UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December ~~31, 2006~~28, 2008
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to .

Commission file number:000-30361

Illumina, Inc.

(Exact name of Registrant as Specified in Its Charter)


Delaware		33-0804655
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

9885 Towne Centre Drive,
San Diego, California		92121
(Address of Principal Executive Offices)		(zip code)

Registrant’s telephone number, including area code:

(858) 202-4500

Securities registered pursuant to Section 12(b) of the Act:

~~None~~


Title of Each Class		Name of Exchange on Which Registered

Common stock, $0.01 par value		The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

~~Common Stock, $0.01 par value~~None

~~(Title of class)~~

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities ~~Act~~Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o

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


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

~~Large accelerated filer~~ þ ~~Accelerated filer~~ o ~~Non-accelerated filer~~ o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ

As of February ~~1, 2007,~~2, 2009, there were ~~60,049,268~~121,077,875 shares (excluding 17,927,983 shares held in treasury) of the Registrant’s Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of June ~~30, 2006~~27, 2008 (the last business day of the Registrant’s most recently completed second fiscal quarter), based on the closing price for the Common Stock on ~~the~~The NASDAQ Global Select Market on that date, was ~~$1,289,642,486.~~$4,849,118,890. This amount excludes an aggregate of ~~2,471,651~~2,556,098 shares of Common Stock held by officers and directors and each person known by the Registrant to own 10% or more of the outstanding Common Stock. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, directly or indirectly, to direct or cause the direction of the management or policies of the Registrant, or that the Registrant is controlled by or under common control with such person.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for the annual meeting of stockholders expected to be held on ~~June 7, 2007~~May 8, 2009 are incorporated by reference into Items 10 through 14 of Part III of this Report.

PART I


ITEM 1.	*Business.*

This Annual Report onForm 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Item 1A. Risk Factors” in this Annual Report, that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels orof activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report. We are not under any duty to update any of the forward-looking statements after the date we file this Annual Report onForm 10-K or to conform these statements to actual results, unless required by law. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission.

Illumina^®, Array of Arrays^tm, BeadArray^tm, BeadXpress^tm®, CSPro^tm®, DASL^®, GoldenGate^®, Genome Studio^tm, Infinium^®, IntelliHyb^tm®, iSelect^tm®, Making Sense Out of Life^®, Oligator^®, Sentrix^®, ~~VeraCode~~^tm, Solexa^®, ~~MPSS~~and VeraCode^tm® are our trademarks. This report also contains brand names, trademarks or service marks of companies other than Illumina, and these brand names, trademarks and service marks are the property of their respective holders.

Available Information

Our annual report onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, and all amendments to those reports are available free of charge on our website, www.illumina.com. The information on our website is not incorporated by reference into this report. Such reports are made available as soon as reasonably practicable after filing with, or furnishing to, the Securities and Exchange ~~Commission.~~Commission (SEC). The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that electronically file with the SEC. Copies of our annual report will be made available, free of charge, upon written request.

Overview

We are a leading developer, manufacturer and marketer of ~~next-generation life science tools and~~ integrated systems for the large scale analysis of genetic variation and biological function. We were incorporated in California in April 1998 and reincorporated in Delaware in July 2000. Our principal executive offices are located at 9885 Towne Centre Drive, San Diego, California 92121. Our telephone number is(858) 202-4500.

Using our proprietary technologies, we provide a comprehensive line of products and services that currently serve the sequencing, genotyping and gene expression ~~markets, and~~markets. In the future, we expect to enter the market for molecular diagnostics. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. Our tools provide researchers around the world with the performance, throughput, cost effectiveness and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information from advances in genomics and proteomics. We believe this information will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery and clinical research, allow diseases to be detected earlier and permit better choices of drugs for individual patients.

perform a range of analyses, including whole genome ~~resequencing,~~re-sequencing, gene expression analysis and small RNA analysis. We believe ~~our combined company is~~we are the only company with genome-scale technology for sequencing, genotyping and gene expression, ~~and sequencing,~~ the three cornerstones of modern genetic analysis.

During the first quarter of 2008, we reorganized our operating structure into two newly created business segments, Life Sciences and Diagnostics. During 2008, the Diagnostics Business Unit had limited business activity and, accordingly, operating results were reported on an aggregate basis as one operating segment. In the future, at each reporting period end, we will reassess our reportable operating segments, particularly as we enter the market for molecular diagnostics.

On August 1, 2008, we completed the acquisition of Avantome, Inc. (Avantome). As consideration for the acquisition, we paid $25.8 million in cash and may pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. Avantome is a development stage company working on developing low-cost, long read sequencing technology. We ~~were incorporated~~expect this technology, if and when available as a product, to have applicability to both the research and diagnostic markets.

Our Strategy

Our goal is to make our Genome Analyzer, BeadArray and BeadXpress platforms the industry standards for products and services addressing the genetic analysis markets. We plan to achieve this by:


	•	focusing on emerging high-growth markets;

	•	seeking new and complementary technologies through strategic acquisitions and other investments;

	•	expanding our technologies into multiple product lines, applications and market segments; and

	•	strengthening our technological leadership.

Our Markets

Our current technologies serve three primary markets: next-generation sequencing,mid-to-high-complexity microarrays for genotyping and gene expression, and the “applied markets,” the majority of which are comprised of agricultural research. Next-generation sequencing is the most rapidly growing of these three markets. It is fueled by private and public funding, new global initiatives to broadly characterize genetic variation, and the migration of legacy genetic applications to sequencing based technologies. We believe our DNA sequencing systems, coupled with complementary technologies from strategic investments, including the acquisition of Avantome and our collaborative alliance with Oxford Nanopore Technologies will enable us to address numerous market segments with innovative solutions.

In 2009, we expect to enter the market for molecular diagnostics. The molecular diagnostic market is currently estimated at nearly $3 billion with the potential to grow to over $5 billion by 2012. This market assessment covers regulated assays and reagents, and does not factor in ~~California~~laboratory-developed tests, which account for a significant portion of the total market. The primary growth drivers in ~~April 1998.~~the molecular diagnostics market are the continued discovery of genetic markers with proven clinical utility, the increasing adoption of genetic based diagnostic tests, and the expansion of reimbursement programs to include a greater number of approved diagnostic tests. We ~~reincorporated~~believe our Veracode technology platform is ideally suited to provide a cost-effective, high-throughput, mid- to low-multiplex solution to the molecular diagnostic market. We are planning to submit the platform for review by the Food and Drug Administration in ~~Delaware in July 2000. Our principal executive offices are located at 9885 Towne Centre Drive, San Diego, California 92121. Our telephone number is(858) 202-4500.~~2009.

Industry Background

Genetic Variation and Biological Function

Every person inherits two copies of each gene, one from each parent. The two copies of each gene may be identical, or they may be different. These differences are referred to as genetic variation. Examples of the physical consequences of genetic variation include differences in eye and hair color. Genetic variation can also have important medical consequences. Genetic variation affects disease susceptibility, including predisposition

to cancer, diabetes, cardiovascular disease and Alzheimer’s disease. In addition, genetic variation may cause people to respond differently to the same drug treatment. Some people may respond well, others may not respond at all, and still others may experience adverse side effects. A common form of genetic variation is a single-nucleotide polymorphism, or SNP. A SNP is a variation in a single position in a DNA sequence. It is estimated that the human genome contains over ~~nine~~ten million SNPs.

While in some cases a single SNP will be responsible for medically important effects, it is now believed that combinations of SNPs may contribute to the development of most ~~major~~common diseases. Since there are millions of SNPs, it is important to investigate many representative, well-chosen SNPs simultaneously in order to discover medically valuable information.

Another contributor to disease and dysfunction is the over- or under-expression of genes within an organism’s cells. A very complex network of genes interacts to maintain health in complex organisms. The challenge for scientists is to delineate the associated genes’ expression patterns and their relationship to disease. Until recently, this problem was addressed by investigating effects on agene-by-gene basis. This is time consuming and difficulties exist when several pathways cannot be observed or “controlled” at the same time. With the advent of microarray technology, thousands of genes can now be tested at the same time.

There are multiple methods of studying genetic variation and biological function, including sequencing, SNP genotyping and gene expression profiling, each of which is uniquely addressed in our breadth of products and services. Our broad portfolio of current products and services supports a range of applications, from highest multiplexing (for whole-genome discovery and profiling) to mid-and low-multiplexing options (for high-throughput targeted screening).

Sequencing

DNA sequencing is the process of determining the order of bases (A, C, G or T) in a DNA sample, which can be further divided intode novosequencing, re-sequencing and tag sequencing. Inde novosequencing, the goal is to determine the sequence of a representative sample from a species never before sequenced. Understanding the similarities and differences in DNA sequence between many species can help our understanding of the function of the protein structures encoded in the DNA.

In re-sequencing, the sequence of samples from a given species is determined and compared to a standard or reference sequence to identify changes that reflect genetic variation. Re-sequencing studies can be performed on a genome-wide basis, which is referred to as whole-genome re-sequencing, or on targeted areas of the genome (for example, regions identified by genome-wide association study), which is known as targeted re-sequencing. This is an extremely comprehensive form of genetic analysis, in which every base is characterized for possible mutations. We believe that these underlying discoveries will likely feed the development of new array products for broader testing and biomarker validation.

In tag sequencing, short sequences, often representative of a larger molecule or genomic location, are detected and counted. In these applications, the number of times that each tag is seen provides quantification of an underlying biological process. As an example, in digital gene expression, one or more tag sequences may be analyzed for each expressed gene, and the number of copies of these tags which are detected in an experiment is a measure of how actively that gene is being expressed in the tissue sample being analyzed. Similarly, a tag sequencing approach known as ChIP sequencing is used to determine the locations and extent of protein and DNA interactions throughout the genome.

SNP Genotyping

SNP genotyping is the process of determining which base (A, C, G or T) is present at a particular site in the genome within any organism. The most common use of SNP genotyping is for genome-wide association studies (GWAS) to look for an ~~individual~~association between DNA sequence variants and a specific phenotype of interest. This is commonly done by studying the DNA of individuals that are affected by a common disease or ~~other organism.~~that exhibit a specific trait against the DNA of control individuals who do not have this disease or trait. The use of SNP genotyping to obtain meaningful statistics on the effect of an individual SNP or a collection of

Gene Expression Profiling

Gene expression profiling is the process of determining which genes are active in a specific cell or group of cells and is accomplished by measuring mRNA, the intermediary messenger between genes (DNA) and proteins. Variation in gene expression can cause disease, or act as an important indicator of disease or predisposition to disease. By comparing gene expression patterns between cells from different environments, such as normal tissue compared to diseased tissue or in the presence or absence of a drug, specific genes or groups of genes that play a role in these processes can be identified. Studies of this type, often used in drug discovery, require monitoring thousands, and preferably tens of thousands, of mRNAs in large numbers of samples. Once a smaller set of genes of interest has been identified, researchers can then examine how these genes are expressed or suppressed across numerous samples, for example, within a clinical trial.

~~Sequencing~~

DNA sequencing is the process of determining the order of bases (A, C, G or T) in a DNA sample, which can be further divided into de novo sequencing, re-sequencing, and tag sequencing. In de novo sequencing, the goal is to determine the sequence of a representative individual from a species never before sequenced. Understanding the similarities and differences in DNA sequence between many species can help to improve our understanding of the function of the structures found in the DNA.

In re-sequencing, one determines the sequences of many individuals from the same species, generally comparing each to a standard or reference sequence. This is an extremely comprehensive form of genotyping, in which every single base is characterized for possible mutations. Mutations tend to fall in two categories: those which occur fairly frequently at a tiny fraction of bases (e.g. at about 0.1% of bases in humans), and those which occur much less frequently but at a large number of locations. Both types can contribute to diseases. Genotyping can subsequently be used to characterize the former, but re-sequencing is used to assay the latter. With the merger of Illumina and Solexa, we will have~~state-of-the-art~~ ~~technologies for both.~~

In tag sequencing, short sequences, each representative of a larger molecule or genomic location, are detected and counted. In these applications, the number of times that each tag is seen provides quantification of an underlying biological process. As an example, in digital gene expression, one tag sequence may exist for each gene, and the number of copies of this tag which are detected in an experiment is a measure of how actively that gene is being expressed in the tissue sample being analyzed.

Our Strategy

Our goal is to make our Genome Analyzer, BeadArray and BeadXpress platforms the industry standards for products and services addressing the genetic analysis markets. We plan to achieve this by:


	•	focusing on emerging high-growth markets;

	•	seeking new and complementary technologies through strategic acquisitions and other investments;

	•	expanding our technologies into multiple product lines, applications and market segments; and

	•	strengthening our technological leadership.

Our Markets

In 2009, we expect to enter the market for molecular diagnostics. The molecular diagnostic market is currently estimated at nearly $3 billion with the potential to grow to over $5 billion by 2012. This market assessment covers regulated assays and reagents, and does not factor in laboratory-developed tests, which account for a significant portion of the total market. The primary growth drivers in the molecular diagnostics market are the continued discovery of genetic markers with proven clinical utility, the increasing adoption of genetic based diagnostic tests, and the expansion of reimbursement programs to include a greater number of approved diagnostic tests. We believe our Veracode technology platform is ideally suited to provide a cost-effective, high-throughput, mid- to low-multiplex solution to the molecular diagnostic market. We are planning to submit the platform for review by the Food and Drug Administration in 2009.

Industry Background

~~BeadArray Technology~~Genetic Variation and Biological Function

~~We have developed a proprietary array technology that enables~~Every person inherits two copies of each gene, one from each parent. The two copies of each gene may be identical, or they may be different. These differences are referred to as genetic variation. Examples of the ~~large-scale analysis~~physical consequences of genetic variation include differences in eye and ~~biological function. Our BeadArray technology combines microscopic beads and a substrate in a simple proprietary manufacturing process to produce arrays that~~hair color. Genetic variation can perform many assays simultaneously. Our BeadArray technology provides a unique combination of high throughput, cost effectiveness, and flexibility. We achieve high throughput with a high density of test sites per array and we are able to format arrays either in a pattern arranged to match the wells of standard microtiter plates or in various configurations in the format of standard microscope slides. We seek to maximize cost effectiveness by reducing consumption of expensive reagents and valuable samples, and through the low manufacturing costs associated with our technologies. Our ability to vary the size, shape and format of the well patterns and to create specific bead pools, or sensors, for different applications provides the flexibility to address multiple markets and market segments. We believe that these featuresalso have ~~enabled our BeadArray technology to become a leading platform for the emerging high-growth market of SNP genotyping and expect they will enable us to become a key player in the gene expression market.~~

Our proprietary BeadArray technology combines microwells etched into a substrate and specially prepared beads that self-assemble into an array. We have deployed our BeadArray technology in two different array formats, the Array Matrix and the BeadChip. Our first bead-based product was the Array Matrix which incorporates fiber optic bundles. The fiber optic bundles, which we cut into lengths of less than one inch, are manufactured to our specifications. Each bundle is comprised of approximately 50,000 individual fibers and 96 of these bundles are placed into an aluminum plate, which forms an Array Matrix. BeadChips are fabricated in microscope slide-shaped sizes with varying numbers of sample sites per slide. Both formats are chemically etched to create tens to hundreds of thousands of wells for each sample site.

In a separate process, we create sensors by affixing a specific type of molecule to each of the billions of microscopic beads in a batch. We make different batches of beads, with the beads in a given batch coated with one particular type of molecule. The particular molecules on a bead define that bead’s function as a sensor. For example, we create a batch of SNP sensors by attaching a particular DNA sequence, or oligo, to each bead in the batch. We combine batches of coated beads to form a pool specific to the type of array we intend to create. A bead pool one milliliter in volume contains sufficient beads to produce thousands of arrays.

