**9
 

 
 financial review        **10-11****Selected Consolidating Financial Data**   **12-38****Management’s Discussion and Analysis**   22Discussion of Applera Corporation   27Discussion of Applied Biosystems Group   32Discussion of Celera Genomics Group   36Market Risks   36Outlook   38Forward-Looking Statements   **39-42****Financial Statements**   39Consolidated Statements of Operations   40Consolidated Statements of Financial Position   41Consolidated Statements of Cash Flows   42Consolidated Statements of Stockholders’ Equity   **43-85****Notes to Consolidated Financial Statements**   **86****Reports of Management**   **87****Report of Independent Registered Public Accounting Firm**                                    
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10Selected Consolidating Financial DataApplera Corporation (Dollar amounts in thousands except per share amounts)Fiscal years ended June 30, **2006** 2005 2004 2003 2002  **Financial Operations**                Net revenues                Applied Biosystems group **$****1,911,226** $1,787,083 $1,741,098 $1,682,943 $1,604,019 Celera Genomics group  **46,207**  66,527  96,828  109,027  130,092 Eliminations  **(8,043****) ** (8,470)  (12,733)  (14,738)  (32,893)Applera Corporation  **1,949,390**  1,845,140  1,825,193  1,777,232  1,701,218  Income (loss) from continuing operations                Applied Biosystems group **$****275,117** $236,894 $172,253 $199,617 $168,481 Celera Genomics group  **(62,710****)** (77,117) (57,476) (81,929) (211,772)Eliminations  **85**  18  176  792  2,710 Applera Corporation  **212,492**  159,795  114,953  118,480  (40,581) **Per Share Information**                **Applied Biosystems Group**                Income per share from continuing operations Basic **$****1.47** $1.21 $0.84 $0.96 $0.80 Diluted **$****1.43** $1.19 $0.83 $0.95 $0.78 Dividends declared per share **$****0.17** $0.17 $0.17 $0.17 $0.17  **Celera Genomics Group**                Net loss per share                Basic and diluted **$****(0.83****)  **$(1.05)  $(0.79)  $(1.15)  $(3.21) **Other Information**                Cash and cash equivalents and short-term investments                Applied Biosystems group **$****373,921** $756,236 $504,947 $601,666 $470,981 Celera Genomics group  **569,522**  668,249  745,794  802,402  888,922 Applera Corporation  **943,443**  1,424,485  1,250,741  1,404,068  1,359,903  Total assets                Applied Biosystems group **$****2,245,772** $2,259,149 $1,921,672 $2,105,179 $1,804,117 Celera Genomics group  **773,678**  909,887  1,055,581  1,157,371  1,272,428 Eliminations  **(6,475****)** (4,851) (4,402) (5,058) (1,146)Applera Corporation  **3,012,975**  3,164,185  2,972,851  3,257,492  3,075,399  Long-term debt                Applied Biosystems group **$****—** $— $— $— $— Celera Genomics group           17,101  17,983 Applera Corporation           17,101  17,983  
Selected consolidating financial data provides five years of financial information for Applera Corporation. This table includes commonly used key financial metrics that facilitate comparisons with other companies. We include information on our business segments in the above selected consolidating financial data to facilitatethe understanding of our business and our financial statements. Our board of directors approves the method of allocating earnings to each class of our common stock for purposes of calculating earnings per share. This determination is generally based on net income or loss amounts of the Applied Biosystems group and theCelera Genomics group calculated in accordance with accounting principles generally accepted in the United States of America, or GAAP, consistently applied, except for the provisions of SFAS 123R which were adopted as of July 1, 2005, as discussed in Note 1 to our consolidated financial statements. See Note 16 toour consolidated financial statements for a detailed description of our segments and the management and allocation policies applicable to the attribution of assets, liabilities, revenues and expenses. You should read this selected consolidating financial data in conjunction with our consolidated financial statements and relatednotes.

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11Selected Consolidating Financial Data — (Continued) Applera Corporation
As part of our recapitalization on May 6, 1999, we issued two new classes of common stock called Applera Corporation-Applied Biosystems Group Common Stock and Applera Corporation-Celera Genomics Group Common Stock. See Note 1 to our consolidated financial statements for additional information on our capitalstructure.

Through December 31, 2005, Celera Diagnostics was a 50/50 joint venture between the Applied Biosystems group and the Celera Genomics group. Effective January 1, 2006, the Celera Genomics group acquired the Applied Biosystems group’s 50 percent interest in the Celera Diagnostics joint venture such that it nowowns 100 percent of Celera Diagnostics. As a result of this restructuring and the manner by which our management now operates and assesses the business, Celera Diagnostics is no longer a separate segment within Applera and we have restated prior period consolidating financial information to reflect this change. Sinceits formation in fiscal 2001, Celera Diagnostics has been focused on the discovery, development, and commercialization of diagnostic products. As part of the Celera Genomics group, the diagnostics business continues to focus on these areas.

A number of items, shown below, impact the comparability of our data from continuing operations. All amounts are pre-tax, with the exception of the tax items and R&D tax credits. See Note 2 to our consolidated financial statements for additional information on the events impacting comparability.
(Dollar amounts in millions)Fiscal years ended June 30, **2006** 2005 2004 2003 2002  **Applied Biosystems Group**                Net gains/(losses) on investments **$****—** $— $11.2 $— $(8.2)Employee-related charges, asset impairments and other  **(0.4****)** (31.8) (25.0) (29.5)   Acquired in-process research and development charge  **(3.4****)**          (2.2)Tax items  **50.2**  23.5     27.8    Legal settlements, net  **(27.4****)** 8.5  6.7  25.8    Gain on asset dispositions  **16.9**  29.7           **Celera Genomics Group**                Employee-related charges, asset impairments and other **$****(26.2****)**$(4.3)$(18.1)$(15.1)$(28.7)Net gains/(losses) on investments  **7.6**     24.8     (6.0)Legal settlements, net  **(0.7****)**            Acquired in-process research and development charge              (99.0)Revenue from the sales of small molecule programs  **8.6**             R&D tax credits     2.2             
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12Management’s Discussion and Analysis Applera Corporation **Discussion 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 potentialimpact 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. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. When used inthis management discussion, the terms “Applera,” “Company,” “we,” “us,” or “our” mean Applera Corporation and its subsidiaries.

We have reclassified some prior period amounts in the consolidated financial statements and notes for comparative purposes.
**Overview**
Through December 31, 2005, we were comprised of three business segments: the Applied Biosystems group, the Celera Genomics group, and Celera Diagnostics.

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 anddevelop 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 tothe 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 Genomics 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 Genomics 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 Genomics group is also    discovering and validating therapeutic targets, and it is seeking strategic    partnerships to develop therapeutic products based on these discovered targets.    In January 2006, the Celera Genomics group announced its intention to sell    or partner its small molecule drug discovery and development programs. During    the fourth quarter of fiscal 2006, the Celera Genomics group transferred    rights to several of these programs to other companies and 

terminated    all other small molecule programs. See the Business Highlights	section below for more information.

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 Genomics group. Effective January 1, 2006, the Celera Genomics group acquired the Applied Biosystems group’s 50 percentinterest in the Celera Diagnostics joint venture such that it now owns 100 percent of Celera Diagnostics. As a result of this restructuring and the manner by which our management now operates and assesses the business, Celera Diagnostics is no longer a separate segment within Applera and we have restated prior periodconsolidating financial information to reflect this change. See Note 15 to our consolidated financial statements for more information. Since its formation in fiscal 2001, Celera Diagnostics has been focused on the discovery, development, and commercialization of diagnostic products. As part of the Celera Genomics group,the diagnostics business continues to focus on these areas.

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 Genomics 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 Genomics group. There is no single security that represents the performance of Applera as a whole, nor was there a separate security traded for CeleraDiagnostics.

Holders of Applera-Applied Biosystems stock and holders of Applera-Celera stock are stockholders of Applera. The Applied Biosystems group and the Celera Genomics 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 aresubject 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 Genomics group do not have separate boards of directors. Applera has one board of directors, which will make any decision in accordance with its good faithbusiness 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 Form 10-K Annual Report for fiscal 2006.

Our fiscal year ends on June 30. The financial information for both segments is presented in Note 16 to our consolidated financial statements, Segment, Geographic, Customer and Consolidating Information. Management’s

 

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13Management’s Discussion and Analysis — (Continued)Applera Corporation 
discussion and analysis addresses the consolidated financial results followed by the discussions of our two segments.
**Business Highlights** *Applera Corporation*  •On July 3, 2006, we joined with Beckman Coulter, Inc. in announcing that we entered into definitive agreement to resolve all outstanding legal disputes between us regarding claims to some Beckman Coulter patented capillary electrophoresis technology and heated cover instrumentation technology and Applera’sallegations of breach of contract of some licensed technology. The terms of the definitive agreement, which was executed on June 30, 2006, are consistent with a preliminary settlement agreement that we announced with Beckman Coulter on April 26, 2006. For further information on this settled legal proceeding,see Item 3 “Legal Proceedings” in Part I of our Form 10-K Annual Report for fiscal 2006.  •In January 2006, we announced a restructuring of the Celera Diagnostics joint venture, effective January 1, 2006, whereby the Applied Biosystems group transferred its 50% interest in Celera Diagnostics to the Celera Genomics group for various considerations. *Applied Biosystems Group*  •In July 2006, the Applied Biosystems group announced that the Technical Board of Appeal of the European Patent Office (EPO) has reinstated Applera’s European Patent No. 872562 covering real-time PCR thermal cycler technology, overturning a December 2004 decision by the EPO’s Opposition Division to revokethe patent for alleged lack of novelty. The case will be returned to the Opposition Division for review of other issues.  •On May 30, 2006, the Applied Biosystems group announced that it had signed a definitive agreement to acquire Agencourt Personal Genomics, Inc. (“APG”) for approximately $120 million in cash. This transaction closed in July 2006. APG was a privately-held developer of extremely high throughput massivelyparallel next generation sequencing technology that we believe will be applicable to numerous genetic analysis applications, including de novo genome sequencing, gene expression, and genotyping.  •In March 2006, the Applied Biosystems group acquired the Research Products Division of Ambion, Inc., a premium provider of RNA based consumables, for a purchase price of approximately $279 million in cash, including transaction closing costs. See Note 3 to our consolidated financial statements for moreinformation.  •In March 2006, the Applied Biosystems group announced the commercial availability in Europe, Asia and Africa of its TaqMan® Influenza A/H5 Detection Kit, which is capable of rapidly and reliably detecting multiple strains of avian influenza in laboratory samples.  •In February 2006, the Applied Biosystems group announced that it had entered into a settlement
agreement with Bio-Rad Laboratories, Inc., resolving a patent infringement suit by Applera and Roche Molecular Systems against MJ Research, Inc. (acquired by Bio-Rad Laboratories in 2004) relating to PCR methods and thermal cycler instruments, another patent infringement suit by Applera against Bio-Rad Laboratoriesand MJ Research relating to real-time PCR thermal cycler instruments, and a patent and trademark infringement suit by Bio-Rad Laboratories against Applera relating to capillary electrophoresis equipment, among other disputes. In conjunction with the settlement, Bio-Rad Laboratories’ existing thermal cycler supplier licensewas amended to include MJ Research thermal cyclers, and Bio-Rad Laboratories licensed Applera under the asserted Bio-Rad Laboratories patent.
*Celera Genomics Group*  •In July 2006, the Celera Genomics group submitted a 510(k) Pre-Market Notification application to the U.S. Food and Drug Administration seeking market clearance for its Cystic Fibrosis Genotyping Assay, a qualitative assay for genotyping mutations associated with cystic fibrosis. This assay provides informationused for cystic fibrosis carrier screening in adults of reproductive age, as an aid in newborn screening for cystic fibrosis and in confirmatory testing of individuals with suspected cystic fibrosis. The Celera Genomics group already markets a CE marked cystic fibrosis *in-vitro* diagnostic test in Europe.  •In July 2006, the Celera Genomics group received approval to CE mark its Real-Time HCV Genotyping Assay, which allows it to be sold in Europe as a diagnostic test. This is the first real-time test for genotyping the HCV virus to obtain regulatory approval for commercial sale as an *in-vitro* diagnostic test in Europe, andwas developed, and will be commercialized, through the alliance with Abbott.  •In July 2006, the Celera Genomics group published data from its research studies showing that variants in the death-associated protein kinase 1 (*DAPK1*) gene on human chromosome 9 correlate strongly with risk for late-onset Alzheimer’s disease. These research findings were presented at the InternationalConference on Alzheimer’s Disease 2006 in Madrid, Spain, and appeared in the August 2006 edition of *Human Molecular Genetics*.  •In June 2006, the Celera Genomics group and Medarex, Inc. formed a strategic collaboration to discover and develop fully human antibodies for the potential treatment of multiple cancer indications. The collaboration encompasses the development of therapeutic antibodies against proteins identified by the CeleraGenomics group’s proteomic research discovery efforts.  •In June 2006, the Celera Genomics group and Specialty Laboratories signed an agreement granting Specialty a non-exclusive license to the Celera Genomics group’s risk markers for cirrhosis. The license agreement allows Specialty to select from among the Celera Genomics group’s genetic findings to develop andcommercialize a genetic test that predicts risk of progression to liver cirrhosis in individuals infected with HCV.
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14Management’s Discussion and Analysis — (Continued)Applera Corporation •In June 2006, the Celera Genomics group announced that Schering AG acquired its cathepsin S inhibitor small molecule drug program for the treatment of autoimmune diseases. The financial terms of the transaction included an upfront cash payment and potential development and commercial milestone payments.The Celera Genomics group will be entitled to royalty payments up to the low double digit percentages based on annual sales of any drugs commercialized from the program. See the Acquired Research and Development section below for further information on the sale.  •In April 2006, the Celera Genomics group announced the sale to Pharmacyclics, Inc. of three of its programs around small molecule drug candidates for the treatment of cancer and other diseases, which included programs that target histone deacetylase (“HDAC”) enzymes, selective HDAC enzymes, Factor VIIa, andB cell tyrosine kinases involved in immune function. See the Acquired Research and Development section below for further information on the sale.  •The Celera Genomics group announced the presentation of data toward development of its cirrhosis risk panel at the 41st annual meeting of The European Association for the Study of the Liver, in Vienna, Austria, April 26-30, 2006. This presentation described the research study in which the Celera Genomics groupand its collaborators have discovered a multi-gene signature that predicts the risk of developing cirrhosis in patients infected with hepatitis C virus. This program is not a part of the Celera Genomics group’s alliance with Abbott.  •During fiscal 2006, the Celera Genomics group launched several new diagnostic products, including analyte specific reagents (“ASRs”) that may be used to detect genetic markers associated with thrombosis risk which were launched in January 2006, and ASRs that may be used for the detection of repeats associatedwith fragile X syndrome, the leading cause of inherited mental retardation, which were launched in April 2006.  •In January 2006, we announced that we restructured Celera Diagnostics’ strategic alliance with Abbott Laboratories. Under the alliance agreement as restructured, the companies will continue to work with each other exclusively through primarily a profit sharing arrangement in most areas of molecular diagnostics,while both companies will also work independently outside the alliance in other selected areas. **Critical Accounting Estimates**
Our consolidated financial statements are prepared 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 couldaffect 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 periods. We believe that, of the significant

accounting policies discussed in Note 1 to our consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments:
•Revenue recognition;•Asset impairment;•Taxes;•Pension benefits;•Allocation of purchase price to acquired assets and liabilities in business combinations;•Exit or disposal activities; and•Allocations to the Applied Biosystems group and the Celera Genomics group. **Revenue Recognition**
The following describes only the areas that are most subject to our judgment. Refer to Note 1, Accounting Policies and Practices, to our consolidated financial statements for a more detailed discussion of our revenue recognition policy.

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

We recognize royalty revenues when earned over the term of the agreement in exchange for the grant of licenses to use our products or some technologies for which we hold patents. We recognize revenue for estimates of royalties earned during the applicable period, based on historical activity, and make revisions foractual royalties received in the following quarter. Historically, these revisions have not been material to our consolidated financial statements. For those arrangements where royalties cannot be reasonably estimated, we recognize revenue upon the receipt of cash or royalty statements from our licensees.
**Asset Impairment** *Inventory*
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Reserves for obsolescence and excess inventory are provided based on historical experience and estimates of future product demand. If actual demand is

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15Management’s Discussion and Analysis — (Continued)Applera Corporation 
less favorable than our estimates, inventory write-downs may be required.
*Investments*
Publicly traded minority equity investments are recorded at fair value, with the difference between cost and fair value recorded to other comprehensive income (loss) within stockholders’ equity. When the fair value of these investments decline below cost, and the decline is viewed as other-than-temporary, the cost basis iswritten down to fair value, which becomes the new cost basis, and the write-down is included in current earnings. We determine whether a decline in fair value is other-than-temporary based on the extent to which cost exceeds fair value, the duration of the market decline, the intent to hold the investment, and the financialhealth of, and specific prospects for, the investee.
*Long-lived assets, including goodwill*
We test goodwill for impairment using a fair value approach at the reporting unit level annually, or earlier if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit can be an operating segment or a business if discretefinancial information is prepared and reviewed by management. Under the impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the reporting unit’s carrying amount of goodwill exceeds the implied fair value of the goodwill. We may berequired to record an impairment charge in the future for adverse changes in market conditions or poor operating results of a related reporting unit.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events which could trigger an impairment review include, among others, a decrease in the market value of an asset, the asset’s inability to generate income fromoperations and positive cash flow in future periods, a decision to change the manner in which an asset is used, a physical change to the asset or a change in business climate. We calculate estimated future undiscounted cash flows, before interest and taxes, resulting from the use of the asset and its estimated value atdisposal and compare it to its carrying value in determining whether impairment potentially exists. If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based on a valuation model and discount rate commensurate with the risks involved. Third partyappraised values may also be used in determining whether impairment potentially exists.
**Taxes**
Deferred taxes represent the difference between the tax bases of assets or liabilities, calculated under tax laws, and the reported amounts in our consolidated financial

statements. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our consolidated statements of operations. We record a valuation allowance against deferred tax assets if it is more likely than notthat we will not be able to utilize these assets to offset future taxes. We determine if a valuation allowance is necessary based on estimates of future taxable profits and losses and tax planning strategies. We believe that our deferred tax assets, net of our valuation allowance, should be realizable due to our estimate offuture profitability in the U.S. Refer to Note 4 to our consolidated financial statements for more information on the Jobs Act. Subsequent revisions to estimates of future taxable profits and losses and tax planning strategies could change the amount of the deferred tax asset we would be able to realize in the future, andtherefore could increase or decrease the valuation allowance.

We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. Tax reserves have been established which we believe to be appropriate given the likelihood of tax adjustments. Determining the appropriate level oftax reserves requires us to exercise judgment regarding the uncertain application of tax law. The amount of reserves is adjusted when information becomes available or when an event occurs indicating a change in the reserve is appropriate. Future changes in tax reserve requirements could have a material impact on ourresults of operations.
**Pension Benefits**
We sponsor domestic and foreign pension plans and also provide retiree healthcare and life insurance benefits to some domestic employees. The majority of the assets of the pension plans are invested in equity and fixed income securities. The postretirement benefit plan is unfunded. We also sponsor nonqualifiedsupplemental benefit plans for select U.S. employees in addition to our principal pension plan. These supplemental plans are unfunded. Pension plan expense and the requirements for funding our major pension plans are determined based on a number of actuarial assumptions. These assumptions include the expected rateof return on pension plan assets, the discount rate applied to pension plan obligations, and the rate of compensation increase of plan participants. Our most significant pension plan is our qualified U.S. pension plan, which constituted over 95% of our consolidated pension plan assets and projected benefit obligations as ofthe end of fiscal 2006. The accrual of future service benefits for participants in our qualified U.S. pension plan was frozen as of June 30, 2004. Refer to Note 5 to our consolidated financial statements for more information regarding our pension and postretirement plans, pension plan asset allocation, expense recordedunder our plans, and the actuarial assumptions used to determine those expenses and the corresponding liabilities.

The expected rate of return on assets is determined based on the historical results of the portfolio, the expected investment mix of the plans’ assets, and estimates of future

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16Management’s Discussion and Analysis — (Continued)Applera Corporation 
long-term investment returns. Our assumption for the expected rate of return on assets in our qualified U.S. pension plan ranges from 6.5% to 8.5% for fiscal 2007, compared to our fiscal 2006 range of 5.25% to 8.5%. The discount rate used is based on rates available on high-quality fixed income debt instruments thathave the same duration as our plan’s liabilities. Specifically, a dedicated bond portfolio model constructs a hypothetical portfolio of high-quality corporate bonds whose cash flows match the expected payments under the plan. The universe of bonds available as of the plan’s measurement date is obtained from Bloomberg, athird party data provider, and includes securities of various maturities rated Aa or better by Moody’s Investor Service. At June 30, 2006, we calculated our U.S. pension obligation using a 6.5% discount rate, a 125 basis point increase from the June 30, 2005 rate of 5.25%. The increase in our discount rate assumption isexpected to decrease our net periodic pension expense for our U.S. pension plans by approximately $3 to $4 million in fiscal 2007 compared to fiscal 2006. For the determination of the expected rate of return on assets and the discount rate, we take into consideration external actuarial advice. Effective in fiscal 2005, theexpected rate of compensation increase was no longer factored into the determination of our net periodic pension expense as the accrual for future service benefits was frozen.

As of June 30, 2006, the unrecognized net losses for our U.S. pension plan were approximately $106 million, down from $152 million at June 30, 2005. Unrecognized net loss amounts arise primarily from the effects of changes in actuarial assumptions, as well as differences between expected and actual returns on planassets, and are being systematically recognized in future net periodic pension expense in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers Accounting for Pensions.” Amortization of total unrecognized net losses at June 30, 2006, is expected to increase net periodic pensionexpense by approximately $10 million in each fiscal year over the next eleven years. Eleven years is the approximate average remaining service period of active employees expected to receive benefits under the plan.

A one percentage point increase or decrease in the discount rate for our U.S. pension plans for fiscal 2007 would decrease or increase our net periodic pension expense by approximately $3 million. A one percentage point increase or decrease in the expected rate of return on our pension assets for fiscal 2007 would alsodecrease or increase our net periodic pension expense by approximately $3 million. We do not generally fund pension plans when our contributions would not be tax deductible. In fiscal 2006, we made a voluntary contribution of $30 million to the qualified U.S. plan concurrent with our decision to update the mortalityassumptions used to value the plan’s liabilities. As of June 30, 2006, we did not expect to fund this plan in fiscal 2007 as no contributions are expected to be required under the Employee Retirement Income Security Act (“ERISA”) regulations due to the level of contributions made in fiscal 2006 and previous fiscal years.Our estimate of annual contributions is based on significant assumptions,

such as pension plan benefit levels, tax deductibility, interest rate levels and the amount and timing of asset returns. Actual contributions could differ from this estimate.
**Allocation of Purchase Price to Acquired Assets and Liabilities in Business Combinations**
The cost of an acquired business is assigned to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. We assess fair value using a variety of methods, including the use of independent appraisers, present value models, and estimation ofcurrent selling prices and replacement values. Amounts recorded as intangible assets, including acquired in-process research and development, or IPR&D, are based on assumptions and estimates regarding the amount and timing of projected revenues and costs, appropriate risk-adjusted discount rates, as well as assessingthe competition’s ability to commercialize products before we can. Also, upon acquisition, we determine the estimated economic lives of the acquired intangible assets for amortization purposes. Actual results may vary from projected results.
**Exit or Disposal Activities**
From time to time, we may undertake actions to improve future profitability and cash flow performance, as appropriate. We record a liability for costs associated with an exit or disposal activity when the liability is incurred, as required under SFAS No. 146, “Accounting for Exit or Disposal Activities.” Costs incurred under anexit or disposal activity could include estimates of severance and termination benefits, facility-related expenses, elimination or reduction of product lines, asset-related write-offs, and termination of contractual obligations, among other items. We will periodically review these cost estimates and adjust the liability, asappropriate.
**Allocations to the Applied Biosystems Group and the Celera Genomics Group**
The attribution of the assets, liabilities, revenues and expenses to the Applied Biosystems group and the Celera Genomics group is primarily based on specific identification of the businesses included in both segments. Where specific identification is not practical, other methods and criteria, which require the use ofjudgments and estimates, are used that we believe are equitable and provide a reasonable estimate of the assets, liabilities, revenues and expenses attributable to both segments, and are consistently applied.

It is not practical to specifically identify the overhead portion of corporate expenses attributable to each of the businesses. As a result, we allocate these corporate overhead expenses primarily based on headcount, total expenses, or revenues attributable to each business.

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

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17Management’s Discussion and Analysis — (Continued)Applera Corporation 
generally based on the net income or loss amounts of the corresponding group calculated in accordance with GAAP, consistently applied.

Our board of directors may modify, rescind, or adopt additional management and allocation policies applicable to the attribution of assets, liabilities, revenues and expenses to the businesses at its sole discretion at any time without stockholder approval. Our board of directors would make any decision in accordance with itsgood faith business judgment that its decision is in the best interests of Applera and all of its stockholders as a whole.

A decision to modify or rescind the management and allocation policies, or adopt additional policies, could have different effects on holders of Applera–Applied Biosystems stock and holders of Applera–Celera stock or could result in a benefit or detriment to one class of stockholders compared to the other class.
**Events Impacting Comparability**
We are providing the following information on some actions taken by us or events that occurred for the three fiscal years ended June 30. 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 itemswhen making comparisons to past performance and assessing prospects for future results.
Income/(charge)          (Dollar amounts in millions) **2006** 2005 2004  Severance and benefit costs **$****(14.3****)**$(24.7)$(6.3)Asset          impairments  **(10.9****)** (0.8) (36.1)Excess          lease space  **(1.2****)** (10.0)   Other  **(2.6****)**      Reduction of expected costs  **2.5**  1.1  0.6  Total employee-related charges, asset impairments, and other **$****(26.5****)**$(34.4)$(41.8) Other events impacting comparability:          Revenue from sales of small molecule programs **$****8.6** $— $— Impairment of inventory recorded in cost of sales     (1.7) (1.2)Asset dispositions and legal settlements  **(11.3****)** 38.2  6.7 Acquired research and development  **(3.4****)**      Investment gains  **7.6**     36.0 Tax items  **50.2**  25.7      **Acquisition**
Effective March 1, 2006, we acquired the Research Products Division    of Ambion, Inc. Ambion, which is based in Austin, Texas, is a provider of    innovative products for the study and analysis of RNA for life science research    and drug development. The Ambion products are used by researchers to study    RNA and its role in disease development and progression. The net assets and    results of operations of Ambion have been included in our consolidated financial    statements since the date of the acquisition, and have been allocated to    the Applied Biosystems group. For further

information on the Ambion acquisition, see Note 3 to our consolidated financial statements.
**Acquired Research and Development**
During 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 Ambion. As of the acquisition date, the technological feasibility of the related projects had not been established, and it was determined that the acquired projectshad no future alternative uses. The determination of the amount attributed to acquired IPR&D took into consideration an independent appraisal performed by a third party.
**Employee-Related Charges, Asset Impairments, and Other**
The following items have been recorded in the Consolidated Statements of Operations in employee-related charges, asset impairments and other, except as noted.
*Fiscal 2006*
In 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 business, a 50/50 joint venture between the Applied Biosystems group and MDS Inc. MDS recorded a restructuring charge for a reduction in workforceas part of its strategy to focus on the life sciences market. The $1.5 million represents the Applied Biosystems group’s share of the restructuring charge.

Also in 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 current estimated market value less estimated selling costs. This charge was in addition to the charge recorded in fiscal 2005 described below. Inthe fourth quarter of fiscal 2006, the Applied Biosystems group completed the sale and recognized a $0.9 million pre-tax favorable adjustment to the charges previously recorded based on the actual sales price per the agreement.

During fiscal 2006, the Celera Genomics 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 Genomics group. These charges consisted of the following components:
(Dollar amounts in millions) Employee-RelatedCharges AssetImpairments ExcessLeaseSpace OtherDisposalCosts      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**  
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18Management’s Discussion and Analysis — (Continued)Applera Corporation 
The employee-related charges    were severance costs primarily for staff reductions in small molecule drug    discovery and development. 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. As of March 31, 2006, all of    the affected employees were notified and substantially all were terminated    by July 31, 2006. Cash expenditures were funded by available cash. We    believe these actions will enable the Celera Genomics group to focus on its    molecular  diagnostics and proteomics activities, reduce cash consumption,    and accelerate its move toward profitability, in part due to lower R&D    expenses. The remaining cash expenditures related to these charges are expected    to be disbursed by December 2006.
*Fiscal 2005*
During fiscal 2005, the Applied Biosystems group recorded pre-tax charges consisting of the following components:
(Dollar            amounts in millions) Employee-          Related Charges Excess          Lease Space Asset          Impairments      Total  First            quarter $7.3 $— $— $7.3 Second            quarter  2.9  2.3     5.2 Fourth            quarter  11.6  6.2  2.6  20.4  Total            charges  21.8  8.5  2.6  32.9  Cash            payments  10.5  0.2     10.7 Non-cash            activity     5.2  1.9  7.1 Reduction            of expected costs  0.3        0.3  Balance            at June 30, 2005  11.0  3.1  0.7  14.8  Cash            payments  **9.5**  **1.4**  **0.3**  **11.2** Reduction            of expected costs             and other  **1.4**     **0.4**  **1.8**  Balance            at June 30, 2006 **$****0.1** **$****1.7** **$****—** **$****1.8**  
The fiscal 2005 severance charges reflected the Applied Biosystems group’s decision to reduce and rebalance its workforce and were implemented as a result of a strategic and operational analysis conducted by management. The positions eliminated were primarily in the areas of R&D, manufacturing, marketing, andoperations. These actions were intended to allow us to expand personnel in other functional areas including field sales and support, manufacturing quality, and advanced research, as well as to better align our resources with the needs of our customers. Additionally, the severance charges recorded in the first and secondquarters related, in part, to staff reductions intended to integrate the Applied Biosystems MALDI TOF product line into the Applied Biosystems/MDS Sciex Instruments joint venture with MDS Inc. We took these actions to improve operational efficiency and quality, while assuring that our R&D spending remains aligned withour strategic initiatives.

As of June 30, 2005, all of the employees affected by the first and second quarter staff reductions had been terminated. By March 31, 2006, all of the employees affected by the fourth quarter staff reduction were terminated. During fiscal 2006, we made cash payments of

$9.5 million, the majority of which related to the fourth quarter termination charge. In regards to the excess lease space charges, through June 30, 2006, we made cash payments of $0.4 million related to the second quarter charge and $1.0 million related to the fourth quarter charge. These cash expenditures werefunded by cash provided by operating activities. In the third quarter of fiscal 2005, the Applied Biosystems group recorded a pre-tax benefit of $0.1 million for a reduction in anticipated employee-related costs associated with the severance and benefit charge recorded in the first quarter of fiscal 2005. In fiscal 2005, theApplied Biosystems group recorded a pre-tax benefit of $0.2 million for a reduction in anticipated employee-related costs associated with the severance and benefit charge recorded in the second quarter of fiscal 2005. The savings from these actions were used to expand personnel during fiscal 2006 in other functionalareas including field sales and support, manufacturing quality, and advanced research. Augmenting and upgrading skills in these critical functions should support higher levels of sales over time.

The excess lease space charges represented the estimated cost of excess lease space less estimated future sublease income for some leased facilities in Massachusetts and California whose leases extend through fiscal years 2007 to 2011. The asset impairment charges taken in the fourth quarter related to the write-downin value of the Applied Biosystems group’s facilities in San Jose, California, and Houston, Texas. As noted above, the Applied Biosystems group recorded an additional impairment charge as well as a favorable adjustment to the charges related to the San Jose facility in fiscal 2006. See Note 8 to our consolidated financialstatements for more information on our San Jose, California facility.

During fiscal 2005, the Celera Genomics group recorded pre-tax charges totaling $4.5 million related to our decision to discontinue promotion of products and most operations of Paracel, Inc., a business we acquired in fiscal 2000. Paracel developed high-performance genomic data and text analysis systems for thepharmaceutical, biotechnology, information services, and government markets. Due to a shift in focus, Paracel was no longer deemed strategic to the overall business. The charge consisted of $1.1 million for severance and benefit costs, $1.7 million for excess facility lease expenses and asset impairments, and$1.7 million in cost of sales for the impairment of inventory. The charge for excess facility lease expenses and asset impairments was primarily for a revision to an accrual initially recorded in fiscal 2002 for the estimated cost of excess facility space for a lease that extends through fiscal 2011 and to write off related fixedassets.

As of March 31, 2005, the majority of the affected Paracel employees were terminated. Substantially all cash payments related to these terminations were made as of June 30, 2005. Through June 30, 2006, we made cash payments of $2.1 million related to the excess lease space charge. The cash expenditures were funded byavailable cash. The remaining cash expenditures related to this charge of approximately $3.0 million are expected to be disbursed by

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19Management’s Discussion and Analysis — (Continued)Applera Corporation 
fiscal 2011. The modest expenses related to the closure of the Paracel business and completion of remaining service obligations during fiscal 2006 did not have a material impact on the Celera Genomics group’s fiscal 2006 operating results.

