country to country. If the Celera group or its collaborators or licensees fail to adequately show the safety and effectiveness of a diagnostic product candidate, regulatory clearance or approval could be delayed or denied. The results from pre-clinical studies may be different from the results that are obtained in clinical trials, and the Celera group or its collaborators or licensees may not be able to show sufficient safety and effectiveness in their clinical trials to allow them to obtain the needed regulatory clearance or approval. The regulatory review and approval process can take many years and require substantial expense and may not be successful.

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these products and harm our business. In September 2006, the U.S. Food and Drug Administration, or FDA, published “Draft Guidance for Industry and FDA Staff: Commercially Distributed Analyte Specific Reagents (ASRs): Frequently Asked Questions” clarifying the FDA’s interpretation of the regulations governing the sale of Analyte Specific Reagent, or ASR, products. ASRs are a class of products that do not require regulatory clearance or approval. The draft guidance document contains an interpretation of the ASR regulations that is a departure from what we believe to be the existing FDA practice and policy regarding products that can be characterized as ASRs. If this draft guidance document becomes the final guidance document, and if the FDA begins enforcing this interpretation of the ASR regulations, the Celera group’s current ASR products may not meet the regulatory definition of an ASR. If this were to occur, the Celera group or its alliance partner Abbott Laboratories might have to stop selling these ASR products until the products receive, if possible, the applicable FDA approval or clearance. Furthermore, the enforcement of this new interpretation might prevent the Celera group or its collaborators or licensees from developing any new products that would qualify as ASRs.

Even if the Celera group or its collaborators or licensees obtain regulatory clearance or approval for a particular diagnostic product, that product will remain subject to ongoing regulatory requirements, and our inability to meet these requirements could prevent or require us to suspend commercialization of a product. The manufacture of our and our collaborators’ and licensees’ diagnostic products is subject to the U.S. Food and Drug Administration’s Quality System Regulation. The occurrence of manufacturing problems for any product, including the inability to comply with this regulation, could result in withdrawal of regulatory clearance or approval for that product, and could also force us or our collaborators or licensees to suspend manufacturing of, reformulate, conduct additional testing for, and/or change the labeling for, that product. This could delay or prevent the Celera group from generating revenues from the sale of any affected diagnostic product.

Clinical trials of diagnostic product candidates may not be successful. Potential clinical trials may not begin on time, may not be completed on schedule, or at all, or may not be sufficient for registration of the products or result in products that can receive necessary clearances or approvals. Numerous unforeseen events during, or as a result of, clinical testing could delay or prevent commercialization of the Celera group’s or its collaborators’ or licensees’ diagnostic product candidates. Diagnostic product candidates that appear to be promising at early stages of development or early clinical trials may later be found to be unsafe, ineffective, or to have limited medical value.

Collaborators or licensees may never successfully develop and commercialize therapeutic product candidates. The development and commercialization of therapeutic products by collaborators or licensees is highly uncertain and subject to a number of significant risks. Therapeutic product candidates that appear to be promising at early stages of development may later be found to be unsafe, ineffective, or to have limited medical value. These product candidates must undergo expensive and time consuming clinical trials to determine whether they are safe and effective, and then they are subject to a lengthy regulatory review for approval by the U.S. Food and Drug Administration and comparable agencies in other countries. Furthermore, even if these products are found to be safe and effective and receive regulatory approvals, they may never be developed into commercial products due to considerations such as: inability to obtain needed licenses to intellectual property owned by others; market and competitive conditions; and manufacturing difficulties or cost considerations. Accordingly, the Celera group may not receive any license, milestone, royalty, or other payments or any other benefit from collaboration, license, or similar agreements for the development of therapeutic products based on targets identified and validated by the Celera group.

The Celera group lacks sales capability in the clinical diagnostics market. The Celera group currently lacks a sales organization for its diagnostic products. Accordingly, its ability to successfully sell these products depends on its ability to develop a sales organization, work with Abbott Laboratories under the existing strategic alliance agreement that is described above, work with another distributor, or pursue a combination of these alternatives. In jurisdictions where the Celera group uses others as distributors for its diagnostic products, its success in marketing these products depends to a great extent on the efforts of the distributors.

The Celera group has limited manufacturing experience and capability for its diagnostic products and may encounter difficulties expanding the operations of its diagnostic products business. If diagnostic product sales or clinical trial usage needs increase, the Celera group may have to increase the capacity of its diagnostic product manufacturing processes and facilities or rely on its collaborators, if any, in this field of business. The Celera group may encounter difficulties in scaling-up diagnostic product manufacturing processes and may be unsuccessful in overcoming these difficulties. In these circumstances, the Celera group’s ability to meet diagnostic product demand or clinical trial usage needs may be impaired or delayed.