To form an array, a pool of coated beads is brought into contact with the array surface where they are randomly drawn into the wells, one bead per well. The tens of thousands of beads in the wells comprise our individual arrays. Because the beads assemble randomly into the wells, we perform a final procedure called ’decoding’ in order to determine which bead type occupies which well in the array. We employ several proprietary methods for decoding, a process that requires only a few steps to identify all the beads in the array. One beneficial by-product of the decoding process is a validation of each bead in the array. This quality control test characterizes the performance of each bead and can identify and eliminate use of any empty wells. We ensure that each bead type on the array is sufficiently represented byimportant medical consequences. Genetic variation affects disease susceptibility, including multiple copies of each bead type. Multiple bead type copies improve the reliability and accuracy of the resulting data by allowing statistical processing of the results of identical beads. We believe we are the only microarray company to provide this level of quality control in the industry.predisposition

~~An experiment is performed by preparing a sample, such as DNA from a patient,~~to cancer, diabetes, cardiovascular disease and ~~introducing it~~Alzheimer’s disease. In addition, genetic variation may cause people to respond differently to the ~~array. The design features~~same drug treatment. Some people may respond well, others may not respond at all, and still others may experience adverse side effects. A common form of ~~our Array Matrix allow it to be simply dipped into~~genetic variation is a ~~solution containing the sample, whereas our BeadChip allows processing of samples on~~single-nucleotide polymorphism, or SNP. A SNP is a slide-sized platform. The molecules in the sample bind to their matching molecules on the coated bead. These molecules in either the sample or on the bead are labeled with a fluorescent dye either before or after the binding. The BeadArray Reader detects the fluorescent dye by shining a laser on the fiber optic bundle or on the BeadChip. This allows the detection of the molecules resultingvariation in a ~~quantitative analysis~~single position in a DNA sequence. It is estimated that the human genome contains over ten million SNPs.

While in some cases a single SNP will be responsible for medically important effects, it is now believed that combinations of SNPs may contribute to the ~~sample.~~development of most common diseases. Since there are millions of SNPs, it is important to investigate many representative, well-chosen SNPs simultaneously in order to discover medically valuable information.

~~VeraCode Technology~~Sequencing

~~The BeadArray technology~~DNA sequencing is ~~most effective~~the process of determining the order of bases (A, C, G or T) in ~~applications~~a DNA sample, which ~~require mid-~~can be further divided intode novosequencing, re-sequencing and tag sequencing. Inde novosequencing, the goal is to ~~high levels~~determine the sequence of ~~multiplexing~~a representative sample from ~~low~~a species never before sequenced. Understanding the similarities and differences in DNA sequence between many species can help our understanding of the function of the protein structures encoded in the DNA.

In re-sequencing, the sequence of samples from a given species is determined and compared to ~~high levels~~a standard or reference sequence to identify changes that reflect genetic variation. Re-sequencing studies can be performed on a genome-wide basis, which is referred to as whole-genome re-sequencing, or on targeted areas of ~~throughput. Multiplexing refers to~~the genome (for example, regions identified by genome-wide association study), which is known as targeted re-sequencing. This is an extremely comprehensive form of genetic analysis, in which every base is characterized for possible mutations. We believe that these underlying discoveries will likely feed the development of new array products for broader testing and biomarker validation.

In tag sequencing, short sequences, often representative of a larger molecule or genomic location, are detected and counted. In these applications, the number of ~~individual pieces~~times that each tag is seen provides quantification of ~~information that are simultaneously extracted from~~an underlying biological process. As an example, in digital gene expression, one ~~sample. We believe~~or more tag sequences may be analyzed for each expressed gene, and the ~~molecular diagnostics market will require systems~~number of copies of these tags which are ~~extremely high throughput and cost effective~~detected in an experiment is a measure of how actively that gene is being expressed in the ~~mid-~~tissue sample being analyzed. Similarly, a tag sequencing approach known as ChIP sequencing is used to~~low-multiplex~~ ~~range. To address this market, we acquired~~ determine the ~~VeraCode technology through our acquisition~~locations and extent of ~~CyVera Corporation in April 2005. Based on digitally encoded microbeads, VeraCode enables low-cost multiplexing from 1 to 384-plex in a single well. We plan to implement~~protein and DNA interactions throughout the VeraCode technology using our newly designed BeadXpress system and our existing assays. We believe that this system will enable lower multiplex genotyping, gene expression and protein based assays. In the research market, we expect our customers to utilize our BeadArray technology for their higher multiplex projects and then move to our BeadXpress system for their lower multiplex projects utilizing the same assays. Additionally, we believe that the cost and multiplex advantages of the BeadXpress system using our VeraCode technology will be welcomed in the molecular diagnostics market. We expect to launch the BeadXpress system during the first quarter of 2007, along with several assays for the system.genome.

~~Oligator Technology~~SNP Genotyping

~~Genomic applications require many different short pieces~~SNP genotyping is the process of DNA that can be made synthetically, called oligos. We have developed our proprietary Oligator technology for the parallel synthesis of many different oligos to meet the requirements of large-scale genomics applications. We believe that our Oligator technologydetermining which base (A, C, G or T) is substantially more cost effective and provides significantly higher throughput than available commercial alternatives. Our synthesis machines are computer controlled and utilize many robotic processes to minimize the amount of labor usedpresent at a particular site in the ~~manufacturing process. In 2005, we implemented our fourth-generation Oligator technology, which~~genome within any organism. The most common use of SNP genotyping is ~~capable~~for genome-wide association studies (GWAS) to look for an association between DNA sequence variants and a specific phenotype of ~~manufacturing over 13,000 different oligos per run.~~interest. This is commonly done by studying the DNA of individuals that are affected by a common disease or that exhibit a specific trait against the DNA of control individuals who do not have this disease or trait. The use of SNP genotyping to obtain meaningful statistics on the effect of an ~~improvement over prior generations~~individual SNP or a collection of technology where we could only manufacture approximately 3,000 oligos per run. This increase in scale was necessary to enable us to support the manufacture of oligos under our collaboration with Invitrogen as well as to support our increased internal need for oligos, a critical component of our BeadArray technology, for product sales and new product development.

SNPs requires the analysis of millions of SNP genotypes and the testing of large populations for each disease. For example, a single large study could involve genotyping more than 1,000,000 SNPs per patient in more than 1,000 patients, thus requiring 1 billion assays. Using previously available technologies, this scale of SNP genotyping was both impractical and prohibitively expensive.

Large-scale SNP genotyping can be used in a variety of ways, including studies designed to understand the genetic contributions to disease (disease association studies), genomics based drug development, clinical trial analysis (responders and non-responders, and adverse event profiles), disease predisposition testing, and disease diagnosis. SNP genotyping can also be used outside of healthcare, for example in the development of plants and animals with commercially desirable characteristics. These markets will require billions of SNP genotyping assays annually.

~~Sequencing Technology~~Gene Expression Profiling

~~Our DNA sequencing technology, acquired~~Gene expression profiling is the process of determining which genes are active in a specific cell or group of cells and is accomplished by measuring mRNA, the intermediary messenger between genes (DNA) and proteins. Variation in gene expression can cause disease, or act as ~~part~~an important indicator of disease or predisposition to disease. By comparing gene expression patterns between cells from different environments, such as normal tissue compared to diseased tissue or in the presence or absence of a drug, specific genes or groups of genes that play a role in these processes can be identified. Studies of this type, often used in drug discovery, require monitoring thousands, and preferably tens of thousands, of mRNAs in large numbers of samples. Once a smaller set of genes of interest has been identified, researchers can then examine how these genes are expressed or suppressed across numerous samples, for example, within a clinical trial.

As gene expression patterns are correlated to specific diseases, gene expression profiling is becoming an increasingly important diagnostic tool. Diagnostic use of expression profiling tools is anticipated to grow rapidly with the combination of the ~~Solexa merger which was completed on January 26, 2007, is based on use~~sequencing of ~~oursequencing-by-synthesis~~ (SBS) biochemistry. In SBS, single stranded DNA is extended from a priming site, one base at a time, using reversible terminator nucleotides. These are DNA bases which can be added to a growing second strand, but which initially cannot be further extended. This means that at each cycle of the chemistry, only one base can be added. Each base which is added includes a fluorescent label which is specific to the particular base. Thus following incorporation, the fluorescence can be imaged, its color determined,various genomes and the ~~base itself can be inferred. Once this is done, an additional step removes both the fluorescence and the block that had prevented further extension~~availability of the second strand. This allows another base to be added, and the cycle can be repeated. We have shown data in which this cycle is repeated up to 50 times, thus determining DNA sequences which are up to 50 bases long. This may well increase in the future as we further develop this technology. The reversible terminator bases which we use are novel synthetic molecules which we manufacture. They are not well incorporated by naturally occurring polymerases, so we have also developed proprietary enzymes for this purpose. Both the nucleotides and enzymes are the subject of significant intellectual property.more cost-effective technologies.

In our DNA sequencing systems, we apply the SBS biochemistry on microscopic islands of DNA. These are called DNA clusters. Each cluster starts as a single DNA molecule, typically a few hundred bases long, attached to the inside surface of a flow cell. We then use a proprietary amplification biochemistry to create copies of each starting molecule. As the copies are made, they are covalently linked to the surface, so they cannot diffuse away. After a number of cycles of amplification, each cluster might have 500 to 1,000 copies of the original starting molecule, but still be only about a micron (one-millionth of a meter) in diameter. By making so many copies, the fluorescent signal from each cluster is significantly increased. Because the clusters are so small though, tens of millions of clusters can be independently formed inside a single flow cell. This large number of clusters can then be sequenced simultaneously, by alternate cycles of SBS biochemistry and electronic imaging.

~~Key Advantages of Our Technology~~

We believe that our technology provides distinct advantages, in a variety of applications, over competing technologies, by creating cost-effective, highly miniaturized arrays with the following characteristics:

~~High Throughput.~~ The miniaturization of our BeadArray technology provides very high information content per unit area. To increase sample throughput, we have formatted our array matrix in a pattern arranged to match the wells of standard microtiter plates, allowing throughput levels of up to nearly 150,000 unique assays per microtiter plate, and we use laboratory robotics to speed process time. Similarly, we have patterned our whole-genome expression BeadChips to support up to 48,000 gene expression assays for six samples with each BeadChip, and our whole-genome genotyping BeadChips to support up to 650,000 genotypes with each BeadChip. Our Infinium and GoldenGate assays are supported by full automation and LIMS to address high throughput laboratories. Our Illumina Genome Analyzer can analyze the DNA sequences of tens of millions of clusters at one time.

~~Cost Effectiveness.~~ Our array products substantially reduce the cost of our customers’ experiments as a result of our proprietary manufacturing process and our ability to capitalize on cost reductions generated by advances in fiber optics, plasma etching processes, digital imaging and bead chemistry. In addition, our products require smaller reagent volumes than other array technologies, thereby reducing reagent costs for our customers. Our Oligator technology further reduces reagent costs, as well as reducing our cost of coating beads used in our BeadArray and VeraCode technologies. We expect the Illumina Genome Analyzer to allow DNA sequencing at 1/100th of the cost of conventional capillary instruments.

~~Flexibility.~~ We are able to offer flexible solutions to our customers based on our ability to attach different kinds of molecules, including DNA, RNA, proteins and other chemicals, to our beads. In addition, we can have BeadChips manufactured in multiple shapes and sizes with wells organized in various arrangements to optimize them for different markets and market segments. In combination, the use of beads and etched wells provides the flexibility and scalability for our BeadArray technology to be tailored to perform many applications in many different market segments, from drug discovery to diagnostics. Our Oligator technology allows us to manufacture a wide diversity of lengths and quantities of oligos. DNA sequences determined with our Illumina Genome Analyzer can also be used to identify larger DNA or RNA molecules from which the sequences have been derived, which leads to a series of applications based on tag sequencing, including digital gene expression analysis and microRNA discovery and quantification.

~~Quality and Reproducibility.~~ The quality of our products is dependent upon each element in the system — the array, the assay used to perform the experiment and the instrumentation and software used to capture the results. Each array is manufactured with a high density of beads, which enables us to have multiple copies of each individual bead type. We measure the copies simultaneously and combine them into one data point. This allows us to make a comparison of each bead against its own population of identical beads, which permits the statistical calculation of a more reliable and accurate value for each data point. Finally, the manufacture of the array includes a proprietary decoding step that also functions as a quality control test of every bead on every array, improving the overall quality of the data. When we develop the assays used with our products, we focus on performance, cost and ease of use. By developing assays that are easy to use, we can reduce the potential for the introduction of error into the experiment. We believe that this enables researchers to obtain high quality and reproducible data from their experiments. Additionally, we manufacture substantially all of the reagents used in our assays, allowing us to control the quality of the product delivered to the customer.

Our Strategy

Our goal is to make our ~~BeadArray, BeadXpress and Illumina~~ Genome Analyzer, BeadArray and BeadXpress platforms the industry ~~standard~~standards for products and services addressing the genetic analysis markets. We plan to achieve this by:


	•	focusing on emerging high-growth markets;

	•	~~rapidly commercializing our BeadLab, BeadStation, BeadXpress, Illumina Genome Analyzer, Array Matrix~~seeking new and ~~BeadChip products;~~complementary technologies through strategic acquisitions and other investments;

	•	expanding our technologies into multiple product lines, applications and market segments; and

	•	strengthening our technological leadership.

~~Products and Services~~Our Markets

~~The first implementation of our BeadArray technology, the Array Matrix, is a disposable matrix with 96 fiber optic bundles arranged in a pattern that matches the standard~~Our current technologies serve three primary markets: next-generation sequencing,~~96-well~~mid-to-high-complexity microtiter plate. Each fiber optic bundle performs more than 1,500 unique assays. The BeadChip, introduced in 2003, is fabricated in multiple configurations to support multiple applications and scanning technologies.

~~We have provided genotyping services using our proprietary BeadArray technology since 2001. In addition, we have developed our first~~microarrays for genotyping and gene expression, ~~products~~and the “applied markets,” the majority of which are comprised of agricultural research. Next-generation sequencing is the most rapidly growing of these three markets. It is fueled by private and public funding, new global initiatives to broadly characterize genetic variation, and the migration of legacy genetic applications to sequencing based ~~on this technology.~~technologies. We believe our DNA sequencing systems, coupled with complementary technologies from strategic investments, including the acquisition of Avantome and our collaborative alliance with Oxford Nanopore Technologies will enable us to address numerous market segments with innovative solutions.

In 2009, we expect to enter the market for molecular diagnostics. The molecular diagnostic market is currently estimated at nearly $3 billion with the potential to grow to over $5 billion by 2012. This market assessment covers regulated assays and reagents, and does not factor in laboratory-developed tests, which account for a significant portion of the total market. The primary growth drivers in the molecular diagnostics market are the continued discovery of genetic markers with proven clinical utility, the increasing adoption of genetic based diagnostic tests, and the expansion of reimbursement programs to include a greater number of approved diagnostic tests. We believe our Veracode technology platform is ideally suited to provide a cost-effective, high-throughput, mid- to low-multiplex solution to the molecular diagnostic market. We are planning to submit the platform for review by the Food and Drug Administration in 2009.