In fiscal 2005, the Celera Genomics group recorded a pre-tax charge of $3.4 million related to the Online/Information Business, an information products and service business. The Celera Genomics group realigned its organization based on a change in its business focus and as part of this realignment, the Online/InformationBusiness was determined to be non-strategic. The pre-tax charge of $3.4 million consisted of $1.8 million for severance and benefit costs and $1.6 million for asset impairments, primarily related to information-technology leases. As of June 30, 2005, all affected employees were notified and by the end of the firstquarter of fiscal 2006, all were terminated. In the fourth quarter of fiscal 2006, the Celera Genomics group recorded a pre-tax benefit of $0.2 million for a reduction in anticipated severance and benefit costs. All cash expenditures related to this action were disbursed by the end of fiscal 2006. The impact of the CeleraGenomics group’s determination that the Online/Information Business was not strategic has been reflected in the Celera Genomics group’s financial results over the past several years.
*Fiscal 2004*
During fiscal 2004, the Applied Biosystems group recorded pre-tax charges of $6.3 million for employee terminations. The savings resulting from this action were used to support the businesses that are driving the Applied Biosystems group’s revenue growth, including through the hiring of additional appropriately-skilledemployees. All cash payments were made by March 31, 2005. The cash payments were funded primarily from cash provided by operating activities.

In fiscal 2004, the Applied Biosystems group recorded pre-tax charges of $14.9 million for the impairment of patents and acquired technology related to Boston Probes, Inc., a business we acquired in fiscal 2002. As a result of a strategic and operational review, we determined, during fiscal 2004, that the intellectualproperty was not expected to lead to feasible commercialization of the products that we had originally envisioned when we purchased Boston Probes. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the impairment charge represented the amount by which the carryingamount of the assets exceeded their fair value. The fair value was based on estimated undiscounted future cash flows relating to the existing service potential of those assets.

Additionally in fiscal 2004, the Applied Biosystems group recorded pre-tax charges of $4.4 million for asset write-downs and other expenses related to the decision to transfer the 8500 Affinity Chip Analyzer product line to HTS Biosystems, Inc., its development partner for this product line. The $4.4 million charge consistedof $3.2 million for write-downs of fixed assets and other charges and $1.2 million for the impairment of inventory recorded in cost of sales. The Applied Biosystems group had entered into a

collaboration and commercialization agreement for this product line with HTS Biosystems in fiscal 2002. As a result of a change in strategic direction and focus at the Applied Biosystems group, as determined during the previously mentioned review, we determined that the inventory and fixed assets related to this productline had no net realizable value. Additionally, we wrote off a loan and accrued the final payments based on our decision to terminate the agreement with HTS Biosystems. In fiscal 2005, the Applied Biosystems group recorded a pre-tax benefit of $0.7 million as a result of the repayment of this loan by HTS Biosystems.

During fiscal 2004, the Celera Genomics group decided to pursue the sale of its Rockville, Maryland facility. As a result of this decision, we classified the related assets as assets held for sale within prepaid expenses and other current assets. In connection with the decision to sell the Rockville facility, the Celera Genomicsgroup recorded a pre-tax impairment charge of $18.1 million during fiscal 2004. This charge represented the write-down of the carrying amount of the facility to its estimated market value less estimated costs to sell. The estimated market value was based on a third-party appraisal. During fiscal 2005, the Celera Genomicsgroup completed the sale of this facility and recorded a $3.6 million pre-tax favorable adjustment to the charge recorded in fiscal 2004.
*Other*
During fiscal 2003, the Applied Biosystems group recorded charges for organization-wide cost reductions. As of June 30, 2006, we had remaining cash payments of $0.5 million for severance and employee benefits related to these charges. The majority of the remaining payments are expected to be disbursed during fiscal2007.
**Other Events Impacting Comparability** *Revenue from the sales of small molecule programs*
In the fourth quarter of fiscal 2006, the Celera Genomics group recorded pre-tax gains of $8.6 million in net revenues from the sale of some small molecule drug discovery and development programs, primarily to Pharmacyclics, Inc. and Schering AG. See the Acquired Research and Development section below for moreinformation about these sales.
*Asset dispositions and legal settlements*
The following items have been recorded in the Consolidated Statements of Operations in asset dispositions and legal settlements.

In fiscal 2006, we established, with Beckman Coulter, the terms of a settlement to resolve all outstanding legal disputes between us regarding claims to some patented capillary electrophoresis technology and heated cover instrumentation technology. As part of the settlement, the parties agreed to grant royalty-bearinglicenses to each other. Additionally, the Applied Biosystems group made a payment of $35 million to Beckman Coulter for rights to some Beckman Coulter technology and for the release of

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20Management’s Discussion and Analysis — (Continued)Applera Corporation 
any and all claims of infringement relating to DNA sequencer and thermal cycler products. As a result of this settlement, we recorded a pre-tax charge of $35.0 million. Commencing in July 2006, Beckman Coulter began making quarterly payments which will total $20 million over ten quarters to the Celera Genomics groupfor diagnostic rights to some Applera technology.

Also in 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-Radagainst 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.

Additionally in fiscal 2006, we recorded a $26.6 million pre-tax charge related to a litigation matter and related to an award in an arbitration proceeding with Amersham Biosciences, now GE Healthcare. We recorded the pre-tax charge as follows: $25.9 million at the Applied Biosystems group and $0.7 million at the CeleraGenomics group. We paid all amounts related to the arbitration matter in January 2006. The arbitration matter involved the interpretation of a license agreement relating to DNA sequencing reagents and kits. Amersham had alleged, among other things, that the Applied Biosystems group had underpaid royalties under thelicense agreement. 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 $23.5 millionin fiscal 2006, $22.6 million of which was recorded in asset dispositions and legal settlements.

In the fourth quarter of fiscal 2006, the Applied Biosystems group recorded a pre-tax gain of $16.9 million from the sale of a vacant facility in Connecticut. This facility was previously used for manufacturing and administration.

During fiscal 2005, the Applied Biosystems group recorded a net pre-tax gain of $29.7 million for the sale of intellectual property, manufacturing inventory, and research and development assets related to the expansion of the scope of the Applied Biosystems/MDS Sciex Instruments joint venture. Under the terms of thetransaction, we received $8 million in cash and a $30 million note receivable for a 50 percent interest in intellectual property assets related to current Applied Biosystems MALDI TOF mass spectrometry systems and next-generation product-related manufacturing and research and development assets. The note receivableis due in 5 years, of which $6 million is payable in October 2006 and $8 million in October 2007, 2008, and 2009.

Also in fiscal 2005, the Applied Biosystems group received a payment of $8.5 million from Illumina, Inc. in connection with the termination of a joint development agreement and settlement of patent infringement and breach of contract claims.

In March 2004, the Applied Biosystems group and MDS Inc., through the Applied Biosystems/MDS Sciex Instruments joint venture, received a payment of $18.1 million from Waters Technologies Corporation in connection with the resolution of patent infringement claims between the parties. The Applied Biosystems grouprecorded a net gain of $6.7 million from legal settlements, including its share of this payment in fiscal 2004.
*Investments*
The following gains have been recorded in the Consolidated Statements of Operations in gain (loss) on investments, net, except as noted.

The Celera Genomics group recorded pre-tax gains of $7.6 million in fiscal 2006 from the sale of non-strategic minority equity investments. The Celera Genomics group recorded a pre-tax gain of $24.8 million in fiscal 2004 from the sale of its investment in Discovery Partners International, Inc. (“DPI”) common stock. Ourinvestment in DPI common stock, which resulted from our acquisition of Axys Pharmaceuticals, Inc. in fiscal 2002, had been accounted for under the equity method of accounting.

The Applied Biosystems group recorded pre-tax gains of $11.2 million in fiscal 2004, related primarily to the sales of minority equity investments. These investment sales resulted from management’s decision to liquidate non-strategic investments.
*Tax items*
In fiscal 2006, the Applied Biosystems group recorded a tax benefit of $13.5 million related to the resolution of transfer pricing matters in Japan. Additionally, the Applied Biosystems group recorded a net tax charge of $26.6 million, which included a $1.4 million favorable adjustment recorded in the fourth quarter of fiscal2006, related to repatriation of $476.4 million of foreign earnings. Also in 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 thefiscal 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 statedeferred 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 impacts of a change in the apportionment of income to California, a reduction in R&D spending, and increasedrevenues and profits from our 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.

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21Management’s Discussion and Analysis — (Continued)Applera Corporation 
During fiscal 2005, the Applied Biosystems group recorded tax benefits of $23.5 million primarily related to additional U.S. R&D tax credit carryforwards, expected results of Canadian examinations, and settlement of some U.K. tax matters. Also during fiscal 2005, the Celera Genomics group recorded a tax benefit of$2.2 million related to additional U.S. R&D tax credits.
**Acquired Research and Development**
During 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 Ambion acquisition. See the Events Impacting Comparability section for further information.

During fiscal 2002, the Celera    Genomics group recorded a charge of $99.0 million to write-off the value    of acquired IPR&D    in connection with the Axys acquisition. In January 2006, the Celera Genomics    group announced its intention to exit its small molecule drug development    and discovery programs. During the fourth quarter of fiscal 2006, the Celera    Genomics group transferred rights to several of these programs to other companies    and terminated all other small molecule programs.	Some of the affected programs were acquired with Axys in November 2001 and     others were developed internally by the Celera Genomics group after that    acquisition.	In April 2006, the Celera Genomics group    announced the sale to Pharmacyclics of three of its programs around small    molecule drug candidates for the treatment of cancer and other diseases,    which included programs that target histone deacetylase (“HDAC”)    enzymes, selective HDAC enzymes, Factor VIIa, and B cell tyrosine kinases    involved in immune function. The financial terms of the transaction included    an upfront cash payment of $2 million andone million shares of Pharmacyclics common stock. If these programs meetdevelopmental milestones specified in the sale agreement and result in drugsthat are approved and commercialized in key geographical markets, they may generatefuture milestone payments to the Celera Genomics group. In addition, the Celera Genomics group will be entitled to percentage royalty payments in the mid tohigh single digits based on annual sales of any drugs commercialized from thethree programs. In June 2006, the Celera Genomics group announced that ScheringAG had acquired its cathepsin S inhibitors for autoimmune diseases. The financialterms of the transaction included a cash payment of $5 million. Paymentof half of this amount was made in July 2006, and payment of the other half is deferred until the transfer of assets is completed,which we expect to occur before the end of calendar 2006. If this program meetsall developmental and marketing milestones as specified in the sale agreementand results in  drugs that are approved and commercialized in key geographicalmarkets, it may generate future milestone payments to the Celera Genomics group.In addition, the Celera Genomics group will be entitled to percentage royaltypayments up to the low double digits based on annual sales of any drugs commercializedfrom theprogram.
**Adoption of SFAS No.** **123R**
We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment (revised 2004)” in July 2005. SFAS No. 123R requires entities to measure and recognize the cost ofemployee services received in exchange for an award of equityinstruments based on the grant-date fair value of the award. Weadopted SFAS No. 123R using the modified prospective methodof transition. This method requires us to apply the provisions ofSFAS No. 123R to new awards from and after our adoption dateand to any awards that wereunvested as of our adoption date, but did not require us to restate prior periods.

Prior to fiscal 2006, we applied the provisions of Accounting Principles Board Opinion No. (“APB Opinion No.”) 25, “Accounting for Stock Issued to Employees,” in accounting for our share-based compensation plans. Under APB Opinion No. 25, we did not record any compensation cost related to stock options since theexercise price of stock options granted to employees generally equaled the fair market value of our stock prices at the date of grant. We also did not record any compensation expense related to our employee stock purchase plans since the provisions of these plans were deemed non-compensatory under APB OpinionNo. 25. However, for restricted stock, the intrinsic value as of the grant date was amortized to compensation expense over the vesting period.

Under our share-based compensation plans, we are authorized to grant stock options, restricted stock units, and other equity awards. In fiscal 2006, we started granting restricted stock units, in addition to stock options and other equity awards. Each year, we will determine the appropriate quantity and type of authorizedinstruments that will be granted under these plans based on various considerations, including our strategic focus and the impact on our results of operations and cash flow. Additionally, our share-based awards may contain service or performance conditions, as well as a retirement eligible provision, whereby the award wouldautomatically vest when the employee retires from the Company provided some conditions have been met. See Note 7 to our consolidated financial statements for a more detailed description of our plans and awards.

In fiscal 2005, our board of directors approved the accelerated vesting of substantially all unvested stock options. See Note 1 to our consolidated financial statements for more information on the acceleration.

With the adoption of SFAS No. 123R, we revised how we determined the expected term and expected volatility of our options. See Note 1 to our consolidated financial statements for more information on the assumptions used to value our options.

We recorded pre-tax charges of $12.7 million ($9.0 million net of tax) for fiscal 2006 in our Consolidated Statements of Operations for compensation costs related to our share-based plans. These amounts included $8.6 million for fiscal 2006 for our restricted stock plans, which would have been recorded as compensationexpense under APB Opinion No. 25. As of June 30, 2006, $27.1 million of total unrecognized compensation costs related to nonvested awards and units are expected to be recognized over a weighted average period of less than two years.

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22Management’s Discussion and Analysis — (Continued)Applera Corporation **Discussion of Applera Corporation’s       Consolidated Operations** **Results of Operations—****2006 Compared with 2005** (Dollar amounts in millions) **2006** 2005 **% Increase/****(Decrease)**  Net revenues **$****1,949.4** $1,845.1  **5.7%** Cost of sales  **881.2**  848.6  **3.8%**  Gross margin  **1,068.2**  996.5  **7.2%** SG&A expenses  **584.5**  525.4  **11.2%** R&D  **271.4**  330.6  **(17.9%****)**Amortization of purchased intangible assets  **5.9**  4.2  **40.5%** Employee-related charges, asset impairments and other  **26.6**  34.4  **(22.7%****)**Asset dispositions and legal settlements  **11.2**  (38.2) **(129.3%****)**Acquired research and development  **3.4**        Operating income  **165.2**  140.1  **17.9%** Gain on investments, net  **7.6**       Interest income, net  **37.1**  28.8  **28.8%** Other income (expense), net  **5.3**  4.5  **17.8%**  Income before income taxes  **215.2**  173.4  **24.1%** Provision for income taxes  **2.7**  13.6  **(80.1%****)** Net income **$****212.5** $159.8  **33.0%**  Percentage of net revenues:          Gross margin  **54.8%**  54.0%    SG&A expenses  **30.0%**  28.5%    R&D  **13.9%**  17.9%    Operating income  **8.5%**  7.6%               Effective income tax rate  **1%**  8%     
The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2006 and 2005:
(Dollar amounts in millions)  **2006**  2005  Income (charge) included in income before income taxes **$****(24.9****)**$2.1 Benefit for income taxes  **(57.3****)** (24.8) 
Net income increased for fiscal 2006 primarily due to the previously described events impacting comparability, including $50.2 million of net tax benefits, higher net revenues at the Applied Biosystems group, lower R&D expenses, and higher interest income. Partially offsetting this increase were higher SG&A expenses atthe Applied Biosystems group and lower net revenues at the Celera Genomics group. The net effect of foreign currency decreased net income in fiscal 2006 by approximately $3 million as compared to the prior year. Read our discussion of segments for information on their financial results.

Net revenues, which include the unfavorable effects of foreign currency, increased in fiscal 2006 compared with the prior year. Revenues for fiscal 2006 included a favorable impact of approximately 1% related to the Ambion acquisition, which was effective March 1, 2006. The effect of foreign currency decreased netrevenues by approximately 1% during fiscal 2006.
•Net revenues increased at the Applied Biosystems group, driven by strength in the Real-Time PCR/Applied Genomics and Mass Spectrometry product categories. Revenues for fiscal 2006 included higher licensing and royalty revenues of approximately $26 million in comparison to fiscal 2005, driven primarily byReal-Time PCR instrumentation license issuance fees and expanded licensing initiatives. Of the $26 million increase, approximately $11 million related to one-time licensing fees.  •Net revenues decreased at the Celera Genomics group, primarily as a result of discontinuation of the Online/Information Business and the operations of Paracel, partially offset by revenues from the sale of the small molecule programs.
Net revenues increased 7.8% in the U.S., 6.7% in Europe, and 5.7% in Latin America and other markets, and decreased 1.7% in Asia Pacific compared with the prior fiscal year. The effect of foreign currency decreased revenues by approximately 3% in Europe and 3% in Asia Pacific during fiscal 2006 as compared to fiscal2005. Excluding the effects of foreign currency, European revenues increased primarily as a result of sales of MALDI TOF/TOF systems, TaqMan® Gene Expression Assays products, Ambion-related products, API triple quadrupole, or quad, systems, and human identification products used in forensics. During fiscal 2006,revenues in Japan declined approximately 10% compared to the prior fiscal year, approximately half due to unfavorable foreign currency effects and the other half due to the discontinuation of the Online/Information Business at the Celera Genomics group. Revenues in other Asia Pacific countries increased by approximately13%, including unfavorable foreign currency effects of approximately 1%, as compared to the prior year. This increase was primarily due to sales of Mass Spectrometry Q TRAP® systems, low to medium throughput genetic analyzers, and human identification products. Sales in the U.S. increased primarily due to sales ofAPI triple quad systems, Ambion-related products, TaqMan Gene Expression Assays products, and increased royalty and licensing revenues.

The higher gross margin percentage in fiscal 2006 compared to fiscal 2005 was driven primarily by Real-Time PCR instrumentation license issuance fees, royalty payments, decreased software amortization, and improved service margins. Service margins at the Applied Biosystems group improved for fiscal 2006 primarilydriven by pricing on selected billable parts and growth in the volume of service contracts. Additionally, gross margin was favorably impacted by manufacturing productivity improvements and a favorable product mix of relatively higher margin Real-Time PCR/Applied Genomics products. Partially offsetting these increases werelower Online/Information Business revenues at the Celera Genomics group and higher royalty expenses at the Applied Biosystems group.

SG&A expenses for fiscal 2006 increased over the prior fiscal year due primarily to increased employee-related costs and sales force investments of approximately $33 million at the Applied Biosystems group, and increased spending of

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23Management’s Discussion and Analysis — (Continued)Applera Corporation 
approximately $21 million at the Applied Biosystems group, which was comprised of: costs related to strategic investments in China and other initiatives; the development of, and enhancements to, the Applied Biosystems Portal; and Ambion-related expenses. The Applied Biosystems group has established an electroniccommerce, or “e-commerce,” Internet web site which the Applied Biosystems group refers to as the “Applied Biosystems Portal.” This increase was partially offset by the favorable effects of foreign currency and lower legal expenses of approximately $10 million at the Applied Biosystems group, and lower expenses dueto the discontinuation of the Online/Information Business.

R&D expenses decreased for fiscal 2006 compared to fiscal 2005 primarily as a result of the Celera Genomics group’s decision to exit small molecule drug discovery and development and the discontinuation of the Online/Information Business. Also contributing to the decrease was cost savings realized from the integrationin fiscal 2005 of the MALDI TOF product line into the Applied Biosystems/MDS Sciex Instruments joint venture with MDS Inc., partially offset by higher employee-related expenses at the Applied Biosystems group, including those associated with the acquisition of Ambion.

Interest income, net increased during fiscal 2006 compared to fiscal 2005 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 repurchaseactivity and the acquisition of Ambion.

Other income, net for fiscal 2006 increased in comparison to the prior fiscal year primarily due to higher benefits associated with our foreign currency risk management program in fiscal 2006. Other income, net for fiscal 2005 included a non-recurring receipt of $1.0 million related to a financing activity for a non-strategicinvestment and the write-down of an investment acquired as part of the Axys acquisition.

The decrease in the effective tax rate for fiscal 2006 was primarily due to the previously described events impacting comparability, including the events described under tax items. An analysis of the differences between the federal statutory income tax rate and the effective income tax rate is provided in Note 4 to ourconsolidated financial statements.
**Results of Continuing Operations—****2005 Compared with 2004**(Dollar amounts in millions) 2005 2004 % Increase/(Decrease)  Net revenues $1,845.1 $1,825.2  1.1% Cost of sales  848.6  850.0  (0.2%) Gross margin  996.5  975.2  2.2% SG&A expenses  525.4  512.3  2.6% R&D  330.6  351.6  (6.0%)Amortization of purchased intangible assets  4.2  7.5  (44.0%)Employee-related charges, asset impairments and other  34.4  41.8  (17.7%)Asset dispositions and legal settlements  (38.2) (6.7) 470.1%  Operating income  140.1  68.7  103.9% Gain on investments, net     35.5  (100.0%)Interest income, net  28.8  22.8  26.3% Other income (expense), net  4.5  2.5  80.0%  Income before income taxes  173.4  129.5  33.9% Provision for income taxes  13.6  14.5  (6.2%) Income from continuing operations $159.8 $115.0  39.0%  Percentage of net revenues:          Gross margin  54.0%  53.4%    SG&A expenses  28.5%  28.1%    R&D  17.9%  19.3%    Operating income  7.6%  3.8%               Effective income tax rate  8%  11%     
The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2005 and 2004:
(Dollar amounts in millions)  2005  2004  Income (charge) included in income before income taxes $2.1 $(0.4)Provision (benefit) for income taxes  (24.8) 1.2  
Income from continuing operations increased for fiscal 2005 primarily due to improved gross margin and lower R&D expenses at the Applied Biosystems group, partially offset by higher SG&A expenses at the Applied Biosystems group and lower revenues at the Celera Genomics group. Additionally, income from continuingoperations increased for fiscal 2005 due to the impact of the previously described events impacting comparability. The net effect of foreign currency on income from continuing operations in fiscal 2005 was a benefit of approximately $14 million as compared to the prior year. Read our discussion of segments for informationon their financial results.

The effect of foreign currency increased net revenues by approximately 2% during fiscal 2005. As a result, net revenues, excluding the effects of foreign currency, decreased slightly in comparison to the prior fiscal year.
•Net revenues increased at the Applied Biosystems group, driven by strength in both the Real-Time PCR/Applied Genomics and Mass Spectrometry product categories, partially offset by lower revenues in the DNA Sequencing, Core PCR & DNA Synthesis, and Other Product Lines product categories.
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24Management’s Discussion and Analysis — (Continued)Applera Corporation •Net revenues decreased at the Celera Genomics group, primarily as a result of the expiration of Online/Information Business customer agreements and the discontinuation of most of the operations of Paracel during the first quarter of fiscal 2005.
Net revenues decreased 5.0% in the U.S. and 0.9% in Asia Pacific, and increased 11.1% in Europe and 9.8% in Latin America and other markets, compared with the prior fiscal year. The effect of foreign currency increased revenues by approximately 4% in Europe and 2% in Asia Pacific during fiscal 2005 as compared tofiscal 2004. European revenues increased primarily due to continued strong sales of the Applied Biosystems 3130 line of Genetic Analyzers and the Applied Biosystems 7300 and 7500 Real-Time PCR Systems and increased sales of human identification products. During fiscal 2005, revenues in Japan declined 5% comparedto the prior fiscal year, net of a positive impact from foreign currency of approximately 2%. Factors contributing to this decline included the continued shift of life science research funding to areas outside of sequencing and constrained spending due to anticipated lower growth in the fiscal 2006 government budget for lifescience research. Revenues in the U.S. decreased primarily due to reduced sales of DNA analyzers to large U.S. genome centers at the Applied Biosystems group and the expiration of Online/Information Business customer agreements and discontinuation of most of the operations of Paracel at the Celera Genomics group.

The higher gross margin percentage in fiscal 2005 compared to fiscal 2004 was due primarily to the favorable effects of foreign currency at the Applied Biosystems group as well as a decrease in both software amortization and warranty costs. Service margins at the Applied Biosystems group have improved for fiscal 2005primarily driven by growth in volume of service contracts, as well as improved pricing on selective billable parts, labor, and service contracts. Also, strong growth in some higher margin products within the sequence detection systems, human identification, and assays product lines helped minimize the effect of the decline inDNA Sequencing instruments.

SG&A expenses for fiscal 2005 increased over the prior fiscal year due primarily to: higher employee-related and outside consultant costs of $14 million at the Applied Biosystems group; the unfavorable effects of foreign currency of approximately $9 million; and increased spending of approximately $6 million on both thedevelopment of, and enhancements to, the Applied Biosystems portal (collectively known as the Applied Biosystems Portal), and a strategic business review. In fiscal 2004, the Applied Biosystems group engaged a consulting firm to assist management in an in-depth review of its entire product portfolio. The increase infiscal 2005 was partially offset by: lower legal expenses of approximately $7 million; lower insurance and pension costs of approximately $8 million; the discontinuation of most of the operations of Paracel; and lower Online/Information Business expenses.

R&D expenses decreased for fiscal 2005 compared to fiscal 2004 primarily as a result of the previously announced realignment of the Applied Biosystems group’s R&D product

portfolio, the integration of the MALDI TOF product line into the Applied Biosystems/MDS Sciex Instruments joint venture with MDS Inc., cost reductions in the Online/Information Business, and the discontinuation of most of the operations of Paracel. This decrease was partially offset by increased expenditures at theCelera Genomics group to support preclinical development activities and the hiring of additional therapeutic R&D personnel.

Interest income, net increased during fiscal 2005 compared to fiscal 2004 primarily due to higher average interest rates, partially offset by lower average cash and cash equivalents and short-term investments.

Other income, net for fiscal 2005 increased in comparison to the prior fiscal year primarily due to higher benefits associated with our foreign currency risk management program in fiscal 2005 and losses recorded from equity method investments in fiscal 2004. This increase was partially offset by higher non-recurring cashreceipts in fiscal 2004.

The decrease in the effective tax rate for fiscal 2005 was primarily due to benefits related to R&D tax credit carryforwards, expected results of Canadian examinations, and settlement of some U.K. tax matters in fiscal 2005.
**Applera Corporation** **Discussion of Consolidated Financial Resources and Liquidity**
We had cash and cash equivalents and short-term investments of $943.4 million at June 30, 2006, and $1.4 billion at June 30, 2005. 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 June 30, 2006or 2005. Cash provided by operating activities has been our primary source of funds over the last three fiscal years.

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

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. In addition, in January 2006, we announced that our board of directors authorized the repurchase of up to an additional 5 million shares of Applera-AppliedBiosystems stock. We completed both of these repurchase authorizations in fiscal 2006. These authorizations supplemented the board’s existing authorization to repurchase shares of Applera-Applied Biosystems stock and Applera-Celera stock from time to time to replenish shares issued under our various employee stockbenefit plans. This authorization has no set dollar or time limits and delegates to management discretion to purchase shares at times and prices it deems appropriate

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25Management’s Discussion and Analysis — (Continued)Applera Corporation 
through open market purchases, privately negotiated transactions, tender offers, exchange offers, or otherwise.
(Dollar amounts in millions) **2006** 2005  Cash and cash equivalents **$****434.2** $779.4 Short-term investments  **509.2**  645.1  Total cash and cash equivalents and short-term investments **$****943.4** $1,424.5 Working capital  **1,018.7**  1,494.9  
Cash and cash equivalents decreased in fiscal 2006 as cash expenditures for the repurchase of Applera-Applied Biosystems stock, the acquisition of Ambion, the purchase of capital and other assets, and the payment of dividends exceeded cash generated from operating activities, proceeds from the sales and maturities ofavailable-for-sale investments, net of purchases, and proceeds from stock issuances.

Cash and cash equivalents increased in fiscal 2005 as cash generated from operating activities, which included the amount received related to the previously described patent infringement lawsuit, proceeds from the sales and maturities of short-term investments, net of purchases, and proceeds from asset sales and stockissuances for employee stock plans were only partially offset by expenditures for capital assets, debt repayment, the payment of dividends, and the repurchase of Applera–Applied Biosystems stock. Also impacting the increase in cash and cash equivalents was a $17.4 million payment made in fiscal 2004 for a patentlawsuit related to a discontinued product line. See Note 14 to our consolidated financial statements for further information. Net cash flows of continuing operations for the fiscal years ending June 30 were as follows:
(Dollar amounts in millions) **2006** 2005 2004  Net cash from operating activities **$****274.9** $216.4 $194.4 Net cash from investing activities  **(155.5****)** 52.2  21.1 Net cash from financing activities  **(461.5****)** 11.4  (349.7)Effect of exchange rate changes on cash  **(3.0****)** (8.9) 12.9              *Operating activities*
The increase in net cash provided from operating activities for fiscal 2006 compared to fiscal 2005 resulted primarily from higher income-related cash flows, including the $33 million Bio-Rad settlement, partially offset by a higher use of cash primarily related to a decrease in accounts payable and other liabilities. Thedecrease in accounts payable and other liabilities was primarily due to a voluntary contribution of approximately $30 million to our qualified U.S. pension plan in fiscal 2006, the payment of approximately $58 million related to the previously discussed Amersham and Beckman Coulter legal matters, partially offset by thetiming of royalty payments, a higher compensation-related accrual in fiscal 2006, and lower income tax payments at the Applied Biosystems group in fiscal 2006. In fiscal 2005, we did not fund our qualified U.S. pension plan as no contributions were required under ERISA regulations. Partially offsetting this higher use of cashin fiscal 2006 was a decrease in prepaid expenses and other

assets due in part to a decrease in a non-trade receivable related to the Applied Biosystems group’s joint venture activities. In fiscal 2006 compared to fiscal 2005, working capital at the Celera Genomics group benefited primarily from a lower decrease in accounts payable and other liabilities, in part due to the discontinuation of the Online/Information Business. Partially offsetting this lower decrease were lower liabilities as a result of its decision to exit the small molecule programs and higherseverance and lease payments.

The increase in net cash provided from operating activities of continuing operations for fiscal 2005 compared to fiscal 2004 resulted primarily from: higher income–related cash flows; the timing of vendor payments; and the funding of our qualified U.S. pension plan of approximately $51 million in fiscal 2004. This increasewas partially offset by: a lower reduction in accounts receivable balance in fiscal 2005 due to the timing of collections; the timing of royalty payments; an increase in a non-trade receivable related to the Applied Biosystems group’s joint venture activities; the timing of the receipt of dividends and distributions frominvestments in unconsolidated subsidiaries; higher severance payments in fiscal 2005; and lower cash receipts in fiscal 2005 due to the expiration of the Online/Information Business customer agreements at the Celera Genomics group.
*Investing activities*
Capital expenditures, net of disposals, were $46.1 million in fiscal 2006, $93.9 million in fiscal 2005, and $68.4 million in fiscal 2004. Fiscal 2006 included expenditures for the development of, and enhancements to, the Applied Biosystems Portal of approximately $8 million. Additionally, fiscal 2006 capital expendituresincluded purchases of production equipment, testing and laboratory equipment, computer equipment, and computer software and licenses at the Applied Biosystems group. Fiscal 2006 capital expenditures at the Celera Genomics group consisted of leasehold improvements and equipment purchases, the majority of whichrelated to our diagnostic business.

Fiscal 2005 capital expenditures included $42 million to purchase several buildings at the Applied Biosystems group’s Foster City, California location. Additionally, fiscal 2005 capital expenditures included purchases of production equipment, testing and laboratory equipment for the Applied Biosystems group’s facilities, aswell as computer equipment purchases at the Applied Biosystems group, and equipment purchases used to support the therapeutics business and improvements made to facilities at the Celera Genomics group.

Fiscal 2004 capital expenditures included: the Applied Biosystems group’s facilities expansions in Pleasanton, California and Bedford, Massachusetts, including production equipment, testing and laboratory equipment for these facilities; as well as enterprise system upgrades; and equipment purchases used to support thetherapeutics business at the Celera Genomics group.

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26Management’s Discussion and Analysis — (Continued)Applera Corporation 
In fiscal 2006, 2005, and 2004, cash was generated from the sales and maturities, net of purchases, of available-for-sale investments. In March 2006, we acquired Ambion for approximately $279 million as described in Note 3 to our consolidated financial statements. In fiscal 2006, we sold a vacant facility in Connecticutand our San Jose, California facility and received net proceeds of approximately $26 million. In fiscal 2006, the Celera Genomics group received proceeds of $9.5 million primarily related to the sale of non-strategic minority equity investments. In fiscal 2005, the Celera Genomics group received proceeds of $42.4 millionfrom the sale of its facilities in Rockville, Maryland. Fiscal 2005 included the maturation of non-callable U.S. government obligations, pledged as collateral for the 8% senior secured convertible notes assumed in connection with the acquisition of Axys. A portion of the proceeds from the principal and interest received fromthese U.S. government obligations was used to fund the interest and principal payments under the notes. Fiscal 2005 also included approximately $7 million in proceeds received from MDS representing the first installment payment related to the previously discussed sale of MALDI TOF assets, net of expenses. In fiscal2004, the Celera Genomics group sold its investment in DPI and received net proceeds of approximately $32 million.
*Financing activities*
In fiscal 2005, we repaid the remaining principal amount of the 8% senior secured convertible notes assumed in connection with the Axys acquisition of approximately $6 million. These notes matured in October 2004. During fiscal 2004, we repurchased $10.0 million in principal amount of these notes. Fiscal 2006 includedthree dividend payments on Applera-Applied Biosystems stock compared to four payments in fiscal 2005 and five payments in fiscal 2004 due to the timing of the payment dates. We repurchased the following shares of Applera–Applied Biosystems stock for the fiscal years ended June 30:
(Dollars and shares in millions) Number of SharesRepurchased  PurchasePrice  **2006** **24.5**  **$601.9** 2005 0.3  6.1 2004 15.4  325.0   **Contractual Obligations**
Our significant contractual obligations at June 30, 2006, and the anticipated payments under these obligations were as follows:
  Payments by Period (Dollar amounts in millions) Total 2007 2008 –2009 2010 –2011 Thereafter  Minimum operating lease payments (a) **$****140.2** **$****36.1** **$****51.9** ******$28.7** ******$23.5** Purchase obligations (b)  **107.5**  **71.9**  **27.7**  **7.9**    Other long-term liabilities (c)  **36.0**  **3.3**  **1.5**  **1.1**  **30.1**  Total **$****283.7** **$****111.3** **$****81.1** ******$37.7** ******$53.6**  (a)Refer to Note 10 to our consolidated financial statements for further information.(b)Purchase obligations are entered into with various vendors in the normal course of business, and include commitments related to capital expenditures, R&D arrangements and collaborations, license agreements, and other services.(c)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 5 to our consolidated financial statements for more information on these plans.
For additional information regarding our financial obligations and commitments, see Notes 9 and 10 to our consolidated financial statements.