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The Celera group’s diagnostic product manufacturing facilities are subject, on an ongoing basis, to the U.S. Food and Drug Administration’s Quality System Regulation, international quality standards and other regulatory requirements, including requirements for good manufacturing practices, and the State of California Department of Health Services Food and Drug Branch requirements. The Celera group may encounter difficulties expanding its diagnostic product manufacturing operations in accordance with these regulations and standards, which could result in a delay or termination of manufacturing or an inability to meet product demand or clinical trial usage needs.

The Celera group’s diagnostic product manufacturing operations are located in a facility in Alameda, California. The Celera group expects to operate its diagnostic product manufacturing out of this facility for the foreseeable future, and it lacks alternative production plans in place or alternative facilities available should its existing manufacturing facility cease to function. Accordingly, the Celera group’s diagnostic product business could be harmed by unexpected interruptions in manufacturing caused by events such as labor problems, equipment failures, or other factors, and the resulting inability to meet customer orders or clinical trial usage needs on a timely basis.

Single suppliers or a limited number of suppliers provide key components of the Celera group’s diagnostic products. If these suppliers fail to supply these components, the Celera group may be unable to satisfy product demand or clinical trial usage needs. Several key components of the Celera group’s products come from, or are manufactured for the Celera group by, a single supplier or a limited number of suppliers. This applies in particular to components such as enzymes, fluorescent dyes, phosphoramadites, and oligonucleotides. The Celera group acquires some of these and other key components on a purchase-order basis, meaning that the supplier is not required to supply the Celera group with specified quantities over any set period of time or set aside part of its inventory for the Celera group’s forecasted requirements. The Celera group has not arranged for alternative supply sources for some of these components and it may be difficult to find alternative suppliers, especially to replace enzymes and oligonucleotides. Furthermore, to maintain compliance with the U.S. Food and Drug Administration’s Quality System Regulation, the Celera group must verify that its suppliers of key components are in compliance with all applicable U.S. FDA regulations. The Celera group believes that compliance with these regulatory requirements would increase the difficulty in arranging for needed alternative supply sources, particularly for components that are from “single source” suppliers, which means that they are currently the only supplier of custom-ordered components. If the Celera group’s diagnostic product sales increase beyond forecasted levels, or if its suppliers are unable or unwilling to supply items on commercially acceptable terms or comply with regulations applicable to manufacturing of the Celera group’s diagnostic products, it may not have access to sufficient quantities of key components on a timely basis and may be unable to satisfy product demand or clinical trial usage needs.

In addition, if any of the components of the Celera group’s products are no longer available in the marketplace, it may be forced to further develop its products or technology to incorporate alternative components. The incorporation of new components into its diagnostic products may require the Celera group to seek clearances or approvals from the FDA or foreign regulatory agencies before commercialization.

The Celera group’s collaborations with outside experts may be subject to restriction and change. The Celera group collaborates with scientific and clinical experts at academic and other institutions that provide assistance and guidance to the Celera group’s research and development efforts. These advisors and collaborators are not employees of the Celera group and may have other commitments that limit their availability to the Celera group. Although they generally agree not to do competing work, if a conflict of interest arises between their work for the Celera group and their work for another company or institution, the Celera group may lose the services of these experts. In addition, although the Celera group’s advisors and collaborators sign agreements not to disclose the Celera group’s confidential information, it is possible that valuable proprietary knowledge may become publicly known or otherwise available to other parties, including the Celera group’s competitors, through them.

The diagnostics industry is intensely competitive and evolving. There is intense competition among healthcare, diagnostic, and biotechnology companies attempting to discover candidates for potential new diagnostic products. The Celera group is aware of competitors who are engaged in research and development projects that address the diseases that the Celera group is targeting. These companies may:


·		develop new diagnostic products in advance of the Celera group or its collaborators or licensees;
·		develop products that are more effective diagnostic products, or more cost-effective, than those developed by the Celera group or its collaborators or licensees;

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obtain regulatory clearances or approvals of their diagnostic products more rapidly than the Celera group or its collaborators or licensees; or

obtain patent protection or other intellectual property rights that would limit the ability of the Celera group or its collaborators or licensees to develop and commercialize diagnostic products, or that would limit the ability of customers to use those products.

The Celera group’s diagnostic products business competes with companies in the U.S. and abroad that are engaged in the development and commercialization of products and services that provide genetic information. These companies may develop products or services that are competitive with the diagnostic products offered by the Celera group or its collaborators or licensees, such as analyte specific reagents, diagnostic test kits, or diagnostic testing services that perform the same or similar purposes as the Celera group’s or its collaborators’ or licensees’ diagnostic products. Also, clinical laboratories may offer testing services that are competitive with the diagnostic products sold by the Celera group or its collaborators or licensees. For example, a clinical laboratory can use either reagents purchased from manufacturers other than the Celera group, or use their own internally developed reagents, to make diagnostic tests. If clinical laboratories make tests in this manner for a particular disease, they could offer testing services for that disease as an alternative to diagnostic products sold by the Celera group or its collaborators or licensees for use in the testing of the same disease. The testing services offered by clinical laboratories may be easier to develop and market than test kits developed by the Celera group or its collaborators or licensees because the testing services are not subject to the same clinical validation requirements that are applicable to U.S. Food and Drug Administration cleared or approved diagnostic test kits. The diagnostic testing services market is dominated by a small number of large clinical laboratories, including Laboratory Corporation of America Holdings, Quest Diagnostics Inc., and Specialty Laboratories, Inc.