Industry Background

Genetic Variation and Biological Function

Every person inherits two copies of each gene, one from each parent. The two copies of each gene may be identical, or they may be different. These ~~products~~differences are referred to as genetic variation. Examples of the physical consequences of genetic variation include ~~disposable Array Matrices~~differences in eye and ~~BeadChips, GoldenGate and Infinium reagent kits for SNP genotyping, BeadArray Reader scanning instruments and an evolving portfolio of custom and standard gene expression products.~~hair color. Genetic variation can also have important medical consequences. Genetic variation affects disease susceptibility, including predisposition

While in some cases a single SNP will be responsible for medically important effects, it is now believed that combinations of SNPs may contribute to the development of most common diseases. Since there are millions of SNPs, it is important to investigate many representative, well-chosen SNPs simultaneously in order to discover medically valuable information.

Sequencing

SNP Genotyping

~~In 2001, we introduced the first commercial application of our BeadArray technology by launching our~~ SNP genotyping ~~services product line. Since this launch, we have had peak days in~~is the process of determining which ~~we operated~~base (A, C, G or T) is present at ~~over 60 million genotypes per day. To our knowledge, no other genotyping platform can achieve comparable levels of throughput while delivering such high accuracy and low cost.~~

~~We designed our first consumable BeadArray product, the Array Matrix, for SNP genotyping. The Array Matrix uses~~ a universal format that allows it to analyze any set of SNPs. We have also developed reagent kits based on GoldenGate assay protocols and the BeadArray Reader, a laser scanner, which is used to read our array products.

Depending on throughput and automation requirements, our customers can select the system configuration to best meet their needs. For production-scale throughput, our BeadLab would be appropriate, and for moderate-scale throughput, our BeadStation would be selected. Our BeadLab includes our BeadArray Reader, combined with LIMS, standard operating procedures and analytical software and fluid handling robotics. This production-scale system was commercialized in late 2002 and when installed, this system can routinely produce millions of genotypes per day.

The BeadStation, a system for performing moderate-scale genotyping designed to match the throughput requirements of individual research groups and core labs, was commercialized in late 2003. The BeadStation includes our BeadArray Reader and genotyping~~and/or~~ gene expression analysis software. Multiple BeadStations can be configured to achieve different levels of desired throughput and are fully upgradeable to a full BeadLab through various steps that add automation, sample preparation equipment and LIMS capability.

In 2003, we announced the availability of an assay set for genetic linkage analysis. This standard product has been deployed in our genotyping services operation and is also sold to customers who use our SNP genotyping systems. Genetic linkage analysis can help identify chromosomal regions with potential disease associations across a related set of samples.

~~In 2005, we announced the introduction of the Major Histocompatability Complex (MHC) Panel Set, which allows the interrogation of adifficult-to-assay~~ area of the genome, often associated with autoimmune diseases. In addition, we announced the introduction of Mouse-6 and MouseRef-8 Gene Expression BeadChip allowing the study of the levels of gene expression in mouse model.

In 2005, we commenced shipping the Sentrix Human-1 Genotyping BeadChip for whole-genome genotyping. This BeadChip provides to scientists the ability to interrogate over 100,000 SNPs located in high-value genetic regions of the human genome. Also, in the fourth quarter of 2005, we began shipping the new Sentrix HumanHap300 Genotyping BeadChip to customers around the world. Using the Infinium assay, which enables us to select virtually any SNPparticular site in the genome within any organism. The most common use of SNP genotyping is for genome-wide association studies (GWAS) to look for an association between DNA sequence variants and a specific phenotype of interest. This is commonly done by studying the ~~HumanHap300 BeadChip allows analysis~~DNA of ~~more than 317,000 SNPs. We selected~~individuals that are affected by a common disease or that exhibit a specific trait against the ~~SNPs for inclusion~~DNA of control individuals who do not have this disease or trait. The use of SNP genotyping to obtain meaningful statistics on the ~~chip in collaboration with~~effect of an individual SNP or a ~~consortium~~collection of scientists that are leaders in the genotyping field. We believe this product’s quality and performance support our expectation that it will become an important discovery tool for researchers seeking to understand the genetic basis of common yet complex diseases.

~~In 2006, we introduced several new SNP genotyping products, including:~~


	•	~~Sentrix HumanHap240S BeadChip.~~ The HumanHap240S BeadChip is a companion to our Sentrix HumanHap300 BeadChip for genome-wide disease association studies that enables researchers to interrogate an additional 240,000 SNPs utilizing our Infinium assay. We began shipment of this product in the first quarter of 2006.

	•	~~Sentrix HumanHap550 BeadChip.~~ ~~The HumanHap550 BeadChip contains over 550,000 SNPs on a single microarray. We began shipment of this product in the second quarter of 2006.~~


	•	~~Sentrix HumanHap650Y BeadChip.~~ The HumanHap650Y BeadChip contains over 650,000 SNP markers on a single microarray, which we believe provides the most comprehensive genomic coverage and highest data quality of any whole-genome genotyping product currently available. We began shipment of this product in the third quarter of 2006.

	•	~~Sentrix HumanHap550+ BeadChip.~~ The HumanHap550+ BeadChip allows customers to add up to 120,000 custom SNP markers to supplement the standard content provided on the existing Sentrix HumanHap550 BeadChip, yielding up to 670,000 markers for association studies.

	•	~~iSelect Infinium genotyping products.~~ The iSelect Infinium genotyping product line is used for focused content applications. Customers can create a custom array of up to 60,000 SNP markers per sample with 12 samples per chip. We began shipment of these products in the third quarter of 2006.

	•	~~HumanHap300-Duo and the Human Hap300-Duo+ Genotyping BeadChips.~~ ~~TheHumanHap300-Duo~~ allows researchers to analyze two samples simultaneously, with over 634,000 total tag SNPs on a single BeadChip. The HumanHap300-Duo+ allows for the addition of 60,000 custom SNP loci to the base product, enabling researchers to enrich that product with SNPs of interest in any genomic region. We began shipment of the HumanHap300-Duo in the fourth quarter of 2006.

	•	~~RatRef-12 Expression BeadChip.~~ The RatRef-12 Expression BeadChip enables analysis of 12 samples in parallel on a single BeadChip. Content for this BeadChip is derived from the NCBI RefSeq database (Release 16), with over 22,000 rat transcripts represented. We began shipment of this product in the fourth quarter of 2006.

~~Through an application called Copy Number Polymorphisms,~~Large-scale SNP genotyping can be used in a variety of ways, including studies designed to understand the ~~HumanHap family~~genetic contributions to disease (disease association studies), genomics based drug development, clinical trial analysis (responders and non-responders, and adverse event profiles), disease predisposition testing, and disease diagnosis. SNP genotyping can also be used outside of BeadChips also provides high-resolution information on amplifications, deletions and loss of heterozygosity throughout the genome, abnormalities common in cancers and congenital diseases. In addition, we announced additional standard panelshealthcare, for example in the ~~first quarter~~development of ~~2006, including mouse linkage~~plants and ~~cancer panels.~~animals with commercially desirable characteristics. These markets will require billions of SNP genotyping assays annually.

Gene Expression Profiling

~~With~~Gene expression profiling is the ~~addition~~process of ~~application~~determining which genes are active in a specific ~~accessory kits,~~cell or group of cells and is accomplished by measuring mRNA, the intermediary messenger between genes (DNA) and proteins. Variation in gene expression can cause disease, or act as an important indicator of disease or predisposition to disease. By comparing gene expression patterns between cells from different environments, such as normal tissue compared to diseased tissue or in the presence or absence of a drug, specific genes or groups of genes that play a role in these processes can be identified. Studies of this type, often used in drug discovery, require monitoring thousands, and preferably tens of thousands, of mRNAs in large numbers of samples. Once a smaller set of genes of interest has been identified, researchers can then examine how these genes are expressed or suppressed across numerous samples, for example, within a clinical trial.

Our Technologies

Sequencing Technology

Our DNA sequencing technology, acquired as part of the Solexa merger in the first quarter of 2007, is based on the use of our ~~production-scale BeadLabs~~sequencing-by-synthesis (SBS) biochemistry. In SBS, single stranded DNA is extended from a priming site, one base at a time, using reversible terminator nucleotides. These are DNA bases which can be added to a growing second strand, but which initially cannot be further extended. This means that at each cycle of the chemistry, only one base can be added. Each base which is added includes a fluorescent label which is specific to the particular base. Thus following incorporation, the fluorescence can be imaged, its color determined, and ~~BeadStations are~~the base itself can be inferred. Once this is done, an additional step removes both the fluorescence and the blocking group that had prevented further extension of the second strand. This allows another base to be added, and the cycle can be repeated. Our technology is capable of ~~performing~~generating several billion bases of DNA sequence from a ~~growing number~~single experiment with a single sample preparation. The reversible terminator bases that we use are novel synthetic molecules which we manufacture. They are not well incorporated by naturally occurring polymerases, so we have also developed proprietary polymerase enzymes for this purpose. Both the nucleotides and enzymes are the subject of ~~applications, including gene expression profiling.~~significant intellectual property owned by us.

In ~~2003,~~our DNA sequencing systems, we ~~introduced our focused set gene expression products~~apply the SBS biochemistry on ~~both~~microscopic islands of DNA, referred to as DNA clusters. Each cluster starts as a single DNA molecule, typically a few hundred bases long, attached to the ~~Array Matrix and BeadChip platforms. Our system includes~~inside surface of a ~~BeadArray Reader for imaging Array Matrices and BeadChips,~~flow cell. We then use a ~~hybridization chamber and software for data extraction. In addition, we~~proprietary amplification biochemistry to create copies of each starting molecule. As the copies are made, they are covalently linked to the surface, so they cannot diffuse away. After a number of cycles of amplification, each cluster might have ~~developed standard gene expression products for each~~500 to 1,000 copies of the ~~human, mouse and arabidopsis genomes with an additional panel that focuses on human toxicology.~~

~~In 2005, we began shipment~~original starting molecule, but still be only about a micron (one-millionth of a meter) in diameter. By making so many copies, the ~~Human-6 and HumanRef-8 Expression BeadChip products. Both products allow large-scale expression profiling~~fluorescent signal from each cluster is significantly increased. Because the clusters are so small, tens of ~~multiple samples on~~millions of clusters can be independently formed inside a single chip and are imaged using our BeadArray Reader. The Human-6 BeadChip is designed to analyze six discrete whole-human-genome samples on one chip, interrogating in each sample approximately 48,000 transcripts from the estimated 30,000 genes in the human genome. The HumanRef-8 BeadChip product analyzes eight samples in parallel against 24,000 transcripts from the roughly 22,000 genes represented in the consensus RefSeq database, a well-characterized whole-genome subset used broadly in genetic analysis. We expect that these gene expression BeadChips will dramatically reduce the cost of whole-genome expression analysis, allowing researchers to expand the scale and reproducibility of large-scale biological experimentation. In 2006, we began shipment of the RatRef-12, which analyzes twelve samples in parallel against 22,226 transcripts from the roughly 21,910 genes represented in the RefSeq database, release 16.flow cell. This

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large number of clusters can then be sequenced simultaneously by alternate cycles of SBS biochemistry and fluorescent imaging.

~~Scanning~~ BeadArray Technology

Our BeadArray technology combines microscopic beads and a substrate in a simple proprietary manufacturing process to produce arrays that can perform many assays simultaneously, enabling large-scale analysis of genetic variation and biological function in a unique high-throughput, cost effective, and flexible manner. We achieve high-throughput with a high density of test sites per array and we are able to format arrays either in a pattern arranged to match the wells of standard microtiter plates or in various configurations in the format of standard microscope slides. We seek to maximize cost effectiveness by reducing consumption of expensive reagents and valuable samples, and through the low manufacturing costs associated with our technologies. Our ability to vary the size, shape and format of the well patterns and to create specific bead pools, or sensors, for different applications provides the flexibility to address multiple markets and market segments. We believe that these features have enabled our BeadArray technology to become a leading platform for the high-growth market of SNP genotyping and have allowed us to be a key player in the gene expression market.

Our proprietary BeadArray technology consists of prepared beads that self-assemble into microwells etched into an array substrate. We have deployed our BeadArray technology in two different array formats, the Array Matrix and the BeadChip. Our first bead based product was the Array Matrix which incorporates fiber optic bundles. Each bundle is comprised of approximately 50,000 individual fibers and 96 of these bundles are placed into an aluminum plate to form an Array Matrix. BeadChips are microscope slide-size silicon wafers with varying numbers of sample sites per slide. Both formats are chemically etched to create tens of thousands to tens of millions of wells for each sample site.

In a separate process, we create sensors by affixing a specific type of molecule to each of the billions of microscopic beads in a batch. We make different batches of beads, with the beads in a given batch coated with one particular type of molecule. The particular molecules on a bead define that bead’s function as a sensor. For example, we create a batch of SNP sensors by attaching a particular DNA sequence, or a short segment of synthetically manufactured DNA called an oligonucleotide (oligo), to each bead in the batch. We combine batches of coated beads to form a pool specific to the type of array we intend to create. A bead pool one milliliter in volume contains sufficient beads to produce thousands of arrays.

To form an array, a pool of coated beads is brought into contact with the array surface where they are randomly drawn into the wells, one bead per well. The beads in the wells comprise our individual arrays. Because the beads assemble randomly into the wells, we perform a final procedure called “decoding” in order to determine which bead type occupies which well in the array. We employ several proprietary methods for decoding, a process that requires only a few steps to identify all the beads in the array. One beneficial by-product of the decoding process is a functional validation of each bead in the array. This quality control test characterizes the performance of each bead and can identify and eliminate use of any empty wells. We ensure that each bead type on the array is sufficiently represented by including multiple copies of each bead type. Multiple bead type copies improve the reliability and accuracy of the resulting data by allowing statistical processing of the results of identical beads. We believe we are the only microarray company to provide this level of quality control in the industry.

An experiment is performed by preparing a sample, such as DNA, and introducing it to the array. The molecules in the sample bind to their matching molecules on the coated beads. The molecules in either the sample or on the bead are labeled with fluorescent dye either before or after the binding. The iScan or BeadArray Reader detects the fluorescent dye by shining a laser on the fiber optic bundle or on the BeadChip. This allows the detection of the molecules resulting in a quantitative analysis of the sample.

VeraCode Technology

Our proprietary VeraCode technology platform leverages the power of digital holographic codes to provide a robust detection method for multiplex assays requiring high precision, accuracy and speed.

Commercially launched in March of 2007 for the research market, VeraCode enables low-cost multiplexing from 1 to 384-plex in a single well. At the heart of the VeraCode technology are cylindrical glass beads measuring 240 microns in length by 28 microns in diameter. Each VeraCode bead type is inscribed with a unique digital holographic code to designate and track the specific analyte or genotype of interest throughout the multiplex reaction. We believe the up to 24 bits of information inscribed in each code allows for an unprecedented level of error checking, improves the robustness of the optical readout process and provides a level of reliability that sets a new standard in multiplex testing. Unlike traditional microarrays, the VeraCode microbeads are used in solution, which takes advantage of solution-phase kinetics for more rapid hybridization times, dramatically reducing the time to achieve results. This technology enables us to serve a number of markets including research, agriculture, forensics, pharmaceuticals and molecular diagnostics.

Our Products

Using our proprietary technologies, our products give our customers the ability to analyze the genome at any level of complexity from whole genome sequencing to low multiplex assays. This enables us to serve a number of markets, including research, agriculture, forensics, pharmaceuticals and molecular diagnostics. The majority of our product sales consist of instruments and consumables based on these various technologies. For the years ended December 28, 2008, December 30, 2007 and December 31, 2006, instrument sales comprised 32%, 33% and 23%, respectively, of total revenues and consumable sales represented 58%, 53% and 54%, respectively, of total revenues.