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27Management’s Discussion and Analysis — (Continued)Applera Corporation **Discussion of Segments’ Operations, Financial Resources and Liquidity** **Applied Biosystems Group** **Results of Operations—****2006 Compared with 2005** (Dollar amounts in millions) **2006** 2005 **% Increase/****(Decrease)**  Net revenues **$****1,911.2** $1,787.1  **6.9%** Cost of sales  **866.4**  834.4  **3.8%**  Gross margin  **1,044.8**  952.7  **9.7%** SG&A expenses  **548.4**  485.6  **12.9%** R&D  **180.3**  192.1  **(6.1%****)**Amortization of purchased intangible assets  **4.8**  1.3  **269.2%** Employee-related charges, asset impairments and other  **0.4**  31.8  **(98.7%****)**Asset dispositions and legal settlements  **10.5**  (38.2) **(127.5%****)**Acquired research and development  **3.4**        Operating income  **297.0**  280.1  **6.0%** Interest income, net  **14.7**  13.9  **5.8%** Other income (expense), net  **5.5**  3.2  **71.9%**  Income before income taxes  **317.2**  297.2  **6.7%** Provision for income taxes  **42.1**  60.3  **(30.2%****)** Net income **$****275.1** $236.9  **16.1%**  Percentage of net revenues:          Gross margin  **54.7%**  53.3%    SG&A expenses  **28.7%**  27.2%    R&D  **9.4%**  10.7%    Operating income  **15.5%**  15.7%               Effective income tax rate  **13%**  20%     
The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2006 and 2005:
(Dollar amounts in millions) **2006** 2005  Income (charge) included in income before income taxes **$****(14.3****)**$6.4 Benefit for income taxes  **(54.0****)** (21.1) 
Net income increased in fiscal 2006 primarily due to: higher net revenues; lower R&D expenses; and the previously described events impacting comparability, including $50.2 million of net tax benefits. Partially offsetting this increase were higher SG&A expenses. The net effect of foreign currency on net income was acharge of approximately $3 million in fiscal 2006 compared to the prior fiscal year.
*Revenues – overall summary*
The following table sets forth the Applied Biosystems group’s revenues by product categories for the fiscal years ended June 30:
(Dollar amounts in millions) **2006** 2005 **% Increase/****(Decrease)**  DNA Sequencing **$****539.9** $544.2  **(1%****)***% of total revenues*  ***29%***  *30%*               Real-Time PCR/Applied Genomics  **600.4**  514.5  **17%** *% of total revenues*  ***31%***  *29%*               Mass Spectrometry  **465.3**  426.5  **9%** *% of total revenues*  ***24%***  *24%*               Core PCR & DNA Synthesis  **198.4**  191.2  **4%** *% of total revenues*  ***10%***  *11%*               Other Product Lines  **107.2**  110.7  **(3%****)***% of total revenues*  ***6%***  *6%*     Total **$****1,911.2** $1,787.1  **7%**  
Revenues for fiscal 2006 included a favorable impact of approximately 1% related to the Ambion acquisition. The effect of foreign currency decreased net revenues in fiscal 2006 by approximately 1% as compared to fiscal 2005. Applied markets contributed across multiple product categories.
•Revenues in the Real-Time PCR/Applied Genomics product category increased primarily due to higher sales of consumables products, in part due to the acquisition of Ambion. Sales of human identification products used in forensics, TaqMan® Gene Expression Assays products used in academic, clinical research andagricultural biotechnology settings, and increased licensing and royalty revenues contributed significantly to the product category growth. Additionally, instrument revenues increased due to higher sales of real-time PCR instruments.  •Mass Spectrometry revenue growth was led by sales of Q TRAP® systems, MALDI TOF/TOF systems, and API triple quad systems and higher service and support revenues. *Revenue by sources*
The following table sets forth the Applied Biosystems group’s revenues by sources for the fiscal years ended June 30:
(Dollar amounts in millions) **2006** 2005 **% Increase/****(Decrease)**  Instruments **$****836.3** $803.5  **4.1%** Consumables  **734.6**  681.5  **7.8%** Other sources  **340.3**  302.1  **12.6%**  Total **$****1,911.2** $1,787.1  **6.9%**   *Instruments*
For fiscal 2006, instrument revenues increased as compared to fiscal 2005 due primarily 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 the Q TRAP, MALDI TOF/TOF,

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28Management’s Discussion and Analysis — (Continued)Applera Corporation 
and API triple quad systems, all of which benefited from new product introductions in the second half of fiscal 2005. The Real-Time PCR/Applied Genomics category increased as a result of higher sales of Real-Time PCR instruments for core research and applied markets applications, including quality and safety testing.
*Consumables*
The increase in consumables sales in fiscal 2006 primarily reflected the strength of Real-Time PCR/Applied Genomics consumables sales. These sales increased primarily as a result of the acquisition of Ambion, higher sales of human identification products used in forensics, TaqMan Gene Expression Assays products, andchromatography media.
*Other sources*
Revenues from other sources, which included service and support, royalties, licenses, and contract research, increased for fiscal 2006 primarily due to higher licensing and royalty revenues of approximately $26 million, driven primarily by Real-Time PCR instrumentation license issuance fees, expanded licensing initiatives,and higher service and support revenues. Of the $26 million increase, approximately $11 million related to one-time licensing fees. In the Real-Time PCR/Applied Genomics category, revenues increased in fiscal 2006 in part due to the issuance of Real-Time instrument licenses in fiscal 2006. Service contract revenuegrowth drove the increase in the Mass Spectrometry category, partially offset by a $2.5 million non-recurring licensing fee for mass spectrometry technology included in revenues for fiscal 2005.
*Revenues by geographic area*
The following table sets forth the Applied Biosystems group’s revenues by geographic area for the fiscal years ended June 30:
(Dollar amounts in millions) **2006** 2005 **% Increase/****(Decrease)**  United States **$****855.1** $781.4  **9.4%** Europe  **643.6**  605.0  **6.4%** Asia Pacific  **339.7**  333.5  **1.9%** Latin America and other markets  **72.8**  67.2  **8.3%**  Total **$****1,911.2** $1,787.1  **6.9%**  
The effect of foreign currency decreased revenues by approximately 3% in Europe and 3% in Asia Pacific during fiscal year 2006 as compared to fiscal 2005. Excluding the effects of foreign currency, revenues increased by approximately 9% in Europe primarily as a result of sales of MALDI TOF/TOF systems, TaqMan GeneExpression Assays products, Ambion-related products, API triple quad systems, and human identification products used in forensics. In fiscal 2006, revenues in Japan declined approximately 4% as compared to the prior year primarily due to unfavorable currency effects of approximately 5%. Revenues in other Asia Pacificcountries increased by approximately 13% as compared to the prior year primarily due to sales of Q TRAP systems, low to medium throughput genetic analyzers, and

human identification products. Sales in the U.S. increased primarily due to the sales of API triple quad systems, Ambion-related products, TaqMan Gene Expression Assays products, and increased royalty and licensing revenues.

Gross margin, as a percentage of net revenues, increased for fiscal 2006 over the prior fiscal year driven primarily by Real-Time PCR instrumentation license issuance fees, royalty payments, and decreased software amortization. Additionally, gross margin was favorably affected by manufacturing productivity improvementsand a favorable product mix of relatively higher margin Real-Time PCR/Applied Genomics products. Service margins also improved for fiscal 2006 primarily driven by pricing on selected billable parts and growth in the volume of service contracts. Partially offsetting these increases were higher royalty expenses.

SG&A expenses for fiscal 2006 increased compared to fiscal 2005 due primarily to higher employee-related costs and sales force investments of approximately $33 million; and increased spending of approximately $21 million, which was comprised of: costs related to strategic investments in China and other initiatives; thedevelopment of, and enhancements to, the Applied Biosystems Portal; and Ambion-related expenses. This increase was partially offset by the favorable effects of foreign currency and lower legal expenses of approximately $10 million.

R&D expenses decreased in fiscal 2006 from fiscal 2005 as a result of cost savings realized from the integration in fiscal 2005 of the MALDI TOF product line into the Applied Biosystems/MDS Sciex Instruments joint venture, partially offset by higher employee-related expenses, including those associated with theacquisition of Ambion.

Interest income, net increased during fiscal 2006 compared to the prior fiscal 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 sharerepurchase activity and the acquisition of Ambion.

Other income (expense), net in fiscal 2006 included higher benefits associated with our foreign currency risk management program as compared to fiscal 2005.

The decrease in the effective tax rate for fiscal 2006 compared to fiscal 2005 was primarily due to the previously described events impacting comparability, including the events described under tax items.

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29Management’s Discussion and Analysis — (Continued)Applera Corporation **Results of Continuing Operations—****2005 Compared with 2004** (Dollar amounts in millions) 2005 2004 % Increase/(Decrease)  Net revenues $1,787.1 $1,741.1  2.6% Cost of sales  834.4  826.8  0.9%  Gross margin  952.7  914.3  4.2% SG&A expenses  485.6  465.2  4.4% R&D  192.1  211.6  (9.2%)Amortization of purchased intangible assets  1.3  4.6  (71.7%)Employee-related charges, asset impairments and other  31.8  23.7  34.2% Asset dispositions and legal settlements  (38.2) (6.7) 470.1%  Operating income  280.1  215.9  29.7% Gain on investments, net     11.2  (100.0%)Interest income, net  13.9  12.0  15.8% Other income (expense), net  3.2  0.6  433.3%  Income before income taxes  297.2  239.7  24.0% Provision for income taxes  60.3  67.4  (10.5%) Income from continuing operations $236.9 $172.3  37.5%  Percentage of net revenues:          Gross margin  53.3%  52.5%    SG&A expenses  27.2%  26.7%    R&D  10.7%  12.2%    Operating income  15.7%  12.4%               Effective income tax rate  20%  28%     
The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2005 and 2004:
(Dollar amounts in millions) 2005 2004  Income (charge) included in income before income taxes $6.4     $(7.1)Benefit for income taxes  (21.1) (1.2) 
Income from continuing operations increased in fiscal 2005 primarily due to improved gross margin, lower R&D expenses and the previously described events impacting comparability, partially offset by higher SG&A expenses. The net effect of foreign currency on income from continuing operations was a benefit ofapproximately $14 million in fiscal 2005 compared to the prior fiscal year.
*Revenues – overall summary*
The following table sets forth the Applied Biosystems group’s revenues by product categories for the fiscal years ended June 30:
(Dollar amounts in millions) 2005 2004 % Increase/(Decrease)  DNA Sequencing $544.2  $572.1   (5%)*% of total revenues*  *30%*  *33%*               Real-Time PCR/Applied Genomics  514.5  430.2  20% *% of total revenues*  *29%*  *25%*               Mass Spectrometry  426.5  414.3  3% *% of total revenues*  *24%*  *24%*               Core PCR & DNA Synthesis  191.2  203.4  (6%)*% of total revenues*  *11%*  *11%*               Other Product Lines  110.7  121.1  (9%)*% of total revenues*  *6%*  *7%*     Total $1,787.1 $1,741.1  3%  
The effect of foreign currency increased net revenues in fiscal 2005 by approximately 2% as compared to fiscal 2004. As a result, net revenues, excluding the effects of foreign currency, increased slightly compared with the prior fiscal year. Applied markets contributed across multiple categories.
•Revenues in the Real-Time PCR/Applied Genomics product category increased primarily due to higher sales of consumables products. Sales of biosecurity, human identification, and TaqMan Gene Expression Assays and Low Density Arrays products contributed significantly to the product category growth.  •Mass Spectrometry revenue growth was led by sales of the API triple quad systems and higher sales of QTRAP systems for both the proteomics and applied markets customers.  •DNA Sequencing revenue declined compared to the prior fiscal year, primarily as a result of decreased sales of 3730*xl*/3730 DNA Analyzers.  •The decrease in revenues from Other Product Lines for fiscal 2005 resulted primarily from lower software sales, consulting and support revenues, and instrument sales compared with the prior fiscal year.  •Revenues in the Core PCR & DNA Synthesis product category declined primarily due to decreased sales of consumables, including decreased sales to some large customers.
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30Management’s Discussion and Analysis — (Continued)Applera Corporation *Revenue by sources*
The following table sets forth the Applied Biosystems group’s revenues by sources for the fiscal years ended June 30:
(Dollar amounts in millions) 2005 2004 % Increase/(Decrease)  Instruments  $803.5  $841.0  (4.5%)Consumables  681.5  609.2  11.9% Other sources  302.1  290.9  3.9% Total $1,787.1 $1,741.1  2.6%            *Instruments*
For fiscal 2005, instrument revenues decreased from the prior fiscal year primarily due to reduced sales of the Applied Biosystems 3730*xl*/3730 DNA Analyzers and ABI PRISM® 3100 and 3100-Avant Genetic Analyzers in the DNA Sequencing product category. This decrease was partially offset by higher sales of the AppliedBiosystems 3130 line of Genetic Analyzers, also in the DNA Sequencing product category, and higher sales in the Real-Time PCR/Applied Genomics product category, resulting primarily from the Applied Biosystems 7300 Real-Time and 7500 Real-Time PCR Systems, partially offset by lower sales of the ABI PRISM® 7000System. In the Mass Spectrometry category, sales of the API 5000TM LC/MS/MS System, which began to sell commercially in the third quarter of fiscal 2005, and higher sales of the 4000 Q Trap® LC/MS/MS System were partially offset by reduced sales of the API 4000TM LC/MS/MS System.
*Consumables*
The increase in consumables sales in fiscal 2005 compared to fiscal 2004 primarily reflected the strength of Real-Time PCR/Applied Genomics consumables sales. This increase resulted primarily from higher sales of biosecurity products, which included assays for the U.S. Postal Service Biohazard Detection Systemdeveloped through a collaborative agreement with Cepheid as subcontractor to Northrop Grumman, human identification products used in forensics, TaqMan Gene Expression Assays and Low Density Arrays, and other consumables products. This increase was partially offset by lower sales of Core PCR & DNA Synthesisconsumables.
*Other sources*
Revenues from other sources, which included service and support, royalties, licenses, and contract research, increased for fiscal 2005 from fiscal 2004 primarily due to higher service revenues, partially offset by lower consulting and support and testing revenues. Included in revenues for fiscal 2005 was a $2.5 million non-recurring licensing fee for some mass spectrometry technology.
*Revenues by geographic area*
The following table sets forth the Applied Biosystems group’s revenues by geographic area for the fiscal years ended June 30:
(Dollar amounts in millions) 2005 2004 % Increase/(Decrease)  United States  $781.4  $809.2   (3.4%)Europe  605.0  537.8  12.5% Asia Pacific  333.5  333.0  0.2% Latin America and other markets  67.2  61.1  10.0%  Total $1,787.1 $1,741.1  2.6%  
The effect of foreign currency increased revenues by approximately 4% in Europe and 2% in Asia Pacific during fiscal 2005 as compared to fiscal 2004. Revenues increased in Europe, primarily as a result of continued strong sales of the Applied Biosystems 3130 line of Genetic Analyzers and the Applied Biosystems 7300and 7500 Real-Time PCR Systems and increased sales of human identification products. During fiscal 2005, revenues from Japan declined approximately 4% compared to the prior fiscal year, net of a positive impact from foreign currency of approximately 2%. Factors contributing to this decline included the continued shiftof life science research funding to areas outside of sequencing and constrained spending due to anticipated lower growth in the fiscal 2006 government budget for life science research. Sales in the U.S. were negatively affected by reduced sales of DNA analyzers to large U.S. genome centers.

Gross margin, as a percentage of net revenues, increased for fiscal 2005 over the prior fiscal year primarily due to the favorable effects of foreign currency and a decrease in both software amortization and warranty costs. Service margins improved for fiscal 2005 primarily driven by growth in volume of service contracts, aswell as improved pricing on selective billable parts, labor, and service contracts. Strong growth in some higher margin products within the sequence detection systems, human identification, and assays product lines helped minimize the effect of the decline in DNA Sequencing instruments.

SG&A expenses for fiscal 2005 increased compared to fiscal 2004 primarily due to: higher employee-related and outside consultant costs of approximately $14 million; the unfavorable effects of foreign currency of approximately $9 million; and increased spending of approximately $6 million on both the development of,and enhancements to, the Applied Biosystems Portal and the strategic business review. In fiscal 2004, the Applied Biosystems group engaged a consulting firm to assist management in an in-depth review of its entire product portfolio. The increase in fiscal 2005 was partially offset by lower legal expenses of approximately$7 million and lower insurance and pension costs of approximately $8 million. A significant portion of the Applied Biosystems group’s legal fees related to defending the Applied Biosystems group’s intellectual property assets.

R&D expenses decreased in fiscal 2005 from fiscal 2004 as a result of the previously announced realignment of the R&D

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31Management’s Discussion and Analysis — (Continued)Applera Corporation 
product portfolio and the integration of the MALDI TOF product line into the Applied Biosystems/MDS Sciex Instruments joint venture.

Interest income, net increased during fiscal 2005 compared to the prior fiscal year primarily due to higher average interest rates and higher average cash and cash equivalents.

Other income (expense), net in fiscal 2005 included higher benefits associated with our foreign currency risk management program, partially offset by lower other non-operating income in fiscal 2005 in comparison to the prior fiscal year.

The decrease in the effective tax rate for fiscal 2005 compared to fiscal 2004 was primarily due to benefits related to R&D tax credit carryforwards, expected results of Canadian examinations, and settlement of some U.K. tax matters in fiscal 2005.
**Applied Biosystems Group** **Discussion of Financial Resources and Liquidity**
The Applied Biosystems group had cash and cash equivalents and short-term investments of $373.9 million at June 30, 2006, and $756.2 million at June 30, 2005. We maintain a $200 million unsecured revolving credit agreement with four banks that matures on April 15, 2010, under which there were no borrowingsoutstanding at June 30, 2006 or 2005. Cash provided by operating activities has been the Applied Biosystems group’s primary source of funds over the last three fiscal years.

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

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. In addition, in January 2006, we announced that our board of directors authorized the repurchase of up to 5 million shares of Applera-Applied Biosystems stock.We completed both of these supplemental repurchase authorizations in fiscal 2006. These authorizations supplement the board’s existing authorization to replenish shares of Applera-Applied Biosystems stock issued under our employee stock benefit plans. This authorization has no set dollar or time limits and delegates toour 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 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 Genomics group on a centralized basis and allocate activity within these balances to the group that uses or generates such resources.
(Dollar amounts in millions) **2006** 2005  Cash and cash equivalents **$****373.9**  $756.2 Working capital  **439.5**  844.1  
Cash and cash equivalents decreased from June 30, 2005, as cash expenditures for the repurchase of Applera-Applied Biosystems stock, the acquisition of Ambion, the purchase of capital and other assets, and the payment of dividends exceeded cash generated from operating activities, proceeds from the sale of assetsand stock issuances, and the $30 million cash received for its interest in the Celera Diagnostics joint venture.

Cash and cash equivalents increased in fiscal 2005 as cash generated from operating activities, which included the amount received from Illumina related to the previously described patent infringement lawsuit, proceeds from the sale of investments, net of purchases, and proceeds from asset sales and stock issuances foremployee stock plans were only partially offset by expenditures for capital assets, the payment of dividends, and the repurchase of Applera–Applied Biosystems stock. Also impacting the increase in cash and cash equivalents was a $17.4 million payment made in fiscal 2004 for a patent lawsuit related to a discontinuedproduct line. See Note 14 to our consolidated financial statements for further information. Net cash flows of continuing operations for the fiscal years ended June 30 were as follows:
(Dollar amounts in millions) **2006** 2005 2004  Net cash from operating activities   **$****375.3**   $334.3   $289.3 Net cash from investing activities  **(295.1****)** (29.0) (72.3)Net cash from financing activities  **(459.4****)** 3.2  (350.0)Effect of exchange rate changes on cash  **(3.0****)** (8.9) 12.9   *Operating activities*
Net cash from operating activities of continuing operations for fiscal 2006 was $41.0 million higher than in fiscal 2005. This increase resulted primarily from higher income-related cash flows, including the $33 million Bio-Rad settlement, partially offset by a higher use of cash primarily due to a decrease in accounts payableand other liabilities. The decrease in accounts payable and other liabilities was primarily due to a voluntary contribution of approximately $30 million to our qualified U.S. pension plan in fiscal 2006, the payment of approximately $58 million related to the previously discussed Amersham and Beckman Coulter legal matters,partially offset by the timing of royalty payments, a higher compensation-related accrual in fiscal 2006, and lower income tax payments in fiscal 2006. In fiscal 2005, we did not fund our U.S. qualified pension plan as no contributions were required under ERISA regulations. Partially offsetting this higher use of cash in fiscal2006 was a decrease in prepaid expenses and other assets due in part to a decrease in a non-trade receivable related to its joint venture activities.

Net cash from operating activities of continuing operations for fiscal 2005 was $45.0 million higher than in fiscal 2004. This increase resulted primarily from: higher income–related

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32Management’s Discussion and Analysis — (Continued)Applera Corporation  
cash flows; the timing of vendor payments; and the funding of our qualified U.S. pension plan of approximately $51 million in fiscal 2004. This increase was partially offset by: a lower reduction in accounts receivable balance in fiscal 2005 due to the timing of collections; the timing of royalty payments; an increase in a non-trade receivable related to the Applied Biosystems group’s joint venture activities; the timing of the receipt of dividends and distributions from investments in unconsolidated subsidiaries; and higher severance payments in fiscal 2005.

The Applied Biosystems group’s days sales outstanding was 54 days at June 30, 2006, compared to 56 days at June 30, 2005 and 61 days at June 30, 2004. The decrease resulted primarily from continued strong collections activity, primarily in the U.S. and Europe, combined with lower sales in Japan, which has a longercollection cycle relative to total sales. Inventory on hand was 2.4 months at June 30, 2006 and 2005, and 2.8 months at June 30, 2004.
*Investing activities*
Capital expenditures, net of disposals, were $41.5 million in fiscal 2006, $84.6 million in fiscal 2005, and $60.4 million in fiscal 2004. Fiscal 2006 included expenditures for the development of, and enhancements to, the Applied Biosystems Portal of approximately $8 million. Additionally fiscal 2006 capital expendituresincluded purchases of production equipment, testing and laboratory equipment, computer equipment, and computer software and licenses. In fiscal 2005, the Applied Biosystems group spent $42 million to purchase several buildings at its Foster City, California location. Additionally, fiscal 2005 capital expenditures includedpurchases of production equipment, testing and laboratory equipment for its facilities, as well as computer equipment. Fiscal 2004 capital expenditures included approximately $12 million for the expansion of facilities, primarily in Pleasanton, California and Bedford, Massachusetts, as well as purchases of productionequipment, testing and laboratory equipment for these facilities, and $13 million for enterprise system upgrades.

In fiscal 2005, cash was generated from the sales and maturities, net of purchases, of available-for-sale investments. In fiscal 2004, purchases exceeded the proceeds received from the sales and maturities of available-for-sale investments. In March 2006, we acquired Ambion for approximately $279 million as described inNote 3 to our consolidated financial statements. In fiscal 2006, we sold a vacant facility in Connecticut and our San Jose, California facility and received net proceeds of approximately $26 million. Fiscal 2005 proceeds from the sale of assets included approximately $7 million received from MDS, representing the firstinstallment payment related to the previously discussed sale of MALDI TOF assets, net of expenses.
*Financing activities*
Fiscal 2006 included three dividend payments on Applera-Applied Biosystems stock compared to four payments in fiscal 2005 and five payments in fiscal 2004 due to the

timing of the payment dates. We repurchased the following shares of Applera–Applied Biosystems stock for the fiscal years ended June 30:
(Dollars and shares in millions) Number of SharesRepurchased PurchasePrice  **2006** **24.5**  **$****601.9** 2005 0.3  6.1 2004 15.4  325.0  
In fiscal 2006, the Applied Biosystems group received $30 million from the Celera Genomics group as partial consideration for its interest in the Celera Diagnostics joint venture.
**Celera Genomics Group** **Results of Operations—****2006 Compared with 2005** (Dollar amounts in millions) **2006** 2005 **% Increase/****(Decrease)**  Net revenues  **$****46.2**    $66.5     **(30.5%****)**Cost of sales  **19.7**  19.9  **(1.0%****)**R&D  **94.3**  141.4  **(33.3%****)**SG&A expenses  **36.1**  39.8  **(9.3%****)**Amortization of purchased intangible assets  **1.1**  2.9  **(62.1%****)**Employee-related charges, asset impairments and other  **26.2**  2.6  **907.7%** Asset dispositions and legal settlements  **0.7**        Operating loss  **(131.9****)** (140.1) **(5.9%****)**Gain on investments, net  **7.6**       Interest income, net  **22.4**  14.9  **50.3%** Other income (expense), net  **(0.2****)** 1.3  **(115.4%****)** Loss before income taxes  **(102.1****)** (123.9) **(17.6%****)**Benefit for income taxes  **39.4**  46.8  **(15.8%****)** Net loss **$****(62.7****)**$(77.1) **(18.7%****)** Effective income tax benefit rate  **39%**  38%     
The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2006 and 2005:
(Dollar amounts in millions) **2006** 2005  Charge included in loss before income taxes **$****(10.6****)  **$(4.3)Benefit for income taxes  **(3.7****)** (3.7) 
Effective January 1, 2006, the Celera Genomics 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. Prior to that date, the Celera Genomics group accounted for its interest in the Celera Diagnostics joint ventureunder the equity method of accounting and included 100 percent of the losses of Celera Diagnostics in its statement of operations as “Loss from joint venture”. Additionally, the Celera Genomics group recorded 100 percent of net losses at Celera Diagnostics. The Celera Genomics group’s historical results have beenrestated for comparative purposes to reflect this transaction. However, the acquisition did not affect the Celera Genomics group’s net loss for the periods presented.

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33Management’s Discussion and Analysis — (Continued)Applera Corporation  
The lower net loss in fiscal 2006 compared to fiscal 2005 primarily resulted from lower R&D expenses and higher interest income, partially offset by lower net revenues and the previously described events impacting comparability.

Reported revenues for the Celera Genomics group are comprised of product sales, equalization payments, license and collaborative revenue, and the sales of the small molecule programs. Under an alliance agreement with Abbott, we work with each other exclusively through primarily a profit sharing arrangement inspecifically agreed areas of molecular diagnostics, but both companies may work independently outside the exclusive areas. At the end of each reporting period, the two companies compare a statement of revenues and expenses for alliance activity recorded by each party. A calculation is made to determine the amount thatneeds to be paid to evenly split both the revenue and expenses. This payment is referred to as the equalization payment and is recorded as revenue by the Celera Genomics group. Product sales consist primarily of shipments to our partner, Abbott, at cost. In the future, product sales that are outside the alliance with Abbottwill also be reported in this category.

Reported revenues decreased for fiscal 2006 compared to the prior year primarily as a result of the discontinuation of the Online/Information Business, which lowered revenues by approximately $23 million in fiscal 2006, and the operations of Paracel, partially offset by revenues from the sales of the small moleculeprograms. Substantially all of the existing customer contracts related to the Online/Information Business terminated on or prior to June 30, 2005. For fiscal 2006, diagnostic-related revenues were approximately $2 million lower compared with fiscal 2005, primarily as a result of lower licensing and collaborative revenuesand decreased equalization revenues from Abbott, partially offset by higher product sales to Abbott.

The reduction in gross margin in fiscal 2006 was primarily attributable to the discontinuation of the Online/Information Business. Cost of sales in fiscal 2005 included a $1.7 million charge related to the impairment of Paracel inventory.

R&D expenses decreased in fiscal 2006 compared to the prior year primarily due to the decision to exit small molecule drug discovery and development, the discontinuation of the Online/Information Business, and the reimbursement by the Applied Biosystems group of some expenses incurred by the Celera Genomics groupfor research performed to assist the Applied Biosystems group in product development activities.

SG&A expenses decreased in fiscal 2006 compared to fiscal 2005 primarily due to the discontinuation of the Online/Information Business, partially offset by higher professional services.

Interest income, net increased during fiscal 2006 as compared to the prior year primarily due to higher average interest rates, partially offset by lower average cash and cash equivalents and short-term investments.

Other income, net for fiscal 2005 included a non-recurring receipt of $1.0 million related to a financing activity for a non-strategic investment and the write-down of an investment acquired as part of the Axys acquisition.

The increase in the effective income tax benefit rate for fiscal 2006 compared to fiscal 2005 was primarily attributable to the impact of R&D credits on the lower losses in fiscal 2006. While the dollar amount of the R&D credits in fiscal 2006 is not substantially different than the prior year, they have a greater impact on theeffective income tax benefit rate. The impact of the R&D credit is partially offset by the previously described events impacting comparability.
**Supplemental information**
The following supplemental information is provided for the fiscal years ended June 30:
(Dollar amounts in millions) **2006** 2005  Equalization revenue, net **$****17.8**  $19.1 End-user alliance revenues for all products sold primarily through Abbott  **79.5**  61.7 The Celera Genomics group’s 50% pre-tax loss from alliance activities  **(24.1****)** (35.9) 
End-user alliance revenues for all products sold primarily through Abbott increased for fiscal 2006 compared to fiscal 2005 primarily due to increased sales of Hepatitis C Virus (“HCV”) and Human Immunodeficiency Virus (“HIV”) RealTi*m*eTM viral load assays used on the *m*2000TM system and third party high resolutionhuman leukocyte antigen (“HLA”) products. HLA-typing products detect specific DNA sequences in several HLA genes. These end-user revenues were partially offset by lower sales of the low resolution HLA product line that was removed from the alliance in December 2005.

In fiscal 2006, the Celera Genomics group’s 50 percent portion of the pre-tax loss of the alliance decreased compared to the prior year primarily as a result of a decrease in R&D spending and higher alliance end-user product revenues. Gross margin as a percentage of end-user revenues in fiscal 2006 declined modestly fromthe prior year primarily due to activities associated with the launch of the *m*2000 system in fiscal 2006.

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34Management’s Discussion and Analysis — (Continued)Applera Corporation **Results of Operations—****2005 Compared with 2004** (Dollar amounts in millions) 2005 2004 % Increase/(Decrease)  Net revenues  $66.5     $96.8   (31.3%)Cost of sales  19.9  31.0  (35.8%)R&D  141.4  145.2  (2.6%)SG&A expenses  39.8  47.1  (15.5%)Amortization of purchased intangible assets  2.9  2.9    Employee-related charges, asset impairments and other  2.6  18.1  (85.6%) Operating loss  (140.1) (147.5) (5.0%)Gain on investments, net     24.3  (100.0%)Interest income, net  14.9  10.8  38.0% Other income (expense), net  1.3  1.9  (31.6%) Loss before income taxes  (123.9) (110.5) 12.1% Benefit for income taxes  46.8  53.0  (11.7%) Net loss $(77.1)$(57.5) 34.1%  Effective income tax benefit rate  38%  48%     
The following table summarizes the impact of the previously described events impacting comparability included in the financial results for fiscal 2005 and 2004:
(Dollar amounts in millions) 2005 2004  Income (charge) included in loss before income taxes $(4.3)   $6.7 Provision (benefit) for income taxes  (3.7) 2.4  
The higher net loss in fiscal 2005 compared to fiscal 2004 primarily resulted from lower net revenues, the decrease in the effective tax benefit rate, and the impact of previously described events impacting comparability, partially offset by lower SG&A expenses and higher net interest income in fiscal 2005.

Revenues decreased for fiscal 2005 compared to fiscal 2004 primarily as a result of the expiration of Online/Information Business customer agreements, the discontinuation of most of the operations of Paracel during the first quarter of fiscal 2005, lower equalization payments and reduced revenue related to shipments toAbbott. This decrease was partially offset by an increase in technology-related revenue, including license fees and royalties from Cepheid Corporation and recognition of milestone payments from Merck & Co. Inc., associated with its target and marker collaboration related to Alzheimer’s disease. Substantially all of theexisting customer contracts related to the Online/Information Business terminated on or prior to June 30, 2005.

Cost of sales in fiscal 2005 included $1.7 million related to the impairment of Paracel inventory.

R&D expenses decreased in fiscal 2005 compared to fiscal 2004 primarily due to lower Online/Information Business R&D expenses, decreased spending for development of an instrument platform for the alliance with Abbott, and the discontinuation of most of the operations of Paracel. R&D expenses included $1.8 millionfor fiscal 2005 and $4.9 million for fiscal 2004 of lease payments on instruments and purchases of consumables from the

Applied Biosystems group. Partially offsetting the decrease in fiscal 2005 were increased expenditures to support preclinical development activities and the hiring of additional therapeutic R&D personnel. R&D expenses for fiscal 2005 included $0.7 million of expense related to the acceleration of the vesting of substantiallyall of the unvested stock options relating to Applera-Celera stock. R&D expenses for fiscal 2004 included a $1.8 million write-off of building improvements related to a reconfiguration of space in the Rockville, Maryland facility.

SG&A expenses decreased in fiscal 2005 compared to the prior fiscal year primarily due to the discontinuation of most of the operations of Paracel and lower Online/Information Business expenses resulting from lower employee-related costs and bad debt expense, partially offset by higher legal expenses. Fiscal 2004included a $1.6 million charge related to a facility lease agreement.

Interest income, net increased during fiscal 2005 compared to fiscal 2004 primarily due to higher average interest rates, partially offset by lower average cash and cash equivalents and short-term investments.

The decrease in other income, net for fiscal 2005 compared to fiscal 2004 primarily resulted from higher non-recurring cash receipts in fiscal 2004 and the write-down in fiscal 2005 of an investment acquired as part of the Axys acquisition, partially offset by losses recorded from equity method investments in fiscal 2004.