Also, a substantial portion of all sales of diagnostic products are made to a small number of clinical reference laboratories, including those identified above, and therefore the Celera group expects to rely on these laboratories for a substantial portion of its diagnostics business sales. The Celera group’s inability to establish or maintain one or more of these laboratories as a customer could harm its business, financial condition, and operating results.

The Celera group’s diagnostic products may not be fully accepted by physicians and laboratories. The growth and success of the Celera group’s diagnostics business depends on market acceptance by physicians and laboratories of its products as clinically useful and cost-effective. The Celera group expects that most of its diagnostic products will use genotyping and gene expression information to predict predisposition to diseases, disease progression or severity, or responsiveness to treatment. Market acceptance depends on the widespread acceptance and use by doctors and clinicians of genetic testing for these purposes. The use of genotyping and gene expression information by doctors and clinicians for these purposes is relatively new. Doctors and clinicians may not want to use the Celera group’s products designed for these purposes.

Even if genetic testing is accepted as a method to manage healthcare, the Celera group’s diagnostic products may not be accepted in the clinical diagnostics market. If genetic testing becomes widely accepted in the clinical diagnostics market, the Celera group cannot predict the extent to which doctors and clinicians may be willing to use the Celera group’s diagnostic products in providing patient care. Doctors and clinicians may prefer competing technologies and products that can be used for the same purposes as the Celera group’s products.

If insurance companies and other third-party payors do not reimburse doctors and patients for the Celera group’s diagnostic tests, its ability to sell its products to the clinical diagnostics market will be impaired. Sales of the Celera group’s diagnostic products will depend, in large part, on the availability of adequate reimbursement to users of those products from government insurance plans, including Medicare and Medicaid in the U.S., managed care organizations, and private insurance plans. Physicians’ recommendations to use diagnostic tests, as well as decisions by patients to pursue those tests, are likely to be influenced by the availability of reimbursement by insurance companies and other third-party payors. Third-party payors are increasingly attempting to contain healthcare costs by limiting both the extent of coverage and the reimbursement rate for testing and treatment products and services. In particular, products and services that are determined to be investigational in nature or that are not considered “reasonably necessary” for diagnosis or treatment may be denied reimbursement coverage. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on medical suppliers to reduce their prices. Thus, third-party reimbursement may not be consistently available or financially adequate to cover the cost of the Celera group’s diagnostic products. This could limit the ability of the Celera group to sell its diagnostic products, cause the Celera group to reduce the prices of its products, or otherwise harm the Celera group’s operating results.

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Because each third-party payor individually approves reimbursement, obtaining these approvals is a time-consuming and costly process. The Celera group must provide scientific and clinical support for the use of each of its diagnostic products to each payor separately with no assurance that they will provide their approval for reimbursement. This process can delay the broad market introduction of new products and could have a negative effect on the Celera group’s revenues and operating results.

Introduction of new diagnostic and therapeutic products may expose the Celera group to product liability claims. New products developed by the Celera group or its collaborators or licensees could expose the Celera group to potential product liability risks that are inherent in the testing, manufacturing, marketing, and sale of human diagnostic and therapeutic products. In addition, clinicians, patients, third-party payors, and others may at times seek damages based on testing or analysis errors caused by a technician’s misreading of results, mishandling of the patient samples, or similar claims. Product liability claims or product recalls, regardless of the ultimate outcome, could require the Celera group to spend significant time and money in litigation and to pay significant damages. Although the Celera group expects to seek and maintain product liability insurance to cover claims relating to the testing and use of diagnostic and therapeutic products, it may not be able to obtain the insurance on commercially reasonable terms, if at all, or it may not be able to obtain coverage in an amount that will be adequate to cover losses from any particular claim. Also, although the Celera group expects that it will be involved in the commercialization of therapeutic products only through other companies who develop and market those products under collaboration, license, or similar agreements, the Celera group could be indirectly exposed to product liability claims under applicable laws or regulations or due to the terms and conditions of those agreements.