Our major products include the following:

Instrumentation


Product	Product Description	Applications	Launch Date
Genome Analyzer II	Instrument for high-throughput (14 — 18Gb per run) sequencing using Illumina sequencing by synthesis technology.	Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling and epigenomics analysis.	Q1 2008
iScan System	High-resolution imaging instrument to rapidly scan our BeadArray based assays.	Array based whole-genome genotyping, gene expression and DNA methylation analysis.	Q1 2008
BeadXpress Reader	Low- to mid-multiplex, high-throughput instrument for readout of assays (e.g., biomarker validation and development of molecular diagnostics) deployed on VeraCode bead technology.	Low-multiplex genotyping, gene expression and protein analysis.	Q1 2007

~~The BeadArray Reader, an instrument we developed, is a key component of both our~~

~~production-scale~~Consumables BeadLab and our benchtop BeadStation. This scanning equipment uses a laser to read the results of experiments that are captured on our arrays and was designed to be used in all areas of genetic analysis that use our Array Matrices and BeadChips. In the second quarter of 2006, we began shipment of the AutoLoader, which automates BeadChip loading and scanning and increases lab throughput. The Autoloader is designed to support up to two BeadArray Readers simultaneously for unattended operation.


Product	Product Description	Applications	Launch Date
Standard Sequencing Kit	Reagents used for sequencing by synthesis chemistry on the Genome Analyzer.	Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling and epigenomics analysis.	Q1 2007
Paired-End Genomic DNA Sample Prep Kit	Streamlined library preparation kit to generate 200 — 500 kb insert paired-end reads.	Whole-genome sequencing, targeted sequencing, gene expression discovery and profiling and epigenomics analysis.	Q2 2008
InfiniumHD Whole-Genome BeadChips	Multi-sample DNA Analysis microarrays that interrogate up to 1.2 million markers per sample. Product line includes Human1M-Duo, Human610-Quad, Human660W-Quad and HumanCytoSNP-12.	Array based whole-genome genotyping.	Q1 — Q4 2008
iSelect Custom Genotyping BeadChips	Customer designable SNP genotyping arrays for 6,000 to 200,000 markers for use with any species.	Array based custom genotyping.	Q2 2006
Whole-Genome Gene Expression BeadChips	Multi-sample expression profiling arrays with up-to-date content for human, mouse and rat.	Gene expression profiling and expression Quantitative Trait Loci (QTL) analysis.	FY05 — FY08

Our Services

~~High-Throughput Oligo Synthesis~~Sequencing

We have ~~put~~been offering sequencing services on our Genome Analyzers since 2007. Our services range from small sets of samples requiring as little as one run to finish, to large-scale projects, like whole-genome sequencing, necessitating multiple instruments running in ~~place astate-of-the-art~~ ~~oligo manufacturing facility. This facility serves both the commercial needs under our collaboration with Invitrogen~~parallel for extended periods of time. The breadth of applications offered includes novel custom products as well as all released products. These applications include but are not limited to re-sequencing, de novo sequencing, small RNA discovery and ~~our internal needs. In addition to their use to coat beads, these oligos are components of the reagent kits for our BeadArray products~~profiling, gene expression using tag based or using random primed RNA sampling technology, ChIP SEQ and are used for assay development. We manufacture oligos in a wide range of lengths and in several scales, with the ability to add many types of modifications. We offer a range of quality control options and have implemented a laboratory information management system to control much of the manufacturing process. In 2005, we stopped selling oligos directly into the market and began shipping oligos under our collaboration with Invitrogen.

~~Our Collaborative Partners~~methylome interrogation.

~~Invitrogen Corporation~~Array

In December 2004, we entered into a strategic collaboration with Invitrogen. The goal of the collaboration is to combine our expertise in oligo manufacturing with the sales, marketing and distribution capabilities of Invitrogen. In connection with the collaboration, weWe have ~~developed the next generation Oligator DNA synthesis technology. This technology includes both plate-andtube-based~~ capabilities. Under the terms of the agreement, Invitrogen paid us an upfront non-refundable collaboration payment of $2.3 million in the first quarter of 2005. Additionally, upon the achievement of a certain milestone, Invitrogen was obligated to make a milestone payment of $1.1 million to us. During 2005, this milestone was achieved and the milestone payment was received. We used these funds to invest in our San Diego facility to enable the development and implementation of fourth-generation Oligator technology and to extend the technology into the larger market for tube-based oligo products. We began manufacturing and shipping the plate-based and certain tube-based oligo products under the collaboration in the third quarter of 2005. In addition, the agreement provides for the transferbeen offering FastTrack Genotyping Services since 2002. Our FastTrack Genotyping Services offers all of our ~~Oligator technology into two Invitrogen facilities outside North America. Collaboration profit~~genotyping products, including standard and custom GoldenGate, standard Infinium and Infinium HD, as well as iSelect Infinium. Our projects range in size from ~~the sale of collaboration products~~a few hundred samples to over 10,000 samples. Our current capacity peak is ~~divided equally between the two~~450 million genotypes per day. Our customer base includes academic institutions, and biotech and pharmaceutical companies.

~~deCODE genetics~~

In May 2006, we executed a Joint Development and Licensing Agreement (the Development Agreement) with deCODE genetics, ehf. (deCODE). Pursuant to the Development Agreement, the parties agreed to collaborate exclusively to develop, validate and commercialize specific diagnostic tests for variants in genes involved in three disease-related pathways: the gene-encoding leukotriene A4 hydrolase, linked to heart attack; the gene-encoding transcription factor 7-like 2 (TCF7L2), linked to type 2 diabetes; and the gene-encoding BARD1, linked to breast cancer. With deCODE, we are developing diagnostic tests based on these variants for use on our BeadXpress system. Under the agreement, we will be responsible for the manufacturing, marketing and selling of the diagnostic products. The companies will share the development costs of these products and split the profits from sales of the diagnostics tests. The Development Agreement may be terminated as to a particular product under development if one party decides to discontinue funding the development of that product, and may be terminated in whole by either party if the other party commits an uncured material breach, files for bankruptcy or becomes insolvent. Under a separate supply agreement, we installed instrumentation at deCODE that will enable deCODE to perform whole genome association studies on up to 100,000 samples using the our Sentrix HumanHap300 BeadChips and associated reagents.

Intellectual Property

We have an extensive patent portfolio, including, as of February 1, ~~2007,~~2009, ownership of, or exclusive licenses to, ~~106~~135 issued U.S. patents and ~~149~~168 pending U.S. patent applications, including ~~five~~four allowed applications that have not yet issued as patents, some of which derive from a common parent application. ~~This portfolio includes patents acquired as part of the Solexa merger on January 26, 2007.~~ Our issued patents, which are directed at various aspects of our ~~array, assay,~~arrays, assays, oligo synthesis, ~~instrument~~sequencing technology, instruments and chemical detection technologies, expire between ~~2011~~2010 and ~~2024.~~2026. We are seeking

to extend the patents directed at the full range of our technologies. We have received or filed counterparts for many of these patents and applications in one or more foreign countries.

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

We are party to various exclusive and non-exclusive license agreements and other arrangements with third parties, which grant us rights to use key aspects of our array and sequencing technologies, assay methods, chemical detection methods, reagent kits and scanning equipment. We have exclusive licenses from Tufts University to patents that are directed at our use of BeadArray technology. These patents were filed by Dr. David Walt, a member of our board of directors, the Chairman of our Scientific Advisory Board and one of our founders. Our exclusive licenses expire with the termination of the underlying patents, which will occur between 2010 and 2020. We also have additional nonexclusive licenses from various third parties for other components of our products. In ~~all~~most cases, the agreements remain in effect over the term of the underlying patents, may be terminated at our request without further obligation and require that we pay customary royalties while the agreement is in effect.

Research and Development

We have made substantial investments in research and development since our inception. We have assembled a team of skilled engineers and scientists who are specialists in biology, chemistry, informatics, instrumentation, optical systems, software, manufacturing and other related areas required to complete the development of our products. Our research and development efforts have focused primarily on the tasks required to optimize our Sequencing, BeadArray, VeraCode and Oligator technologies and to support commercialization of the products and services derived from these technologies. As of December ~~31, 2006,~~28, 2008, we had a total of ~~144~~406 employees engaged in research and development activities.

Our research and development expenses for ~~2006, 2005~~2008, 2007, and ~~2004~~2006 (inclusive of charges relating to stock-based compensation of ~~$3.9~~$14.1 million, ~~$0.1~~$10.0 million and ~~$0.3~~$3.9 million, respectively) were $100.0 million, $73.9 million and $33.4 million, ~~$27.8 million and $21.5 million,~~ respectively. ~~Compared to 2006, we~~We expect research and development expense to increase ~~in absolute dollars and as a percentage of overall revenue~~ during ~~2007~~2009 as we continue to expand our research and product development ~~efforts, including research and development projects associated with our acquisition of Solexa.~~efforts.

Marketing and Distribution

Our current products address the genetic analysis portion of the life sciences market, in particular, experiments involving sequencing, SNP genotyping and gene expression profiling. These experiments may be involved in many areas of biologic research, including basic human disease research, pharmaceutical drug discovery and development, pharmacogenomics, toxicogenomics and agricultural research. Our potential customers include pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies, as well as academic or private research centers. The genetic analysis market is relatively new and emerging and its size and speed of development will be ultimately driven by, among other items:


	•	the ability of the research community to extract medically valuable information from genomics and to apply that knowledge to multiple areas of disease-related research and treatment;

	•	the availability of sufficiently low cost, high-throughput research tools to enable the large amount of experimentation required to study genetic variation and biological function; and

	•	the availability of government and private industry funding to perform the research required to extract medically relevant information from genomic analysis.

We market and distribute our products directly to customers in North America, ~~major European markets, Japan~~Europe and ~~Singapore.~~Asia-Pacific. In each of these areas, we have dedicated sales, service and application support personnel responsible for expanding and managing their respective customer bases. In smaller markets ~~in the Pacific Rim countries~~within Europe and ~~Europe,~~ Asia-Pacific,

we sell our products and provide services to customers through distributors that specialize in life science products. We expect to significantly increase our sales and distribution resources during ~~2007~~2009 and beyond as we launch a number of new products and expand the number of customers that can use our products.

Manufacturing

We manufacture our sequencing and array platforms, reagent kits, scanning equipment and ~~oligos in-house.~~oligos. Our manufacturing capacity for consumables has grown to support our increased customer demand during 2008. In the third quarter of 2008, we began shipping BeadChips ~~has increased approximately fourfold over the level as of January 1, 2006. We intend to continue to increase capacity as needed to manufacture~~from our ~~products in sufficient quantity to meet our business plan for 2007.~~new Singapore facility. We are also focused on continuing to enhance the quality and manufacturing yield of our Array Matrices, ~~and~~ BeadChips and FlowCells. To continue to increase throughput and improve the quality and manufacturing yield as we increase the complexity of our products, we are exploring ways to continue increasing the level of automation in the manufacturing process. ~~In addition, we have implemented information management systems for many of our manufacturing and services operations to manage all aspects of material and sample use.~~ We adhere to access and safety standards required by federal, state and local health ordinances, such as standards for the use, handling and disposal of hazardous substances.

~~We intend to add capacity to manufacture Array Matrices~~Raw Materials

Our manufacturing operations require a wide variety of raw materials, electronic and ~~BeadChips throughout 2007. We currently depend upon outside suppliers~~mechanical components, chemical and biochemical materials and other supplies. While we have multiple commercial sources for ~~materials used in the manufacture~~many of our ~~products. We intend~~components and supplies, there are some raw materials we obtain from single source suppliers. If we are unable to ~~continue, and may extend, the outsourcing~~secure a sufficient supply of ~~portions of~~those or other product components, our ~~manufacturing process~~business could be temporarily interrupted. To mitigate this risk, we can redesign our products for alternative components or use alternative reagents. In addition, while we generally attempt to ~~subcontractors where~~keep our inventory at minimal levels, we ~~determine it is in~~do purchase incremental inventory as circumstances warrant to protect our ~~best commercial interests.~~supply chain.

Competition

Although we expect that our ~~BeadArray~~ products and services will provide significant advantages over ~~currently available~~ products and services currently available from other sources, we expect to encounter intense competition from other companies that offer products and services for the sequencing, SNP genotyping and gene expression ~~and sequencing~~ markets. These include companies such as Affymetrix, Agilent, ~~Amersham Biosciences (acquired by GE Corp. and now named GE Healthcare), Applera Corporation, Applied Biosystems,~~ Beckman Coulter, ~~Caliper~~Complete Genomics, Fluidigm, GE Corp., Life Technologies, Luminex, ~~Monogram~~Pacific Biosciences, ~~NimbleGen, Perlegen Sciences,~~ Roche Diagnostics ~~in partnership with 454 Life Sciences, Sequenom~~ and ~~Third Wave Technologies.~~Sequenom. Some of these companies have or will have substantially greater financial, technical, research, and other resources and larger, more established marketing, sales, distribution and service organizations than we do. In addition, they may have greater name recognition than we do in the markets we ~~need to~~ address and in some cases a ~~large~~larger installed base of systems. Each of these markets is very competitive and we expect new competitors to emerge and the intensity of competition to ~~increase in the future.~~increase. In order to effectively compete with these companies, we will need to demonstrate that our products have superior throughput, cost and accuracy advantages over ~~the existing~~competing products. Rapid technological development may result in our products or technologies becoming obsolete. Products offered by us could be made obsolete either by less expensive or more effective products based on similar or other technologies. Although we believe that our technology and products will offer advantages that will enable us to compete effectively with these companies, we cannot assure you that we will be successful.

Segment and Geographic Information

During the first quarter of 2008, we reorganized our operating structure into a newly created Life Sciences Business Unit, which includes all products and services related to the research market, namely the Sequencing, BeadArray and BeadXpress product lines. We ~~operate~~also created a Diagnostics Business Unit to focus on the emerging opportunity in ~~one business segment, for~~molecular diagnostics. During 2008, we had limited activity related to the ~~development, manufacture~~Diagnostics Business Unit and ~~commercialization of tools for genetic analysis. Our operations are treated as one segment as we only report~~ operating results were reported on an aggregate basis to our chief operating decision maker, ~~our Chief Executive Officer.~~the chief executive officer. Accordingly, we operated in one reportable segment during 2008.

~~During 2006, $81.5 million, or 44%,~~We currently sell our products to a number of ~~our total revenue came from shipments~~customers outside the United States, including customers in other areas of North America, Europe and Asia-Pacific. Shipments to customers outside the United States totaled $293.2 million, or 51% of our total revenue during 2008, compared to ~~$28.0~~$159.1 million, or ~~38%~~43%, and

$81.5 million, or 44%, in ~~2005.~~2007 and 2006, respectively. Sales to territories outside of the United States ~~are~~were generally denominated in U.S. dollars. In 2008, we reorganized our international structure to establish more efficient channels between product development, product manufacturing and sales. The reorganization increased our foreign subsidiaries’ anticipated dependence on the U.S. entity for management decisions, financial support, production assets and inventory thereby making the foreign subsidiaries more of a direct and integral component of the U.S. entity’s operations. As a result, we reassessed the primary economic environment of our foreign subsidiaries and determined the subsidiaries are more U.S. dollar based, resulting in a U.S. dollar functional currency determination. We expect that sales to international customers will continue to be an important and growing source of revenue. ~~We have sales support resources in Western Europe~~See Note 14 of the Notes to Consolidated Financial Statements for further information concerning our foreign and ~~direct sales offices in Japan, Singapore and China. In addition, we have distributor relationships in various countries in the Pacific Rim region and Europe.~~domestic operations.