The decrease in the effective income tax benefit rate for fiscal 2005 compared to the prior fiscal year was primarily attributable to a reduction of the valuation allowance in fiscal 2004, partially offset by higher R&D tax credits in fiscal 2005.
**Supplemental information**
The following supplemental information is provided for the fiscal years ended June 30:
(Dollar amounts in millions) 2005 2004  Equalization revenue, net $19.1   $23.3 End-user alliance revenues for all products sold primarily through Abbott  61.7  45.9 The Celera Genomics group’s 50% pre-tax loss from alliance activities  (35.9) (44.8) 
End-user alliance revenues for all products sold primarily through Abbott increased for fiscal 2005 compared to fiscal 2004 primarily due to increased sales of HCV genotyping and viral load ASRs, products for HLA typing, and the ViroSeqTM HIV-1 Genotyping System. HLA-typing products detect specific DNA sequences inseveral HLA genes. The ViroSeq system includes reagents for identifying key mutations of the HIV-1 genome.

In fiscal 2005, the Celera Genomics group’s 50 percent portion of the pre-tax loss of the alliance decreased compared to the prior year primarily as a result of increased gross margin resulting from the higher end-user revenues coupled with reduced R&D spending. Gross margin as a percentage of end-user revenues in fiscal2006 was relatively unchanged from the prior year.

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35Management’s Discussion and Analysis — (Continued)Applera Corporation  **Celera Genomics Group** **Discussion of Financial Resources and Liquidity**
The Celera Genomics group had cash and cash equivalents and short-term investments of $569.5 million at June 30, 2006, and $668.3 million at June 30, 2005. We maintain a $200 million unsecured revolving credit agreement with four banks that matures on April 15, 2010, under which there were no borrowingsoutstanding at June 30, 2006 or 2005.

We believe that existing funds and existing sources of debt financing are more than adequate to satisfy the Celera Genomics group’s normal operating cash flow needs and planned capital expenditures for the next twelve months and for the foreseeable future, including those of Celera Diagnostics following the acquisitionby the Celera Genomics group of the Applied Biosystems group’s 50 percent interest in Celera Diagnostics.

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 deemsappropriate through open market purchases, privately negotiated transactions, tender offers, exchange offers, or otherwise.

We manage the investment of surplus cash and the issuance and repayment of short and long-term debt for the Celera Genomics 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.
(Dollar amounts in millions) **2006** 2005  Cash and cash equivalents **$****60.3**   $23.2 Short-term investments  **509.2**  645.1  Total cash and cash equivalents andshort-term investments **$****569.5** $668.3 Working capital  **578.9**  650.4  
Cash and cash equivalents for fiscal 2006 increased as the proceeds received from the sales and maturities of available-for-sale investments, net of purchases, the sale of assets, and stock issuances exceeded the amount expended on operations, the $30 million payment by the Celera Genomics group to the AppliedBiosystems group as partial consideration for its interest in the Celera Diagnostics joint venture, and the purchase of capital assets.

Cash and cash equivalents for fiscal 2005 decreased as expenditures for operations, capital assets, and debt repayment were only partially offset by proceeds from the sales and maturities of short-term investments, net of purchases, sale of assets and proceeds from stock issuances.

Net cash flows for the fiscal years ended June 30 were as follows:
(Dollar amounts in millions) **2006** 2005 2004  Net cash from operating activities  **$****(100.2****)  **$(117.2)  $(94.8)Net cash from investing activities  **139.4**  80.6  93.5 Net cash from financing activities  **(2.1****)** 8.3  0.3   *Operating activities*
Net cash used by operating activities for fiscal 2006 was $17.0 million lower than in fiscal 2005. The lower use of cash resulted primarily from lower net cash operating losses and lower working capital requirements in fiscal 2006. In fiscal 2006 compared to fiscal 2005, working capital benefited primarily from a lowerdecrease in accounts payable and other liabilities, partially offset by an increase in accounts receivable. The lower decrease in accounts payable and other liabilities resulted in part due to the discontinuation of the Online/Information Business. Partially offsetting this lower decrease were lower liabilities as a result of thedecision to exit small molecule drug discovery and development and higher severance and other restructuring-related payments. The increase in accounts receivable resulted in part due to the sale of the small molecule programs and higher receivables associated with the diagnostics business.

Net cash used by operating activities for fiscal 2005 was $22.4 million higher than in fiscal 2004 primarily from higher net cash operating losses and lower cash receipts due to the expiration of Online/Information Business customer agreements.
*Investing activities*
Capital expenditures, net of disposals, were $4.8 million in fiscal 2006, $9.9 million in fiscal 2005, and $8.3 million in fiscal 2004. Fiscal 2006 capital expenditures consisted of leasehold improvements and equipment purchases, the majority of which related to the diagnostics business. Fiscal 2005 and 2004 capitalexpenditures consisted primarily of equipment purchases to support the small molecule drug discovery, diagnostics and proteomics businesses. Fiscal 2005 also included improvements made primarily to its therapeutics facilities.

In fiscal 2006, 2005, and 2004, cash was generated from the sales and maturities of available-for-sale investments, net of purchases of available-for-sale investments. Fiscal 2005 included the maturation of non-callable U.S. government obligations, pledged as collateral for the 8% senior secured convertible notes assumed inconnection with the acquisition of Axys. A portion of the proceeds from the principal and interest received from these U.S. government obligations was used to fund the interest and principal payments under the notes. In fiscal 2006, the Celera Genomics group received proceeds of $9.5 million primarily related to the saleof non-strategic minority equity investments. In fiscal 2005, the Celera Genomics group received proceeds of $42.4 million from the sale of its facilities in Rockville, Maryland. In fiscal 2004, the Celera

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36Management’s Discussion and Analysis — (Continued)Applera Corporation  
Genomics group sold its investment in DPI and received net proceeds of approximately $32 million.
*Financing activities*
In fiscal 2005, we repaid the remaining $6 million principal amount of the 8% senior secured convertible notes assumed in connection with the acquisition of Axys. These notes matured in October 2004. In fiscal 2004, we repurchased $10.0 million in principal amount of these notes. In fiscal 2006, we received proceeds of$23.5 million from the exercise of stock options, the majority of which were held by The Institute for Genomic Research (“TIGR”). TIGR received these options in fiscal 1999 in connection with the formation of the Celera Genomics group. Also in fiscal 2006, we paid $30 million to the Applied Biosystems group as partialconsideration for its interest in the Celera Diagnostics joint venture.
**Market Risks**
We are exposed to potential loss from exposure to market risks represented principally by changes in currency rates, interest rates, and equity prices.

We operate internationally, with manufacturing and distribution facilities in various countries throughout the world. For fiscal 2006, 2005, and 2004, we derived approximately 50% to 55% of our revenues from countries outside of the U.S., while a significant portion of the related costs were based in U.S. dollars. Weanticipate that our future results will continue to be affected by market risks, including changes in political and economic conditions in foreign markets and fluctuations in currency rates, primarily the euro, Japanese yen, and British pound.

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 tominimize 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. Forward contracts commit us to buy or sell a currency at a contracted rate on a specific future date. Option contracts grant us theright, but not the obligation, to buy or sell a currency at a certain rate by or on a specific future date in exchange for a fee. Option contracts provide us with an effective hedge against a negative movement in currency rates at a fixed cost. Range forward contracts consist of the simultaneous purchase and sale of options tocreate a range within which we can benefit from changes in currency rates. We generally use forward contracts to offset the impact of changes in currency rates on various foreign currency-denominated assets and liabilities. In hedging various foreign currency forecasted revenues and intercompany transactions where wehave functional currency exposure, we use a combination of forward, option and range forward contracts in a cost beneficial manner. 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 June 30, 2006. Assuming a hypothetical 10% adverse change in currency rates relative to the U.S. dollar, we calculated a hypothetical after-tax loss of $12.3 million, as compared to a hypothetical after-tax loss of $13.8 million at June 30, 2005. Our analysis included the changein the value of the derivative financial instruments, along with the impact of translation on foreign currency-denominated assets and liabilities. Our analysis excluded the impact of translation of foreign currency forecasted revenues and intercompany transactions. If currency rates actually change in a manner similar to theassumed 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 ratemovements and actual exposures and hedges.

We do not hedge our equity positions in other companies or our short-term investments. Our exposure on these instruments is limited to changes in quoted market prices. The fair value of our minority equity positions in other companies was approximately $16 million at June 30, 2006, as compared to $11 million atJune 30, 2005.
**Impact of Inflation and Changing Prices**
Inflation and changing prices are continually monitored. We attempt to minimize the impact of inflation by improving productivity and efficiency through continual review of both manufacturing capacity and operating expense levels. When operating costs and manufacturing costs increase, we attempt to recover such costs byincreasing, over time, the selling price of our products and services. We believe the effects of inflation have been appropriately managed and therefore have not had a material impact on our historic consolidated operations and resulting financial position.
**Recently Issued Accounting Standards**
See Note 1 to our consolidated financial statements for a description of the effect of recently issued accounting pronouncements.
**Outlook** *Applied Biosystems Group*
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

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37Management’s Discussion and Analysis — (Continued)Applera Corporation  
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; and    amortization of acquired intangibles. 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    thatwhen GAAP financial measures are viewed in conjunction withnon-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.

The Applied Biosystems group believes that its fiscal 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; the outcome of pendinglitigation matters; competitive product introductions and pricing; and the continued integration of Ambion-related products.

Subject to the inherent uncertainty associated with these factors, the Applied Biosystems group has the following expectations regarding its financial performance for fiscal 2007:
•The Applied Biosystems          group expects mid to high single digit revenue growth for fiscal 2007.          This outlook includes the full fiscal year impact from the March 2006          acquisition of Ambion and the impact of currency. Revenues are expected          to increase for both instruments and consumables. The Applied Biosystems           group anticipates revenue growth in the Real-Time PCR/Applied Genomics          and Mass Spectrometry product categories and revenue declines in the          Core PCR & DNA Synthesis and Other Product Lines categories. Revenues          in the DNA Sequencing product category are expected to approximately          equal those in fiscal  2006. 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 anticipates gross margin to equal or slightly exceed the fiscal 2006 gross margin of 54.7%. Operating expenses as a percentage of total revenues in fiscal 2007 are expected to be approximately equal to those in the prior year. SG&A as a percentage of total revenues is expected to beapproximately equal to or less than the prior year level of 28.7%. R&D as a percentage of total revenues, and including the impact of Agencourt, is expected to be equal to or slightly above the prior year level of 9.4%. The Applied Biosystems group expects operating margin in fiscal 2007 to increase modestly from thefiscal 2006 level of 16.5%, excluding non-GAAP items in both fiscal years as described above.  •The Applied Biosystems group expects the effective tax rate to be approximately 31%, compared to 29% in fiscal 2006. Factors contributing to the anticipated increase in the effective tax rate include the phase out of export benefits, lower R&D credits, and lower overseas dividends, excluding non-GAAP items in bothfiscal years as described above.  •The Applied Biosystems group expects earnings per share to increase at a rate slightly below the annual revenue growth rate.	This outlook excludes the non-GAAP fiscal 2006 items mentioned above. Excluding the impact of the Agencourt acquisition, the incremental impact of stock based compensation, and theincrease in the effective tax rate, the Applied Biosystems group believes that earnings per share would increase at a low double digit rate over the fiscal 2006 level. The total impact of these three items on fiscal 2007 EPS is expected to be approximately $0.12.  •Capital spending is expected be in the range of $65 to $75 million.
The Applied Biosystems group    anticipates that year-over-year revenue growth rates will be higher in the    first three quarters of the fiscal year than in the fourth quarter primarily    due to the acquisition of Ambion in March 2006. Additionally, due to the    Ambion and Agencourt acquisitions, the Applied Biosystems group  anticipates    higher incremental operating expenses as a percentage of total first quarter    fiscal 2007 revenues compared to the prior year period. As a result, the    Applied Biosystems group expects a mid single digit year-over-year growth    rate in non-GAAP EPS for the first quarter of fiscal 2007, excluding the    fiscal 2006 non-GAAP items mentioned above. The Applied Biosystems group    also expects that the third quarter year-over-year non-GAAP EPS growth rate    will be negatively impacted due to income from licensing fees and royalties    associated with a litigation settlement in the third quarter of fiscal 2006.

The Applied Biosystems group anticipates non-GAAP adjustments in fiscal 2007 related to the amortization of acquired intangibles and also anticipates potential in process R&D charges from the Agencourt acquisition that have not yet been quantified.

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38Management’s Discussion and Analysis — (Continued)Applera Corporation  
The total pre-tax impact of FAS 123R (accounting for share-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 Item 5 “Forward-Looking Statements and Risk Factors” in Part II of our Form 10-K Annual Report for fiscal 2006.
*Celera Genomics Group*
The Celera Genomics group anticipates that its fiscal 2007 financial performance will be affected by continued growth in demand for current and new diagnostic products and potential revenue from technology licenses and collaborations. Subject to the inherent uncertainty associated with these factors, the Celera Genomicsgroup has the following expectations regarding its financial performance for fiscal 2007:
• Total reported revenues are anticipated to be $40 to $45 million, including revenues from licensing and collaborations, which are anticipated to be $8 to $12 million.  •R&D expenses are anticipated to be $55 to $65 million, and SG&A expenses are anticipated to be $30 to $35 million.  •Net loss from operations is anticipated to be $28 to $35 million.  •The Celera Genomics group expects to consume approximately $45 to $55 million in cash and short-term investments to fund operations, anticipated growth in placements of the *m*2000 system, and cash costs related to the fiscal 2006 restructuring. This does not include any proceeds that might be received fromthe sale of the Celera Genomics group’s small molecule facilities in South San Francisco, CA.  •Total end-user revenues recognized through the Celera Genomics group’s alliance with Abbott and total revenue from unpartnered new genetic tests are anticipated to be $105 to $115 million.  •Capital spending in fiscal 2007 is anticipated to be $2 to $4 million.
Other risks and uncertainties that may affect the Celera Genomics group’s financial performance are detailed in Item 5 “Forward-Looking Statements and Risk Factors” in Part II of our Form 10-K Annual Report for fiscal 2006.
**Forward-Looking Statements**
Some statements contained 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 statementsmay 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 cannotguarantee that any forward-looking statements will be realized.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. In order 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 inforward-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. Therisks and uncertainties that may affect the operations, performance, development, and results of our business include, but are not limited to, those described under the headings “Factors Relating to Applied Biosystems” and “Factors Relating to Celera Genomics” contained in our Form 10-K Annual Report for fiscal 2006.

Also, we note that owners of Applera-Applied Biosystems stock and Applera-Celera stock are 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 ofcommon stock, include, but are not limited to, those described under the heading “Risks Relating to a Capital Structure with Two Separate Classes of Common Stock” contained in our Form 10-K Annual Report for fiscal 2006.

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39Consolidated Statements of Operations Applera Corporation     (Dollar amounts in thousands except per share amounts)    For the years ended June 30, **2006**  2005  2004 Products**$****1,576,870** $1,490,361 $1,455,959 Services **218,278**  205,514  182,440 Other **154,242**  149,265  186,794 **Total Net Revenues** **1,949,390**  1,845,140  1,825,193 Products **769,416**  734,001  725,698 Services **96,346**  95,911  91,916 Other **15,476**  18,747  32,365 **Total Cost of Sales** **881,238**  848,659  849,979 **Gross Margin** **1,068,152**  996,481  975,214 Selling, general and administrative **584,483**  525,377  512,238 Research, development and engineering **271,359**  330,603  351,620 Amortization of purchased intangible assets **5,916**  4,237  7,519 Employee-related charges, asset impairments and other **26,547**  34,376  41,824 Asset dispositions and legal settlements **11,221**  (38,172) (6,660)Acquired research and development **3,400**       **Operating Income** **165,226**  140,060  68,673 Gain (loss) on investments, net **7,628**  (50) 35,529 Interest expense **(656****)** (280) (300)Interest income **37,714**  29,140  23,137 Other income (expense), net **5,342**  4,473  2,448 **Income before Income Taxes** **215,254**  173,343  129,487 Provision for income taxes **2,762**  13,548  14,534 **Income from Continuing Operations** **212,492**  159,795  114,953 Income from discontinued operations, net of income taxes       10,628 **Net Income****$****212,492** $159,795 $125,581 **Applied Biosystems Group (see Note 1)**         **Income from Continuing Operations per Share**            Basic**$****1.47** $1.21 $0.84    Diluted**$****1.43** $1.19 $0.83           **Income from Discontinued Operations per Share**            Basic and diluted**$****—** $— $0.05           **Net Income per Share**            Basic**$****1.47** $1.21 $0.89    Diluted**$****1.43** $1.19 $0.88 **Celera Genomics Group (see Note 1)**         **Net Loss per Share**            Basic and diluted**$****(0.83****)**$(1.05)$(0.79)See accompanying notes to Applera Corporation’s consolidated financial statements.  
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40Consolidated Statements of Financial Position Applera Corporation     (Dollar amounts in thousands except share data)    At June 30, **2006**  2005 **Assets**      Current assets         Cash and cash equivalents**$****434,191** $779,401    Short-term investments **509,252**  645,084    Accounts receivable (net of allowances for doubtful accounts of $7,638            and $7,025 respectively) **382,509**  383,938    Inventories, net **137,651**  126,541    Prepaid expenses and other current assets **163,362**  152,645 Total current assets **1,626,965**  2,087,609 Property, plant and equipment, net **396,436**  438,398 Goodwill and intangible assets, net **322,097**  63,076 Other long-term assets **667,477**  575,102 **Total Assets****$****3,012,975** $3,164,185 **Liabilities and Stockholders’ Equity**      Current liabilities         Accounts payable**$****201,691** $174,022    Accrued salaries and wages **98,938**  91,188    Current deferred tax liability **17,560**  12,504    Accrued taxes on income **50,944**  77,327    Other accrued expenses **239,157**  237,630 Total current liabilities **608,290**  592,671 Other long-term liabilities **200,351**  227,431 **Total Liabilities** **808,641**  820,102 Commitments and contingencies (see Note 10)      **Stockholders’ Equity**      Capital stock         Preferred stock            Applera Corporation: $.01 par value; 10,000,000 shares authorized at June 30, 2006, and               2005; no shares issued and outstanding at June 30, 2006 and 2005         Common stock            Applera Corporation–Applied Biosystems stock: $.01 par value; 213,194,000 shares               issued at June 30, 2006, and 213,008,000 shares issued at June 30, 2005 **2,132**  2,130       Applera Corporation–Celera stock: $.01 par value; 77,335,000 shares issued at               June 30, 2006, and 74,255,000 shares issued at June 30, 2005 **773**  743 Capital in excess of par value **2,192,559**  2,132,364 Retained earnings **714,137**  558,065 Accumulated other comprehensive income (loss) **40,947**  (41,787)Treasury stock, at cost **(746,214****)** (307,432)**Total Stockholders’ Equity** **2,204,334**  2,344,083 **Total Liabilities and Stockholders’ Equity****$****3,012,975** $3,164,185 See accompanying notes to Applera Corporation’s consolidated financial statements.  
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41Consolidated Statements of Cash Flows Applera Corporation     (Dollar amounts in thousands)    For the years ended June 30, **2006**  2005  2004 **Operating Activities of Continuing Operations**         Income from continuing operations**$****212,492** $159,795 $114,953 Adjustments to reconcile income from continuing operations             to net cash provided by operating activities:                 Depreciation and amortization **90,988**  101,955  125,267         Asset impairments **10,070**  2,398  37,288         Employee-related charges and other **7,674**  27,931  5,456         Share-based compensation programs **12,829**  6,031  3,309         Deferred income taxes **(42,789****)** (34,871) (49,236)        Sale of assets and legal settlements, net **34,936**  (29,646) (35,463)        Acquired research and development **3,400**               Loss from equity method investees       488 Changes in operating assets and liabilities:            Accounts receivable **14,399**  9,471  49,338    Inventories **4,398**  13,912  11,787    Prepaid expenses and other assets **5,713**  (14,135) (13,223)   Accounts payable and other liabilities **(79,221****)** (26,418) (55,529)**Net Cash Provided by Operating Activities          of Continuing Operations** **274,889**  216,423  194,435 **Net Cash Provided (Used) by Operating Activities****   of Discontinued Operations** **(135****)** 338  (17,738)**Investing Activities of Continuing Operations**         Additions to property, plant and equipment, net **(46,077****)** (93,881) (68,391)Proceeds from maturities of available-for-sale investments **317,008**  2,022,558  2,230,846 Proceeds from sales of available-for-sale investments **313,482**  670,062  1,020,316 Purchases of available-for-sale investments **(495,748****)** (2,595,919) (3,196,559)Acquisitions and investments, net of cash acquired **(279,133****)** (371) (288)Proceeds from the sale of assets, net **34,985**  49,751  35,221 **Net Cash Provided (Used) by Investing Activities          of Continuing Operations** **(155,483****)** 52,200  21,145 **Financing Activities**         Net change in loans payable **(72****)**      Principal payments on debt    (6,000) (10,000)Dividends **(23,957****)** (33,446) (43,528)Purchases of common stock for treasury **(601,910****)** (6,100) (324,999)Proceeds from stock issued for stock plans and other **164,442**  56,982  28,801 **Net Cash Provided (Used) by Financing Activities** **(461,497****)** 11,436  (349,726)**Effect of Exchange Rate Changes on Cash** **(2,984****)** (8,866) 12,871 **Net Change in Cash and Cash Equivalents** **(345,210****)** 271,531  (139,013)**Cash and Cash Equivalents Beginning of Year** **779,401**  507,870  646,883 **Cash and Cash Equivalents End of Year****$****434,191** $779,401 $507,870 See accompanying notes to Applera Corporation’s consolidated financial statements.  
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42Consolidated Statements of Stockholders’ Equity Applera Corporation      Applera–          Accumulated         Applied Applera–  Capital in    Other    Total  Biosystems Celera  Excess of  Retained Comprehensive  Treasury Stockholders’ (Dollar amounts in thousands) Stock  Stock  Par Value  Earnings Income (Loss)  Stock Equity **Balance at June 30, 2003**$2,128 $723 $2,102,936 $355,252 $(54,485)$(66,269)$2,340,285 Comprehensive income                        Net income          125,581        125,581    Other comprehensive income:                        Foreign currency translation adjustments             34,044          Unrealized gain on hedge contracts, net of                            reclassification adjustments             6,168          Minimum pension liability adjustment             8,780          Unrealized loss on investments, net of                            reclassification adjustments             (10,190)                             Other comprehensive income             38,802     38,802                     Comprehensive income                   164,383                     Cash dividends declared on Applera-Applied                        Biosystems stock          (34,645)       (34,645)Purchase of shares for treasury stock                (324,999) (324,999)Issuances under Applera-Applied Biosystems                        stock plans 2     (3,385) (5,148)    32,135  23,604 Issuances under Applera-Celera stock plans    8  5,733           5,741 Tax benefit related to employee stock options       3,372           3,372 Share-based compensation       3,149  29     130  3,308 **Balance at June 30, 2004** 2,130  731  2,111,805  441,069  (15,683) (359,003) 2,181,049 Comprehensive income                        Net income          159,795        159,795    Other comprehensive income:                        Foreign currency translation adjustments             (8,598)         Unrealized gain on hedge contracts, net of                            reclassification adjustments             10,975          Minimum pension liability adjustment             (24,610)         Unrealized loss on investments, net of                            reclassification adjustments             (3,871)                             Other comprehensive loss             (26,104)    (26,104)                    Comprehensive income                   133,691                     Cash dividends declared on Applera-Applied                        Biosystems stock          (33,446)       (33,446)Purchase of shares for treasury stock                (6,100) (6,100)Issuances under Applera-Applied Biosystems                        stock plans       (474) (9,379)    57,433  47,580 Issuances under Applera-Celera stock plans    12  9,757           9,769 Tax benefit related to employee stock options       5,509           5,509 Share-based compensation       5,767  26     238  6,031 **Balance at June 30, 2005** 2,130  743  2,132,364  558,065  (41,787) (307,432) 2,344,083 Comprehensive income                        Net income          **212,492**        **212,492**    Other comprehensive income:                        Foreign currency translation adjustments             **548**          Unrealized loss on hedge contracts, net of                            reclassification adjustments             **(7,947****)**         Minimum pension liability adjustment             **90,410**          Unrealized loss on investments, net of                            reclassification adjustments             **(277****)**                             Other comprehensive income             **82,734**     **82,734**                     Comprehensive income                   **295,226**                     Cash dividends declared on Applera-Applied                        Biosystems stock          **(31,660****)**       **(31,660****)**Purchase of shares for treasury stock                **(601,910****)** **(601,910****)**Issuances under Applera-Applied Biosystems                        stock plans **2**     **5,431**  **(24,794****)**    **163,312**  **143,951** Issuances under Applera-Celera stock plans    **30**  **25,107**        **(277****)** **24,860** Tax benefit related to employee stock options       **16,956**           **16,956** Share-based compensation       **12,701**  **34**     **93**  **12,828** **Balance at June 30, 2006****$****2,132** **$****773** **$****2,192,559** **$****714,137** **$****40,947** **$****(746,214****)****$****2,204,334** See accompanying notes to Applera Corporation’s consolidated financial statements.  
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43Notes to Consolidated Financial StatementsApplera Corporation
 
**Note** **1—Accounting Policies and Practices** **Organization**
Applera Corporation is a life sciences company with a mission to improve human health and society by understanding and applying the power of biology to develop breakthrough research technologies and diagnostic products. When used in these notes, the terms “Applera,” “Company,” “we,” “us,” or “our” mean AppleraCorporation and its subsidiaries. Through December 31, 2005, we were comprised of three business segments: the Applied Biosystems group, the Celera Genomics group, and Celera Diagnostics. Through December 31, 2005, we operated a diagnostic business known as Celera Diagnostics. This business was a 50/50joint venture between the Applied Biosystems group and the Celera Genomics group. Effective January 1, 2006, the Celera Genomics 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. As a result of thisrestructuring and the manner by which our management now operates and assesses the business, Celera Diagnostics is no longer a separate segment within Applera and we have restated prior period consolidating financial information to reflect this change. See Note 16 to our consolidated financial statements for moreinformation on our segments.
**Principles of Consolidation**
We include the accounts of Applera and all of our majority-owned subsidiaries that we control in our consolidated financial statements. In addition, as required under Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 46R, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,”our consolidation policy requires the consolidation of variable interest entities, or VIEs, in which we are determined to be the primary beneficiary from the date the determination is made. As of June 30, 2006 and 2005, we did not have any investments in VIEs. We have eliminated all significant intracompany transactionsand balances in consolidation.

We have reclassified some prior year amounts in the consolidated financial statements and notes for comparative purposes.
**Use of Estimates**
We prepare our 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 periods.
**Capital Structure**
In fiscal 1999, as part of a recapitalization of our Company, we created two classes of common stock called Applera Corporation-Applied Biosystems Group Common Stock (“Applera-Applied Biosystems stock”) and Applera Corporation-Celera Genomics Group Common Stock (“Applera-Celera stock”). Applera-AppliedBiosystems stock is intended to reflect the relative performance of the Applied Biosystems group, and Applera-Celera stock is intended to reflect the relative performance of the Celera Genomics group.

Holders of Applera-Applied Biosystems stock and holders of Applera-Celera stock are stockholders of Applera. The Applied Biosystems group and the Celera Genomics 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 aresubject to all of the risks associated with an investment in Applera and all of its businesses, assets, and liabilities.

Financial effects arising from one group that affect our consolidated results of operations or consolidated financial position could, if significant, affect the results of operations or financial position of the other group and the per share market price of the class of common stock relating to the other group. Any net losses of theApplied Biosystems group or the Celera Genomics group and dividends or distributions on, or repurchases of, Applera-Applied Biosystems stock or Applera-Celera stock or repurchases of preferred stock of the Company will reduce the assets of Applera legally available for payment of dividends.
**Recently Issued Accounting Standards**
In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 is intended to clarify the accounting for uncertainty in income tax positions. FIN 48 addresses the recognition and measurement of uncertain income tax positions using a “more-likely-than-not” threshold and will also require enhanced disclosures in the financial statements. The provisions of FIN 48 are effective for us beginning July 1, 2007. We are currently evaluating the impact of this Interpretation on our financial statements.
**Earnings (Loss) per Share**
We compute basic earnings (loss) per share for each class of common stock using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. To calculatebasic earnings (loss) per share for each class of common stock, we divide the earnings (losses) allocated to each class of common stock by the weighted average number of outstanding shares of that class of common stock. Diluted earnings (loss) per share is calculated using the weighted average number of outstandingshares of that class of common stock adjusted to include the dilutive effect of common stock equivalents.

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44Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

Dilutive common stock equivalents primarily consist of employee stock options.

Our board of directors approves the method of allocating earnings to each class of common stock for purposes of calculating earnings (loss) per share. This determination is generally based on the net income or loss amounts of the

corresponding group calculated in accordance with GAAP, consistently applied. We believe this method of allocation is systematic and reasonable. Our board of directors can, in its discretion, change the method of allocating earnings (losses) to each class of common stock at any time.
 The following table presents a reconciliation of basic and diluted earnings (loss) per share for the fiscal years ended June 30:   Applied Biosystems Group Celera Genomics Group (Amounts in millions except per share amounts) **2006** 2005 2004 **2006** 2005 2004  Income (loss) from continuing operations **$****275.1** $236.9 $172.3 **$****(62.7****)**$(77.1)$(57.5)Allocated intercompany sales of assets  **0.1**                 Total net income (loss) allocated  **275.2**  236.9  172.3  **(62.7****)** (77.1) (57.5)Less dividends declared on common stock  **31.7**  33.4  34.6           Undistributed earnings (loss) **$****243.5** $203.5 $137.7 **$****(62.7****)**$(77.1)$(57.5) Allocation of basic earnings (loss) per share                   Basic distributed earningsper share* **$****0.17** $0.17 $0.17 **$****—** $— $— Basic undistributed earnings (loss) per share  **1.30**  1.04  0.67  **(0.83****)** (1.05) (0.79) Total basic earnings (loss) per share fromcontinuing operations **$****1.47** $1.21 $0.84 **$****(0.83****)**$(1.05)$(0.79) Allocation of diluted earnings (loss) per share                   Diluted distributed earnings per share* **$****0.17** $0.17 $0.17 **$****—** $— $— Diluted undistributed earnings (loss) per share  **1.26**  1.02  0.66  **(0.83****)** (1.05) (0.79) Total diluted earnings (loss) per share fromcontinuing operations **$****1.43** $1.19 $0.83 **$****(0.83****)**$(1.05)$(0.79) Weighted average number of common shares                   Basic  **187.0**  196.4  204.6  **75.5**  73.4  72.5 Common stock equivalents  **4.9**  2.6  3.7           Diluted  **191.9**  199.0  208.3  **75.5**  73.4  72.5  * Amounts represent actual dividends per share distributed. 
Options to purchase stock at exercise prices greater than the average market prices of our common stocks were excluded from the computation of diluted earnings per share because the effect would have been antidilutive. Additionally, options and warrants to purchase shares of Applera-Celera stock were excluded fromthe computation of diluted loss per share because the effect would have been antidilutive. The following table presents the number of shares excluded from the diluted earnings and loss per share computations at June 30:
(Shares in millions) **2006** 2005 2004  Applera-Applied Biosystems stock  **5.2**  16.5  27.2 Applera-Celera stock  **8.1**  11.9  12.8   **Share-Based Compensation**
Under our share-based compensation plans, we issue stock options, restricted stock and restricted stock units. We also sponsor an employee stock purchase plan. See Note 7 to our consolidated financial statements for further information. Effective July 1, 2005, we adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Share-Based Payment (revised 2004)” for all of our share-based compensation plans. SFAS No. 123R

requires entities to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. We adopted SFAS No. 123R using the modified prospective method of transition. This method requires us to apply the provisions of SFASNo. 123R to new awards from and after our adoption date and to any awards that were unvested as of our adoption date, but did not require us to restate prior periods. For our stock option and restricted stock plans, we recognize compensation expense on a straight-line basis over the requisite service period for the entiregrant. We recognize expense for our employee stock purchase plans as costs are incurred. For the year ended June 30, 2006, total share-based compensation expense and the earnings per share effects of adopting the provisions of SFAS No. 123R were as follows:
(Dollar amounts in millions, except per share amounts) Applera-AppliedBiosystemsStock Applera-CeleraStock  Pre-tax share-based compensation expense **$****11.2** **$****1.5** Tax benefit  **3.4**  **0.3**  Net expense **$****7.8** **$****1.2**  Basic earnings per share **$****0.04** **$****0.02** Diluted earnings per share  **0.04**  **0.02**  
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45Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

The amounts above include pre-tax charges of $8.6 million for the year ended June 30, 2006, for our restricted stock plans, primarily allocated to the Applied Biosystems group, which would have been recorded as compensation expense under Accounting Principles Board Opinion No. (“APB Opinion No.”) 25, “Accountingfor Stock Issued to Employees.” Cash received from option exercises under these plans was $164.4 million and the total intrinsic value of awards exercised and released was $55.8 million for fiscal 2006. In connection with these exercises, we realized a tax benefit of $17.0 million for fiscal 2006.

*Pro Forma Disclosures – Prior to Adoption of SFAS No.* *123R*

Prior to fiscal 2006, we applied the provisions of APB Opinion No. 25 and FIN 44, “Accounting for certain transactions involving stock compensation – an interpretation of Accounting Principles Board No. 25” in accounting for our share-based compensation plans. With the exception of the effect of accelerating the vestingof some stock options in fiscal 2005, under APB Opinion No. 25, we did not record any compensation cost related to stock options since the exercise price of stock options granted to employees, generally, equaled the fair market value of our stock prices at the date of grant. We also did not record any compensationexpense related to our employee stock purchase plans since the provisions of these plans were deemed non-compensatory under APB Opinion No. 25. However, for restricted stock, the intrinsic value as of the grant date was amortized to compensation expense over the vesting period. We recorded pre-tax charges of$3.0 million ($2.0 million net of tax) for fiscal 2005 and $2.9 million ($1.9 million net of tax) for fiscal 2004 for restricted stock under ABP Opinion No. 25.