The Celera group’s operations involve the use, manufacture, sale, and distribution of hazardous materials, and the mishandling of these hazardous materials could result in substantial liabilities and harm to the Celera group. The Celera group’s diagnostic and therapeutic research and development activities, and diagnostic manufacturing activities, involve the controlled use of potentially hazardous materials, including biological materials, chemicals, and various radioactive compounds. Also, some of the Celera group’s diagnostic products, including products sold through its strategic alliance with Abbott Laboratories, are hazardous materials or include hazardous materials. The Celera group cannot completely eliminate the risk of accidental or other contamination or injury from these materials, and the Celera group could be held liable for resulting damages, which could be substantial. Under some laws and regulations, a party can be subject to “strict liability” for damages caused by some hazardous materials, which means that a party can be liable without regard to fault or negligence. Furthermore, the Celera group could be held indirectly responsible for contamination or injury arising from the conduct of Abbott Laboratories in manufacturing, selling, or distributing alliance diagnostic products. The Celera group could be held similarly responsible for the actions of its other collaborators or licensees. In addition, the Celera group is subject to federal, state, local, and foreign laws, regulations, and permits governing the use, storage, handling, and disposal of hazardous materials and specified waste products, as well as the shipment and labeling of materials and products containing hazardous materials. If the Celera group fails to comply with any of these laws, regulations, or permits, or if the Celera group is held indirectly responsible for conduct of Abbott Laboratories or other collaborators or licensees found to be non-compliant, we could be subject to substantial fine or penalty, payment of remediation costs, loss of permits, and/or other adverse governmental action. Any of these events could harm the Celera group’s business and financial condition.

The Celera group’s business depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, and Internet applications and related tools and functions. The Celera group’s business requires manipulating and analyzing large amounts of data, and communicating the results of the analysis to its internal research personnel and its collaborators via the Internet. Also, the Celera group relies on a global enterprise software system to operate and manage its business. The Celera group’s business therefore depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that the Celera group’s hardware or software malfunctions or access to the Celera group’s data by the Celera group’s internal research personnel or collaborators through the Internet is interrupted, the Celera group’s business could suffer.

The Celera group’s computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. If the Celera group fails to maintain and further develop the necessary computer capacity and data to support its and its collaborators’ and licensees’ discovery, research, and development activities, including its associated computational needs, it could experience a loss of or delay in

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revenues. In addition, any sustained disruption in Internet access provided by other companies could harm the Celera group’s business.

The Celera group’s competitive position depends on maintaining its intellectual property protection. The Celera group’s ability to compete and to achieve and maintain profitability depends, in part, on its ability to protect its proprietary discoveries and technologies through obtaining and enforcing patent rights, obtaining copyright protection, maintaining its trade secrets, and operating without infringing the intellectual property rights of others. The Celera group’s ability to obtain patent protection for the inventions it makes, including those relating to novel methods of diagnosing and/or treating diseases, is uncertain. The patentability of these and other types of biotechnology inventions involves complex factual, scientific, and legal questions. As a result, it is difficult to predict whether patents will issue or the breadth of claims that will be allowed in biotechnology patents. This may be particularly true with regard to the patenting of gene sequences, gene functions, and genetic variations. In this regard, the U.S. Patent and Trademark Office has adopted guidelines for use in the review of the utility of inventions, particularly biotechnology inventions. These guidelines increased the amount of evidence required to demonstrate utility to obtain a patent in the biotechnology field, making patent protection more difficult to obtain. Also, future changes in policies or laws, or interpretations of these policies or laws, relevant to the patenting of biotechnology inventions could harm our patent position in the U.S. or other countries. Opposition to the protection of these inventions in the U.S. or other countries could result in stricter standards for obtaining or enforcing biotechnology patent rights.

In some instances, patent applications in the U.S. are maintained in secrecy until a patent issues. In most instances, the content of U.S. and international patent applications is made available to the public approximately 18 months after the initial filing from which priority is claimed. As a result, the Celera group may not be aware that others have filed patent applications for inventions covered by the Celera group’s patent applications and may incorrectly believe that the Celera group inventors were the first to make the invention. Accordingly, the Celera group’s patent applications may be preempted or the Celera group may have to participate in interference proceedings before the U.S. Patent and Trademark Office. These proceedings determine the priority of invention and the right to a patent for the claimed invention in the U.S.

The Celera group also relies on trade secret protection for its confidential and proprietary information and procedures, including procedures related to sequencing genes and to searching and identifying important regions of genetic information. The Celera group protects its trade secrets through recognized practices, including access control, confidentiality and non-use agreements with employees, consultants, collaborators and customers, and other security measures. These confidentiality and non-use agreements may be breached, however, and the Celera group may not have adequate remedies for a breach. In addition, the Celera group’s trade secrets may otherwise become known or be independently developed by competitors. Accordingly, it is uncertain whether the Celera group’s reliance on trade secret protection will be adequate to safeguard its confidential and proprietary information and procedures.

Disputes may arise in the future with regard to the ownership of rights to any invention developed with collaborators. These and other possible disagreements with collaborators could lead to delays in the achievement of milestones or receipt of royalty payments or in research, development and commercialization of the Celera group’s or its collaborators’ diagnostic products. In addition, these disputes could require or result in lawsuits or arbitration. Lawsuits and arbitration are time-consuming and expensive. Even if the Celera group wins, the cost of these proceedings could harm its business, financial condition, and operating results.