Seasonality

Historically, customer purchasing patterns have not shown significant seasonal variation, although demand for our products is usually lowest in the first quarter of the calendar year and highest in the third quarter of the calendar year as academic customers spend unused budget allocations before the end of the government’s fiscal year.

Environmental Matters

We are ~~dedicated~~committed to the protection of our employees and the environment. Our operations require the use of hazardous materials which subject us to a variety of federal, state and local environmental and safety laws and regulations. We believe we are in material compliance with current applicable laws and regulations; however, we could be held liable for damages and fines should contamination of the environment or individual exposures to hazardous substances occur. In addition, we cannot predict how changes in these laws and regulations, or the development of new laws and regulations, will affect our business operations or the cost of compliance.

Employees

As of December ~~31, 2006,~~28, 2008, we had a total of ~~596 employees, 73 of whom hold Ph.D. degrees. 43 of our employees with Ph.D. degrees are engaged in full-time research and development activities.~~1,536 employees. None of our employees are represented by a labor union. We consider our employee relations to be positive. Our success will depend in large part upon our ability to attract and retain employees. In addition, we employ a number of temporary and contract employees. We face competition in this regard from other companies, research and academic institutions, government entities and other organizations.

Executive Officers

Our executive officers and their ages as of February 1, ~~2007,~~2009, are as follows:


~~Name~~	~~Age~~		~~Position~~

~~Jay T. Flatley~~		54	~~President, Chief Executive Officer and Director~~
~~Christian O. Henry~~		38	~~Senior Vice President and Chief Financial Officer~~
~~Christian G. Cabou~~		58	~~Senior Vice President, General Counsel and Secretary~~
~~Arthur L. Holden~~		54	~~Senior Vice President of Corporate and Market Development~~
~~Tristan B. Orpin~~		40	~~Senior Vice President of Commercial Operations~~
~~John R. Stuelpnagel, DVM~~		49	~~Co-Founder, Senior Vice President and General Manager, Microarray Business, Chief Operating Officer and Director~~
~~John West~~		50	~~Senior Vice President and General Manager of DNA Sequencing~~

Jay Flatley, age 56, is President and Chief Executive Officer of Illumina. Prior to his appointment in 1999, Mr. Flatley was the President and Chief Executive Officer of Molecular Dynamics, later acquired by Amersham Pharmacia Biotech in 1998 and now a part of GE Healthcare. Mr. Flatley, who was a founder and member of the board of directors for Molecular Dynamics, lead the company to its initial public offering (IPO) in 1993, in addition to helping the company develop and launch over 15 major instrumentation systems, including the world’s first ~~capillary-based~~capillary based DNA sequencer. Prior to joining Molecular Dynamics, Mr. Flatley was Vice President of Engineering and Strategic Planning for Plexus Computers, a manufacturer of high-performance Unix super-microcomputers. Before his career at Plexus, Mr. Flatley was Executive Vice President for Manning Technologies and held various manufacturing positions while working for the Autolab division of Spectra Physics. Mr. Flatley received a bachelor of arts degree in economics from Claremont McKenna College (Claremont, CA) and a bachelor of science and master of science (summa cum laude) in industrial engineering from Stanford University (Stanford, CA). Currently, he serves as a member of the board of directors of both Illumina and GenVault Corporation.

Christian Henry, age 40,is Senior Vice President and Chief Financial ~~Officer of Illumina.~~Officer. Mr. Henry joined Illumina in June 2005 and is responsible for worldwide financial operations, controllership functions and facilities management. In addition, throughout 2008, Mr. Henry was Acting General Manager of Illumina’s DNA Sequencing business. Mr. Henry served previously as the Chief Financial Officer for Tickets.com, a publicly traded, online ticket provider that was ~~recently~~ acquired by Major League Baseball Advanced Media, LP. Prior to that,

Christian Cabou, age 60,is Senior Vice President, General Counsel and Secretary of Illumina. Mr. Cabou joined Illumina in May 2006 and has worldwide responsibility for all legal and intellectual property ~~matters, in addition to being responsible for the Company’s human resources function.~~matters. Mr. Cabou is also Illumina’s Code of Ethics Compliance Officer. Before joining Illumina, Mr. Cabou spent five years as General Counsel for GE Global Research and, before that, was Senior Counsel of Global Intellectual Property for GE Medical Systems. Prior to his position at GE, Mr. Cabou spent seven years with the law firm Foley & Lardner where he was a partner. He had twenty years of experience in engineering design and management prior to his career in law and intellectual property. Mr. Cabou received a J.D. from Northwestern University’s School of Law (Chicago, IL.) in addition to a master of engineering management degree from Northwestern University. Mr. Cabou was awarded a MSEE (equivalent) degree from the Conservatoire National des Arts et Métiers (Paris, France) and a bachelor of science (equivalent) degree from the Lycée Technique d’Etat (Armentières, France).

~~Arthur Holden~~Greg Heath, age 51, is ~~the~~ Senior Vice President & General Manager, Diagnostics Business Unit of ~~Corporate and Business Development for~~ Illumina. ~~Mr. Holden~~Dr. Heath joined Illumina in ~~April 2006~~March 2008 and is responsible for ~~leading~~managing Illumina’s emerging diagnostics business, specifically overseeing the development of diagnostic content for the BeadXpress system, and ultimately for Illumina’s sequencing platform. Dr. Heath joined Illumina from Roche Molecular Systems where he held a number of senior executive positions, including head of clinical genomics, senior vice president of global product marketing, senior vice president of global marketing and business development, and the development of relationships and partnerships with pharmaceutical firms, large-scale research consortia, and governmental bodies such as the National Institute of Health (NIH) and the Food and Drug Administration (FDA). Mr. Holden was most recently, senior vice president of global business. From 2000 — 2003, Dr. Heath was head of business development and licensing for the ~~principal founder, chairman~~diagnostics division of F. Hoffman La Roche in Basel. Prior to this, Dr. Heath held numerous roles in marketing and business development with Roche Diagnostics’ U.S. affiliate.

Joel McComb, age 44, is Senior Vice President & General Manager, Life Sciences Business Unit of Illumina. Mr. McComb joined Illumina in March 2008 and is responsible for managing all products and services related to the research market, namely the Sequencing, BeadArray and VeraCode product lines. Mr. McComb joined Illumina from GE Healthcare where he held a number of executive positions, including president of the interventional medicine business and president of life sciences discovery systems. From 2001 — 2004, Mr. McComb was president, chief executive officer ~~for First Genetic Trust.~~and board member of Innovadyne Technologies. Prior to ~~this he was Chairman and Chief Executive Officer~~Innovadyne, Mr. McComb held various positions at Beckman Coulter, including roles as general manager of the ~~SNP Consortium, Ltd.~~primary care diagnostic division and Chief Executive Officer and Director of Celsis International, PLC. From 1983 to 1994 Mr. Holden held various executive positions at Baxter International. A winner of multiple awards, including the Laura Jackson Achievement Award for outstanding leadership in the healthcare industry, the Illinois Technology Innovation & Entrepreneurship award and the STRIVE Entrepreneurial award, Mr. Holden currently serves on a number of commercial and non-profit boards. He is chairman of the Pharmaceutical Biomedical Research and the Serious Adverse Event Consortia. In addition, he is Chairman of the Advisory Board for the Biotechnology Management Program at the J.L. Kellogg Graduate School of Management. He is a director of ~~iBIO and the Illinois Technology Development Alliance. Mr. Holden earned a master of~~corporate business ~~administration degree from Northwestern University’s Kellogg School of Management (Chicago, IL) and a bachelor of science degree from Union College (Schenectady, NY).~~development.

Tristan Orpin, age 42, is Senior Vice President, Commercial Operations of Illumina. Mr. Orpin joined Illumina in December of 2002 in the role of Vice President of Worldwide Sales, and in January of 2007 was promoted to the position of Senior Vice President of Commercial Operations. Before joining Illumina, Mr. Orpin was Director of Sales and Marketing for Sequenom from September 1999 to August 2001. Later, Mr. Orpin was elected Vice President of Sales and Marketing and held this position from August 2001 to November 2002. Prior to 2001, Mr. Orpin served in several senior sales and marketing positions at Bio-Rad Laboratories. ~~Mr. Orpin received a bachelor of science in genetics and biochemistry with first class honors from the University of Melbourne (Melbourne, Australia).~~

~~John Stuelpnagel, D.V.M~~Mostafa Ronaghi, Ph.D.., ~~one of Illumina’s co-founders,~~age 40, is General Manager for Illumina’s Microarray business and Chief Operating Officer. He has served as the Company’s Chief Operating Officer since January 2005 and a Director since April 1998. From April 1998 to October 1999, he served as actingSenior Vice President and Chief ~~Executive~~Technology Officer of Illumina. Dr. Ronaghi joined Illumina in August 2008 and ~~from April 1998 to April 2000 as acting Chief Financial Officer. Between October 1999~~is responsible for leading internal research programs and ~~January 2005,~~evaluating new technologies for the Company. In 2007, Dr. ~~Stuelpnagel~~Ronaghi co-founded Avantome, a privately held sequencing company. Before this, he co-founded NextBio, a search engine for life science data. In 2001, Dr. Ronaghi co-founded ParAllele Bioscience, which was Vice President of Business Development and later as Senior Vice President of Operations. While founding Illumina, Dr. Stuelpnagel was an associate with CW Group, a venture capital firm. Dr. Stuelpnagel received both a bachelor of science degree in biochemistry and a doctorate degree in veterinary medicine from the University of California (Davis, CA)eventually acquired by Affymetrix, Inc., and ~~went~~was involved in the development and commercialization of highly multiplexed technology for genetic testing. In 1997, he co-founded Pyrosequencing AB, which was renamed Biotage in 2003. In June 2000, the company completed a successful initial public offering on ~~to receive~~the Stockholm Stock Exchange. Dr. Ronaghi was a ~~master~~principal investigator at Stanford University from 2002 — 2008 where he focused on the development of ~~business administration degree from the University of California, Los Angeles.~~novel tools for molecular diagnostic applications.

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~~John West~~is Senior Vice President and General Manager for Illumina’s DNA Sequencing business. Mr. West joined Illumina from Solexa, where he was Chief Executive Officer. Before Solexa, he was Vice President of DNA Platforms for Applied Biosystems, Inc. (AB) and was responsible for the company’s instrument and reagent products for DNA sequencing, gene expression, genotyping, PCR, and DNA synthesis. His group developed and launched the instruments that now populate virtually all genome sequencing centers worldwide. He also had business responsibility for AB’s first gene expression array system, for its real-time PCR instruments, and for its microfluidic PCR products. Previously, Mr. West held a number of senior positions, including President of Princeton Instruments, Inc., President and Founder of BioAutomation, Inc. and Marketing Director for Microfluidics at Microcosm Technologies, Inc. During Mr. West’s term at Princeton Instruments, the company introduced the first low light imaging system for single molecule fluorescence — and Solexa, at that time a startup, bought one of the first units. Mr. West received both bachelor of science and master of science degrees in engineering from MIT, and a master of business administration in finance from the Wharton School of Business at the University of Pennsylvania.


ITEM 1A.	*Risk Factors.*

Our business is subject to various risks, including those described below. In addition to the other information included in thisForm 10-K, the following issues could adversely affect our operating results or our stock price.

Litigation or other proceedings or third party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or impact our stock price.

Our commercial success depends in part on our non-infringement of the patents or proprietary rights of third parties and on our ability to protect our own intellectual property. As we have previously disclosed, Affymetrix, Inc. filed a complaint against us in July 2004, alleging infringement of six of its patents.

On June 30, 2006, the court dismissed a patent Affymetrix had sought to withdraw from its suit leaving five patents being asserted against us. On August 16, 2006, the court issued a ruling on the claim construction hearing that it had held on April 20, 2006 as part of this litigation. We believe the court’s mixed ruling interpreted certain claim terms in our favor, and did not adversely impact our defenses and counterclaims which are still pending. At the request of both parties, trial has been rescheduled to March 5, 2007 from October 16, 2006. A pre-trial conference was held on February 8, 2007 during which the court established a multi-phase trial structure with the first phase of the trial to begin on March 5, 2007, and addressed related issues. Any adverse ruling or perception of an adverse ruling throughout these proceedings may have an adverse impact on our stock price, and such impact may be disproportionate to the actual import of the ruling itself.

Third parties, including Affymetrix, have asserted or may assert that we are employing their proprietary technology without authorization. As we enter new markets, we expect that competitors will likely assert that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into those markets. In addition, third parties may have obtained and may in the future obtain patents allowing them to claim that the use of our technologies infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to develop further, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products. We may not be able to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and maintain profitability.

We expect intense competition in our target markets, which could render our products obsolete, result in significant price reductions or substantially limit the volume of products that we sell. This would limit our ability to compete and maintain profitability. If we cannot continuously develop and commercialize new products, our revenue may not grow as intended.

We compete with life sciences companies that design, manufacture and market instruments for analysis of genetic variation and biological function and other applications using technologies, ~~such as two-dimensional electrophoresis,~~ capillary electrophoresis, mass spectrometry, flow cytometry, microfluidics, nanotechnology, next-generation DNA sequencing and mechanically deposited, inkjet and photolithographic arrays. We anticipate that we will face increased competition in the future as existing companies develop new or improved products and as new companies enter the market with new technologies. The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition, new product introductions and strong price competition. For example, prices per data point for genotyping have fallen significantly over the last two years and we anticipate that prices will continue to fall. One or more of our competitors may render our technology obsolete or uneconomical. Some of our competitors have greater financial and personnel resources, broader product lines, a more established customer base and more experience in research and development than we do. Furthermore, life sciences and pharmaceutical companies, which are our potential customers and strategic partners, could develop competing products. For example, during the third quarter of fiscal 2007, Life Technologies (previously referred to as Applied Biosystems Group, a business segment of Applera Corporation) launched the SOLiD^tm System,its next generation sequencing technology. If we are unable to develop enhancements to our technology and rapidly deploy new product offerings, our business, financial condition and results of operations will suffer.

~~Any inability to adequately protect~~Negative conditions in global credit markets may result in delayed payments from our ~~proprietary technologies could harm~~customers and may negatively impact our ~~competitive position.~~smaller suppliers.

~~Our success will depend~~The recent economic conditions and market turbulence may impact the operations of certain of our customers and suppliers. Certain of our customers may face challenges gaining timely access to sufficient credit, which could result in ~~part on~~an impairment of their ability to make timely payments to us. If that were to occur, our allowance for doubtful accounts and our days sales outstanding could increase. Additionally, these economic conditions may cause our smaller suppliers to be unable to supply in a timely manner sufficient quantities of customized components, which would impair our ability to ~~obtain patents~~manufacture on schedule and ~~maintain adequate protection~~at commercially reasonable costs. In addition, due to discontinuing parts, suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors.

In addition, our business depends on the overall demand for methods of analysis of genetic variation and biological function. We rely in large part on the research and development spending of our ~~intellectual property~~customers, which is often discretionary, and the recent economic downturn has caused many companies to reduce their research and development budgets. If the current worldwide economic downturn continues, our customers may delay or reduce their purchases of our products and services. A reduction in demand will reduce our revenues and harm our profitability.