During fiscal 2005, our board of directors approved the accelerated vesting of substantially all unvested stock options previously awarded to employees, officers, directors, and consultants in light of the new accounting requirements of SFAS No. 123R. In order to prevent unintended personal benefits to directors, officers,and other senior management, the board imposed restrictions on any shares received through the exercise of accelerated options held by those individuals. These restrictions prevent the sale, or any other transfer, of any stock obtained through exercise of an accelerated option prior to the earlier of the original vesting dateor the individual’s termination of employment.

Our board of directors approved the accelerated vesting based on the belief that it was in the best interest of stockholders as it will reduce our reported compensation expense commencing July 1, 2005, with the adoption of SFAS No. 123R. As a result of the acceleration, during fiscal 2005, the Applied Biosystems grouprecorded a pre-tax charge of $1.6 million and the Celera Genomics group recorded a pre-tax charge of $1.0 million of compensation cost that represents the intrinsic value measured at the relevant acceleration dates for the estimated number of awards that, absent the accelerated vesting, would have expiredunexercisable. As a result of the accelerated vesting, options to purchase approximately 14.0 million shares of Applera-Applied Biosystems stock and approximately 3.6 million shares of Applera-Celera stock became exercisable immediately during fiscal 2005. Our pro forma tables below include the acceleration of theunamortized portion of unvested stock options, which resulted in an additional pre-tax amount of approximately $98 million for the Applied Biosystems group and approximately $19 million for the Celera Genomics group for fiscal 2005.

 

For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options’ vesting period. The following tables illustrate the effect on reported income (loss) from continuing operations and earnings (loss) per share as if we had applied the fair value method of accounting foremployee stock plans as required by SFAS No. 123 for the fiscal years ended June 30:

 
  Applera Corporation (Dollar amounts in millions) 2005 2004  Income from continuing operations, as reported $159.8 $115.0 Add:Share-based employee compensation expense included in reported income from continuing operations, net of tax  4.3  1.9 Deduct:Share-based employee compensation expense determined under fair value based method, net of tax  170.5  120.9  Pro forma loss from continuing operations $(6.4)$(4.0)   
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46Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
  Applied Biosystems Group Celera Genomics Group (Dollar amounts in millions except per share amounts) 2005 2004 2005 2004  Income (loss) from continuing operations, as allocated $236.9 $172.3 $(77.1)$(57.5)Add:Share-based employee compensation expense included in reported income (loss) from continuing operations, net of tax  2.7  1.2  1.6  0.7 Deduct:Share-based employee compensation expense determined under fair value based method, net of tax  141.9  97.6  28.6  23.3  Pro forma income (loss) from continuing operations $97.7 $75.9 $(104.1)$(80.1) Earnings (loss) per share from continuing operations             Basic — as reported $1.21 $0.84 $(1.05)$(0.79)Basic — pro forma  0.50  0.37  (1.42) (1.10)Diluted — as reported  1.19  0.83  (1.05) (0.79)Diluted — pro forma  0.49  0.36  (1.42) (1.10) 
We estimate the fair value of our options using the Black-Scholes option pricing model, which was developed for use in estimating the value of freely-traded options that have no vesting restrictions and are fully transferable. Similar to other option pricing models, this model requires the input of highly-subjective assumptions,including the stock price volatility. Our options have characteristics significantly different from traded options, and changes in the input assumptions can materially affect the fair value estimates. The fair value of the options was estimated at the grant date with the following weighted average assumptions for the fiscal yearsended June 30:
  **2006** 2005 2004  **Applied Biosystems Group**          Dividend yield  **0.7%**  0.9%  0.8% Volatility  **24%**  62%  71% Risk-free interest rate  **4.5%**  3.6%  3.8% Expected option life in years  **4**  5  5 Weighted average fair value per option granted **$****6.31** $11.15 $12.32  **Celera Genomics Group**          Volatility  **35%**  43%  66% Risk-free interest rate  **4.3%**  3.6%  3.8% Expected option life in years  **5**  4  4 Weighted average fair value per option granted **$****4.36** $3.90 $6.05  
Prior to fiscal 2006, we determined the expected term of our options primarily based on the average life of our options for both Applera-Applied Biosystems stock and Applera-Celera stock. With the adoption of SFAS No. 123R in fiscal 2006, we determined the expected term of our options based on historical exercisepatterns, which factored in the historical weighted average holding period from grant date to settlement date and from vest date to exercise date. We used the historical exercise patterns to project future settlement of outstanding options. As a result, the expected option life for Applera-Applied Biosystems stock decreasedfrom five to four years and increased from four to five years for Applera-Celera stock.

Prior to fiscal 2006, we determined expected volatility over the expected term based on historical volatilities of our two 

     

classes of common stock. With the adoption of SFAS No. 123R, we continue to determine expected volatility based on historical volatilities, but have incorporated some adjustments, as noted below, related to the Celera Genomics group. In addition, under SFAS No. 123R, we began using a mean reversion analysis, whichwe believe provides a better estimate of current and future volatility rate expectations for our classes of stock. The volatility rate for Applera-Applied Biosystems stock decreased from the prior year primarily as a result of the decline in the expected option life as discussed in the preceding paragraph. We believe that themethodology used to determine the historical volatility for Applera-Celera stock under APB Opinion No. 25, which included the impact during the time period of the sequencing and publication of the human genome by the Celera Genomics group, resulted in extraordinary volatility in the Celera Genomics group’s stock price.As such, with the adoption of SFAS No. 123R, we excluded this unusually volatile period from our mean-reversion analysis for fiscal years commencing with 2006.
**Foreign Currency**
We translate assets and liabilities of foreign operations, where the functional currency is the local currency, into U.S. dollars at the fiscal year-end currency rates. We record the related translation adjustments as a separate component of accumulated other comprehensive income (loss) in the Consolidated Statements ofFinancial Position. We translate foreign currency revenues and expenses using average currency rates prevailing during the fiscal year. Foreign currency transaction gains and losses are included in net income. Transaction gains and losses occur from fluctuations in exchange rates when assets and liabilities are denominatedin currencies other than the functional currency of an entity. Net transaction gains were $5.7 million for fiscal 2006, net transaction gains were $3.4 million for fiscal 2005, and net transaction losses were $0.6 million for fiscal 2004. Net transaction gains and losses include the gains and losses on the revaluation of non-functional currency-denominated net assets offset by the losses and gains on non-qualified hedges on these positions. See Note 11 to our consolidated financial statements for further information on our hedging program.

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47Notes to Consolidated Financial Statements — (Continued)Applera Corporation **Derivative Financial Instruments**
We use derivative financial instruments to minimize exposure to market risks arising from changes in currency rates. We used forward, option, and range forward contracts as our derivative financial instruments during fiscal 2006 and 2005 (see Note 11 to our consolidated financial statements).
**Cash and Cash Equivalents and Short-Term Investments**
Our cash equivalents consist of highly liquid debt instruments, time deposits, and certificates of deposit with original maturities of three months or less at the date of purchase. These instruments are readily convertible into cash.

All short-term investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses included as a separate component of stockholders’ equity, net of any related tax effect. Investments with maturities beyond one year may be classified as short-term based on their highly liquid natureand because such marketable securities represent the investment of cash that is readily available for current operations should it be needed. We use the specific identification method to determine the cost of securities disposed of, with realized gains and losses recorded in other income (expense), net in the ConsolidatedStatements of Operations.

The fair value of short-term investments and unrealized gains (losses) at June 30, 2006 and 2005, was as follows:
(Dollar amounts in millions) **2006** 2005  Certificates of deposit and time deposits **$****30.3** $18.8 Commercial paper  **39.3**  54.8 U.S. government and agency obligations  **182.3**  326.1 Corporate bonds  **161.3**  180.4 Asset backed securities  **96.1**  65.0  Total short-term investments **$****509.3** $645.1  Unrealized gains on investments **$****0.1** $0.1 Unrealized losses on investments  **(3.6****)** (2.5) 
The realized gains and losses associated with our short-term investments for the fiscal years ended June 30 were as follows:
(Dollar amounts in millions) **2006** 2005 2004  Realized gains on investments **$****0.1** $0.1 $0.3 Realized losses on investments  **(0.1****)** (0.2) (0.3) 
The following table summarizes the contractual maturities of available-for-sale securities at June 30:
(Dollar amounts in millions) **2006**  Less than one year **$****251.8** Due in one to two years  **114.3** Due in two to five years  **137.8** Over five years  **5.4**  Total **$****509.3**  
We also held securities that are classified as trading at June 30, 2006 and 2005, which were recorded at fair value with realized and unrealized gains and losses included in income. These securities are recorded in other current assets. Included in income were unrealized net gains of $2.6 million during fiscal 2006 andunrealized losses of $1.9 million during fiscal 2005.
**Investments**
We account for investments in business entities in which we have the ability to exercise significant influence over operating and financial policies (generally 20% to 50% ownership) using the equity method of accounting. Under the equity method of accounting, we record investments at cost and we adjust for dividends andundistributed earnings and losses. As of June 30, 2006 and 2005, we did not have any investments in VIEs.

We classify investments for which we do not have the ability to exercise significant influence as minority equity investments. We account for non-marketable minority equity investments using the cost method of accounting. We generally classify minority equity investments in public companies as available-for-sale and carrythem at market value in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” We use the specific identification method to determine the cost of securities disposed of. Under the cost method of accounting, we carry investments in equity securities at cost and adjust only forother-than-temporary declines in fair value, distributions of earnings and additional investments.
**Inventories**
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Cost is determined principally on the standard cost method for manufactured goods which approximates cost on the first-in, first-out method. Reserves for obsolescence and excess inventory are provided based on historical experience andestimates of future product demand. Inventories at June 30, 2006 and 2005, included the following components:
(Dollar amounts in millions) **2006** 2005  Raw materials and supplies **$****44.3** $45.9 Work-in-process  **12.8**  5.3 Finished products  **80.6**  75.3  Total inventories, net **$****137.7** $126.5  
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48Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Property, Plant and Equipment, and Depreciation**
Property, plant and equipment are recorded at cost and consisted of the following at June 30, 2006 and 2005:
(Dollar amounts in millions) **2006** 2005  Land and improvements **$****117.4** $117.6 Buildings and leasehold improvements  **272.5**  288.4 Machinery and equipment  **269.2**  306.5 Computer software and licenses  **151.1**  133.9  Property, plant and equipment, at cost  **810.2**  846.4 Accumulated depreciation and amortization  **413.8**  408.0  Property, plant and equipment, net **$****396.4** $438.4  
We capitalize major renewals and improvements that significantly add to productive capacity or extend the life of an asset. We expense repairs, maintenance, and minor renewals and improvements as incurred. We remove the cost of assets and related depreciation from the related accounts on the balance sheet whensuch assets are disposed of, and any related gains or losses are reflected in current earnings.

We compute depreciation expense of owned property, plant and equipment based on the expected useful lives of the assets primarily using the straight-line method. We amortize leasehold improvements over their estimated useful lives or the term of the applicable lease, whichever is less. Useful lives are generally five toten years for land improvements, 30 to 40 years for buildings, and three to seven years for machinery and equipment. We amortize capitalized internal-

use software costs primarily over the expected useful lives, not to exceed seven years. Depreciation expense for property, plant and equipment was $73.8 million for fiscal 2006, $82.5 million for fiscal 2005, and $94.9 million for fiscal 2004. During fiscal 2006, the Celera Genomics group recorded $9.8 million ofimpairment charges, of which $1.8 million was recorded in the fourth quarter of fiscal 2006, related to the closure of its South San Francisco, California facilities. In addition, the Applied Biosystems group recorded $2.6 million of impairment charges in fiscal 2005 related to its San Jose, California, and Houston, Texasfacilities. Included in this charge was $1.9 million of property, plant and equipment. These charges are included in employee-related charges, asset impairments and other in the Consolidated Statements of Operations. See Note 2 to our consolidated financial statements for more information.
**Capitalized Software**
We capitalize and include in other long-term assets software development costs for software used in our products which are incurred from the time technological feasibility of the software is established until the software is ready for its intended use. We amortize these costs using the straight-line method over a maximumof three years or the expected life of the product, whichever is less. Capitalized software costs, net of accumulated amortization, were $2.1 million at June 30, 2006, and $2.8 million at June 30, 2005. Amortization expense was $1.6 million in fiscal 2006, $6.9 million in fiscal 2005, and $13.6 million in fiscal 2004. Weexpense R&D costs and other computer software maintenance costs related to software development as incurred.

 
**Intangible Assets**
We amortize intangible assets using the straight-line method over their expected useful lives. Intangible assets at June 30, 2006 and 2005, included the following:
     **2006** 2005 (Dollar amounts in millions)  WeightedAverage Life  GrossCarryingAmount  AccumulatedAmortization  GrossCarryingAmount  AccumulatedAmortization  Amortized intangible assets:                Acquired technology  **6**  **$**  **83.3**  **$44.5**  $60.5  $42.7 Patents  **7**  **29.9**  **22.9**  25.5  20.7 Customer relationships  **7**  **27.1**  **1.6**       Favorable operating leases           11.6  10.5 Other     **0.3**  **0.3**        Total amortized intangible assets     **140.6**  **69.3**  97.6  73.9  Unamortized intangible assets:                Trade name     **4.9**           Total     **$145.5**  **$69.3**  $97.6  $73.9    
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49Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

Aggregate amortization expense for the fiscal years ended June 30, 2006 and 2005, was as follows:
(Dollar amounts in millions) **2006** 2005  Applied Biosystems group **$****11.6** $7.0 Celera Genomics group  **3.3**  5.0  Consolidated **$****14.9** $12.0  
We record amortization expense in cost of sales and SG&A. However, amortization of acquisition-related intangible assets is recorded in the amortization of purchased intangible assets in the Consolidated Statements of Operations. At June 30, 2006, we estimated annual amortization expense of our intangible assets foreach of the next five fiscal years to be as shown in the following table. Future acquisitions or impairment events could cause these amounts to change.
(Dollar amounts in millions) AppliedBiosystemsGroup CeleraGenomicsGroup Consolidated  2007 **$****16.9** **$****2.2** **$****19.1** 2008  **13.9**  **0.6**  **14.5** 2009  **12.6**  **0.2**  **12.8** 2010  **10.2**  **0.2**  **10.4** 2011  **6.5**  **0.1**  **6.6**  
In connection with the acquisition    of the Research Products Division of Ambion Inc. (“Ambion”), we acquired the Ambion trade name that we determined to be indefinitely lived. This intangible asset is tested for impairment as part of our annual goodwill impairment test as discussed below.
**Goodwill**
Goodwill represents the excess purchase price over the net asset value of companies acquired. We test goodwill for impairment using a fair value approach at the reporting unit level annually, or earlier if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit belowits carrying amount. A reporting unit can be an operating segment or a business if discrete financial information is prepared and reviewed by management. Under the impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the reporting unit’scarrying amount of goodwill exceeds the implied fair value of the goodwill.
(Dollar amounts in millions) AppliedBiosystemsGroup CeleraGenomicsGroup Consolidated  Balance as of June 30, 2005  $  36.7  $2.7  $  39.4 Goodwill recorded as part of the acquisition of Ambion  **206.5**     **206.5**  Balance as of June 30, 2006  **$243.2**  **$2.7**  **$245.9**  
Refer to Note 3 to our consolidated financial statements for information on the goodwill we acquired in connection with the Ambion acquisition.
**Impairment of Long-Lived Assets**
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events which could trigger an impairment review include, among others, a decrease in the market value of an asset, an asset’s inability to generate income fromoperations and positive cash flow in future periods, a decision to change the manner in which an asset is used, a physical change to an asset or a change in business climate. We calculate estimated future undiscounted cash flows, before interest and taxes, resulting from the use of the asset and its estimated value atdisposal and compare it to its carrying value in determining whether impairment potentially exists. If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based on a valuation model and discount rate commensurate with the risks involved. Third partyappraised values may also be used in determining whether impairment potentially exists.
**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 warrantyaccrual 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 the analysis of the warranty reserve for the fiscal years ended June 30, 2006 and 2005:
(Dollar amount in millions) **2006** 2005  Beginning of year **$****14.0** $15.9 Accruals for warranties  **16.6**  21.9 Usage of reserve  **(16.9****)** (22.8)Other*  **(3.1****)** (1.0) End of year **$****10.6** $14.0  * Other consists of accrual adjustments to reflect actual experience and currency translation. **Revenues**
We record revenue on entering into a final agreement with the customer that includes the specific nature and terms of the revenue-generating activity and for which collectibility is reasonably assured, which is generally at the time of shipment of products or performance of services. Concurrently, we record provisions forwarranty, returns, and installation based on historical experience and anticipated product performance. Discounts are recorded as sales reductions concurrently with the applicable sale. Cash discounts are recorded as sales reductions on our receipt of the sales proceeds. Deferred revenues consist of

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50Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

prepayments for service contracts and subscription agreements. Revenue is not recognized at the time of shipment of products in situations where risks and rewards of ownership are transferred to the customer at a point other than shipment due to the shipping terms, the existence of an acceptance clause, theachievement of milestones, or some return or cancellation privileges. Revenue is recognized once customer acceptance occurs or the acceptance provisions lapse. Service revenue is recognized over the period services are performed. Amounts billed to customers related to shipping and handling are included in net revenues,whereas shipping and handling costs are included in cost of sales.

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

Under sales-type or direct financing lease agreements, revenue is recognized at the time of shipment, and the difference between the gross investment in the lease and the sales price of the property is deferred and amortized over the lease term using the interest method. These transactions represent an insignificantportion of our consolidated revenues.

We recognized revenue on subscription fees for access to our on-line information databases as part of the Celera Discovery SystemTM (“CDS”) ratably over the contracted period.

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

A substantial portion of the Celera Genomics group reported net revenues consists of equalization payments from Abbott Laboratories resulting from a profit and loss sharing arrangement between the Company and Abbott. All revenues, costs and expenses of the alliance are shared

equally by both parties. At the end of each reporting period the two companies compare a statement of revenues and expenses for alliance activities recorded by each party. A calculation is made to determine the amount that needs to be paid to evenly split both the revenue and expenses. This payment is referred to as theequalization payment and is recorded as revenue by the Celera Genomics group. The timing and nature of equalization payments can lead to fluctuations in both reported revenues and gross margins from period to period due to changes in end-user revenues of alliance products and differences in relative operating expensesbetween the alliance partners.
**Research, Development and Engineering**
We expense research, development and engineering costs as incurred. Research, development and engineering expenses include salaries and benefits, supplies and materials, facilities costs, equipment depreciation, contract services, allocations of various corporate costs and other outside costs.
**Supplemental Cash Flow Information**
Cash paid for interest and income taxes and significant non-cash investing and financing activities for the following fiscal years ended June 30 were as follows:
(Dollar amounts in millions) **2006** 2005 2004  Interest **$****0.1** $0.2 $1.3 Income taxes  **48.6**  58.0  52.8 Significant non-cash investing and financing activities:          Tax benefit related to employee stock options  **17.0**  5.5  3.4 Dividends declared not paid  **7.7**       Issuances of restricted stock     0.8  6.6 Stock issued for which proceeds were in-transit  **3.1**  0.9  0.5    **Note** **2—Events Impacting Comparability**
We are providing the following information on some actions taken by us or events that occurred during the fiscal years ended June 30:
Income/(charge)          (Dollar amounts in millions) **2006** 2005 2004  Severance and benefit costs **$****(14.3****)**$(24.7)$(6.3)Asset          impairments ** ****(10.9****)** (0.8) (36.1)Excess lease space  **(1.2****)** (10.0)   Other  **(2.6****)**      Reduction of expected costs  **2.5**  1.1  0.6  Total employee-related charges, asset impairments, and other **$****(26.5****)**$(34.4)$(41.8) 
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51Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Employee-Related Charges, Asset Impairments,       and Other**
The following items have been recorded in the Consolidated Statements of Operations in employee-related charges, asset impairments and other, except as noted.
*Fiscal 2006*
In 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 business, a 50/50 joint venture between the Applied Biosystems group and MDS Inc. MDS recorded a restructuring charge for a reduction in workforceas part of its strategy to focus on the life sciences market. The $1.5 million represents the Applied Biosystems group’s share of the restructuring charge.

Also in 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 current estimated market value less estimated selling costs. This charge was in addition to the charge recorded in fiscal 2005 described below. Inthe fourth quarter of fiscal 2006, the Applied Biosystems group completed the sale and recognized a $0.9 million pre-tax favorable adjustment to the charges previously recorded based on the actual sales price per the agreement. Please see Note 8 to our consolidated financial statements for additional information.

During fiscal 2006, the Celera Genomics 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 Genomics group. These charges consisted of the following components:
(Dollar amounts in millions) Employee-RelatedCharges AssetImpairments ExcessLeaseSpace OtherDisposalCosts 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**  
The employee-related charges were severance costs primarily for staff reductions in small molecule drug discovery and development. 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. As of March 31, 2006, all of the affected employees were notified and substantially all were terminated by July 31, 2006. Cash expenditures were funded by available cash. The remaining cash expenditures related to these charges are expected to be disbursed byDecember 2006.
*Fiscal 2005*
During fiscal 2005, the Applied Biosystems group recorded pre-tax charges consisting of the following components:
(Dollar amounts in millions) Employee-RelatedCharges ExcessLeaseSpace AssetImpairments Total  First quarter $7.3 $— $— $7.3 Second quarter  2.9  2.3     5.2 Fourth quarter  11.6  6.2  2.6  20.4  Total charges  21.8  8.5  2.6  32.9  Cash payments  10.5  0.2     10.7 Non-cash activity     5.2  1.9  7.1 Reduction of expected costs  0.3        0.3  Balance          at June 30, 2005  11.0  3.1  0.7  14.8  Cash payments  **9.5**  **1.4**  **0.3**  **11.2** Reduction of expected costs   and other  **1.4**     **0.4**  **1.8**  Balance          at June 30, 2006 **$****0.1** **$****1.7** **$****—** **$****1.8**  
The fiscal 2005 severance charges reflected the Applied Biosystems group’s decision to reduce and rebalance its workforce and were implemented as a result of a strategic and operational analysis conducted by management. The positions eliminated were primarily in the areas of R&D, manufacturing, marketing, andoperations. These actions were intended to allow us to expand personnel in other functional areas including field sales and support, manufacturing quality, and advanced research, as well as to better align our resources with the needs of our customers. Additionally, the severance charges recorded in the first and secondquarters related, in part, to staff reductions intended to integrate the Applied Biosystems MALDI TOF product line into the Applied Biosystems/MDS Sciex Instruments joint venture with MDS Inc. We took these actions to improve operational efficiency and quality, while assuring that our R&D spending remains aligned withour strategic initiatives.

As of June 30, 2005, all of the employees affected by the first and second quarter staff reductions had been terminated. By March 31, 2006, all of the employees affected by the fourth quarter staff reduction were terminated. During 2006, we made cash payments of $9.5 million, the majority of which related to thefourth quarter termination charge. In regards to the excess lease space charges, through June 30, 2006, we made cash payments of $0.4 million related to the second quarter charge and $1.0 million related to the fourth quarter charge. These cash expenditures were funded by cash provided by operating activities. In thethird quarter of fiscal 2005, the Applied Biosystems group recorded a pre-tax benefit of $0.1 million for a reduction in anticipated employee-related costs associated with the severance and benefit charge recorded in the first quarter of fiscal 2005. In fiscal 2005, the Applied Biosystems group recorded a pre-tax benefit of$0.2 million for a reduction in anticipated employee-related costs associated with the severance and benefit charge recorded in the second quarter of fiscal 2005.

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52Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

The excess lease space charges represented the estimated cost of excess lease space less estimated future sublease income for some leased facilities in Massachusetts and California whose leases extend through fiscal years 2007 to 2011. The asset impairment charges taken in the fourth quarter related to the write-downin value of the Applied Biosystems group’s facilities in San Jose, California, and Houston, Texas. As noted above, the Applied Biosystems group recorded an additional impairment charge as well as a favorable adjustment to the charges related to the San Jose facility in fiscal 2006. See Note 8 to our consolidated financialstatements for more information on our San Jose, California facility.

During fiscal 2005, the Celera Genomics group recorded pre-tax charges totaling $4.5 million related to our decision to discontinue promotion of products and most operations of Paracel, Inc., a business we acquired in fiscal 2000. Paracel developed high-performance genomic data and text analysis systems for thepharmaceutical, biotechnology, information services, and government markets. Due to a shift in focus, Paracel was no longer deemed strategic to the overall business. The charge consisted of $1.1 million for severance and benefit costs, $1.7 million for excess facility lease expenses and asset impairments, and$1.7 million in cost of sales for the impairment of inventory. The charge for excess facility lease expenses and asset impairments was primarily for a revision to an accrual initially recorded in fiscal 2002 for the estimated cost of excess facility space for a lease that extends through fiscal 2011 and to write off related fixedassets.

As of March 31, 2005, the majority of the affected Paracel employees were terminated. Substantially all cash payments related to these terminations were made as of June 30, 2005. Through June 30, 2006, we made cash payments of $2.1 million related to the excess lease space charge. The cash expenditures werefunded by available cash. The remaining cash expenditures related to this charge of approximately $3.0 million are expected to be disbursed by fiscal 2011.

In fiscal 2005, the Celera Genomics group recorded a pre-tax charge of $3.4 million related to the Online/Information Business, an information products and service business. The Celera Genomics group realigned its organization based on a change in its business focus and as part of this realignment, the Online/InformationBusiness was determined to be non-strategic. The pre-tax charge of $3.4 million consisted of $1.8 million for severance and benefit costs and $1.6 million for asset impairments, primarily related to information-technology leases. As of June 30, 2005, all affected employees were notified and by the end of the firstquarter of fiscal 2006, all were terminated. In the fourth quarter of fiscal 2006, the Celera Genomics group recorded a pre-tax benefit of $0.2 million for a reduction in anticipated severance and benefit costs. All cash expenditures related to this action were disbursed by the end of fiscal 2006.
*Fiscal 2004*
During fiscal 2004, the Applied Biosystems group recorded pre-tax charges of $6.3 million for employee terminations. All cash payments were made by March 31, 2005. The cash payments were funded primarily from cash provided by operating activities.

In fiscal 2004, the Applied Biosystems group recorded pre-tax charges of $14.9 million for the impairment of patents and acquired technology related to Boston Probes, Inc., a business we acquired in fiscal 2002. As a result of a strategic and operational review, we determined, during fiscal 2004, that the intellectualproperty was not expected to lead to feasible commercialization of the products that we had originally envisioned when we purchased Boston Probes. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the impairment charge represented the amount by which the carryingamount of the assets exceeded their fair value. The fair value was based on estimated undiscounted future cash flows relating to the existing service potential of those assets.

Additionally in fiscal 2004, the Applied Biosystems group recorded pre-tax charges of $4.4 million for asset write-downs and other expenses related to the decision to transfer the 8500 Affinity Chip Analyzer product line to HTS Biosystems, Inc., its development partner for this product line. The $4.4 million charge consistedof $3.2 million for write-downs of fixed assets and other charges and $1.2 million for the impairment of inventory recorded in cost of sales. The Applied Biosystems group had entered into a collaboration and commercialization agreement for this product line with HTS Biosystems in fiscal 2002. As a result of a change instrategic direction and focus at the Applied Biosystems group, as determined during the previously mentioned review, we determined that the inventory and fixed assets related to this product line had no net realizable value. Additionally, we wrote off a loan and accrued the final payments based on our decision to terminatethe agreement with HTS Biosystems. In fiscal 2005, the Applied Biosystems group recorded a pre-tax benefit of $0.7 million as a result of the repayment of this loan by HTS Biosystems.

During fiscal 2004, the Celera Genomics group decided to pursue the sale of its Rockville, Maryland facility. As a result of this decision, we classified the related assets as assets held for sale within prepaid expenses and other current assets. In connection with the decision to sell the Rockville facility, the Celera Genomicsgroup recorded a pre-tax impairment charge of $18.1 million during fiscal 2004. This charge represented the write-down of the carrying amount of the facility to its estimated market value less estimated costs to sell. The estimated market value was based on a third-party appraisal. During fiscal 2005, the Celera Genomicsgroup completed the sale of this facility and recorded a $3.6 million pre-tax favorable adjustment to the charge recorded in fiscal 2004.

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53Notes to Consolidated Financial Statements — (Continued)Applera Corporation*Other*
During fiscal 2003, the Applied Biosystems group recorded charges for organization-wide cost reductions. As of June 30, 2006, we had remaining cash payments of $0.5 million for severance and employee benefits related to these charges. The majority of the remaining payments are expected to be disbursed during fiscal2007.
**Other Events Impacting Comparability** *Revenue from the sales of small molecule programs*
In the fourth quarter of fiscal 2006, the Celera Genomics group recorded pre-tax gains of $8.6 million in net revenues from the sales of some small molecule drug discovery and development programs, primarily to Pharmacyclics, Inc. and Schering AG.
*Asset dispositions and legal settlements*
The following items have been recorded in the Consolidated Statements of Operations in asset dispositions and legal settlements.

In fiscal 2006, we established, with Beckman Coulter, the terms of a settlement to resolve all outstanding legal disputes between us regarding claims to some patented capillary electrophoresis technology and heated cover instrumentation technology. As part of the settlement, the parties agreed to grant royalty-bearinglicenses to each other. Additionally, the Applied Biosystems group made a payment of $35 million to Beckman Coulter 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. As a result of this settlement, we recordeda pre-tax charge of $35.0 million. Commencing in July 2006, Beckman Coulter began making quarterly payments which will total $20 million over ten quarters to the Celera Genomics group for diagnostic rights to some Applera technology.

Also in 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-Radagainst 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.

Additionally in fiscal 2006, we recorded a $26.6 million pre-tax charge related to a litigation matter and related to an award in an arbitration proceeding with Amersham Biosciences, now GE Healthcare. We recorded the pre-tax charge as follows: $25.9 million at the Applied Biosystems group and $0.7 million at the CeleraGenomics group. We paid all amounts related to the arbitration matter in January 2006. The arbitration matter involved the interpretation of a license agreement relating to DNA sequencing reagents and kits. Amersham had alleged, among other things, that the Applied Biosystems group had underpaid royalties under the

license agreement. 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 $23.5 millionin fiscal 2006, $22.6 million of which was recorded in asset dispositions and legal settlements.

In the fourth quarter of fiscal 2006, the Applied Biosystems group recorded a pre-tax gain of $16.9 million from the sale of a vacant facility in Connecticut. This facility was previously used for manufacturing and administration.

During fiscal 2005, the Applied Biosystems group recorded a net pre-tax gain of $29.7 million for the sale of intellectual property, manufacturing inventory, and research and development assets related to the expansion of the scope of the Applied Biosystems/MDS Sciex Instruments joint venture. Under the terms of thetransaction, we received $8 million in cash and a $30 million note receivable for a 50 percent interest in intellectual property assets related to current Applied Biosystems MALDI TOF mass spectrometry systems and next-generation product-related manufacturing and research and development assets. The note receivableis due in 5 years, of which $6 million is payable in October 2006 and $8 million in October 2007, 2008, and 2009.

Also in fiscal 2005, the Applied Biosystems group received a payment of $8.5 million from Illumina, Inc. in connection with the termination of a joint development agreement and settlement of patent infringement and breach of contract claims.

In March 2004, the Applied Biosystems group and MDS Inc., through the Applied Biosystems/MDS Sciex Instruments joint venture, received a payment of $18.1 million from Waters Technologies Corporation in connection with the resolution of patent infringement claims between the parties. The Applied Biosystems grouprecorded a net gain of $6.7 million from legal settlements, including its share of this payment, in fiscal 2004.
*Acquired research and development*
During fiscal 2006, the Applied Biosystems group recorded a $3.4 million charge to write-off the value of acquired in-process research and development (“IPR&D”) in connection with the acquisition of Ambion. As of the acquisition date, the technological feasibility of the related projects had not been established, and it wasdetermined that the acquired projects had no future alternative uses. The determination of the amount attributed to acquired IPR&D took into consideration an independent appraisal performed by a third party. See Note 3 to our consolidated financial statements for more information on this acquisition.
*Investments*
The following gains have been recorded in the Consolidated Statements of Operations in gain (loss) on investments, net, except as noted.

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54Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

The Celera Genomics group recorded pre-tax gains of $7.6 million in fiscal 2006 from the sale of non-strategic minority equity investments. The Celera Genomics group recorded a pre-tax gain of $24.8 million in fiscal 2004 from the sale of its investment in Discovery Partners International, Inc. (“DPI”) common stock. Ourinvestment in DPI common stock, which resulted from our acquisition of Axys Pharmaceuticals, Inc. in fiscal 2002, had been accounted for under the equity method of accounting.

The Applied Biosystems group recorded pre-tax gains of $11.2 million in fiscal 2004, related primarily to the sales of minority equity investments. These investment sales resulted from management’s decision to liquidate non-strategic investments.
*Tax items*
In fiscal 2006, the Applied Biosystems group recorded a tax benefit of $13.5 million related to the resolution of transfer pricing matters in Japan. Additionally, the Applied Biosystems group recorded a net tax charge of $26.6 million, which included a $1.4 million favorable adjustment recorded in the fourth quarter of fiscal2006, related to repatriation of $476.4 million of foreign earnings. Also in 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 thefiscal 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 statedeferred 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 impacts of a change in the apportionment of income to California, a reduction in R&D spending, and increasedrevenues and profits from our 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 fiscal 2005, the Applied Biosystems group recorded tax benefits of $23.5 million primarily related to additional U.S. R&D tax credit carryforwards, expected results of Canadian examinations, and settlement of some U.K. tax matters. Also during fiscal 2005, the Celera Genomics group recorded a tax benefit of$2.2 million related to additional U.S. R&D tax credits.