The Celera group may infringe the intellectual property rights of others, may become involved in expensive intellectual property legal proceedings, and may need to obtain licenses to intellectual property from others. There has been substantial litigation and other legal proceedings regarding patents and other intellectual property rights in the biotechnology, pharmaceutical, and diagnostics industries. The intellectual property rights of biotechnology companies, including the Celera group, are generally uncertain and involve complex factual, scientific, and legal questions. The Celera group’s success in diagnostic product development and therapeutic target discovery may depend, in part, on its ability to operate without infringing the intellectual property rights of others and to prevent others from infringing its intellectual property rights. Also, contractual disputes related to existing license rights to patents owned by others may affect the Celera group’s ability to develop, manufacture, and sell its products.

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to enforce its patent rights or invalidate patents held by others. These legal actions may similarly be initiated against the Celera group by others alleging that the Celera group is infringing their rights. The cost to the Celera group of any patent litigation or proceedings, even if the Celera group is successful, could be substantial, and these legal actions may absorb significant management time.

If infringement claims against the Celera group are resolved unfavorably to the Celera group, the Celera group may be enjoined from manufacturing or selling its products or services without a license from a third party, and the Celera group may not be able to obtain a license on commercially acceptable terms, or at all. Also, the Celera group could become subject to significant liabilities to others if these claims are resolved unfavorably to the Celera group. Similarly, our business could be harmed and we could be subject to liabilities because of lawsuits brought by others against Abbott Laboratories, with whom we have a strategic alliance. For example, Abbott has been sued by Innogenetics N.V. for patent infringement due to Abbott’s sale of hepatitis C virus genotyping analyte specific reagents, or ASRs, manufactured by the Celera group for Abbott. In September 2006, a jury rendered a verdict against Abbott and awarded $7 million in monetary damages to Innogenetics. We have agreed to share the cost of this litigation, including these damages, and we are also subject to a permanent injunction that was issued by the court after the jury verdict, in January 2007, that prohibits us or Abbott from manufacturing or selling hepatitis C virus genotyping ASRs. Abbott is appealing the verdict but it may not be successful, and the appeal process may take a year or more to conclude. The alliance therefore will not receive any revenues from the sale of the hepatitis C virus genotyping products for the foreseeable future because of the permanent injunction.

Furthermore, even if Abbott succeeds in its appeal and the injunction is lifted in the future, we cannot predict whether and to what extent there may continue to be a market for these products at a time in the future.

Ethical, legal, and social issues related to the use of genetic information and genetic testing may cause less demand for the Celera group’s diagnostic products. Genetic testing has raised issues regarding confidentiality and the appropriate uses of the resulting information. For example, concerns have been expressed regarding the use of genetic test results by insurance carriers or employers to discriminate on the basis of this information, resulting in barriers to the acceptance of genetic tests by consumers. This could lead to governmental authorities calling for limits on or regulation of the use of genetic testing or prohibiting testing for genetic predisposition to some diseases, particularly those that have no known cure. Any of these scenarios could reduce the potential markets for products of the Celera group.

The Celera group may pursue acquisitions, investments, or other strategic relationships or alliances, which may consume significant resources, may be unsuccessful, and could dilute the holders of Applera-Celera stock. Acquisitions, investments and other strategic relationships and alliances, if pursued, may involve significant cash expenditures, debt incurrence, additional operating losses, and expenses that could have a material effect on the Celera group’s financial condition and operating results. Acquisitions involve numerous other risks, including:

diversion of management from daily operations;

difficulties integrating acquired technologies and personnel into the Celera group’s business;

inability to obtain required financing on favorable terms;

entry into new markets in which the Celera group has little previous experience;

potential loss of key employees, key contractual relationships, or key customers of acquired companies or of the Celera group; and

assumption of the liabilities and exposure to unforeseen liabilities of acquired companies.

If these types of transactions are pursued, it may be difficult for the Celera group to complete these transactions quickly and to integrate these acquired operations efficiently into its current business operations. Any acquisitions, investments or other strategic relationships and alliances by the Celera group may ultimately harm its business and financial condition. In addition, future acquisitions may not be as successful as originally anticipated and may result in impairment charges. We have incurred these charges in recent years in relation to acquisitions. For example, since fiscal 2002 we have incurred charges for impairment of goodwill, intangibles and other assets and other charges of $30.4 million related to the Celera group’s acquisition of Paracel, Inc. and $14.9 million related to the Applied Biosystems group’s acquisition of Boston Probes, Inc. Additionally, during our 2006 and 2007 fiscal years, we incurred charges totaling $28.8 million for severance and benefit costs and asset impairments relating to the Celera group’s acquisition of Axys Pharmaceuticals, Inc., and its subsequent decision to partner or sell its small molecule drug discovery and development programs, and the integration of Celera Diagnostics into the Celera group.