Due to our increasing foreign operations, fluctuations in foreign currency exchange rates could negatively impact our results of operations.

We are focused on expanding our international operations in key markets. We have sales offices located internationally throughout Europe and the Asia Pacific region, as well as manufacturing facilities in the United Kingdom and Singapore. During 2008, the majority of our sales to international customers and purchases of raw materials from international suppliers were denominated in the U.S. dollar. Changes in the value of the

The patent positions of companies developing tools for the life sciences and pharmaceutical industries, including our patent position, generally are uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We intend to apply for patents covering our technologies and products, as we deem appropriate. However, our patent applications may be challenged and may not result in issued patents or may be invalidated or narrowed in scope after they are issued. Questions as to inventorship may also arise. For example, in June 2005, a former employee filed a complaint against us, claiming he is entitled to be named as joint inventor of certain of our U.S. patents and pending U.S. and foreign patent applications, and seeking a judgment that the related patents and applications are unenforceable. Any finding that our patents and applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship rights to our patents and applications could require us to obtain certain rights to practice related technologies, which may not be available on favorable terms, if at all.

In addition, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. There also is risk that others may independently develop similar or alternative technologies or design around our patented technologies. Also, our patents may fail to provide us with any competitive advantage. We may need to initiate additional lawsuits to protect or enforce our patents, or litigate against third party claims, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel.

We also rely upon trade secret protection for our confidential and proprietary information. We have taken security measures to protect our confidential information. These measures, however, may not provide adequate protection for our trade secrets or other confidential information. Among other things, we seek to protect our trade secrets and confidential information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose our confidential information, and we may not otherwise be able to effectively protect our trade secrets. Accordingly, others may gain access to our confidential information, or may independently develop substantially equivalent information or techniques.

~~If we are unable to develop and maintain operation of our manufacturing capability, we may not be able to launch or support our products in a timely manner, or at all.~~

We currently possess limited facilities capable of manufacturing our principle products and services for both sale to our customers and internal use. If a natural disaster were to significantly damage our facility or if other events were to cause our operations to fail, these events could prevent us from developing and manufacturing our products and services. Also, many of our manufacturing processes are automated and are controlled by our custom-designed Laboratory Information Management System (LIMS). Additionally, as part of the decoding step in our array manufacturing process, we record several images of each array to identify what bead is in each location on the array and to validate each bead in the array. This requires significant network and storage infrastructure. If either our LIMS system or our networks or storage infrastructure were to fail for an extended period of time, it wouldthus adversely impact our ~~ability to manufacture our products on a timely basis and may prevent us from achieving our expected shipments in any given period.~~

~~Our manufacturing capacity may limit our ability to sell our products.~~

We continue to ramp up our capacity to meet our anticipated demand for our products. Although we have significantly increased our manufacturing capacity and we believe that we have sufficient plans in place to ensure we have adequate capacity to meet our business plan in 2007 and 2008, there are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility and launch new products. As a result, we may experience difficulties in meeting customer, collaborator and internal demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Additionally, in the past, we have experienced variations in manufacturing conditions that have temporarily reduced production yields. Due to the intricate nature of manufacturing products that contain DNA, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products, or to produce them economically, prevent us from achieving expected performance levels or cause us to set prices that hinder wide adoption by customers.financial conditions.

If we are unable to find third-party manufacturers to manufacture components of our products, we may not be able to launch or support our products in a timely manner, or at all.

The nature of our products requires customized components that currently are available from a limited number of sources. For example, we currently ~~obtain the fiber optic bundles and BeadChip slides included~~use multiple components in our products ~~from single vendors.~~that are single-sourced. If we are unable to secure a sufficient supply of those or other product components, we will be unable to meet demand for our products. We may need to enter into contractual relationships with manufacturers for commercial-scale production of some of our products, or develop these capabilities internally, and we cannot assure you that we will be able to do this on a timely basis, for sufficient quantities or on commercially reasonable terms. Accordingly, we may not be able to establish or maintain reliable, high-volume manufacturing at commercially reasonable costs.

WeIf we lose our key personnel or are unable to attract and retain additional personnel, we may ~~encounter difficulties in integrating acquisitions that could adversely affect~~be unable to achieve our ~~business.~~goals.

We ~~acquired Solexa in January 2007~~are highly dependent on our management and ~~CyVera Corporation in April 2005~~scientific personnel, including Jay Flatley, our president and we may in the future acquire technology, products or businesses related to our current or future business. We have limited experience in acquisition activities and may have to devote substantial time and resources in order to complete acquisitions. Further, these potential acquisitions entail risks, uncertainties and potential disruptions to our business. For example, we may not be able to successfully integrate a company’s operations, technologies, products andchief executive officer. The loss of their services information systems and personnel into our business. An acquisition may further strain our existing financial and managerial resources, and divert management’s attention away from our other business concerns. In connection with these acquisitions, we assumed certain liabilities and hired certain employees, which is expected to continue to result in an increase in our research and development expenses and capital expenditures. There may also be unanticipated costs and liabilities associated with an acquisition that could adversely affect our operating results. To finance any acquisitions, we may choose to issue shares of our common stock as consideration, which would result in dilution to our stockholders. Additionally, an acquisition may have a substantial negative impact ~~on near-term expected financial results.~~

The success of the Solexa merger will depend, in part, on our ability to realize the anticipated synergies, growth opportunities and cost savings from integrating Solexa’s businesses with our businesses. Our success in realizing these benefits and the timing of this realization depend upon the successful integration of the operations of Solexa. The integration of two independent companies is a complex, costly and time-consuming process. The difficulties of combining the operations of the companies include, among other factors:


	•	~~lost sales and customers as a result of certain customers of either of the two companies deciding not to do business with the combined company;~~


	•	~~complexities associated with managing the combined businesses;~~

	•	~~integrating personnel from diverse corporate cultures while maintaining focus on providing consistent, high quality products and customer service;~~

	•	~~coordinating geographically separated organizations, systems and facilities;~~

	•	~~potential unknown liabilities and unforeseen increased expenses or delays associated with the merger; and~~

	•	~~performance shortfalls at one or both of the companies as a result of the diversion of management’s attention to the merger.~~

If we are unable to successfully combine the businesses in a manner that permits the combined company to achieve the cost savings and operating synergies anticipated to result from the merger, such anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, we and Solexa have operated and will continue to operate independently. It is possible that the integration process could result in the loss of key employees, diversion of each company’s management’s attention, the disruption or interruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers and employees or our ability to achieve our business objectives. We will need to hire additional qualified personnel with expertise in molecular biology, chemistry, biological information processing, sales, marketing and technical support. We compete for qualified management and scientific personnel with other life science companies, universities and research institutions, particularly those focusing on genomics. Competition for these individuals, particularly in the ~~anticipated benefits of~~San Diego and San Francisco area, is intense, and the ~~merger, or could reduce our earnings or otherwise adversely affect the business and financial results of the combined company.~~

~~The combined company may fail to realize the anticipated benefits of the merger as a result of our failure to achieve anticipated revenue growth following the merger.~~

Solexa’s business faces significant risks. These risks include the fact that Solexa’s technology is at the development stage and, although Solexa has accepted orders for its Genome Analyzer and has shipped and installed those systems, Solexa has not completed performance specifications for those systems and has not invoiced customers for them. Thereturnover rate can be ~~no assurance it will be able~~high. Failure to ~~do so. These risks also include those described under the caption “Risk Factors” of Solexa’s Quarterly Report onForm 10-Q~~ ~~filed with the Securities~~attract and ~~Exchange Commission for the quarterly period ended September 30, 2006,~~retain management and ~~may include additional risks of which we are not currently aware~~scientific personnel would prevent us from pursuing collaborations or ~~which we currently do not believe are material. If any of the events~~developing our products or circumstances underlying these risks actually occur, Solexa’s business, financial condition or results of operations could be harmed and, as a result, Solexa may, among other things, fail to achieve the anticipated revenue growth following the merger.

~~The merger will cause dilution of Illumina’s earnings per share.~~

The merger and the transactions contemplated by the merger agreement are expected to have a dilutive effect on our earnings per share at least through 2007 due to losses of Solexa, the additional shares of Illumina common stock that were issued in the merger, the transaction and integration-related costs and other factors such as the potential failure to realize any benefit from synergies anticipated in the merger. These factors could adversely affect the market price of our common stock.

Solexa had a material weakness in its internal controls over financial reporting as of December 31, 2005. If additional material weaknesses are identified in the future, current and potential stockholders could lose confidence in our consolidated financial reporting, which could harm our business and the trading of our common stock.

As of December 31, 2005, Solexa did not maintain effective control over the application of GAAP related to the financial reporting process. This control deficiency resulted in numerous adjustments being required to bring Solexa’s financial statements into compliance with GAAP. Additionally, this deficiency could have resulted in material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, Solexa’s management determined that this control deficiency constituted a material weakness. Because of this material weakness, Solexa’s management concluded that, as of December 31, 2005, it did not maintain effective internal control over financial reporting based on those criteria. Should we, or our independent registered public accounting firm, determine in future fiscal periods that there are material weaknesses in our consolidated internal controls over financial reporting (including Solexa), the reliability of our financial reports may be impacted, and our results of operations or financial condition may be harmed and the price of our common stock may decline.

~~We expect that our results of operations will fluctuate. This fluctuation could cause our stock price to decline.~~technologies.

Our ~~revenue is subject to fluctuations due~~planned activities will require additional expertise in specific industries and areas applicable to the ~~timing of sales of high-value~~ products ~~and services projects, the impact of seasonal spending patterns, the timing and size of research projects~~developed through our customers perform, changes in overall spending levels in the life sciences industry, and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experience~~quarter-to-quarter~~ ~~fluctuations in revenue resulting in the potential for a sequential decline in quarterly revenue. A large portion of our expenses are relatively fixed,~~technologies, including expenses for facilities, equipment and personnel. In addition, we expect operating expenses to continue to increase significantly. Accordingly, if revenue does not grow as anticipated, we may not be able to maintain annual profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our future revenue growth or cause a sequential decline in quarterly revenue. Due to the possibility of fluctuations in our revenue and expenses, we believe that quarterly comparisons of our operating results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price could decline.

We have a limited history of commercial sales of systems and consumable products, and our success depends on our ability to develop commercially successful products and on market acceptance of our new and relatively unproven technologies.

We may not possess all of the resources, capability and intellectual property necessary to develop and commercialize all the products or services that may result from our technologies. Sales of our genotyping and gene expression systems only began in 2003, and some of our other technologies are in the early stages of commercialization or are still in development. You should evaluate us in light of the uncertainties and complexities affecting similarly situated companies developing tools for the life sciences and ~~pharmaceutical~~healthcare industries. We must conduct a substantial amount of additional research and development before some of our products will be ready for sale, and we currently have fewer resources available for research and development activities than some of our competitors. We may not be able to develop or launch new products in a timely manner, or at all, or they may not meet customer requirements or be of sufficient quality or at a price that enables us to compete effectively in the marketplace. Problems frequently encountered in connection with the development or early commercialization of products and services using new and relatively unproven technologies might limit our ability to develop and successfully commercialize these products and services. In addition, we may need to enter into agreements to obtain intellectual property necessary to commercialize some of our products or services, which may not be available on favorable terms, or at all.

Historically, life sciences and pharmaceutical companies have analyzed genetic variation and biological function using a variety of technologies. In order to be successful, our products must meet the commercial requirements of the life sciences and pharmaceutical industries as tools for the large-scale analysis of genetic variation and biological function.

~~Market acceptance will depend on many factors, including:~~


	•	~~our ability to demonstrate to potential customers the benefits and cost effectiveness of our products and services relative to others available in the market;~~

	•	~~the extent and effectiveness of our efforts to market, sell and distribute our products;~~

	•	~~our ability to manufacture products in sufficient quantities with acceptable quality and reliability and at an acceptable cost;~~

	•	~~the willingness and ability of customers to adopt new technologies requiring capital investments; and~~

	•	the extended time lag and sales expenses involved between the time a potential customer is contacted on a possible sale of our products and services and the time the sale is consummated or rejected by the customer.

~~Our sales, marketing and technical support organization may limit our ability to sell our products.~~

We currently have fewer resources available for sales and marketing and technical support services compared to some of our primary competitors. In order to effectively commercialize our sequencing, genotyping and gene expression systems and other products to follow,Thus, we will need to ~~expand our sales, marketing~~add new personnel, including management, and ~~technical support staff both domestically and internationally. We may not be successful in establishing or maintaining either a direct sales force or distribution arrangements~~develop the expertise of existing management. The failure to ~~market our products and services. In addition, we compete primarily with much larger companies that have larger sales and distribution staffs and a significant installed base of products in place, and~~do so could impair the ~~efforts from a limited sales and marketing force may not be sufficient to build the market acceptance of our products required to support continued~~ growth of our business.

~~We have only recently achieved annual operating profitability.~~

Prior to 2006, we had incurred net losses each year since our inception. As of December 31, 2006, our accumulated deficit was $104.6 million. Our ability to sustain annual profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level of our expenses. SFAS No. 123R is also likely to adversely affect our future profitability. We expect to continue incurring significant expenses related to research and development, sales and marketing efforts to commercialize our products and the continued development of our manufacturing capabilities. In addition, we expect that our research and development and selling and marketing expenses will increase at a higher rate in the future as a result of the development and launch of new products. Even if we maintain profitability, we may not be able to increase profitability on a quarterly basis.

We may encounter difficulties in managing our growth. These difficulties could impair our profitability.

We have experienced and ~~we may~~ expect to continue to experience rapid and substantial growth in order to achieve our operating plans, which will place a strain on our human and capital resources. If we are unable to manage this growth effectively, our profitability could suffer. Our ability to manage our operations and growth effectively requires us to continue to expend funds to enhance our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to scale up and implement improvements to our manufacturing process and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then we will not be able to make available the products required to successfully commercialize our technology. Failure to attract and retain sufficient numbers of talented employees will further strain our human resources and could impede our growth.

2314

~~Our effective tax rate may vary significantly.~~

Our future effective tax rates could be adversely affected by various internal and external factors. These factors, include but are not limited to, earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates; changes in the valuation of our deferred tax assets and liabilities; or changes in tax laws or interpretations thereof; changes in tax rates, future levels of research and development spending, and changes in overall levels of pretax earnings. Any new interpretative guidance relating to accounting for uncertain tax positions could adversely affect our tax provision.

~~If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to achieve our goals.~~

We are highly dependent on our management and scientific personnel, including Jay Flatley, our president and chief executive officer, John Stuelpnagel, our senior vice president and chief operating officer and John West, our senior vice president and general manager of DNA sequencing . The loss of their services could adversely impact our ability to achieve our business objectives. We will need to hire additional qualified personnel with expertise in molecular biology, chemistry, biological information processing, sales, marketing and technical support. We compete for qualified management and scientific personnel with other life science companies, universities and research institutions, particularly those focusing on genomics. Competition for these individuals, particularly in the San Diego area, is intense, and the turnover rate can be high. Failure to attract and retain management and scientific personnel would prevent us from pursuing collaborations or developing our products or technologies.

Our planned activities will require additional expertise in specific industries and areas applicable to the products developed through our technologies, including the life sciences and healthcare industries. Thus, we will need to add new personnel, including management, and develop the expertise of existing management. The failure to do so could impair the growth of our business.

A significant portion of our sales ~~are~~is to international customers.