 
**Note** **3—Acquisitions** *Completed acquisition*
Effective March 1, 2006, we acquired the Research Products Division of Ambion, Inc. for approximately $279 million in cash, including transaction costs. Ambion,

which is based in Austin, Texas, is a provider of innovative products for the study and analysis of ribonucleic acid (RNA) for life science research and drug development. The Ambion products are used by researchers to study RNA and its role in disease development and progression. This acquisition is intended to drivegrowth by enabling us to deliver more complete customer workflow solutions and by expanding the Applied Biosystems group’s consumables product offering. We expect that Ambion’s RNA R&D expertise, consumables manufacturing capabilities, and culture of scientific innovation will complement our existing strengths.Ambion will continue to be based in Austin, Texas.

We allocated the purchase price of $279.4 million to tangible net assets and intangible assets as follows:
(Dollar amounts in millions)    Current assets**$****27.4** Long-term assets **16.0** Current liabilities **(8.2****)**Long-term liabilities **(22.8****)** Tangible net assets acquired, at       approximate fair value **12.4**  Goodwill **206.5** Customer relationships **27.1** Existing technology **24.8** Trade name **4.9** Acquired IPR&D **3.4** Purchase order backlog **0.3**  Total intangible assets **267.0**  Total purchase price**$****279.4**  
We are amortizing the recorded values of the intangible assets, other than the acquired IPR&D and the trade name, over their expected period of benefit, which on a weighted average basis is 5.5 years. An established client list, a recognized company name in the RNA field, a strong scientific employee base, and operationsin a complementary consumables business were among the factors that contributed to a purchase price resulting in the recognition of goodwill. The goodwill and the trade name will be tested for impairment as part of our annual impairment test at the reporting unit level. In fiscal 2006, the Applied Biosystems grouprecorded approximately $4 million of amortization of intangible assets related to this acquisition and a $3.4 million charge to write-off the value of acquired IPR&D (see Note 2 to our consolidated financial statements) from this acquisition. We recorded a $7.2 million deferred tax asset, included in current assets, and a$22.8 million deferred tax liability, included in long-term liabilities, for net operating loss carryforwards and other temporary differences of Ambion that we expect to use. The goodwill recognized will not be deductible for federal income tax purposes.

 

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55Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

The net assets and results of operations of Ambion have been included in our consolidated financial statements since the date of the acquisition, and have been allocated to the Applied Biosystems group. The following selected unaudited pro forma financial information for Applera and the Applied Biosystems group has been    prepared assuming the acquisition had occurred at the beginning of fiscal 2005 and gives effect to purchase accounting adjustments:
(Dollar amounts in millions except per share amounts)**2006** 2005  **Applera Corporation**      Net revenues**$****1,986.5** $1,893.6 Net income **197.2**  153.0  **Applied Biosystems Group**      Net revenues**$****1,948.3** $1,835.6 Net income, as allocated **259.8**  230.1 Basic earnings per share **1.39**  1.17 Diluted earnings per share **1.35**  1.16 
There was no financial impact to the Celera Genomics group related to this acquisition.

On consummation of the acquisition, the Applied Biosystems group recorded a $3.4 million non-cash charge to write-off the value of acquired IPR&D, which has been included in the pro forma results above. This unaudited pro forma data is for informational purposes only and may not be indicative of the actual results that    would have occurred had the acquisition been consummated at the beginning of fiscal 2005 or of the future operations of the combined companies.
*Fiscal 2007 acquisition*
In May 2006, we signed a definitive agreement to acquire Agencourt Personal Genomics (“APG”) for approximately $120 million in cash. APG is a privately-held developer of next-generation genetic analysis technology. APG’s proprietary technology is based on stepwise ligation, a novel and extremely high throughput    approach to DNA analysis. We believe that the products arising from this acquisition will complement, rather than replace the Applied Biosystems group’s current capillary electrophoresis instruments and will be applicable to many genetic analysis applications, including *de novo* genome sequencing, medical sequencing, high    throughput gene expression and high

throughput genotyping. We expect the two technologies to be complementary, because different types of experiments may require the different attributes of each technology. The acquired APG operations and personnel will continue to be based in Beverly, Massachusetts.

This transaction closed in July 2006. The net assets and results of operations of APG will be included in our consolidated financial statements from the date of the acquisition, and will be allocated to the Applied Biosystems group.
**Note** **4—Income Taxes**
Income before income taxes from continuing operations for fiscal 2006, 2005, and 2004 is summarized below:
(Dollar amounts inmillions)**2006**20052004Domestic***$****508.1** $14.9$19.6 Foreign **154.2**  158.4 169.7 Elimination of intercompany dividends **(447.1****)**   (59.8) Total**$****215.2** $173.3$129.5 * U.S. and foreign entities includable in U.S. returns.
Our provision (benefit) for income taxes from continuing operations for fiscal 2006, 2005, and 2004 consisted of the following:
(Dollar amounts inmillions)**2006**20052004**Currently Payable**         Domestic**$****8.0** $(1.7)$17.7 State **2.1**  2.5  3.1 Foreign **35.3**  47.6  43.0  Total currently payable **45.4**  48.4  63.8  **Deferred**         Domestic **5.3**  (28.3) (39.9)State **(46.9****)**      Foreign **(1.1****)** (6.6) (9.4) Total deferred **(42.7****)** (34.9) (49.3) Total provision for income taxes**$****2.7******$13.5 $14.5  
 

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56Notes to Consolidated Financial Statements — (Continued)Applera Corporation
A reconciliation of the federal statutory tax rate to Applera’s, the Applied Biosystems group’s and the Celera Genomics group’s tax rate on continuing operations for fiscal 2006, 2005, and 2004 is set forth in the following table:
  Applied Biosystems Group Celera Genomics Group Consolidated (Dollar amounts in millions) **2006** 2005 2004 **2006** 2005 2004 **2006** 2005 2004  Federal statutory rate  **35%**  35%  35%  **35%**  35%  35%  **35%**  35%  35%  Tax at federal statutory rate **$****111.0** $104.0 $83.9 **$****(35.7****)**$(43.4)$(38.7)**$****75.3** $60.6 $45.3 State income taxes (net of federal benefit)  **2.6**  0.2  0.5  **0.4**  0.8  0.3  **3.0**  1.0  0.8 Effect on income taxes from Singapore operations  **(12.5****)** (10.7) (10.8)          **(12.5****)** (10.7) (10.8)Effect on income taxes from other foreign operations  **16.0**  (12.8) (2.5)          **16.0**  (12.8) (2.5)Effect on income taxes from export operations  **(5.0****)** (7.7) 1.3           **(5.0****)** (7.7) 1.3 Goodwill and intangibles  **1.6**  (4.0) 0.4  **(0.9****)** (0.9) (0.9) **0.7**  (4.9) (0.5)R&D          tax credit  **(6.3****)** (10.0) (7.5) **(3.4****)** (3.1) (10.1) **(9.7****)** (13.1) (17.6)Valuation allowance  **(22.2****)**    0.7        (4.0) **(22.2****)**    (3.3)Other  **2.6**  1.3  1.5  **0.2**  (0.2) 0.3  **2.8**  1.1  1.8 Tax settlements  **(45.7****)**                **(45.7****)**       Total provision (benefit) for income taxes from continuing operations **$****42.1** $60.3 $67.5 **$****(39.4****)**$(46.8)$(53.1)**$****2.7** $13.5 $14.5  
 

In fiscal 2006, the Applied Biosystems group recorded tax benefits of $13.5 million related to the resolution of transfer pricing matters in Japan, and $63.3 million related to the completed IRS exam, state valuation allowance reversal, and U.S. R&D credits. In fiscal 2005, there were favorable tax adjustments of$25.7 million primarily related to additional U.S. R&D tax credit carryforwards, expected results of Canadian examinations, and settlement of some U.K. tax matters. See Note 2 to our consolidated financial statements for additional information.

On October 22, 2004, the President signed the American Jobs Creations Act of 2004 (the “Jobs Act”). The Jobs Act created a temporary incentive for the company to repatriate earnings accumulated outside the U.S. by allowing the company to reduce its taxable income by 85% of certain eligible dividends received fromnon-U.S. subsidiaries by the end of fiscal 2006. In order to benefit from this incentive, the company must reinvest the qualifying dividends in the U.S. under a domestic reinvestment plan approved by the Chief Executive Officer and Board of Directors. During fiscal 2006, the plan was approved to repatriate up to$500 million of foreign earnings under the Jobs Act. Accordingly, we repatriated $476.4 million and recorded income tax expense of $26.6 million associated with this repatriation. The repatriation resulted in a cash tax liability of approximately $7.7 million and the utilization of existing alternative minimum tax credits.

We have two tax exemption grants for our manufacturing operations in Singapore. One grant expires on August 14, 2007, and the other grant expires after fiscal year 2014. For fiscal 2006, we have not provided deferred taxes on $81.7 million of undistributed earnings of foreign subsidiaries, as it is our plan to indefinitelyreinvest these earnings in our foreign subsidiaries. However, we periodically repatriate a portion of earnings to the extent that we will not incur a material additional U.S. tax liability. Quantification of the

deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.

Significant components of deferred tax assets and liabilities at June 30, 2006 and 2005, are summarized below:
(Dollar amounts inmillions) **2006** 2005  **Deferred Tax Assets**       Depreciation **$****17.6** $21.7 Inventories  **31.3**  18.0 Postretirement and postemployment benefits  **6.0**  62.7 Unrealized losses on investments  **3.1**  2.9 Other accruals  **45.5**  37.9 Tax credit and loss carryforwards  **242.0**  137.6 Capitalized R&D expense  **197.5**  247.6 State taxes  **33.9**  79.6  Subtotal  **576.9**  608.0 Valuation allowance  **(59.4****)** (101.6) Total deferred tax assets  **517.5**  506.4  **Deferred Tax Liabilities**       Other accruals  **17.8**  12.3 Intangible assets  **26.2**  2.9  Total deferred tax liabilities  **44.0**  15.2  Total deferred tax assets, net **$****473.5** $491.2  
We have U.S. federal loss carryforwards as a result of various acquisitions of approximately $94.1 million that will expire between fiscal 2012 and 2025. The Internal Revenue Code has limited the amount of these net operating loss carryforwards that can be used annually to offset future taxable income as a result of theseacquisitions. We do not anticipate that any of these loss carryforwards will expire due to Internal Revenue Code limitations. We also have U.S. federal credit carryforwards of $162.2 million that expire

 

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57Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

between fiscal 2007 and 2025, and loss carryforwards of approximately $57.8 million in various foreign countries with varying expiration dates.

Our worldwide valuation allowance of $59.4 million at June 30, 2006, is detailed in the following table. The valuation allowance decreased by $42.2 million in fiscal 2006, primarily due to the release of a portion of the state valuation allowance. Changes in business operations allowed us to determine that we would more        likely than not be able to realize our deferred tax assets in the state of California and we therefore released the valuation allowance on those assets. The remainder of the change in the valuation allowance is due to changes in losses in foreign jurisdictions

and passive foreign tax credit carryforwards. At June 30, 2005, our valuation allowance was $101.6 million, which consisted of $79.6 million related to state deferred tax assets and $22.0 million related to foreign tax losses and passive foreign tax credit carryforwards. In fiscal 2005, the valuation allowance increased by        $8.2 million as a result of our assessment of the realization of certain state deferred tax assets and foreign losses. A valuation allowance has been maintained on these carryforwards, since we believe it is more likely than not that we may not generate sufficient income, of the appropriate character, and in the particular        jurisdictions, to realize the benefits before the carryforward periods expire.

 

 
 Our deferred tax assets include benefits expected from the utilization of net operating losses and credit carryforwards in the future. The following table identifies the various deferred tax asset components and the related allowances that existed at June 30, 2006. Due to time limitations on the ability to realize the benefit of      the carryforwards, additional portions of these deferred tax assets may become unrealizable in the future. (Dollar amounts in millions) Deferred Tax Asset Valuation Allowance Carryforward period Earliest Fiscal Year of Expiration  **Federal**             Net operating losses **$****32.9** **$****—**  15 – 20 years 2012  Foreign tax credits  **93.1**  **6.1**  10 years 2010  R&D              tax credits  **59.1**     15 – 20 years 2007* Other tax credits  **10.0**     Unlimited    Temporary differences  **254.6**           Total federal  **449.7**  **6.1**        **State**             Net operating losses  **10.7**  **10.7**  Various 2007  Tax credits  **30.0**  **3.6**  Unlimited    Temporary differences  **23.4**  **19.6**        Total state  **64.1**  **33.9**        **Foreign**             Net operating losses  **20.4**  **19.4**  Various 2007  Other non-U.S. temporary differences  **(1.3****)**    Various     Total foreign  **19.1**  **19.4**        Total **$****532.9** **$****59.4**        * $0.7 million of the $59.1 million total R&D tax credits expire prior to fiscal year 2012.     
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58Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Note** **5—Retirement and Other Benefits** **Pension Plans, Retiree Healthcare, and Life Insurance Benefits**
We maintain or sponsor pension plans that cover a portion of our worldwide employees. Pension benefits earned are generally based on years of service and compensation during active employment. However, the level of benefits and terms of vesting may vary among plans. We determine the required funding of thepension plans in accordance with statutory funding requirements. We also sponsor nonqualified supplemental benefit plans for select U.S. employees in addition to our principal pension plan. These supplemental plans are unfunded.

Our domestic pension plan covers U.S. employees hired prior to July 1, 1999. The accrual of future service benefits for all participants was frozen as of June 30, 2004. Benefits earned under the plan will be paid out under existing plan provisions.

Our postretirement benefit plan is unfunded and provides healthcare and life insurance benefits to domestic employees hired prior to January 1, 1993, who retire and satisfy certain service and age requirements. Generally, medical coverage pays a stated percentage of most medical expenses, and in some cases,participants pay a co-payment. Benefits are reduced for any deductible and for payments made by Medicare or other group coverage. We share the cost of providing these benefits with retirees.

During fiscal 2004, we adopted the provisions of FSP No. 106, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” We determined that our prescription plan is “actuarially equivalent” to the Medicare Part D Coverage due to the fact that theplan provides a greater reimbursement than the Medicare benefit, at all levels of annual claim amounts. We remeasured our postretirement benefit obligation as of July 1, 2003, which resulted in a reduction of approximately $9 million in our accumulated postretirement benefit obligation (“APBO”).

The postretirement benefit obligation reflects that we will recognize the federal subsidy as an offset to plan costs and this amount was included as an unrecognized gain to the plan at June 30, 2004. The impact of this remeasurement is being amortized over the average working life of our employees eligible forpostretirement benefits beginning July 1, 2004.

We use a June 30 measurement date for our pension and postretirement benefit plans.

The components of net pension and postretirement benefit expenses for fiscal 2006, 2005, and 2004 are set forth in the following table:
(Dollar amounts in millions) **2006** 2005 2004  **Pension**          Service cost   **$****3.2**   $2.5   $10.1 Interest cost  **36.6**  39.9  36.3 Expected return on plan assets  **(39.2****)** (41.8) (37.3)Amortization of transition obligation     0.1  0.2 Amortization of prior service cost  **0.2**  (0.1) (0.1)Amortization of losses  **9.0**  4.0  4.6 Special termination benefits and other  **0.1**  1.0  1.2  Net periodic expense **$****9.9** $5.6 $15.0  **Postretirement Benefit**          Service cost **$****0.2** $0.2 $0.3 Interest cost  **3.2**  3.9  4.7 Amortization of (gains) losses  **0.1**  (0.9)    Net periodic expense **$****3.5** $3.2 $5.0  
 
      The following weighted-average actuarial assumptions were used for the pension and postretirement plans for the years ended June 30:         Domestic Plans Foreign Plans   **2006** 2005 2004 **2006** 2005 2004  Discount rate used to determine benefit obligation:                   Pension  **6.50%**  5.25%  6.50%  **2.25-4.75%**  1.75-4.75%  2.00-5.25% Postretirement  **6.25%**  5.00%  6.50%          Discount rate used to determine net benefit cost:                   Pension  **5.25%**  6.50%  6.25%  **1.75-4.75%**  2.00-5.25%  1.50-5.25% Postretirement  **5.00%**  6.50%  6.25%          Compensation increase  **—%**  —%  4%  **1.15-3.50%**  1.15-3.50%  1.00-3.50% Expected rate of return*  **5.25-8.50%**  6.50-8.50%  6.25-8.50%  **1.00-4.25%**  1.00-3.50%  1.00-4.00%  * 6.50 – 8.50% for domestic pension plan for fiscal 2007. 
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59Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

The following tables set forth the changes in the benefit obligations and the plan assets, the funded status of the plans, and the amounts recorded in our Consolidated Statements of Financial Position at June 30, 2006 and 2005:

 
  Pension Postretirement (Dollar amounts in millions) **2006** 2005 **2006** 2005  **Change in Benefit Obligation**             Benefit obligation, beginning of year **$****706.9** $637.7 **$****68.4** $65.0 Service cost  **3.2**  2.5  **0.2**  0.2 Interest cost  **36.6**  39.9  **3.2**  3.9 Participants’ contributions  **0.4**  0.3       Benefits paid  **(40.3****)** (38.3) **(6.9****)** (7.6)Actuarial (gain) loss  **(28.6****)** 48.8  **(5.4****)** 6.9 Variable annuity unit value change  **13.6**  17.4       Foreign currency translation and other  **8.7**  (1.4)       Benefit obligation **$****700.5** $706.9 **$****59.5** $68.4  **Change in Plan Assets**             Fair value of plan assets, beginning of year **$****616.8** $586.7 **$****—** $— Actual return on plan assets  **63.4**  64.7       Participants’ contributions  **0.3**  0.3       Company contributions  **29.8**  1.2  **6.9**  7.6 Benefits paid  **(38.5****)** (36.0) **(6.9****)** (7.6)Foreign currency translation and other  **0.6**  (0.1)       Fair value of plan assets **$****672.4** $616.8 **$****—** $—  **Funded Status Reconciliation**             Funded status **$****(28.1****)**$(90.1)**$****(59.5****)**$(68.4)Unrecognized prior service cost  **7.7**  0.1       Unrecognized transition obligation  **0.6**  0.7       Unrecognized (gains) losses  **105.8**  154.0  **(7.0****)** (1.5) Net amount recognized **$****86.0** $64.7 **$****(66.5****)**$(69.9) **Amounts Recognized in the Consolidated Statements****of Financial Position**             Prepaid benefit cost **$****121.4** $1.8 **$****—** $— Accrued benefit liability  **(51.0****)** (89.1) **(66.5****)** (69.9)Intangible asset  **3.8**  1.0       Minimum pension liability adjustment  **11.8**  151.0        Net amount recognized **$****86.0** $64.7 **$****(66.5****)**$(69.9) **Supplemental Information**             Accumulated benefit obligation **$****691.9** $702.1 **$****59.5** $68.4  **Selected Information for Plans with Accumulated Benefit****Obligations in Excess of Plan Assets**             Accumulated benefit obligation **$****679.6** $690.0 **$****59.5** $68.4 Projected benefit obligation  **685.3**  692.6  **59.5**  68.4 Fair value of plan assets  **655.9**  602.5        
A minimum pension liability adjustment is required when the actuarial present value of accumulated plan benefits exceeds plan assets and accrued pension liabilities.

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60Notes to Consolidated Financial Statements — (Continued)Applera Corporation
Our domestic pension plan weighted-average target range for fiscal 2006 and actual domestic and foreign pension plan asset allocation at June 30, 2006 and 2005 are as follows:
  Domestic Plan Foreign Plans   Percentage of Plan Assets Target Range Percentage of Plan Assets   **2006** 2005 **2006** **2006** 2005  Equity securities  **44%**  58%  **39 – 47%**  **15%**  14% Fixed income securities  **25%**  30%  **23 – 31%**  **84%**  83% Global balanced strategies  **10%**  —%  **17 – 23%**       Hedge funds  **10%**  10%  **7 – 13%**       Cash and other  **11%**  2%  **0 – 10%**  **1%**  3%  Total  **100%**  100%     **100%**  100%  
 

In the fourth quarter of fiscal 2006, the pension plan committee approved the creation of a global balanced strategy classification and an additional investment into that classification. In anticipation of that investment in the first quarter of fiscal 2007, assets were temporarily held as cash at June 30, 2006. Global balancedstrategies are comprised of U.S. large capital equity securities, international developed equity securities, high grade U.S. and global bonds, cash and, to a limited extent, commodity funds. The investment managers for global balanced strategies can, at their discretion, allocate funds between these asset classes.

Our asset investment goal for the domestic pension plan is to achieve a long-term targeted rate of return consistent with the ongoing nature of the plan’s liabilities. The plan’s assets are invested so that the total portfolio risk exposure and risk-adjusted returns meet the plan’s long-term total return goal. A trustee administersour pension plan assets and investment responsibility for the assets is assigned to outside investment managers. The plan’s investment policy prohibits the use of derivatives for speculative purposes. The assets of the plan are periodically rebalanced to remain within the desired target allocations.

The expected rate of return on assets is determined based on the historical results of the portfolio, the expected investment mix of the plans’ assets, and estimates of future long-term investment returns, and takes into consideration external actuarial advice.

For postretirement benefits measurement purposes, a 9.6% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for plan year 2007, gradually reducing to 6% in 2014 and thereafter. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
(Dollar amounts in millions) One-Percentage-Point Increase One Percentage-Point Decrease  Effect on the total of service and interest cost components ******$0.3**   ******$(0.3****)**Effect on postretirement benefit obligation ******$4.6** ******$(4.0****)** 
Our estimated future employer contributions, gross expected benefit payments, and gross amount of annual Medicare Part D federal subsidy expected to be received at June 30, 2006, are as follows:
(Dollar amounts in millions) Pension   Postretirement  **Employer Contributions**       2007 **$****1.9** ******$  7.4**  **Expected Benefit Payments**       2007 **$****39.5** ******$  7.4** 2008  **39.9**  **7.5** 2009  **40.3**  **7.3** 2010  **40.8**  **7.2** 2011  **41.0**  **7.1** 2012 and thereafter  **228.0**  **31.8**  **Expected Federal Subsidy Receipts**       2007    ******$  1.2** 2008     **1.3** 2009     **1.3** 2010     **1.4** 2011     **1.4** 2012 and thereafter     **6.7**  
In fiscal 2006, we made voluntary contributions of approximately $30 million to our pension plans, the majority of which was to the U.S. plan in order to reduce the amount by which the U.S. plan was underfunded. As a result of better than expected investment returns and a higher discount rate, our qualified U.S. pensionplan was overfunded by approximately $26 million as of June 30, 2006. Based on the level of our contributions to the U.S. pension plan during fiscal 2006 and previous years, we do not expect to have to fund our U.S. pension plan in fiscal 2007 in order to meet minimum statutory funding requirements.
**Savings Plans**
We provide a 401(k) savings plan for domestic employees with a dollar-for-dollar matching of up to 6% for savings plan participants. Prior to fiscal 2005, automatic Company contributions were 2% of eligible compensation and a dollar-for-dollar matching contribution was up to 4% of eligible compensation. Employees noteligible for the employee pension plan received an extra 2% Company contribution in

 

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61Notes to Consolidated Financial Statements — (Continued)Applera Corporation
addition to the automatic 2% Company contribution through June 30, 2004. Our contributions to this plan, net of plan forfeitures, were $14.5 million for fiscal 2006, $16.3 million for fiscal 2005, and $21.0 million for fiscal 2004. We recorded expenses for foreign defined contribution plans of $3.8 million in fiscal 2006,$2.5 million in fiscal 2005, and $2.2 million in fiscal 2004.
**Postemployment Benefits**
We provide some postemployment benefits to eligible employees, which generally include severance and outplacement costs, disability, and medical-related costs paid after employment but before retirement.
**Note** **6—Stockholders’ Equity** **Capital Stock**
We have two classes of common stock: Applera-Applied Biosystems stock and Applera-Celera stock. Applera-Applied Biosystems stock is intended to reflect the relative performance of the Applied Biosystems group, and Applera-Celera stock is intended to reflect the relative performance of the Celera Genomics group.Holders of Applera-Applied Biosystems stock and holders of Applera-Celera stock are stockholders of Applera. The groups are not separate legal entities and holders of these stocks are stockholders of a single company, Applera. As a result, our stockholders are subject to all of the risks associated with an investment inApplera and all of its businesses, assets, and liabilities.

At June 30, 2006 and 2005, we had one billion authorized shares of a class of common stock designated as Applera Corporation-Applied Biosystems Group Common Stock, 225 million authorized shares of a class of common stock designated as Applera Corporation-Celera Genomics Group Common Stock, and10 million authorized shares of Applera Corporation preferred stock. Of the 10 million authorized shares of preferred stock, we previously designated 80,000 shares of two series of participating junior preferred stock in connection with our Stockholder Protection Rights Agreement described below.
**Treasury Stock**
We have in the past, and may in the future, repurchase shares of our Applera-Applied Biosystems stock or Applera-Celera stock. In January 2006, we announced that our board of directors authorized the repurchase of up to 5 million shares of Applera-Applied Biosystems stock. In addition, in July 2005, we announced thatour board of directors authorized the repurchase of up to 10% of the outstanding shares of Applera Corporation-Applied Biosystems stock. We completed all repurchases under these authorizations during fiscal 2006. Repurchases may also be made under standing resolutions of our board of directors to replenish sharesissued under our various stock plans. These resolutions, which have no time restrictions, delegate authority to management to purchase shares from time to time at price levels it deems appropriate through open market or negotiated purchases.

 
       The following table provides transactions relating to our two classes of common stocks:         Applera-Applied Biosystems Stock  Applera-Celera Stock (Shares in millions) Issued Shares  Treasury StockShares  Issued Shares  Balance at June 30, 2004 213.0  17.3   73.1 Purchases of shares for treasury stock    0.3    Issuances of shares under stock plans    (3.0)  1.2  Balance at June 30, 2005 213.0  14.6  74.3 Purchases of shares for treasury stock    **24.5**    Issuances of shares under stock plans **0.2**  **(7.3****)** ** 3.0**  Balance at June 30, 2006 **213.2**  **31.8**  **77.3**  **Stockholder Protection Rights Agreement**
In connection with our recapitalization, we adopted a Stockholder Protection Rights Agreement (the “Rights Agreement”) to protect stockholders against abusive takeover tactics. Under the Rights Agreement, we will issue one right for every four shares of Applera-Applied Biosystems stock (an “Applera-Applied BiosystemsRight”), which will allow holders to purchase one-thousandth of a share of our Series A participating junior preferred stock at a purchase price of $425, subject to adjustment (the “Series A Purchase Price”), and one right for every two shares of Applera-Celera stock (an “Applera-Celera Right”), which will allow holders topurchase one-thousandth of a share of our Series B participating junior preferred stock at a

purchase price of $125, subject to adjustment (the “Series B Purchase Price”).

An Applera-Applied Biosystems Right or an Applera-Celera Right will be exercisable only if a person or group (“Acquiring Person”): (a) acquires 15% or more of the shares of Applera-Applied Biosystems stock then outstanding or 15% or more of the shares of Applera-Celera stock then outstanding or (b) commences a tenderoffer that would result in such person or group owning such number of shares.

If any person or group becomes an Acquiring Person, each Applera-Applied Biosystems Right and each Applera-Celera Right will entitle its holder to purchase, for the Series A Purchase Price or the Series B Purchase Price, as applicable, a number of shares of the related class of our common

 

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62Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

stock having a market value equal to twice such purchase price.

If following the time a person or group becomes an Acquiring Person, we are acquired in a merger or other business combination transaction and we are not the surviving corporation; any person consolidates or merges with us and all or part of the common stock is converted or exchanged for securities, cash, or property ofany other person; or 50% or more of our assets or earnings power is sold or transferred, each Applera-Applied Biosystems Right and each Applera-Celera Right will entitle its holder to purchase, for the Series A Purchase Price or Series B Purchase Price, as applicable, a number of shares of common stock of the survivingentity in any such merger, consolidation, or business combination or the purchaser in any such sale or transfer having a market value equal to twice the Series A Purchase Price or Series B Purchase Price.

The rights are redeemable at our option at one cent per right prior to a person or group becoming an Acquiring Person.
**Note** **7—Share-Based Compensation** **Share-Based Plans**
As discussed in Note 1, we adopted the fair value recognition provisions for share-based plans using the modified prospective transition method provided by SFAS No. 123R. Approximately, 45.6 million shares of Applera-Applied Biosystems stock and 20.2 million shares of Applera-Celera stock were authorized for thegranting of awards under our share-based plans. We settle share-based exercises primarily with treasury shares The summary below describes our share-based plans.
**1999 Stock Incentive Plans**
Our stockholders first approved the Applera Corporation/Applied Biosystems Group 1999 Amended and Restated Stock Incentive Plan (the “Applera-Applied Biosystems Group Plan”) and the Applera Corporation/Celera Genomics Group 1999 Amended and Restated Stock Incentive Plan (the “Applera-Celera Genomics GroupPlan”) in April 1999. The Applera-Applied Biosystems Group Plan authorizes grants of Applera-Applied Biosystems stock options, restricted stock units, and other equity awards. The Applera-Celera Genomics Group Plan authorizes grants of Applera-Celera stock options, restricted stock units, and other equity

awards. Directors, officers, key employees, and consultants with responsibilities involving both the Applied Biosystems group and the Celera Genomics group may be granted awards under both incentive plans in a manner which reflects their responsibilities. Our board of directors believes that granting awards tied to theperformance of the group in which the participants work and, in some cases the other group, is in the best interests of both the Company and its stockholders.

We grant stock options to employees that allow them to purchase shares of Applera-Applied Biosystems stock and Applera Celera stock under the terms of the respective plans. In addition, members of our board of directors receive stock options for their service on our board. We issue stock options at their fair marketvalue at grant date. With the exception of options granted in the fourth quarter of fiscal 2005, as discussed below, most options vest equally over a four-year service period and expire ten years from the grant date. Our stock option grants have a retirement eligible provision, whereby awards granted to employees who havereached the age of 55 and who have provided five years of service, automatically vest when they retire from the Company. Prior to the adoption of SFAS No. 123R, we accounted for these awards using the nominal vesting period (over a four-year service period) approach in our pro forma disclosures. Effective July 1,2005, new awards are subject to the non-substantive vesting period approach. Under this approach, we recognize the compensation costs for the awards when the employee is no longer required to provide any additional service to retain the award.

During the fourth quarter of fiscal 2005, our board of directors approved options to purchase 2.8 million shares of Applera-Applied Biosystems stock and 1.3 million shares of Applera-Celera stock to some employees, including executive officers. These options have a term of ten years from the grant date, and were fullyvested and exercisable as of the grant date. However, shares acquired on the exercise of these options are subject to a restriction on transfer (covering sales, gifts, pledges, and any other method of disposition). The transfer restriction will lapse, for each grant of options to purchase Applera-Applied Biosystems stock andApplera-Celera stock, on 25% of the shares covered by these grants on each of the first four anniversaries of the grant date. Also, the transfer restriction will lapse in full upon termination of employment for any reason.