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In addition, acquisitions and other transactions may involve the issuance of a substantial amount of Applera-Celera stock without the approval of the holders of Applera-Celera stock. Any issuances of this nature could be dilutive to holders of Applera-Celera stock.

Earthquakes could disrupt operations in California. The Celera group has headquarters, research and development, manufacturing, and administrative facilities in Alameda, California. Alameda is located near major California earthquake faults. The ultimate impact of earthquakes on the Celera group, its significant suppliers, and the general infrastructure is unknown, but operating results could be harmed if a major earthquake occurs.

Applera-Celera stock price may be volatile. The market price of Applera-Celera stock has in the past been and may in the future be volatile due to the risks and uncertainties described in this section of this report, as well as other factors that may have affected or may in the future affect the market price, such as:

conditions and publicity regarding the genomics, biotechnology, pharmaceutical, diagnostics, or life sciences industries generally;

price and volume fluctuations in the stock market at large which do not relate to the Celera group’s operating performance; and

comments by securities analysts or government officials, including with regard to the viability or profitability of the biotechnology sector generally or with regard to intellectual property rights of life science companies, or the Celera group’s ability to meet market expectations.

Our company is subject to a class action lawsuit relating to its 2000 offering of shares of Applera-Celera stock that may be expensive and time consuming. Our company and some of our officers are defendants in a lawsuit brought on behalf of purchasers of Applera-Celera stock in our follow-on public offering of Applera-Celera stock completed on March 6, 2000. In the offering, we sold an aggregate of approximately 4.4 million shares of Applera-Celera stock at a public offering price of $225 per share. The lawsuit was commenced with the filing of several complaints in 2000, which have been consolidated into a single case which has been certified by the court as a class action. 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 unspecified monetary damages, rescission, costs and expenses, and other relief as the court deems proper. Although we believe the asserted claims are without merit and intend to defend the case vigorously, the outcome of this or any other litigation is inherently uncertain. The defense of this case will require management attention and resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to potential loss from exposure to market risks represented principally by changes in foreign exchange rates, interest rates, and equity prices. Please refer to the market risks section of the management’s discussion and analysis included on page 49 of this report. Additional information can also be found in the market risk section of the management’s discussion and analysis included on page 36 of our 2006 Annual Report to Stockholders (which section is incorporated in this report by reference).

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We are responsible for maintaining disclosure controls and procedures, as defined by the Securities and Exchange Commission in its Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated the effectiveness of our disclosure controls and procedures as of the end of the third quarter of our 2007 fiscal year, the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to achieve their stated purpose. However, there is no assurance that our disclosure controls and procedures will operate effectively under all circumstances.

Internal Control Over Financial Reporting

We are responsible for maintaining internal control over financial reporting, as defined by the Securities and Exchange Commission in its Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. Based on an evaluation of internal control over financial reporting by our management, we have not identified any changes made to our internal control over financial reporting during the third quarter of our 2007 fiscal year, which is our last fiscal quarter and the period covered by this report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. 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. We disclosed information about some of our legal actions in Part I, Item 3, of our 2006 Annual Report on Form 10-K. We made additional disclosures regarding our legal actions in Item 1 of Part II of our previously filed Quarterly Reports on Form 10-Q for the first and second quarters of our current fiscal year, updating the information disclosed in our 2006 10-K. Set forth below is the description of the settlement of a case involving On-Line Technologies. The settlement occurred in the third fiscal quarter of our current fiscal year, but was previously disclosed in our second quarter report because of the timing of the settlement. For additional information about our legal proceedings, refer to Note 12 to our Unaudited Condensed Consolidated Financial Statements in Part I of this report.

We believe that we have meritorious defenses against the claims currently asserted against us, including the ongoing claims described in our 2006 10-K as updated by the disclosures in our subsequent reports, and we intend to defend them vigorously. However, the outcome of legal actions is inherently uncertain, and we cannot be sure that we will prevail in our defense of claims currently asserted against us. An adverse determination in the cases we are currently defending, particularly the claims against us described in Item 3 of our 2006 10-K under the heading “Commercial Litigation,” as updated by the disclosures in our subsequent reports, could have a material adverse effect on us, the Applied Biosystems group, or the Celera group.

Item 1A. Risk Factors.

Overview

Some statements contained in, or incorporated by reference in, this report, including the Outlook section of Management’s Discussion and Analysis of Financial Condition and Results of Operation contained in Item 2 of Part I of this report, are forward-looking and are subject to a variety of risks and uncertainties. Similarly, the press releases we issue and other public statements we make from time to time may contain language that is forward-looking. These forward-looking statements may be identified by the use of forward-looking words or phrases such as “forecast,” “believe,” “expect,” “intend,” “anticipate,” “should,” “plan,” “estimate,” and “potential,” among others. The forward-looking statements contained in this report are based on our current expectations, and those made at other times will be based on our expectations when the statements are made. We cannot guarantee that any forward-looking statements will be realized.