~~Approximately~~Shipments to customers outside the United States comprised 51%, 43% and 44% ~~and 38%~~ of our revenue for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, ~~and January 1, 2006, respectively, was derived from shipments to customers outside the United States.~~respectively. We intend to continue to expand our international presence ~~and export sales~~by selling to ~~international~~ customers located outside of the U.S. and we expect the total amount ofnon-U.S. sales to continue to grow. Export sales entail a variety of risks, including:


	•	longer payment cycles and difficulties in collecting accounts receivable outside of the United States;

	•	currency exchange fluctuations;

	•	challenges in staffing and managing foreign operations;

	•	tariffs and other trade barriers;

	•	unexpected changes in legislative or regulatory requirements of foreign countries into which we import our products;

	•	difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays; and

	•	significant taxes or other burdens of complying with a variety of foreign laws.

In addition, ~~sales to international customers typically result in longer payment cycles and greater difficulty in accounts receivable collection. We~~we are also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. One or more of these factors could have a material adverse effect on our business, financial condition and operating results.

We may encounter difficulties in integrating acquisitions that could adversely affect our business, specifically the effective launch and customer acceptance of new technology platforms.

We have made, and may in the future make, acquisitions of or significant investments in businesses with complementary products, services or technologies. Acquisitions involve numerous risks, including, but not limited to:


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

	•	lack of synergies or the inability to realize expected synergies and cost-savings;

	•	difficulties in managing geographically dispersed operations;

	•	revenue and expense levels of acquired entities differing from those anticipated at the time of the acquisitions;

	•	negative near-term impacts on financial results after an acquisition;

	•	the potential loss of key employees, customers and strategic partners of acquired companies;

	•	claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction;

	•	the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash;

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

	•	inconsistencies in standards, controls, procedures and policies; and

	•	the impairment of intangible assets as a result of technological advancements, orworse-than-expected performance of acquired companies;

Acquisitions and other transactions are inherently risky and our previous or future transactions may not be successful. The inability to effectively manage the risks associated with these transactions could materially and adversely affect our business, financial condition or results of operations.

2415

Any inability to protect effectively our proprietary technologies could harm our competitive position.

Our success will depend in part on our ability to obtain patents and maintain adequate protection of our intellectual property in the United States and other countries. If we do not protect our intellectual property adequately, competitors may be able to use our technologies and thereby erode our competitive advantage. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in protecting their proprietary rights abroad. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights abroad.

The patent positions of companies developing tools for the life sciences and pharmaceutical industries, including our patent position, generally are uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We intend to apply for patents covering our technologies and products as we deem appropriate. However, our patent applications may be challenged and may not result in issued patents or may be invalidated or narrowed in scope after they are issued. Questions as to inventorship may also arise. Any finding that our patents and applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship rights to our patents and applications could require us to obtain certain rights to practice related technologies, which may not be available on favorable terms, if at all.

In addition, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. There also is risk that others may independently develop similar or alternative technologies or design around our patented technologies. Also, our patents may fail to provide us with any competitive advantage. We may need to initiate lawsuits to protect or enforce our patents, or litigate against third party claims, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel.

We also rely upon trade secret protection for our confidential and proprietary information and have taken security measures to protect this information. These measures, however, may not provide adequate protection for our trade secrets or other confidential information. Among other things, we seek to protect our trade secrets and confidential information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose our confidential information, and we may not otherwise be able to protect effectively our trade secrets. Accordingly, others may gain access to our confidential information, or may independently develop substantially equivalent information or techniques.

Our commercial success depends, in part, on our non-infringement of the patents or proprietary rights of third parties and on our ability to protect our own intellectual property. Third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. As we enter new markets, we expect that competitors will likely claim that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into those markets. In addition, third parties may have obtained and may in the future obtain patents allowing them to claim that the use of our technologies infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a material adverse impact on our stock price, which may be disproportionate to the actual import of the ruling itself. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to develop further, commercialize and sell products, and could result in the

award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products. In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and maintain profitability.

Changes in our effective income tax rate could impact our profitability.

We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in determining the provision for income taxes. Our effective income tax rate could be adversely affected by various factors including, but not limited to, changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax laws or tax rates, changes in the level of non-deductible expenses including share-based compensation, changes in our future levels of research and development spending, mergers and acquisitions, and the result of examinations by various tax authorities.

If we are unable to increase our manufacturing capacity and develop and maintain operation of our manufacturing capability, we may not be able to launch or support our products in a timely manner, or at all.

We continue to ramp up our capacity to meet the anticipated demand for our products. Although we have significantly increased our manufacturing capacity and we believe we have plans in place sufficient to ensure we have adequate capacity to meet our business plan for 2009, there are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facilities and launch new products. As a result, we may experience difficulties in meeting customer, collaborator and internal demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Additionally, in the past, we have experienced variations in manufacturing conditions that have temporarily reduced production yields. Due to the intricate nature of manufacturing products that contain DNA, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products, or to produce them economically, prevent us from achieving expected performance levels or cause us to set prices that hinder wide adoption by customers.

Additionally, we currently manufacture in a limited number of locations. Our manufacturing facilities are located in San Diego and Hayward, California; Singapore; and Little Chesterford, United Kingdom. These areas are subject to natural disasters such as earthquakes or floods. If a natural disaster were to significantly damage one of our facilities or if other events were to cause our operations to fail, we may be unable to manufacture our products, provide our services or develop new products.

Also, many of our manufacturing processes are automated and are controlled by our custom-designed Laboratory Information Management System (LIMS). Additionally, the decoding process in our array manufacturing requires significant network and storage infrastructure. If either our LIMS system, or our networks or storage infrastructure were to fail for an extended period of time, it may adversely impact our ability to manufacture our products on a timely basis and would prevent us from achieving our expected shipments in any given period.

We expect that our results of operations will fluctuate. This fluctuation could cause our stock price to decline.

Our revenue is subject to fluctuations due to the timing of sales of high-value products and services projects, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life sciences industry, and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experiencequarter-to-quarter fluctuations in revenue resulting in the potential for a sequential decline in quarterly revenue. A large portion of our expenses is relatively fixed, including expenses for facilities, equipment and personnel. In addition, we expect operating expenses to continue to increase significantly in absolute dollars. Accordingly, if revenue does not grow as anticipated, we may not be able to maintain annual profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our future revenue growth or cause a sequential decline in quarterly revenue. Due to the possibility of fluctuations in our revenue and expenses, we believe that quarterly comparisons of our operating results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price could decline.

Our success depends upon the continued emergence and growth of markets for analysis of genetic variation and biological function.

We design our products primarily for applications in the life sciences and pharmaceutical industries. The usefulness of our technology depends in part upon the availability of genetic data and its usefulness in identifying or treating disease. We are ~~initially~~ focusing on markets for analysis of genetic variation and biological function, namely sequencing, SNP genotyping and gene expression profiling. ~~Both of these~~These markets are new and emerging, and they may not develop as quickly as we anticipate, or reach their full potential. Other methods of analysis of genetic variation and biological function may emerge and displace the methods we are developing. Also, researchers may not seek or be able to convert raw genetic data into medically valuable information through the analysis of genetic variation and biological function. In addition, factors affecting research and development spending generally, such as changes in the regulatory environment affecting life sciences and pharmaceutical companies, and changes in government programs that provide funding to companies and research institutions, could harm our business. If useful genetic data is not available or if our target markets do not develop in a timely manner, demand for our products may grow at a slower rate than we expect, and we may not be able to ~~achieve~~sustain profitability.

Loss of the tax deduction on our outstanding convertible notes.

We could lose some or all of the tax deduction for interest expense associated with our $400.0 million aggregate principal amount of convertible notes due in 2014 if the foregoing notes are not subject to the special Treasury Regulations governing integration of certain debt instruments, the notes are converted, or we invest in non-taxable investments.

We may not be able to sustain ~~annual~~operating profitability.

Prior to 2006, we had incurred net losses each year since our inception, and in 2007 we reported a net loss of $278.4 million, reflecting significant charges associated with our acquisition of Solexa in January 2007 and the settlement of our litigation with Affymetrix. As of December 28, 2008, our accumulated deficit was $332.5 million. Our ability to sustain profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level of our expenses. Non-cash stock-based compensation expense and expenses related to prior and future acquisitions are also likely to continue to adversely affect our future profitability. We expect to continue incurring significant expenses related to research and development, sales and marketing efforts to commercialize our products and the continued development of our manufacturing capabilities. In addition, we expect that our research and development and selling and marketing expenses will increase at a higher rate in the future as a result of the development and launch of new products. Although we have regained profitability, we may not be able to sustain profitability on a quarterly basis.

Negative conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio.

Our investment securities consist of marketable debt securities, including treasury bills and commercial paper with strong credit ratings, corporate bonds and short maturity mutual funds providing similar financial returns. Additionally, as of December 28, 2008, we had $55.9 million of auction rate securities issued primarily by municipalities and universities. These securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through auctions. Our entire auction rate portfolio is held in a brokerage account with UBS Financial Services, Inc., a subsidiary of UBS AG (UBS) and is currently rated AAA or AA by a rating agency. Beginning in February 2008, these auction rate securities became illiquid because their scheduled auctions failed to settle. An auction failure occurs when the parties wishing to sell securities at auction cannot. As of December 28, 2008, the securities continued to fail auction and remained illiquid.

Various regulatory agencies initiated investigations into the sales and marketing practices of several banks and broker-dealers, including UBS, which sold auction rate securities, alleging violations of federal and state laws. Along with several other broker-dealers, UBS subsequently reached a settlement with the federal and state regulators that required them to repurchase auction rate securities from certain investors at par at some future date. In November 2008, we signed a settlement agreement to sell our auction rate securities at par value to UBS during the period of June 30, 2010 through July 2, 2012.

The settlement agreement with UBS and the associated put option mitigates the risk of loss on our auction rate security portfolio. However, given the negative conditions in the global credit markets there is still risk that UBS may not be able to fulfill its obligation.


Item 1B.	*Unresolved Staff Comments.*

None.


Item 2.	*Properties.*

The following chart indicates the facilities ~~that~~ we lease as of December 28, 2008, the location and size of each such facility and their designated use. During 2008, we expanded our facilities and leased additional space to accommodate growth in our business. We anticipate ~~needing~~continuing to expand our facilities over the next several years as we continue to expand our worldwide commercial operations and our manufacturing capabilities.


	~~Approximate~~			~~Lease~~
~~Location~~	~~Square Feet~~		~~Operation~~	~~Expiration~~

~~San Diego, CA~~		~~116,000 sq. ft.~~	~~R&D, Manufacturing,~~		~~2023~~
			~~Administrative~~
		~~17,300 sq. ft.~~	~~Administrative~~		~~2009~~
		~~9,000 sq. ft.~~	~~Storage and Distribution~~		~~2011~~
~~Wallingford, CT~~		~~14,500 sq. ft.~~	~~R&D~~		~~2008~~
~~Netherlands~~		~~4,100 sq. ft.~~	~~Administrative and~~		~~2011~~
			~~Distribution~~
~~Tokyo, Japan~~		~~3,300 sq. ft.~~	~~Administrative~~		~~2009~~
~~Singapore~~		~~1,600 sq. ft.~~	~~Administrative~~		~~2009~~
~~Beijing, China~~		~~200 sq. ft.~~	~~Administrative~~		~~2007~~


	Approximate			Lease
Location	Square Feet		Operation	Expiration Dates

San Diego, CA		289,300	R&D, Manufacturing, Storage,		2008 – 2023
			Distribution and Administrative
Hayward, CA		148,000	R&D, Manufacturing and Administrative		2008 – 2013
Singapore		36,100	Manufacturing and Administrative		2010 – 2013
Little Chesterford, United Kingdom		28,500	R&D, Manufacturing and Administrative		2009
Tokyo, Japan		9,800	Sales and Administrative		2009 – 2014
Netherlands		9,300	Distribution and Administrative		2011
Melbourne, Australia		3,900	Sales and Administrative		2013

~~As part of our acquisition of Solexa on January 26, 2007,~~In February 2008, we ~~assumed a non-cancelable operating~~agreed to lease for facilities space of approximately 147,000 square feet in two buildings in Hayward, California. One of the buildings is utilized for administrative operations, research and development, genomics services production and instrument production. The remaining space may be developed and occupied in phases, depending on growth. The Hayward lease runs through December 2008. We have an option to extend the lease for an additional ~~five-year period, subject to certain conditions. We also lease approximately 23,000 square feet~~facility in Little Chesterford, United Kingdom ~~which~~that is ~~occupied by Solexa Limited, our wholly-owned subsidiary. The Chesterford lease expires~~ in ~~July 2008.~~

On February 15, 2006, the court allowed us to file our first amended answer and counterclaims, adding allegations of inequitable conduct with respect to all six asserted Affymetrix patents, violation of Section 2 of the Sherman Act, and unclean hands. In March 2006, Affymetrix notified usultimate resolution of its decision to drop one of the six patents from the suit and of its intention to assert infringement of certain additional claims of the remaining five patents. We have filed a motion to preclude Affymetrix from asserting infringement of those additional claims. That motion is still pending at this time. On June 30, 2006, the court dismissed the patent Affymetrix had sought to withdraw from the suit. Both parties filed summary judgment motions by the July 14, 2006 deadline established by the court. On August 16, 2006, the court issued a ruling on the claim construction hearing that it had held on April 20, 2006. We believe the court’s opinion construed several key claim terms in our favor, and did not adversely impact our defenses and pending counterclaims in any material respect. Trial has been rescheduled to March 5, 2007 from October 16, 2006 at the request of both parties. A pre-trial conference was held on February 8, 2007 during which the court established a multi-phase trial structure with the first phase of the trial to begin on March 5, 2007, and addressed related issues. We believe we have meritorious defenses against each of the infringement claims alleged by Affymetrix, and intend to defend vigorously against this suit. However, we cannot be sure that welegal matters will ~~prevail in this matter. Any unfavorable determination, and in particular, any significant cash amounts required to be paid by us or prohibition of the sale of our products and services, could~~ result in a material adverse ~~effect on our business, financial condition and results of operations.~~

~~Dr. Anthony W. Czarnik v. Illumina, Inc.~~

On June 15, 2005, Dr. Anthony Czarnik, a former employee, filed suit against us in the U.S. District Court for the District of Delaware seeking correction of inventorship of certain of our patents and patent applications and alleging that we committed inequitable conduct and fraud in not naming him as an inventor. Dr. Czarnik seeks an order requiring us and the U.S. Patent and Trademark Officeimpact to correct the inventorship of certain of our patents and patent applications by adding Dr. Czarnik as an inventor, a judgment declaring certain of our patents and patent applications unenforceable, unspecified monetary damages and attorney’s fees. On August 4, 2005, we filed a motion to dismiss the complaint for lack of standing and failure to state a claim. While this motion was pending, Dr. Czarnik filed an amended complaint on September 23, 2005. On October 7, 2005, we filed a motion to dismiss the amended complaint for lack of standing and failure to state a claim. On July 13, 2006, the court granted our motion to dismiss the counts of Dr. Czarnik’s complaint dealing with correction of inventorship in pending applications and inequitable conduct. On July 27, 2006, we filed an answer to the two remaining counts of the amended complaint (correction of inventorship in issued patents and fraud). There has been no trial date set for this case. We believe we have meritorious defenses against these claims.us.