 

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63Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

The following tables summarize option activity under our share-based plans for the year ended June 30,  2006:
  Applera-Applied Biosystems Stock   Number ofOptions Weighted-AverageExercise Price Weighted-AverageRemainingContractualLife in Years Aggregate IntrinsicValue(In millions)  Outstanding at June 30, 2005  35,348,668  $31.04       Granted  **965,250**  **25.44**       Exercised  **(7,149,474****)** **19.07**       Cancelled  **(2,532,788****)** **48.84**        Outstanding at June 30, 2006  **26,631,656**  **32.40**  **5.56**  **$246.9** Vested or expected to vest at June 30, 2006*  **26,447,180**  **32.45**  **5.54**  **245.6** Exercisable at June 30, 2006  **25,563,223**  **32.57**  **5.40**  **238.8**  * The expected to vest amount represents the unvested options as of June 30, 2006 less estimated forfeitures.                      Applera-Celera Stock    Number ofOptions  Weighted-AverageExercise Price  Weighted-AverageRemainingContractualLife in Years  Aggregate IntrinsicValue(In millions)  Outstanding at June 30, 2005  10,412,800  $19.09       Granted  **80,300**  **11.51**       Exercised  **(1,317,061****)** **9.63**       Cancelled  **(1,273,845****)** **39.79**        Outstanding at June 30, 2006  **7,902,194**  **17.44**  **5.34**  **$20.5** Vested or expected to vest at June 30, 2006*  **7,889,686**  **17.45**  **5.33**  **20.5** Exercisable at June 30, 2006  **7,834,457**  **17.43**  **5.30**  **20.4**  * The expected to vest amount represents the unvested options as of June 30, 2006 less estimated forfeitures. 
The following tables summarize information regarding options outstanding and exercisable at June 30, 2006:
(Option prices per share)  Number ofOptions  Weighted-AverageExercise Price  **Applera-Applied Biosystems Stock** **Options Outstanding**        $  1.82 – $  16.02  **3,952,875**  **$15.45** $16.07 – $  20.42  **5,355,484**  **19.02** $20.65 – $  25.57  **9,618,471**  **22.62** $26.62 – $  34.50  **3,349,541**  **27.89** $35.73 – $108.31  **4,355,285**  **89.30**  **Options Exercisable**       $  1.82 – $  16.02  **3,932,863**  **$15.45** $16.07 – $  20.42  **5,174,113**  **19.00** $20.65 – $  25.57  **9,323,771**  **22.61** $26.62 – $  34.50  **2,777,191**  **27.95** $35.73 – $108.31  **4,355,285**  **89.30**  (Option prices per share)  Number ofOptions  Weighted-AverageExercise Price  **Applera-Celera Stock**        **Options Outstanding**       $   0.74 – $    9.13  **2,989,837**  **$**  **8.33** $   9.68 – $  15.13  **2,860,634**  **10.81** $ 17.47 – $  27.18  **1,031,988**  **19.68** $ 27.58 – $132.63  **1,019,735**  **60.92**  **Options Exercisable**       $   0.74 – $    9.13  **2,989,794**  **$**  **8.33** $   9.68 – $  15.13  **2,794,020**  **10.62** $ 17.47 – $  27.18  **1,031,988**  **19.68** $ 27.58 – $132.63  **1,018,655**  **60.77**  
 

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64Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

In fiscal 2006, we started granting restricted stock units to employees. These units represent rights to receive a share of the corresponding class of common stock on satisfaction of the applicable vesting conditions. The fair value of the units is determined and fixed on the grant date based on the applicable class ofcommon stock. Restricted stock units with service conditions vest in four equal annual installments. Restricted stock units with performance conditions vest in various increments following the end of our fiscal year-ends based on the terms of the awards and attainment of performance targets. At grant date, we assumethat the performance targets will be achieved. If the performance targets are not met at the end of the requisite period, no compensation costs is recognized and previously recognized compensation cost is reversed. The following tables summarize restricted stock unit activity under our share-based plans for the year endedJune 30, 2006:
  Applera-Applied Biosystems Stock   Number ofUnits Weighted-AverageGrant-DateFair Value Weighted-AverageRemainingContractual Lifein Years Aggregate IntrinsicValue(In millions)  Outstanding at June 30, 2005     $      —       Granted  **1,187,173**  **26.78**       Vested  **(141,675****)** **26.62**       Cancelled  **(56,545****)** **26.62**        Outstanding at June 30, 2006  **988,953**  **26.81**  **1.77** ******$32.0** Vested or expected to vest at June 30, 2006  **946,157**  **26.81**  **1.64**  **30.5**                   Applera-Celera Stock        Number ofUnits  Weighted-AverageGrant-DateFair Value Weighted-AverageRemainingContractual Lifein Years  Aggregate IntrinsicValue(In millions)  Outstanding at June 30, 2005     $      —       Granted  **461,470**  **11.41**       Cancelled  **(2,375****)** **12.67**        Outstanding at June 30, 2006  **459,095**  **11.41**  **2.46**  **$5.9** Vested or expected to vest at June 30, 2006  **355,844**  **11.41**  **2.37**  **4.6**  
As of June 30, 2006, we had $27.1 million of total unrecognized compensation costs related to nonvested awards and restricted stock units that are expected to be recognized over a weighted average period of less than two years.
**Employee Stock Purchase Plans**
Our employee stock purchase plans offer U.S. and some non-U.S. employees the right to purchase shares of Applera-Applied Biosystems stock and/or Applera-Celera stock. Employees are eligible to participate through payroll deductions of up to 10% of their compensation. In the U.S., shares are purchased at 85% of thelower of the average market price at the beginning or the end of each three-month offering period. Provisions of the plan for employees in countries outside the U.S. vary according to local practice and regulations. As a result of our adoption of SFAS No. 123R in fiscal year 2006, we recorded approximately $2.2 million inexpense under our employee stock purchase plans. The following table presents shares issued under the employee stock purchase plans for the fiscal years ended June 30:
  **2006** 2005 2004  Applera-Applied Biosystems stock  **334,000**   359,000   432,000 Applera-Celera stock  **335,000**  378,000  372,000  **Director Stock Purchase and Deferred Compensation Plan**
We have a Director Stock Purchase and Deferred Compensation Plan that requires our non-employee directors to apply at least 50% of their annual retainer and other board fees to the purchase of common stock. Purchases of Applera-Applied Biosystems stock and Applera-Celera stock are made in a ratio approximatelyequal to the number of shares of Applera-Applied Biosystems stock and Applera-Celera stock outstanding. The purchase price is the fair market value on the date of purchase. At June 30, 2006, we had 50,800 shares of Applera-Applied Biosystems stock and 13,500 shares of Applera-Celera stock that have been deferredunder our 1993 Director Stock Purchase and Deferred Compensation Plan and are treated as treasury shares for accounting purposes. At June 30, 2006, we had approximately 309,000 shares of Applera-Applied Biosystems stock and approximately 75,000 shares of Applera-Celera stock available for issuance under this plan.

 

 

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65Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Restricted Stock**
As part of our stock incentive plans, employees and non-employee directors have been granted shares of restricted stock that vest when certain continuous employment/service restrictions and/or specified performance goals are

achieved. The fair value of shares granted is generally expensed over the restricted periods. The periods may vary depending on the estimated achievement of performance goals.
 The following table summarizes nonvested share activity under our share-based plans during the year ended June 30,      2006:   Applera-Applied Biosystems Stock Applera-Celera Stock   Number of Shares Weighted-AverageGrant Date Fair Value Number of Shares Weighted-AverageGrant Date Fair Value  Nonvested at June 30, 2005  209,448  $20.98  60,834  $10.42 Granted  **23,400**  **23.25**  **9,000**  **11.78** Vested  **(143,782****)** **21.10**  **(53,112****)** **10.40**  Nonvested at June 30, 2006  **89,066** ******$21.47**  **16,722** ******$16.94**  
As of June 30, 2006, the total fair value of shares that vested during fiscal 2006 was $2.3 million.
**Performance Unit Bonus Plan**
We adopted a Performance Unit Bonus Plan in fiscal 1997. This plan authorizes a performance unit bonus pool that is tied to the grant of corresponding options under our Applera-Applied Biosystems Group Plan and our Applera-Celera Genomics Group Plan. Performance units granted under the plan represent the right toreceive cash from us at a specified date in the future. The amount of the payment for each grant is determined on the date of grant. Performance units can be granted in relation to either or both classes of our common stock. The performance units vest when the applicable class of common stock reaches and maintainsspecified price levels, based on its moving average price, for a specified period.

We did not grant any performance units in fiscal 2006, 2005 or 2004. As a result of performance targets being achieved in each fiscal year, we recognized compensation expense of $0.7 million in fiscal 2006, $0.9 million in fiscal 2005, and $1.8 million in fiscal 2004.
**Note** **8—Additional Information** **Selected Accounts**
The following table provides the major components of selected accounts of the Consolidated Statements of Financial Position at June 30:
(Dollar amounts in millions) **2006** 2005  **Other Long-Term Assets**       Noncurrent deferred tax asset, net **$****454.9**   $482.8 Prepaid pension benefit cost  **124.4**  1.0 Other  **88.2**  91.3  Total other long-term assets **$****667.5** $575.1  **Other Accrued Expenses**       Deferred revenues **$****96.1** $94.6 Other  **143.1**  143.0  Total other accrued expenses **$****239.2** $237.6  **Other Long-Term Liabilities**       Accrued postretirement benefits **$****63.0** $64.4 Accrued pension benefits  **51.0**  89.0 Other  **86.4**  74.0  Total other long-term liabilities **$****200.4** $227.4  
 

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66Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Assets Held for Sale**
In connection with the reduction and rebalancing of the Applied Biosystems group’s workforce during fiscal 2005, the Applied Biosystems group decided to pursue the sale of its San Jose, California facility. As a result of this decision, we reclassified $7.0 million of property, plant and equipment into assets held for salewithin prepaid expenses and other current assets at June 30, 2005, and recorded a $1.7 million pre-tax charge that represented the write-down of the carrying amount of this facility to its estimated market value less estimated selling costs. As discussed in Note 2, the Applied Biosystems group adjusted the carryingvalue of this facility in both the first and third quarters of fiscal 2006. The Applied Biosystems group completed the sale of this facility in the fourth quarter of fiscal 2006 and received net proceeds of $6.1 million from the sale.

During the second quarter of fiscal 2006, we reclassified $3.6 million of property, plant and equipment into assets held for sale. This reclassification was for a facility in Connecticut that was previously used for manufacturing and administration. We completed the sale of this facility in the fourth quarter of fiscal 2006 andreceived net proceeds of $20.5 million that was allocated to the Applied Biosystems group.

In connection with the Celera Genomics group’s decision to exit its small molecule drug discovery and development programs as discussed in Note 2, the Celera Genomics group decided to pursue the sale of its South San Francisco, California facility. As a result of this decision, we reclassified $11.5 million of property,plant and equipment into assets held for sale in 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 current estimated market value less estimated selling costs. We expect the sale of this facility to occur by March 31, 2007.
**Note** **9—Debt and Lines of Credit**
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 June 30, 2006 and 2005. This credit agreement replaced a $50 million unsecured revolving credit agreement that was scheduled to mature in April2005, under which there were no borrowings outstanding at June 30, 2004. Borrowings under this credit facility may be made in U.S. dollars and other currencies, and interest rates will vary depending on whether the borrowings are undertaken in the domestic or international markets. Commitment and facility fees arebased on our long-term senior unsecured non-credit enhanced debt ratings. We are required to maintain certain minimum net worth and leverage ratios under this credit agreement.
**Note** **10—Commitments, Contingencies, and Guarantees**
Future minimum payments at June 30, 2006, under non-cancelable operating leases for real estate and equipment were as follows:
(Dollar amounts in millions)     2007 **$****36.1** 2008  **29.5** 2009  **22.4** 2010  **16.9** 2011  **11.8** 2012 and thereafter  **23.5**  Total **$****140.2**  
We recorded rental expense of $45.7 million for fiscal 2006, $51.6 million for fiscal 2005, and $60.7 million for fiscal 2004.
**Guarantees**
There are three types of guarantees related to our business activities that are included in the scope of FIN. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of Statement of Financial Accounting Standards Nos. 5, 57, and 107and rescission of FIN 34”: leases with recourse provisions; the guarantee of pension benefits for a divested business; and product warranties. See Note 1 to our consolidated financial statements for more information on product warranties.
**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 theevent of default by a customer, we would repossess the underlying instrument. We record revenues from these transactions on the completion of installation/acceptance of products and maintain a reserve for estimated losses on all lease transactions with recourse provisions based on historical default rates and currenteconomic conditions. At June 30, 2006, the financing companies’ outstanding balance of lease receivables with recourse to us was $8 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 thesepayment obligations were not transferable to the buyer under German law. The guaranteed payment obligation, which approximated $56 million at June 30, 2006, is not expected to have a material adverse effect on our Consolidated Statements of Financial Position.

 

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67Notes to Consolidated Financial Statements — (Continued)Applera Corporation**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 pastperformance 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 offuture 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.
**Supply Arrangement**
On October 8, 2005, Delphi Medical Systems Texas Corporation, a supplier of some instruments and parts for the Applied Biosystems group (“Delphi Medical Systems”), and its parent Delphi Corporation, filed a petition in the United States Bankruptcy Court for the Southern District of New York seeking relief under theprovisions of Chapter 11 of the federal Bankruptcy Code. As of June 30, 2006, the Applied Biosystems group had a pre-petition accounts receivable balance of approximately $7 million and an accounts payable balance of approximately $4 million with Delphi Medical Systems. At the present time, no assessment can bemade as to if and when or how much of the balance due from Delphi Medical Systems may be paid, how much of the amount owed to Delphi Medical Systems may be offset against the amounts payable by Delphi Medical Systems, or the effect of the Chapter 11 filing on the supply contract in effect between thecompanies.
**Legal Proceedings**
We are involved in various lawsuits, arbitrations, investigations, and other legal actions from time to time with both private parties and governmental entities. These legal actions currently involve, for example, commercial, intellectual property, antitrust, environmental, securities, and employment matters. The following is adescription of some claims we are currently defending, including some counterclaims brought against us in response to claims filed by us against third parties. We believe that we have meritorious defenses against the claims currently asserted against us, including those described below, and intend to defend themvigorously.

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 publicoffering 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 failedto 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 Genomics group has never sought, or intended to seek, a patent on the basic human genomesequence data, the complaint also alleges that we did not adequately disclose the risk that the Celera Genomics 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 courtcertified the case as a class action.

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 thedefendants’ 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 patentwas 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 patentis invalid and not infringed, costs and expenses, and other relief as the court deems proper.

Promega Corporation filed a patent infringement action against Lifecodes Corporation, Cellmark Diagnostics, Genomics International Corporation, and us in the U.S. District Court for the Western District of Wisconsin on April 24, 2001. The complaint alleges that the defendants are infringing Promega’s U.S. Patent Nos.6,221,598 and 5,843,660, both entitled “Multiplex Amplification of Short Tandem Repeat Loci,” due to the defendants’ sale of forensic identification and paternity testing kits. Promega is seeking monetary damages, costs and expenses, injunctive relief, and other relief as the court deems proper. The defendants answeredthe complaint on July 9, 2001, and we asserted counterclaims alleging that Promega is infringing our U.S. Patent No. 6,200,748, entitled “Tagged Extendable Primers and Extension Products,” due to Promega’s sale of forensic identification and paternity testing kits. Because of settlement negotiations, the case wasdismissed on October 29, 2002. However, the case was dismissed without prejudice, which means that Promega could re-file its claim against us.

 

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68Notes to Consolidated Financial Statements — (Continued)Applera Corporation    
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 alleges 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 MCS100Einfringed U.S. Patent No. 5,440,143. On-Line Technologies seeks 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-LineTechnologies 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 will be decided by the District Court in subsequent proceedings.

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 toEnzo 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 LabeledNucleotides,” 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. EnzoBiochem, 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 ofTaq 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. Thecomplaint 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    fordeclaratory relief that the ‘736 patent is invalid, not infringed, and unenforceable,and is seeking dismissal of our complaint, a judgment that the ‘736patent is invalid, not infringed, and unenforceable, costs and expenses, andother relief as the court deems proper. After the filing of the action againstThermoElectron, on December 8, 2004, Thermo Finnigan filed a patent infringementaction against us in the U.S. District Court for the District of Delaware. Thecomplaint alleges that we have infringed U.S. Patent No. 5,385,654 as aresult of, for example, our Applied Biosystems group’s commercializationof 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 andcounterclaimed for declaratory relief that the ‘654 patent is invalid, notinfringed, and unenforceable, and are seeking dismissal of Thermo Finnigan’scomplaint, a judgment that the ‘654 patent is invalid, not infringed, andunenforceable, costs and expenses, and other relief as the court deems proper.Thermo Finnigan subsequently filed a second patent infringement action againstus, MDS, and the Applied Biosystems/MDS Sciex Instruments joint venture, in theU.S.District Court for the District of Delaware on February 23, 2005. The complaintalleges that we and the other defendants have infringed U.S. Patent No. 6,528,784as a result of, for example, our commercialization of the API 5000TM LC/MS/MSsystem. Thermo Finnigan is seeking monetary damages, costs, expenses, and  otherrelief as the court deems proper. We have answered the complaint and counterclaimedfor declaratory relief that the ‘784 patent is invalid and not infringed,and are seeking dismissal of Thermo Finnigan’s complaint, a judgment thatthe ‘784 patent is invalid and not infringed, costs and expenses, and otherrelief as thecourt 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 isinherently 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,

 

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69Notes to Consolidated Financial Statements — (Continued)Applera Corporation    
could have a material adverse effect on us and our consolidated financial statements.
**Note** **11—Financial Instruments**
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 tominimize 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. Our foreign currency exposures vary, but are primarily concentrated in euro, Japanese yen, and British pound. We do not use derivativefinancial instruments for trading or speculative purposes or for activities other than risk management, nor are we a party to leveraged derivatives.

We record the fair value of foreign currency derivative contracts in either prepaid expenses and other current assets or other accrued expenses in the Consolidated Statements of Financial Position.
**Cash Flow Hedges**
Our international sales are typically denominated in the local currency of the customer, whether third party or intercompany. We use forward, option, and range forward contracts to hedge a portion of forecasted international sales not denominated in U.S. dollars. We use hedge accounting on the derivative contracts to offsetthe changes in fair value of various forecasted sales transactions caused by the movements in currency rates. We designate these contracts as cash flow hedges and we record the effective portion of the change in the fair value of these contracts in other comprehensive income (loss) in the Consolidated Statements ofFinancial Position until the underlying forecasted transaction affects earnings. At that time, we reclassify to net revenues in the Consolidated Statements of Operations the gain or loss on the derivative instrument which had been deferred in accumulated other comprehensive income (loss). We recognized a net gain of$12.9 million in fiscal 2006 and net losses of $18.8 million in fiscal 2005 and $40.7 million in fiscal 2004 in net revenues from derivative instruments designated as cash flow hedges of anticipated sales. At June 30, 2006, we recorded $1.5 million of net derivative losses in accumulated other comprehensive income(loss). This amount, which is net of tax, is expected to be reclassified to revenues within the next twelve months.

Because the critical terms of the derivative contracts designated as cash flow hedges and the underlying forecasted sales transactions are the same, we expect that the changes in the fair value of the underlying exposure will be offset completely by the changes in the fair value of the derivative contracts, both at inceptionand on an ongoing basis. Our ongoing assessment of hedge effectiveness includes verifying and documenting that the critical terms of the hedge and forecasted transaction have not changed. We

recorded less than $0.1 million of net gain of hedge ineffectiveness during the fiscal year ended June 30, 2006. No amounts related to hedge ineffectiveness were recorded for the fiscal years ended June 30, 2005 and 2004.
**Other Foreign Currency Derivatives**
We also use derivative financial instruments to hedge the impact resulting from changes in currency rates on various foreign currency-denominated net asset positions. The gains and losses on these derivatives are expected to largely offset transaction losses and gains on the underlying foreign currency-denominated assetsand liabilities, both of which are recorded in other income (expense), net in the Consolidated Statements of Operations.
**Concentration of Credit Risk**
The forward and option contracts used in managing our foreign currency exposures have an element of risk in that the counterparties may be unable to meet the terms of the agreements. We attempt to minimize this risk by limiting the counterparties to a diverse group of highly-rated major domestic and internationalfinancial institutions. In the event of non-performance by these counterparties, the carrying values of our financial instruments (see table below) represent the maximum amount of loss we would have incurred as of our fiscal year-end. However, we do not expect to record any losses as a result of counterparty default. Wedo not require and are not required to pledge collateral for these financial instruments. Other financial instruments that potentially subject us to concentrations of credit risk are cash and cash equivalents, short-term investments, and accounts receivable. We attempt to minimize the risks related to cash and cash equivalentsand short-term investments by using highly-rated financial institutions that invest in a broad and diverse range of financial instruments. We have established guidelines relative to credit ratings and maturities intended to maintain safety and liquidity.

Concentration of credit risk with respect to accounts receivable is limited due to our large and diverse customer base, which is dispersed over different geographic areas. Allowances are maintained for potential credit losses and such losses have historically been within our expectations.

 

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Notes to Consolidated Financial Statements — (Continued)Applera Corporation    **Fair Value**
We use various methods to estimate the fair value of financial instruments we hold or own. The carrying amount of cash and cash equivalents approximates fair value. We use quoted market prices, if available, or quoted market prices of financial instruments with similar characteristics in valuing our short-term investmentsand minority equity investments. The following table presents the carrying amounts and fair values of our significant financial instruments at June 30:
  **2006** 2005 (Dollar amounts in millions) CarryingAmount FairValue CarryingAmount FairValue  Cash and cash equivalents **$****434.2** **$****434.2** $779.4 $779.4 Short-term investments  **505.8**  **509.3**  642.7  645.1 Currency forwards and options  **3.0**  **(0.2****)** 3.7  14.0 Other investments  **30.8**  **30.8**  27.3  27.3 Minority equity investments  **8.4**  **16.0**  4.5  11.3  
We report net unrealized gains and losses on short-term investments and minority equity investments as a separate component of accumulated other comprehensive income (loss) in the Consolidated Statements of Financial Position.
 **Note** **12—Quarterly Financial Information (Unaudited)**
The following is a summary of quarterly financial results:
  First Quarter Second Quarter Third Quarter Fourth Quarter (Dollar amounts in millions except per share amounts) **2006(a)** 2005(b) **2006(c)** 2005(d) **2006(e)** 2005(f) **2006(g)** 2005(h)  **Consolidated**                         Net revenues **$****422.2** $407.2 **$****489.7** $477.5 **$****497.8** $469.4 **$****539.7** $491.0 Gross margin  **226.4**  220.2  **266.8**  253.5  **278.8**  258.8  **296.2**  264.0 Net income  **25.2**  16.1  **14.1**  54.9  **100.5**  34.7  **72.7**  54.1  **Applied Biosystems Group**                         Net revenues **$****415.5** $390.3 **$****481.9** $463.4 **$****490.7** $454.8 **$****523.1** $478.6 Gross margin  **222.2**  207.9  **262.5**  243.4  **275.8**  247.4  **284.3**  254.0 Net income  **43.1**  37.1  **30.9**  72.7  **124.4**  55.5  **76.7**  71.6 Dividends declared per share **$****.0425** $.0425 **$****.0425** $.0425 **$****.0425** $.0425 **$****.0425** $.0425 Net income per share                         Basic **$****0.21** $0.19 **$****0.17** $0.38 **$****0.67** $0.28 **$****0.43** $0.36 Diluted **$****0.21** $0.18 **$****0.17** $0.37 **$****0.65** $0.28 **$****0.41** $0.35  **Celera Genomics Group**                         Net revenues **$****9.2** $18.8 **$****10.3** $16.1 **$****8.9** $17.2 **$****17.8** $14.4 Net loss  **(16.7****)** (20.3) **(17.3****)** (19.4) **(23.3****)** (21.0) **(5.3****)** (16.4)Net loss per share                         Basic and diluted **$****(0.23****)**$(0.28)**$****(0.23****)**$(0.27)**$****(0.31****)**$(0.29)**$****(0.07****)**$(0.22) Price range of common stock                         **Applied Biosystems Group**                         High **$****23.49** $21.50 **$****28.17** $21.40 **$****29.27** $21.27 **$****33.00** $22.94 Low  **19.25**  17.76  **22.10**  18.37  **26.13**  19.42  **26.38**  19.20 **Celera Genomics Group**                         High  **13.10**  12.55  **13.08**  14.73  **13.45**  14.10  **13.17**  11.70 Low  **10.67**  10.32  **10.33**  11.00  **10.68**  10.12  **10.24**  9.09  
There were no dividends paid on Applera-Celera stock during the periods presented. Through December 31, 2005, Celera Diagnostics was a 50/50 joint venture between the Applied Biosystems group and the Celera Genomics group. Effective January 1, 2006, the Celera Genomics group acquired the Applied Biosystemsgroup’s 50 percent interest in the Celera Diagnostics joint venture such that it now owns 100 percent of Celera Diagnostics. As a result of this restructuring and the manner by which our management now operates and assesses the business, Celera Diagnostics is no longer a separate segment within Applera and we haverestated prior period consolidating financial information to reflect this change. See Note 15 to our consolidated financial statements for additional information.

The following transactions impacted the comparability between fiscal 2006 and 2005 and are discussed in detail in Note 2.
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71Notes to Consolidated Financial Statements — (Continued)Applera Corporation    (a)The Applied Biosystems group recorded a pre-tax benefit of $0.2 million for a reduction in anticipated employee-related costs associated with a severance and benefit charge recorded in fiscal 2005. The Applied Biosystems group recorded a tax benefit of $13.5 million related to the resolution of transfer pricing matters in Japan. The Applied Biosystemsgroup recorded a charge of $1.1 million due to asset impairments. The Celera Genomics group recorded a pre-tax gain of $4.5 million from the sale of a non-strategic minority equity investment. In addition, we recorded a pre-tax charge of $23.5 million relating to litigation and arbitration settlements, of which $22.8 million was allocated to the AppliedBiosystems group and $0.7 million was allocated to the Celera Genomics group.(b)The Applied Biosystems group recorded a pre-tax charge of $7.3 million for severance and benefit costs. The Celera Genomics group recorded pre-tax charges of $4.5 million related to the discontinuation of most of the operations of Paracel.(c)The Applied Biosystems group recorded pre-tax charges of $1.5 million for employee terminations at the Applied Biosystems/MDS Sciex Instruments joint venture and pre-tax benefits of $1.2 million for reductions in anticipated employee-related costs associated with the severance and benefit charges recorded in fiscal 2005. Additionally, the AppliedBiosystems group recorded a pre-tax charge of $3.1 million as a result of the final determination of interest related to the Amersham arbitration award and a tax charge of $28.0 million related to repatriation of foreign earnings.(d)The Applied Biosystems group recorded a net pre-tax gain of $29.7 million for the sale of intellectual property, manufacturing inventory, and research and development assets related to the expansion of the scope of its existing joint venture in life science mass spectrometry with MDS. Additionally, the Applied Biosystems group recorded a pre-tax charge of$2.9 million for severance and benefit costs and $2.3 million related to the cost of excess lease space.(e)The Applied Biosystems group recognized a $0.9 million pre-tax favorable adjustment related to the sale of its San Jose, California, facility. The Applied Biosystems group recorded a net pre-tax charge of $1.6 million which is primarily comprised of a charge of $35.0 million related to the Beckman Coulter settlement and a benefit of $33.4 million relatedto the Bio-Rad Laboratories, Inc. and MJ Research, Inc. settlement. The Applied Biosystems group recorded a pre-tax charge of $3.4 million for the immediate write-off of the value of acquired IPR&D related to its acquisition of Ambion. In addition, the Applied Biosystems group recorded a $63.3 million tax benefit related to a completed Internal RevenueServices exam, state valuation allowance reversal, and R&D credits. The Celera Genomics group recorded pre-tax charges of $20.9 million for restructuring costs related to its decision to exit its small molecule drug discovery and development programs and the integration of Celera Diagnostics into the Celera Genomics group. The Celera Genomics grouprecorded a pre-tax gain of $3.1 million from the sale of non-strategic minority equity investments.(f)The Applied Biosystems group recorded a pre-tax benefit of $0.7 million as a result of the repayment of a loan previously written off in fiscal 2004, and $0.2 million for reductions in anticipated employee-related costs associated with severance and benefit charges recorded in fiscal 2003 through fiscal 2005.(g)The Applied Biosystems group recorded a pre-tax gain of $16.9 million from the sale of a company-owned facility in Connecticut and a $1.4 million favorable tax adjustment to a previously recorded charge in the second quarter of fiscal 2006 related to repatriation of foreign earnings. The Celera Genomics group recorded pre-tax charges of $5.3 million forrestructuring costs related to its decision to exit its small molecule drug discovery and development programs and the integration of Celera Diagnostics into the Celera Genomics group. Additionally, the Celera Genomics group recorded a pre-tax gain of $8.6 million in net revenues from the sales of certain small molecule drug discovery and developmentprograms.(h)The Applied Biosystems group recorded a net pre-tax charge of $11.4 million for severance and benefit costs, $6.2 million for charges related to facility lease agreements, and $2.6 million for asset impairments. The Celera Genomics group recorded a $3.6 million pre-tax favorable adjustment to a charge recorded in fiscal 2004 associated with the sale ofits Rockville, Maryland facility and a pre-tax charge of $3.4 million for severance and asset impairments related to the discontinuation of the Online/Information Business. Additionally, the Applied Biosystems group recorded tax benefits of $23.5 million primarily related to additional U.S. R&D tax credit carryforwards, expected results of Canadianexaminations and settlement of some U.K. tax matters, and the Celera Genomics group recorded a tax benefit of $2.2 million related to additional U.S. R&D tax credit carryforwards.
 

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72Notes to Consolidated Financial Statements — (Continued)Applera Corporation     **Note** **13—Accumulated Other Comprehensive Income (Loss)**
Accumulated other comprehensive income (loss), net of tax, for fiscal 2006, 2005, and 2004 was as follows:
(Dollar          amounts in millions) Unrealized        Gain        (Loss) on        Investments Unrealized        Gain (Loss) on        Hedge        Contracts Foreign        Currency        Translation        Adjustments Minimum        Pension        Liability Accumulated        Other        Comprehensive        Income (Loss)  Balance          at June 30, 2003 $17.0 $(10.7)$21.5 $(82.3)$(54.5)Change          in net unrealized losses on investments, net of tax benefit of $1.1  (2.1)          (2.1)Net          unrealized gains reclassified into earnings, net of tax expense of $4.4  (8.1)          (8.1)Change          in net unrealized losses on hedge contracts, net of tax benefit of $9.9     (20.9)       (20.9)Net          unrealized losses reclassified into earnings, net of tax benefit of          $13.6     27.1        27.1 Foreign          currency translation adjustments        34.0     34.0 Minimum          pension liability adjustment, net of tax expense of $4.7           8.8  8.8  Balance          at June 30, 2004  6.8  (4.5) 55.5  (73.5) (15.7) Change          in net unrealized losses on investments, net of tax benefit of $2.1  (3.9)          (3.9)Change          in net unrealized losses on hedge contracts, net of tax benefit of $7.5     (1.5)       (1.5)Net          unrealized losses reclassified into earnings, net of tax benefit of          $6.3     12.5        12.5 Foreign          currency translation adjustments        (8.6)    (8.6)Minimum          pension liability adjustment, net of tax benefit of $13.3           (24.6) (24.6) Balance          at June 30, 2005  2.9  6.5  46.9  (98.1) (41.8) Change          in net unrealized losses on investments, net of tax benefit of $-  **(0.3****)**          **(0.3****)**Change          in net unrealized losses on hedge contracts, net of tax benefit of $7.1     **(16.2****)**       **(16.2****)**Net          unrealized losses reclassified into earnings, net of tax benefit of          $4.6     **8.2**        **8.2** Foreign          currency translation adjustments        **0.6**     **0.6** Minimum          pension liability adjustment, net of tax expense of $48.7           **90.4**  **90.4**  Balance          at June 30, 2006 **$****2.6** **$****(1.5****)****$****47.5** **$****(7.7****)****$****40.9**  
 

The unrealized gains and losses on investments consist of investments in debt securities and minority equity investments in public companies that are classified as available-for-sale. The gains and losses recorded above resulted from temporary declines in the market value of the investments based on the most recent publicinformation available. Please see Note 1 to our consolidated financial statements for the accounting policies related to our investments. The currency translation adjustments are not currently adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
**Note** **14—Discontinued Operations**
In October 2002, we received an adverse jury verdict in Federal District Court for the District of Delaware in connection with a patent lawsuit between TA Instruments, Inc., a subsidiary of Waters Corporation, and The Perkin-

Elmer Corporation relating to thermal analysis products. Applera is involved as the successor to The Perkin-Elmer Corporation, having sold the thermal instruments product line as part of the sale of its Analytical Instruments business to EG&G, Inc. (now named PerkinElmer, Inc.) in 1999. In fiscal 2003, the jury awarded TAInstruments $13.3 million based on lost sales, price erosion, and reasonable royalties, and also rejected claims we had made against TA Instruments alleging that their conduct infringed one of our patents. Subsequently, the District Court entered final judgment on a modified award of $17.3 million, after ruling on motionsfiled by us and TA Instruments which resulted in the Court’s striking the price erosion element of the jury’s damage award, but granting TA Instruments enhanced damages and attorneys’ fees on certain aspects of the verdict, and prejudgment interest. The Applied Biosystems group recorded a charge of $16.4 million, netof income

 

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73Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

taxes, as part of discontinued operations in fiscal 2003. In June 2003, we appealed the judgment rejecting our infringement claims to the U.S. Court of Appeals for the Federal Circuit. On May 2004, the U.S. Court of Appeals for the Federal Circuit affirmed the District Court’s judgment denying our infringement claim, and wehave elected not to pursue further appeals. As a result, we paid TA Instruments $17.4 million during fiscal 2004. Also, during fiscal 2004, as a result of the final judgment and subsequent payment to TA Instruments, the Applied Biosystems group recorded an after-tax benefit of $3.0 million related to the reversal of aportion of the patent lawsuit liability accrued in fiscal 2003.

During fiscal 2004, we also recorded a $7.6 million German tax benefit from tax refunds and other tax attributes (benefits) resulting from the tax write-off of our investment in one of our former German affiliates. Based on our discussions with the German tax authorities, we concluded that the write-off of our investmentwas appropriate and that refunds would be due to the Applied Biosystems group. The write-off also created loss carryforwards, however, since it is possible that the tax benefit attributable to the loss carryforwards may not be realized, a full valuation allowance of $6.2 million has been established against the asset.
**Note** **15—Celera Diagnostics and Abbott Alliance Restructuring** **Celera Diagnostics Restructuring**
In January 2006, we announced that our board of directors had approved a restructuring of the Celera Diagnostics joint venture between the Applied Biosystems group and the Celera Genomics group. The joint venture was formed pursuant to a Celera Diagnostics Joint Venture Agreement dated as of April 1, 2001, asamended. Since its formation, Celera Diagnostics had been focused on the discovery, development, and commercialization of diagnostic products. As part of the Celera Genomics group, the diagnostic business continues to focus on these areas.

As a result of the restructuring, effective as of January 1, 2006, the Applied Biosystems group’s interest in Celera Diagnostics was transferred to the Celera Genomics group in exchange for various considerations to the Applied Biosystems group. In determining that the restructuring was in the best interests of theCompany and its stockholders, our board of directors considered numerous factors and used the assistance and advice of several independent advisors. Included in the process were independent analyses of: the Applied Biosystems group’s 50 percent interest in Celera Diagnostics; the various considerations made to theApplied Biosystems group in the restructuring; and the pro forma impact of the restructuring on the Applied Biosystems group and the Celera Genomics group businesses.