The risks and uncertainties that may affect the operations, performance, development, and results of our Applied Biosystems group and Celera group businesses include, but are not limited to, those described in Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Forward-Looking Statements and Risk Factors” in Item 2 of Part I of this report. That description amends and restates the risk factors associated with our Applied Biosystems group and Celera group businesses that were previously disclosed in Item 1A of Part I of our 2006 Annual Report on Form 10-K and subsequently restated in our Quarterly Reports on Form 10-Q for the first and second quarters of our current fiscal year. Set forth below is a description of changes we have made to those risk factors since they were disclosed in our 2006 10-K that may be material. The risks and uncertainties that arise from our capital structure, particularly our two separate classes of common stock, include, but are not limited to, those described in Item 1A of Part I of our 2006 Annual Report on Form 10-K under the heading “Risk Factors-Risks Relating to a Capital Structure with Two Separate Classes of Common Stock.” There have not been any material changes to these risk factors since they were disclosed in our 2006 10-K. We note that there may be additional risks and uncertainties that could affect us or our businesses that are not currently known to us or that we currently think are immaterial.

Changes to Applied Biosystems group risk factors

Following is the restated text of individual Applied Biosystems group risk factors that may have changed materially from their previous disclosure in our 2006 10-K.

The Applied Biosystems group is currently, and could in the future be, subject to lawsuits, arbitrations, investigations, and other legal actions with private parties and governmental entities, particularly involving claims for infringement of patents and other intellectual property rights, and it may need to obtain licenses to intellectual property from others. The Applied Biosystems group believes that it has meritorious defenses against the claims currently asserted against it and intends to defend them vigorously. However, the outcome of legal actions is inherently uncertain, and the Applied Biosystems group cannot be sure that it will prevail in any of these actions. An adverse determination in some of the Applied Biosystems group’s current legal actions, particularly the cases described below, could harm our business and financial condition.

Several legal actions have been filed against us that could affect the intellectual property rights of the Applied Biosystems group and its products and services, including the following:

Enzo Biochem, Inc., Enzo Life Sciences, Inc., and Yale University have filed a lawsuit against us alleging that we are infringing six patents due to the sale of sequencing reagent kits, TaqMan^{^®} genotyping and gene expression assays, and the gene expression microarrays used with the Applied Biosystems group’s Expression Array System.

Following is the text of a risk factor, which we have added since the filing of our 2006 10-K, relating to the Applied Biosystems group business.

Changes to Celera group risk factors

Following is the restated text of an individual Celera group risk factor that may have changed materially from its previous disclosure in our 2006 10-K.

has been substantial litigation and other legal proceedings regarding patents and other intellectual property rights in the biotechnology, pharmaceutical, and diagnostics industries. The intellectual property rights of biotechnology companies, including the Celera group, are generally uncertain and involve complex factual, scientific, and legal questions. The Celera group’s success in diagnostic product development and therapeutic target discovery may depend, in part, on its ability to operate without infringing the intellectual property rights of others and to prevent others from infringing its intellectual property rights. Also, contractual disputes related to existing license rights to patents owned by others may affect the Celera group’s ability to develop, manufacture, and sell its products.

The Celera group may initiate proceedings at the U.S. Patent and Trademark Office to determine its patent rights with respect to others, referred to as interference proceedings. Also, the Celera group may initiate patent litigation to enforce its patent rights or invalidate patents held by others. These legal actions may similarly be initiated against the Celera group by others alleging that the Celera group is infringing their rights. The cost to the Celera group of any patent litigation or proceedings, even if the Celera group is successful, could be substantial, and these legal actions may absorb significant management time.

Following is the text of a risk factor, which we have added since the filing of our 2006 10-K, relating to the Celera group business.

The U.S. Food and Drug Administration has issued a draft interpretation of the regulations governing the sale of Analyte Specific Reagent products which could prevent or delay our or our collaborators’ or licensees’ sales of these products and harm our business. In September 2006, the U.S. Food and Drug Administration, or FDA, published “Draft Guidance for Industry and FDA Staff: Commercially Distributed Analyte Specific Reagents (ASRs): Frequently Asked Questions” clarifying the FDA’s interpretation of the regulations governing the sale of Analyte Specific Reagent, or ASR, products. ASRs are a class of products that do not require regulatory clearance or approval. The draft guidance document contains an interpretation of the ASR regulations that is a departure from what we believe to be the existing FDA practice and policy regarding products that can be characterized as ASRs. If this draft guidance document becomes the final guidance document, and if the FDA begins enforcing this interpretation of the ASR regulations, the Celera group’s current ASR products may not meet the regulatory definition of an ASR. If this were to occur, the Celera group or its alliance partner Abbott Laboratories might have to stop selling these ASR products until the products receive, if possible, the applicable FDA approval or clearance. Furthermore, the enforcement of this new interpretation might prevent the Celera group or its collaborators or licensees from developing any new products that would qualify as ASRs.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

This table provides information regarding our purchases of shares of Applera-Applied Biosystems stock during the third quarter of fiscal 2007.


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (3) (4)
January 1-January 31, 2007	239,410	$36.5914	237,100	-
February 1-February 28, 2007	-	-	-	-
March 1- March 31, 2007	-	-	-	-
Total	239,410	$36.5914	237,100	-

(1)

Share repurchases reported in this column consist of (a) shares repurchased under the authorization described in footnote (3) below, (b) 401 shares tendered by employees in January 2007 to cover taxes relating to the vesting of restricted stock units, and (c) 1,909 shares tendered by employees in January 2007 to cover taxes relating to the vesting of restricted stock awards.

(2)

Share repurchases reported in this column consist of shares repurchased under the authorization described in footnote (3) below. Market purchases are reported in this column based on trade settlement date.

(3)

We previously announced that our board of directors has authorized the repurchase of shares of Applera-Applied Biosystems stock from time to time to replenish shares issued under our various employee stock benefit plans. This authorization has no set dollar or time limits and delegates to our management discretion to purchase shares at times and prices it deems appropriate through open market or negotiated purchases. Accordingly, the amounts in this column do not reflect this authorization.

(4)

On April 26, 2007, subsequent to the end of our third fiscal quarter, we announced that our board of directors authorized the repurchase of up to 18,400,000 shares of Applera-Applied Biosystems stock, in addition to the authorization described in footnote (3) above. The new authorization has no time restrictions and delegates to Company management discretion to purchase shares at times and prices it deems appropriate through open market purchases, privately negotiated transactions, tender offers, exchange offers, or otherwise. It is anticipated that repurchases will be made from time to time depending on market and business conditions and will be funded using the Applied Biosystems group’s U.S. cash reserves and cash generated from domestic operations, as well as funds to be borrowed under our revolving corporate credit facility or from other sources, if and when required. No shares were purchased under this authorization during our third fiscal quarter.

This table provides information regarding our purchases of shares of Applera-Celera stock during the third quarter of fiscal 2007.


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Program (2)
January 1- January 31, 2007	10,331	$14.7050	-	-
February 1- February 28, 2007	-	-	-	-
March 1- March 31, 2007	-	-	-	-
Total	10,331	$14.7050	-	-

(1)

Share repurchases reported in this column consist of shares tendered by employees in January 2007 to cover taxes relating to the vesting of restricted stock units.

(2)

We previously announced that our board of directors has authorized the repurchase of shares of Applera-Celera stock from time to time to replenish shares issued under our various employee stock benefit plans. This authorization has no set dollar or time limits and delegates to Company management discretion to purchase shares at times and prices it deems appropriate through open market or negotiated purchases. Accordingly, the amounts in this column do not reflect this authorization. No shares were purchased under this authorization during the third quarter of our 2007 fiscal year.

Item 6. Exhibits.


10.1		Description of Compensation for Non-Management Members of the Applera Corporation Board of Directors as of January 1, 2007 (incorporated by reference to Item 5.02(e) of our Current Report on Form 8-K dated January 18, 2007, and filed January 24, 2007 (Commission file number 001-04389)).

10.2		Form of Non-Qualified Stock Option Agreement for executive officers pursuant to the Applera Corporation/Applied Biosystems Group Amended and Restated 1999 Stock Incentive Plan, as amended on October 19, 2006.

10.3		Form of Non-Qualified Stock Option Agreement for executive officers pursuant to the Applera Corporation/Celera Group Amended and Restated 1999 Stock Incentive Plan, as amended on October 19, 2006.

13.1		Annual Report to Stockholders for the fiscal year ended June 30, 2006, to the extent incorporated herein by reference (incorporated by reference to Exhibit 13 to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2006 (Commission file number 001-04389)).

31.1		Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


APPLERA CORPORATION
By:		/s/ Dennis L. Winger
		Dennis L. Winger
		Senior Vice President and
		Chief Financial Officer
By:		/s/ Ugo D. DeBlasi
		Ugo D. DeBlasi
		Vice President and
		Controller
		(Chief Accounting Officer)

Dated: May 8, 2007

EXHIBIT INDEX


Exhibit Number

10.2		Form of Non-Qualified Stock Option Agreement for executive officers pursuant to the Applera Corporation/Applied Biosystems Group Amended and Restated 1999 Stock Incentive Plan, as amended on October 19, 2006.

10.3		Form of Non-Qualified Stock Option Agreement for executive officers pursuant to the Applera Corporation/Celera Group Amended and Restated 1999 Stock Incentive Plan, as amended on October 19, 2006.

31.1		Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.