The financial elements of the consideration made to the Applied Biosystems group in connection with the restructuring of Celera Diagnostics included:
•The Applied Biosystems group gained the right to sell instrument platforms to end-user diagnostic customers, a
field of activity previously reserved for Celera Diagnostics. The Applied Biosystems group will also be the preferred supplier of some diagnostic instruments to the Celera Genomics group’s strategic alliance with Abbott Laboratories, and the Celera/Abbott alliance will be the preferred diagnostics company marketing some ofthe Applied Biosystems group’s instruments. Refer to the Abbott Alliance Restructuring discussion below for more information.
•The Celera Genomics group provides some R&D and regulatory support to the Applied Biosystems group at cost, including assistance in the development of new PCR reagents and clinical diagnostic instrument systems. Additionally, the Celera Genomics group may use it’s GMP reagent manufacturing capability tomanufacture selected products for the Applied Biosystems group’s customers. GMP refers to the U.S. Food and Drug Administration’s Good Manufacturing Practices regulations.  •The Celera Genomics group forgave future royalties due through 2017 on sales of Applied Biosystems group’s products under the terms of a marketing and distribution agreement between the Groups, which is described in Note 16 to our consolidated financial statements.  •The Celera Genomics group paid the Applied Biosystems group $30 million in cash. **Abbott Alliance Restructuring**
In January 2006, we also announced that we had restructured our long term strategic alliance agreement with Abbott Laboratories. The restructured agreement was entered into on January 9, 2006. The alliance was originally formed in June 2002 to discover, develop, and commercialize a broad range of *in vitro*, meaningoutside of the living body, diagnostic products for disease detection, prediction of disease predisposition, disease progression monitoring, and therapy selection. Under the agreement before the restructuring, the parties were obligated to work exclusively with each other in the commercialization of nucleic acid-based (DNA orRNA) diagnostic products, also referred to as molecular diagnostic products. Under the relationship as restructured, the Celera Genomics group and Abbott will continue to work exclusively with each other primarily through a profit sharing arrangement in specifically agreed areas of nucleic acid-based diagnostic products, butboth companies may work independently outside the exclusive areas. This restructuring also enables the Applied Biosystems group to develop and sell diagnostic instruments to end-users for clinical diagnostic applications, an activity that was previously restricted under the original Abbott alliance agreement. Development ofdiagnostic products based on the detection of proteins, rather than nucleic acids, is another potential business area for the Celera Genomics group but is not part of the agreement with Abbott.

Under the Abbott alliance agreement as restructured, the Celera Genomics group and Abbott will continue to conduct separate but coordinated research and development activities that are within the scope of the alliance. The

 

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74Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

coordinated activities include the sharing of scientific results and collaboration regarding the technology and instrumentation that their alliance products will use. The alliance agreement with Abbott permits the Celera Genomics group to form collaborations and relationships with other companies to support its researchactivities. Under the profit sharing arrangement, the parties share equally in the costs of their separate research and development activities under the alliance, and then share equally in any profits or losses resulting from the marketing and sale of alliance products.

Generally, Abbott is the worldwide distributor of products developed and manufactured by the parties that are covered by the alliance. The Celera Genomics group believes that Abbott’s expertise in the diagnostics industry and its global distribution system enhances the Celera Genomics group’s ability to bring diagnosticproducts to market. Also, the Abbott alliance covers some products that are manufactured by other companies and marketed by Abbott. Although most products marketed by Abbott under the restructured alliance agreement are covered by the profit-sharing arrangement, some of the products manufactured by othercompanies are not part of the profit-sharing arrangement, and instead the Celera Genomics group is entitled to a royalty based on sales by Abbott.

The Celera Genomics group expects to rely substantially on its alliance with Abbott for the success of a major portion of its diagnostic products business strategy for the foreseeable future. The term of the strategic alliance agreement runs until June 2017. Although this is a long-term alliance, the alliance agreement containsprovisions 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 thealliance agreement. Also, the Celera Genomics group cannot ensure that Abbott will perform its obligations as expected. If Abbott terminates the alliance or otherwise fails to conduct its collaborative activities in a timely manner, the Celera Genomics group’s development or commercialization of diagnostic products may bedelayed or otherwise adversely affected.

The Celera Genomics group expects that a significant portion of its nucleic acid-based diagnostic products for the foreseeable future will be covered by the Abbott alliance agreement so long as it remains in effect, and will be marketed, distributed, and sold through Abbott. The Celera Genomics group is also developingproducts not covered by the alliance, but for these products the Celera Genomics group will have to develop its own marketing and distribution capability or find other distributors.
**Note** **16—Segment, Geographic, Customer and Consolidating Information** **Business Segments**
We are organized based on the products and services that we offer. We operate in the life science industry through two reportable segments: the Applied Biosystems group and the Celera Genomics group. We collectively refer to the Applied Biosystems group and the Celera Genomics group as the groups. The AppliedBiosystems 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 newpharmaceuticals. 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 ofbiological terrorism and other malicious, accidental, and natural biological dangers; and quality and safety testing, for example in food and the environment. The Celera Genomics group is primarily a molecular diagnostics business that is using proprietary genomics and proteomics discovery platforms to identify and validatenovel diagnostic markers, and is developing diagnostic products based on these markers as well as other known markers. The Celera Genomics group maintains a strategic alliance with Abbott for the development and commercialization of molecular, or nucleic acid-based, diagnostic products, and it is also developing newdiagnostic products outside of this alliance. Through its genomics and proteomics research efforts, the Celera Genomics group is also discovering and validating therapeutic targets, and it is seeking strategic partnerships to develop therapeutic products based on these discovered targets.

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 Genomics group. Effective January 1, 2006, the Celera Genomics group acquired the Applied Biosystems group’s 50 percentinterest in the Celera Diagnostics joint venture such that it now owns 100 percent of Celera Diagnostics. As a result of this restructuring and the manner by which our management now operates and assesses the business, Celera Diagnostics is no longer a separate segment within Applera and we have restated prior periodconsolidating financial information to reflect this change. Since its formation in fiscal 2001, Celera Diagnostics has been focused on the discovery, development, and commercialization of diagnostic products. As part of the Celera Genomics group, the diagnostics business continues to focus on these areas.

Refer to the consolidating information section of this note for additional information regarding our segments.

 

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75Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Geographic Areas**
Information concerning principal geographical areas for the fiscal years ended June 30 follows:
(Dollar amounts in millions)  **2006**  2005  2004  **Net Revenues From**          **External Customers**          United States  **$**   **888.7**  $   824.7  $   868.5 Europe  **648.1**  607.5  546.8 Japan  **203.7**  225.2  237.8 Other Asia Pacific countries  **136.0**  120.4  110.8 Latin America and other  **72.9**  67.3  61.3  Consolidated  **$1,949.4**  $1,845.1  $1,825.2  
Net revenues are attributable to geographic areas based on the region of destination.

Information concerning long-lived assets at June 30 follows:
(Dollar amounts in millions)  **2006**  2005  2004  **Long-Lived Assets**          United States  **$**   **348.1**  $   387.8  $   391.5 Europe  **32.5**  37.1  41.0 Japan  **11.3**  14.0  14.0 Other Asia Pacific countries  **3.5**  2.5  2.7 Latin America and other  **1.0**  0.6  0.4  Consolidated  **$**   **396.4**  $   442.0  $   449.6  
Long-lived assets exclude goodwill and other intangible assets.
**Customer Information**
We have a large and diverse customer base. No single customer accounted for more than 10% of total net revenues during fiscal 2006, 2005, or 2004.
**Consolidating Information**
Presented below is our 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 and interest income and expense on intercompany borrowings. Our boardof 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.

The management and allocation policies applicable to the attribution of assets, liabilities, revenues and expenses to our segments may be modified or rescinded, or additional policies may be adopted, at the sole discretion of our board of directors at any time without stockholder approval. Our board of directors would makeany decision in accordance with its good faith business judgment that its decision is in the best interests of Applera and all of its stockholders as a whole.

We primarily base the attribution of the assets, liabilities, revenues and expenses to both segments on specific identification of the businesses included in both segments. Where specific identification is not practical, we use other methods and criteria that we believe are equitable and provide a reasonable estimate of theassets, liabilities, revenues and expenses attributable to both segments.
**Intersegment Revenues**
We record the sales of products and services between the segments as intersegment revenues, which are eliminated in determining our consolidated net revenues. These sales are generally made on terms that would be available from third parties in commercial transactions. If similar transactions with third parties are notavailable for purposes of determining fair value, the purchasing business will pay fair value as determined by our board of directors for such products and services or at the cost (including overhead) of the selling business. The selling business records revenues on these transactions when the product is shipped, as theservice is performed, or over the term of the lease, as applicable.
**Access to Technology and Know-How**
Both segments has free access to all of our technology and know-how (excluding products and services of the other segment) that may be useful in that segment’s business, subject to obligations and limitations applicable to us and to such exceptions that our board of directors may determine. The segments consult witheach other on a regular basis concerning technology issues that affect both segments. The costs of developing technology remain in the segment responsible for its development.
**Allocation of Corporate Overhead and Administrative Shared Services**
Our shared corporate services (such as executive management, human resources, legal, accounting, auditing, tax, treasury, strategic planning and environmental services) and related balance sheet amounts have been allocated to the segments based on identification of such services specifically benefiting both segments. Aportion of our costs of administrative shared services (such as information technology services) has been allocated in a similar manner. Where determination based on specific usage alone is not practical, we use other methods and criteria that we believe are equitable and provide a reasonable estimate of the costattributable to both segments. It is not practical to specifically identify a portion of corporate overhead expenses attributable to both of the segments. As a result, we allocate these corporate overhead expenses primarily based on headcount, total expenses, and revenues attributable to both segments. We believe that theallocation methods developed are reasonable and have been consistently applied.

 

 

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76Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Joint Transactions between Segments**
The segments may from time to time engage in transactions jointly, including with third parties. Research and development and other services performed by one segment for a joint venture or other collaborative arrangement will be charged at fair value, as determined by our board of directors. The segments also may jointlyundertake a project where the total costs and benefits of the project are shared. Shipments of products or performance of services related to such joint projects are not recorded as revenues by any of the businesses, but instead are included, at cost, in the total project costs that are shared based on each business’expected benefit.

Our businesses may perform services for one another, which are not directly attributable to either businesses’ revenue generating activities. In these cases the business performing the services charges the benefiting business the cost of performing the services, including overhead.
**Allocation of Federal and State Income Taxes**
The federal income taxes of the Company and its subsidiaries that own assets allocated between the groups are determined on a consolidated basis using the asset and liability approach prescribed by SFAS No. 109, “Accounting for Income Taxes.” If we had used the separate return basis of accounting for taxes, the taxprovision for the Applied Biosystems group would not have changed, but more likely than not, a significant valuation allowance would have been recorded by the Celera Genomics group. We allocate the federal income tax provisions and related tax payments or refunds between the groups based on a consolidated returnapproach taking into account each group’s relative contribution (positive or negative) to our consolidated federal taxable income, tax liability, and tax credit position. We tax intersegment transactions as if both segments were a stand-alone company. We transfer tax benefits that cannot be used by the group generating thosebenefits, but can be used on a consolidated basis, to the group that can use such benefits. We have, and we will continue, to reimburse existing tax benefits acquired by either group in a business combination that are used by the other group, to the group that acquired such benefits. Tax benefits generated by the CeleraGenomics group commencing July 1, 1998, which could be used on a consolidated basis, were reimbursed by the Applied Biosystems group to the Celera Genomics group up to a limit of $75 million.

Pursuant to the terms of the Celera Diagnostics joint venture agreement, which was terminated during fiscal 2006 (see Note 15 to our consolidated financial statements), the Applied Biosystems group reimbursed the Celera Genomics group for tax benefits generated by Celera Diagnostics to the extent such tax benefitswere used by the Applied Biosystems group. These tax benefits were not subject to the $75 million limit described above. The amounts used by the Applied Biosystems group that were not reimbursed to the Celera Genomics group were recorded to allocated net worth of each group in the following Consolidating Statements of Financial Position.

We calculate, depending on the tax laws of the respective jurisdictions, state and local income taxes on either a separate, consolidated, or combined basis. We allocate state and local income tax provisions and related tax payments or refunds between the groups based on the respective contributions of the groups to ourstate or local tax liabilities.
**Financing Activities**
As a matter of policy, we manage most financing activities of the Applied Biosystems group and the Celera Genomics group on a centralized basis. These activities include the investment of surplus cash, the issuance and repayment of short-term and long-term debt, treasury stock repurchases, and the issuance andrepayment of any preferred stock.

Our board of directors has adopted the following financing policy that affects the financial results of the Applied Biosystems group and the Celera Genomics group.

We allocate our debt between the groups (“pooled debt”) or, if we so determine, in its entirety to a particular group. We will allocate preferred stock, if issued, in a similar manner.

Cash allocated to one group that is used to repay pooled debt or redeem pooled preferred stock decreases such group’s allocated portion of the pooled debt or preferred stock. Cash or other property allocated to one group that is transferred to the other group, if so determined by our board of directors, decreases thetransferring group’s allocated portion of the pooled debt or preferred stock and, correspondingly, increases the recipient group’s allocated portion of the pooled debt or preferred stock.

Pooled debt bears interest for the groups at a rate equal to the weighted average interest rate of the debt calculated on a quarterly basis and applied to the average pooled debt balance during the period. Preferred stock, if issued and if pooled in a manner similar to the pooled debt, will bear dividends for the groups at a ratebased on the weighted average dividend rate of the preferred stock similarly calculated and applied. Any expense related to increases in pooled debt or preferred stock will be reflected in the weighted average interest or dividend rate of such pooled debt or preferred stock as a whole. During fiscal 2006 and 2005, there wasno pooled debt or preferred stock outstanding.

If we allocate debt for a particular financing in its entirety to one group, that debt will bear interest for that group at a rate determined by our board of directors. If we allocate preferred stock in its entirety to one group, we will charge the dividend cost to that group in a similar manner. If the interest or dividend cost is higherthan our actual cost, the other group will receive a credit for an amount equal to the difference as compensation for the use of our credit capacity. Any expense related to our debt or preferred stock that is allocated in its entirety to a group will be allocated in whole to that group.

Cash or other property that we allocate to one group that is transferred to the other group could, if so determined by our 

 

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77Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 

board of directors, be accounted for either as a short-term loan or as a long-term loan. Short-term loans bear interest at a rate equal to the weighted average interest rate of our pooled debt. If we do nothave any pooled debt, our board of directors will determine the rate of interest for such loan. Our board of directors establishes the terms on which long-term loans between the groups could be made, including interest rate, amortization schedule, maturity, and redemption terms.

In addition, cash allocated to the Applied Biosystems group may be reallocated to the Celera Genomics group in exchange for Celera Genomics Designated Shares as provided under our Certificate of Incorporation. The number of Celera Genomics Designated Shares issued would be determined by dividing the amount ofcash reallocated by the average market value of Applera-Celera stock over the 20-trading day period immediately prior to the date of the reallocation. As a result of such a reallocation, a relative percentage of future earnings or losses of the Celera Genomics group would be attributed to the Applied Biosystems group. Therewere no Celera Genomics Designated Shares issued during fiscal 2006 or 2005.

Although we may allocate our debt and preferred stock between the groups, the debt and preferred stock remain obligations of the Company and all stockholders of the Company are subject to the risks associated with these obligations.
**Transfers of Assets between Segments**
Transfers of assets can be made between segments without stockholder approval. Such transfers will be made at fair value, as determined by our board of directors. The consideration for such transfers may be paid by one segment to the other in cash or other consideration, as determined by our board of directors.
**Online Marketing and Distribution Agreement**
In April 2002, the Celera Genomics group and the Applied Biosystems group entered into a marketing and distribution agreement under which the Applied Biosystems group became the exclusive distributor of the Celera Genomics group’s CDS database and related human genomic and other biological and medicalinformation. As a result of this arrangement, the Applied Biosystems group integrated the CDS database and other genomic and biological information into its product offerings. In exchange for the rights it acquired under the marketing and distribution agreement, the Applied Biosystems group agreed to pay royalties to theCelera Genomics group based on revenues generated by sales of some of the Applied Biosystems group’s products. However, as part of the restructuring of Celera Diagnostics described above in Note 15 to our consolidated financial statements, as of January 1, 2006, the Applied Biosystems group continues to haveaccess to the Celera Genomics group’s information during the 15 year term of the marketing and distribution agreement but has no further financial obligations to the Celera Genomics group under the agreement.

 

 

 
**Transactions between Segments**
The following table summarizes the related party transactions between our segments for the fiscal years ended June 30:
(Dollar amounts in millions) **2006** 2005 2004  **Applied Biosystems Group**          Sales to the Celera Genomics group (a) **$****6.1** $5.5 $10.0 Nonreimbursable utilization of tax benefits (b)  **64.3**  51.1  12.3 Payments for reimbursable utilization of tax benefits (c)  **8.0**  11.6  16.4  **Celera Genomics Group**          Royalties from the Applied Biosystems group (d) **$****1.9** $3.0 $2.7  (a)The Applied Biosystems group recorded net revenues from leased instruments and sales of consumables and project materials to the Celera Genomics group.  (b)The Applied Biosystems group received, without reimbursement to the Celera Genomics group, some of the tax benefits generated by the Celera Genomics group in accordance with the tax allocation policy described above.  (c)The Applied Biosystems group paid the Celera Genomics group for the use of existing tax benefits acquired by the Celera Genomics group in business combinations and other tax benefits, in accordance with the tax allocation policy described above.  (d)The Celera Genomics group recorded net revenues primarily for royalties generated from sales by the Applied Biosystems group of products integrating CDS and some other genomic and biological information under a marketing and distribution agreement. The Celera Genomics group forgave future royalties related to this agreement as discussed inNote 15 to our consolidating financial statements.
In the following consolidating financial information, the "Eliminations" column represents the elimination of intersegment activity.

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78Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Consolidating Statement of Operations for the Year Ended June** **30, 2006** (Dollar amounts in thousands) AppliedBiosystemsGroup CeleraGenomicsGroup Eliminations Consolidated  Products $1,566,061 $10,809 $— $1,576,870 Services  217,237  1,041     218,278 Other  121,849  32,393     154,242  Net revenues from external customers  1,905,147  44,243  —  1,949,390 Intersegment revenues  6,079  1,964  (8,043)    **Total Net Revenues**  1,911,226  46,207  (8,043) 1,949,390  Products  761,523  12,335  (4,442) 769,416 Services  93,916  2,886  (456) 96,346 Other  11,014  4,462     15,476  **Total Cost of Sales**  866,453  19,683  (4,898) 881,238  **Gross Margin**  1,044,773  26,524  (3,145) 1,068,152  Selling, general and administrative  503,813  28,184  52,486  584,483 Corporate allocated expenses  44,572  7,931  (52,503)   Research, development and engineering  180,295  94,327  (3,263) 271,359 Amortization of purchased intangible assets  4,825  1,091     5,916 Employee-related charges, asset impairments and other  356  26,191     26,547 Asset dispositions and legal settlements  10,546  675     11,221 Acquired research and development  3,400        3,400  **Operating Income (Loss)**  296,966  (131,875) 135  165,226 Gain on investments, net     7,628     7,628 Interest income, net  14,694  22,364     37,058 Other income (expense), net  5,567  (225)    5,342  **Income (Loss) before Income Taxes**  317,227  (102,108) 135  215,254 Provision (benefit) for income taxes  42,110  (39,398) 50  2,762  **Net Income (Loss)** $275,117 $(62,710)$85 $212,492                
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79Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Consolidating Statement of Financial Position at June** **30, 2006** (Dollar amounts in thousands) AppliedBiosystemsGroup CeleraGenomicsGroup 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                
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80Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Consolidating Statement of Cash Flows for the Year Ended June** **30, 2006** (Dollar amounts in thousands) AppliedBiosystemsGroup CeleraGenomicsGroup Eliminations Consolidated  **Operating Activities of Continuing Operations**             Net income (loss) $275,117 $(62,710)$85 $    212,492 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:             Depreciation and amortization  77,164  14,252  (428) 90,988 Asset impairments  215  9,855     10,070 Employee-related charges and other  (1,409) 9,083     7,674 Share-based compensation programs  11,334  1,495     12,829 Deferred income taxes  (72,359) 30,649  (1,079) (42,789)Sale of assets and legal settlements, net  41,880  (6,944)    34,936 Acquired research and development  3,400        3,400 Nonreimbursable utilization of intergroup tax benefits  64,254  (64,254)      Changes in operating assets and liabilities:             Accounts receivable  17,516  (2,865) (252) 14,399 Inventories  3,259  1,139     4,398 Prepaid expenses and other assets  11,027  (7,390) 2,076  5,713 Accounts payable and other liabilities  (56,117) (22,510) (594) (79,221) **Net Cash Provided (Used) by Operating Activities****of Continuing Operations**  375,281  (100,200) (192) 274,889  **Net Cash Used by Operating Activities****of Discontinued Operations**  (135)       (135) **Investing Activities of Continuing Operations**             Additions to property, plant and equipment, net  (41,548) (4,844) 315  (46,077)Proceeds from maturities of available-for-sale investments     317,008     317,008 Proceeds from sales of available-for-sale investments  104,877  208,605     313,482 Purchases of available-for-sale investments  (104,877) (390,871)    (495,748)Acquisitions and investments, net of cash acquired  (279,133)       (279,133)Proceeds from the sale of assets, net  25,593  9,515  (123) 34,985  **Net Cash Provided (Used) by Investing Activities****of Continuing Operations**  (295,088) 139,413  192  (155,483) **Financing Activities**             Net change in loans payable  (72)       (72)Dividends  (23,957)       (23,957)Net cash funding from groups  25,644  (25,644)      Purchases of common stock for treasury  (601,910)       (601,910)Proceeds from stock issued for stock plans and other  140,906  23,536     164,442  **Net Cash Used by Financing Activities**  (459,389) (2,108)    (461,497) **Effect of Exchange Rate Changes on Cash**  (2,984)       (2,984) **Net Change in Cash and Cash Equivalents**  (382,315) 37,105     (345,210)**Cash and Cash Equivalents Beginning of Year**  756,236  23,165     779,401  **Cash and Cash Equivalents End of Year** $373,921 $60,270 $— $434,191                
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81Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Consolidating Statement of Operations for the Year Ended June** **30, 2005** (Dollar amounts in thousands) AppliedBiosystemsGroup CeleraGenomicsGroup Eliminations Consolidated  Products $1,480,771      $9,590      $—      $1,490,361 Services  199,036  6,478     205,514 Other  101,750  47,515     149,265  Net revenues from external customers  1,781,557  63,583  —  1,845,140 Intersegment revenues  5,526  2,944  (8,470)    **Total Net Revenues**  1,787,083  66,527  (8,470) 1,845,140  Products  726,548  10,888  (3,435) 734,001 Services  94,285  2,140  (514) 95,911 Other  13,544  6,890  (1,687) 18,747  **Total Cost of Sales**  834,377  19,918  (5,636) 848,659  **Gross Margin**  952,706  46,609  (2,834) 996,481  Selling, general and administrative  443,546  31,002  50,829  525,377 Corporate allocated expenses  42,042  8,787  (50,829)   Research, development and engineering  192,066  141,399  (2,862) 330,603 Amortization of purchased intangible assets  1,337  2,900     4,237 Employee-related charges, asset impairments and other  31,762  2,614     34,376 Asset dispositions and legal settlements  (38,172)       (38,172) **Operating Income (Loss)**  280,125  (140,093) 28  140,060 Loss on investments, net  (50)       (50)Interest income, net  13,919  14,941     28,860 Other income (expense), net  3,202  1,271     4,473  **Income (Loss) before Income Taxes**  297,196  (123,881) 28  173,343 Provision (benefit) for income taxes  60,302  (46,764) 10  13,548  **Net Income (Loss)** $236,894 $(77,117)$18 $159,795                
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82Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Consolidating Statement of Financial Position at June** **30, 2005** (Dollar amounts in thousands) AppliedBiosystemsGroup CeleraGenomicsGroup Eliminations Consolidated  **Assets**             Current assets             Cash and cash equivalents $756,236 $23,165 $— $779,401 Short-term investments     645,084     645,084 Accounts receivable, net  378,159  6,761  (982) 383,938 Inventories, net  117,168  9,373     126,541 Prepaid expenses and other current assets  139,246  16,948  (3,549) 152,645  Total current assets  1,390,809  701,331  (4,531) 2,087,609 Property, plant and equipment, net  400,422  38,567  (591) 438,398 Goodwill and intangible assets, net  54,643  8,433     63,076 Other long-term assets  413,275  161,556  271  575,102  **Total Assets** $2,259,149 $909,887 $(4,851)$3,164,185  **Liabilities and Stockholders’ Equity**             Current liabilities             Accounts payable $167,060 $11,159 $(4,197)$174,022 Accrued salaries and wages  74,598  16,590     91,188 Current deferred tax liability  12,504        12,504 Accrued taxes on income  66,792  10,535     77,327 Other accrued expenses  225,738  12,626  (734) 237,630  Total current liabilities  546,692  50,910  (4,931) 592,671 Other long-term liabilities  220,461  6,970     227,431  **Total Liabilities**  767,153  57,880  (4,931) 820,102  **Total Stockholders’ Equity**  1,491,996  852,007  80  2,344,083  **Total Liabilities and Stockholders’ Equity** $2,259,149 $909,887 $(4,851)$3,164,185    
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83Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Consolidating Statement of Cash Flows for the Year Ended June** **30, 2005** (Dollar amounts in thousands) AppliedBiosystemsGroup CeleraGenomicsGroup Eliminations Consolidated  **Operating Activities of Continuing Operations**             Net Income (loss) $236,894 $(77,117)$18 $159,795 Adjustments to reconcile net income (loss) to net cash     provided (used) by operating activities:             Depreciation and amortization  82,944  19,247  (236) 101,955 Asset impairments  2,604  (206)    2,398 Employee-related charges and other  23,224  4,707     27,931 Share-based compensation programs  3,966  2,065     6,031 Deferred income taxes  (53,141) 19,084  (814) (34,871)Sale of assets and legal settlements, net  (29,672) 26     (29,646)Nonreimbursable utilization of intergroup tax benefits  51,110  (51,110)      Changes in operating assets and liabilities:             Accounts receivable  6,057  4,025  (611) 9,471 Inventories  13,398  514     13,912 Prepaid expenses and other assets  (9,357) (5,456) 678  (14,135)Accounts payable and other liabilities  6,243  (33,018) 357  (26,418) **Net Cash Provided (Used) by Operating Activities****of Continuing Operations**  334,270  (117,239) (608) 216,423  **Net Cash Provided by Operating Activities****of Discontinued Operations**  338        338  **Investing Activities of Continuing Operations**             Additions to property, plant and equipment, net  (84,591) (9,898) 608  (93,881)Proceeds from maturities of available-for-sale investments     2,022,558     2,022,558 Proceeds from sales of available-for-sale investments  158,150  511,912     670,062 Purchases of available-for-sale investments  (109,525) (2,486,394)    (2,595,919)Other investments  (371)       (371)Proceeds from the sale of assets, net  7,329  42,422     49,751  **Net Cash Provided (Used) by Investing Activities****of Continuing Operations**  (29,008) 80,600  608  52,200  **Financing Activities**             Principal payments on debt     (6,000)    (6,000)Dividends  (33,446)       (33,446)Net cash funding from groups  (4,825) 4,825       Purchases of common stock for treasury  (6,100)       (6,100)Proceeds from stock issued for stock plans and other  47,551  9,431     56,982  **Net Cash Provided by Financing Activities**  3,180  8,256     11,436  **Effect of Exchange Rate Changes on Cash**  (8,866)       (8,866) **Net Change in Cash and Cash Equivalents**  299,914  (28,383)    271,531 **Cash and Cash Equivalents Beginning of Year**  456,322  51,548     507,870  **Cash and Cash Equivalents End of Year** $756,236 $23,165 $— $779,401    
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84Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Consolidating Statement of Operations for the Year Ended June** **30, 2004** (Dollar amounts in thousands) AppliedBiosystemsGroup CeleraGenomicsGroup Eliminations Consolidated  Products $1,441,759 $14,200 $— $1,455,959 Services  178,239  4,201     182,440 Other  111,105  75,689     186,794  Net revenues from external customers  1,731,103  94,090  —  1,825,193 Intersegment revenues  9,995  2,738  (12,733)    **Total Net Revenues**  1,741,098  96,828  (12,733) 1,825,193  Products  719,264  10,307  (3,873) 725,698 Services  91,820  800  (704) 91,916 Other  15,753  19,845  (3,233) 32,365  **Total Cost of Sales**  826,837  30,952  (7,810) 849,979  **Gross Margin**  914,261  65,876  (4,923) 975,214  Selling, general and administrative  418,765  36,932  56,541  512,238 Corporate allocated expenses  46,339  10,202  (56,541)   Research, development and engineering  211,608  145,206  (5,194) 351,620 Amortization of purchased intangible assets  4,619  2,900     7,519 Employee-related charges, asset impairments and other  23,741  18,083     41,824 Asset dispositions and legal settlements  (6,660)       (6,660) **Operating Income (Loss)**  215,849  (147,447) 271  68,673 Gain on investments, net  11,235  24,294     35,529 Interest income, net  12,068  10,769     22,837 Other income (expense), net  592  1,856     2,448  **Income (Loss) before Income Taxes**  239,744  (110,528) 271  129,487 Provision (benefit) for income taxes  67,491  (53,052) 95  14,534  **Income (Loss) from Continuing Operations**  172,253  (57,476) 176  114,953 Income from discontinued operations, net of income taxes  10,628        10,628  **Net Income (Loss)** $182,881 $(57,476)$176 $125,581    
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85Notes to Consolidated Financial Statements — (Continued)Applera Corporation
 
**Consolidating Statement of Cash Flows for the Year Ended June** **30, 2004** (Dollar amounts in thousands) AppliedBiosystemsGroup CeleraGenomicsGroup Eliminations Consolidated  **Operating Activities of Continuing Operations**             Income (loss) from continuing operations $172,253 $(57,476)$176 $114,953 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization  96,776  28,623  (132) 125,267 Asset impairments  19,205  18,083     37,288 Employee-related charges and other  5,456        5,456 Share-based compensation programs  2,410  899     3,309 Deferred income taxes  (21,395) (27,270) (571) (49,236)Sale of assets and legal settlements, net  (11,411) (24,052)    (35,463)Loss from equity method investees     488     488 Nonreimbursable utilization of intergroup tax benefits  12,334  (12,334)      Changes in operating assets and liabilities:             Accounts receivable  39,910  10,896  (1,468) 49,338 Inventories  11,966  (40) (139) 11,787 Prepaid expenses and other assets  (12,329) (1,882) 988  (13,223)Accounts payable and other liabilities  (25,917) (30,758) 1,146  (55,529) **Net Cash Provided (Used) by Operating Activities****of Continuing Operations**  289,258  (94,823) —  194,435  **Net Cash Used by Operating Activities****of Discontinued Operations**  (17,738)       (17,738) **Investing Activities of Continuing Operations**             Additions to property, plant and equipment, net  (60,410) (8,297) 316  (68,391)Proceeds from maturities of available-for-sale investments     2,230,846     2,230,846 Proceeds from sales of available-for-sale investments  345,464  674,852     1,020,316 Purchases of available-for-sale investments  (360,325) (2,836,234)    (3,196,559)Other investments  (288)       (288)Proceeds from the sale of assets, net  3,241  32,296  (316) 35,221  **Net Cash Provided (Used) by Investing Activities****of Continuing Operations**  (72,318) 93,463  —  21,145  **Financing Activities**             Principal payments on debt     (10,000)    (10,000)Dividends  (43,528)       (43,528)Net cash funding from groups  (4,552) 4,552       Purchases of common stock for treasury  (324,999)       (324,999)Proceeds from stock issued for stock plans and other  23,062  5,739     28,801  **Net Cash Provided (Used) by Financing Activities**  (350,017) 291     (349,726) **Effect of Exchange Rate Changes on Cash**  12,871        12,871  **Net Change in Cash and Cash Equivalents**  (137,944) (1,069)    (139,013)**Cash and Cash Equivalents Beginning of Year**  594,266  52,617     646,883  **Cash and Cash Equivalents End of Year** $456,322 $51,548 $— $507,870    
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86Reports of Management Applera Corporation
 
**To the Stockholders of Applera Corporation** **Management Responsibility for Financial Statements**
We are responsible for the accompanying consolidated financial statements. We prepared the financial statements in conformity with accounting principles generally accepted in the United States of America, which requires us to make informed judgments and estimates that we believe are appropriate under thecircumstances. Financial information presented elsewhere in this annual report is consistent with that in the financial statements.

In meeting our responsibility for preparing reliable financial statements, we maintain a system of internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with corporate policy and management authorization. We believe ourinternal controls provide reasonable assurance that errors or irregularities which could be material to the financial statements are prevented or would be detected within a timely period. In designing such controls, we recognize judgments are required to assess and balance the costs and expected benefits of a system ofinternal controls. Adherence to these controls is reviewed through a coordinated audit effort of our internal audit staff and independent registered public accounting firm.

The Audit/Finance Committee of our board of directors is comprised solely of outside directors and is responsible for overseeing and monitoring the quality of our accounting and auditing practices. The independent registered public accounting firm and internal auditors have full and free access to the Audit/FinanceCommittee and meet periodically with the committee to discuss accounting, auditing, and financial reporting matters.
**Management Report on Internal Control Over Financial Reporting**
We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the Unites States of America.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

We conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we conclude that, as of June 30, 2006, our internalcontrol over financial reporting was effective.

Our assessment of the effectiveness of our internal control over financial reporting as of June 30, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Dennis L. WingerSenior Vice President and Chief Financial Officer

Tony L. WhiteChairman, President, and Chief Executive Officer

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87Report of Independent Registered Public Accounting Firm Applera Corporation
 
**To the Board of Directors and Stockholders of Applera Corporation**
We have completed integrated audits of Applera Corporation’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of June 30, 2006 and an audit of its 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting OversightBoard (United States). Our opinions, based on our audits, are presented below.
**Consolidated Financial Statements**
In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Applera Corporation and its subsidiaries at June 30, 2006 and 2005, and the results of theiroperations and their cash flows for each of the three years in the period ended June 30, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation effective July 1, 2005.
**Internal Control over Financial Reporting**
Also, in our opinion, management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of June 30, 2006 based on criteria established in *Internal Control - Integrated Framework* issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on criteriaestablished in *Internal Control - Integrated Framework* issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions onmanagement’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.
PricewaterhouseCoopers LLPStamford, Connecticut August 23, 2006  **