Applied Biosystems Litigation

On December 26, 2006, the Applied Biosystems Group of Applera Corporation (Applied Biosystems) filed suit in California Superior Court, Santa Clara County against Solexa ~~which~~(which we acquired ~~in astock-for-stock~~ ~~merger~~ on January 26, ~~2007. Applied Biosystems’~~2007). This State Court action ~~against Solexa, which was filed in California state court in Santa Clara County, seeks~~related to the ownership of several patents ~~coveringSequencing-by-Ligation~~ ~~technologies. We filed our answer to the complaint by the required deadline. The patents at issue were~~ assigned in 1995 to Solexa’s predecessor company (Lynx Therapeutics) by a former employee ~~Dr.~~(Dr. Stephen ~~Macevicz,~~Macevicz), who is the inventor of these patents and is named as a co-defendant in the suit. The Macevicz patents are directed to methods for sequencing DNA (US Pat. Nos. 5,750,341 and 6,306,597) using successive rounds of oligonucleotide probe ligation(sequencing-by-ligation), and to a probe (5,969,119) used in connection with these sequencing methods. Lynx ~~which~~ was originally a unit of Applied Biosystems but was spun out ofin 1992. On May 31, 2007, Applied Biosystems ~~in 1992. The patents at issue~~filed a second suit, this time against us, in the U.S. District Court for the Northern District of California. This second suit ~~relate~~sought a declaratory judgment of non-infringement of the Macevicz patents that were the subject of the State Court action mentioned above. Both suits were later consolidated in the U.S. District Court for the Northern District of California, San Francisco Division. By these consolidated actions, Applied Biosytems was seeking ownership of the three Macevicz patents, unspecified costs and damages, and a declaration of non-infringement and invalidity of these patents. Applied Biosystems was not asserting any claim for patent infringement against us.

On January 5, 2009, the case went to ~~methods for sequencing DNA using successive rounds~~trial in two phases. The first phase addressed the determination of ~~oligonucleotide~~ownership of thepatents-in-suit, and the second phase addressed whether these patents were valid and infringed by Applied Biosystems. On January 14, 2009, at the end of the first phase, a federal jury determined that Solexa was the rightful owner of all three Macevicz patents. On January 27, 2009, the same jury found that Applied Biosystems did not infringe the ’119 probe ~~ligation(Sequencing-by-Ligation).~~patent and that the ’119 patent was valid. In August 2008, the court had ruled that Applied Biosystems’ two-base system did not infringe the ’341 and ’597 patents. Prior to the jury finding of non-infringement of the ’119 patent, Applied Biosystems conceded its one-base system infringed claim 1 of the ’597 patent and Solexa conceded invalidity of that same claim under the court’s construction of that claim. Both parties reserved the right to appeal the court’s construction of claim 1 of the ’597 patent, among other things.

Our ~~new Illumina~~ Genome Analyzer ~~system uses~~products use a different technology, ~~DNA~~calledSequencing-by-Synthesis (SBS), which ~~we believe~~ is not covered by any of the patents at issue in the suit. We also believe the MPSS technology used by Lynx did not use the methods covered by these patents, and in any event our subsidiary no longer uses the MPSS technologies. We believe that the suit is not material to our current or future business, andMacevicz patents. In addition, we have no plans to use any of theSequencing-by-Ligation technologies covered by ~~the patents at issue in the suit. Applied Biosystems does not assert any claim for patent infringement in the suit.~~these patents.

~~Termination-of-Employment~~ ~~Lawsuit~~

In March 2001, a complaint seeking damages of an unspecified amount was filed against us by Dr. Czarnik in the Superior Court of the State of California in connection with the employee’s termination of employment with Illumina. In June 2002, a California Superior Court judgment was rendered against us and we recorded a $7.7 million charge in our financial results for the second quarter of 2002 to cover total damages and remaining expenses. We appealed the decision, and in December 2004, the Fourth Appellate District Court of Appeal, in San Diego, California, reduced the amount of the award. We recorded interest expense on the $7.7 million during the appeal based on the statutory rate. As a result of the revised judgment, we reduced the $9.2 million liability on our balance sheet to $5.9 million and recorded a gain of $3.3 million as a litigation judgment in the fourth quarter of 2004. In January 2005, we paid the $5.9 million and removed the liability from our balance sheet.


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

No matters were submitted to a vote of security holders during the fourth quarter of ~~2006.~~fiscal 2008.

2720

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.*

Market Information

Our common stock has been quoted on ~~the~~The NASDAQ Global Select Market under the symbol “ILMN” since July 28, 2000. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the quarterly high and low sales prices per share of our common stock as reported on The NASDAQ Global Select Market and has been adjusted to reflect thetwo-for-one split of our common stock that was effected in the form of a 100% stock dividend on September 22, 2008.


	2008				2007
	High		Low		High		Low

First Quarter	$	38.30	$	27.89	$	21.10	$	14.06
Second Quarter		43.50		34.90		21.04		14.47
Third Quarter		47.88		36.97		26.94		20.02
Fourth Quarter		42.32		18.82		31.69		25.17

Stock Performance Graph

The graph below compares the cumulative total stockholder returns on our common stock for the last five fiscal years with the cumulative total stockholder returns on the NASDAQ ~~Global Market.~~ Composite Index and the NASDAQ Biotechnology Index for the same period. The graph assumes that $100 was invested on December 26, 2003 in our common stock and in each index and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

Holders

As of February 2, 2009 we had 476 record holders and 56,709 beneficial holders of our common stock.

Dividends

Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends in the foreseeable future. In addition, the

indenture for our convertible senior notes due 2014, which are convertible into cash and, in certain circumstances, shares of our common stock, requires us to increase the conversion rate applicable to the notes if we pay any cash dividends.

2006
High Low

First Quarter $ 27.98 $ 16.10
Second Quarter 32.00 21.60
Third Quarter 40.00 27.02
Fourth Quarter 45.87 32.20

Purchases of Equity Securities by the Issuer

2005
High Low

First Quarter $ 11.35 $ 6.72
Second Quarter 12.95 7.90
Third Quarter 14.83 10.82
Fourth Quarter 16.80 12.76

On October 23, 2008, our board of directors authorized a $120.0 million stock repurchase program, which was announced October 24, 2008. The following table summarizes shares repurchased pursuant to this program during the quarter ended December 28, 2008:


					Total Number of		Approximate Dollar
					Shares Purchased as		Value of Shares
	Total Number of				Part of Publicly		that May Yet Be
	Shares		Average Price		Announced		Purchased Under
Period	Purchased(1)		Paid per Share(1)		Programs(1)		the Programs(1)

September 29 – October 26, 2008		92,969	$	23.67		92,969	$	117,797,090
October 27 – November 23, 2008		2,915,514		22.80		2,915,514		51,260,959
November 24 – December 28, 2008		100,400		20.35		100,400		49,215,398

Total		3,108,883	$	22.75		3,108,883	$	49,215,398

~~At February 1, 2007, there were approximately 1,500 stockholders of record, and the closing price per share of our common stock, as reported on the NASDAQ Global Market on such date, was $41.56.~~


(1)		All shares purchased were in connection with the Company’s $120.0 million stock repurchase program announced October 24, 2008 and were made in open-market transactions or through privately negotiated transactions in compliance withRule 10b-18 under the Securities Exchange Act of 1934.

Sales of Unregistered Securities

None during the fourth quarter of fiscal ~~2006.~~2008.

~~Issuer Purchases of Equity Securities~~

~~None during fiscal 2006.~~

~~Use of Proceeds~~

We completed our initial public offering of common stock in July 2000, resulting in net proceeds of $101.3 million. Through December 31, 2006, we used approximately $46.0 million to purchase property, plant and equipment, approximately $2.4 million for the acquisition of CyVera, and approximately $52.9 million to fund general operating expenses.


Item 6.	*Selected Financial Data.*

The following table sets forth selected historical consolidated financial data ~~has been derived from our audited consolidated financial statements. The balance sheet data as of December 31, 2006 and January 1, 2006 and statement of operations data~~ for each of ~~the three~~our last five fiscal years ~~in the period ended December 31, 2006 are derived from audited consolidated financial statements included in this Annual Report onForm 10-K.~~ ~~The balance sheet data as of January 2, 2005, December 28, 2003, and December 29, 2002 and statement of operations data for each of the two years in~~during the period ended December 28, ~~2003 are derived from our audited consolidated financial statements that are not included in this Annual Report onForm 10-K.~~ The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended December 31, 2006 and January 1, 2006 were both 52 weeks. The year ended January 2, 2005 was 53 weeks. You should read this table in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data.”2008.

Statement of Operations Data

Year Ended
Year Ended
Year Ended
Year Ended
Year Ended

December 31,
January 1,
January 2,
December 28,
December 29,

2006 2006 2005 2003 2002
(In thousands, except per share data)

Revenue:
Product revenue $ 155,811 $ 57,752 $ 40,497 $ 18,378 $ 4,103
Service and other revenue 27,486 13,935 8,075 6,496 3,305
Research revenue 1,289 1,814 2,011 3,161 2,632

Total revenue 184,586 73,501 50,583 28,035 10,040

Costs and expenses:
Cost of product revenue (including non-cash stock compensation expense of $1,289, $0, $0, $0 and $0, respectively) 51,271 19,920 11,572 7,437 1,815
Cost of service and other revenue (including non-cash stock compensation expense of $235, $0, $0, $0 and $0, respectively) 8,073 3,261 1,687 2,600 1,721
Research and development (including non-cash stock compensation expense of $3,891, $84, $348, $1,289 and $2,399, respectively) 33,373 27,809 21,462 23,800 29,247
Selling, general and administrative (including non-cash stock compensation expense of $8,889, $186, $496, $1,165 and $1,961, respectively) 54,057 28,158 25,576 20,064 11,060
Acquired in-process research and development — 15,800 — — —
Litigation judgment (settlement), net — — (4,201 ) 756 8,052

Total costs and expenses 146,774 94,948 56,096 54,657 51,895

Income (loss) from operations 37,812 (21,447 ) (5,513 ) (26,622 ) (41,855 )
Interest income 5,368 1,404 941 1,821 3,805
Interest and other expense, net (560 ) (668 ) (1,518 ) (2,262 ) (2,281 )

Income (loss) before income taxes 42,620 (20,711 ) (6,090 ) (27,063 ) (40,331 )
Provision for income taxes 2,652 163 135 — —

Net income (loss) $ 39,968 $ (20,874 ) $ (6,225 ) $ (27,063 ) $ (40,331 )

Net income (loss) per basic share $ 0.90 $ (0.52 ) $ (0.17 ) $ (0.85 ) $ (1.31 )

Net income (loss) per diluted share $ 0.82 $ (0.52 ) $ (0.17 ) $ (0.85 ) $ (1.31 )

Shares used in calculating basic net income (loss) per share 44,501 40,147 35,845 31,925 30,890

Shares used in calculating diluted net income (loss) per share 48,754 40,147 35,845 31,925 30,890


	Year Ended		Year Ended			Year Ended		Year Ended			Year Ended
	December 28,		December 30,			December 31		January 1,			January 2,
	2008		2007			2006		2006			2005
	(52 weeks)		(52 weeks)			(52 weeks)		(52 weeks)			(53 weeks)
	(In thousands, except per share data)

Total revenue	$	573,225	$	366,799		$	184,586	$	73,501		$	50,583
Income (loss) from operations(1),(2),(3)		80,457		(301,201	)		37,812		(21,447	)		(5,513	)
Net income (loss)		50,477		(278,359	)		39,968		(20,874	)		(6,225	)
Net income (loss) per share:
Basic		0.43		(2.57	)		0.45		(0.26	)		(0.09	)
Diluted		0.38		(2.57	)		0.41		(0.26	)		(0.09	)
Shares used in calculating net income (loss) per share(4):
Basic		116,855		108,308			89,002		80,294			71,690
Diluted		133,607		108,308			97,508		80,294			71,690

2922

~~See Note 1 to the consolidated financial statements for an explanation of the determination of the number of shares used to compute basic and diluted net income (loss) per share.~~

Balance Sheet Data

December 31,
January 1,
January 2,
December 28,
December 29,

2006 2006 2005 2003 2002
(In thousands)

Cash, cash equivalents and short-term investments $ 130,804 $ 50,822 $ 66,994 $ 33,882 $ 66,294
Working capital 159,950 57,992 64,643 32,229 58,522
Total assets 300,584 100,610 94,907 99,234 121,906
Long-term debt, less current portion — 54 — 24,999 25,620
Accumulated deficit (104,618 ) (144,586 ) (123,712 ) (117,487 ) (90,424 )
Total stockholders’ equity 247,342 72,497 72,262 47,388 71,744


	December 28,		December 30,		December 31,		January 1,		January 2,
	2008		2007		2006		2006		2005
			(In thousands)

Cash, cash equivalents and short-term investments(3),(5),(6),(7)	$	640,075	$	386,082	$	130,804	$	50,822	$	66,994
Working capital		355,379		397,040		159,950		57,992		64,643
Total assets		1,377,100		987,732		300,584		100,610		94,907
Current portion of long-term debt(7)		399,999		—		—		—		—
Long-term debt, less current portion(7)		—		400,000		—		54		—
Total stockholders’ equity(1),(5),(6)		848,596		411,678		247,342		72,497		72,262

In addition to the following notes, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” for further information regarding our consolidated results of operations and financial position for periods reported therein and for known factors that will impact comparability of future results.


(1)		The consolidated financial statements include results of operations of acquired companies commencing on their respective acquisition dates. In August 2008, we completed our acquisition of Avantome. As consideration, we paid $25.8 million in cash and may pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones. In January 2007, we completed our acquisition of Solexa in a stock for stock merger transaction for a total purchase price of $618.7 million. In April 2005, we completed our acquisition of Cyvera Corporation for a total purchase price of $17.8 million. As part of the accounting for the acquisitions, we recorded charges to write-off acquired in-process research and development, or IPR&D, of $24.7 million, $303.4 million and $15.8 million during the fiscal years ended December 28, 2008, December 30, 2007 and January 1, 2006, respectively. See Note 2 of Notes to Consolidated Financial Statements for further information regarding our Avantome and Solexa acquisitions.

(2)		We adopted Statement of Financial Accounting Standards (SFAS) 123(R),“Share-Based Payment,”on January 2, 2006 using the modified prospective transition method. Because we elected to use the modified prospective transition method, results for prior periods have not been restated to include share-based compensation expense. See Note 1 and Note 10 of Notes to Consolidated Financial Statements for further information.

(3)		For the year ended December 30, 2007, we recorded a $54.0 million charge for the settlement of our litigation with Affymetrix. In January 2008, we paid $90.0 million related to the Affymetrix settlement. See Note 5 of Notes to Consolidated Financial Statements.

(4)		Adjusted to reflect atwo-for-one stock split effective September 22, 2008. For an explanation of the determination of the number of shares used to compute basic and diluted net income (loss) per share, see Note 1 of Notes to Consolidated Financial Statements.

(5)		In August 2008, a total of 8,050,000 shares were sold to the public at a public offering price of $43.75 per share, raising net proceeds to us of $342.6 million. See Note 10 of Notes to Consolidated Financial Statements.

(6)		For the years ended December 28, 2008 and December 30, 2007, we repurchased 3.1 million and 14.8 million shares, respectively, of common stock for $70.8 million and $251.6 million, respectively. See Note 10 of Notes to Consolidated Financial Statements.

(7)		In February 2007, we issued $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014. As of December 28, 2008, the principal amount of these Notes is classified as current liabilities since the conditions to convertibility were satisfied during the third calendar quarter of 2008. See Note 8 of Notes to Consolidated Financial Statements.


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

The purpose of the following discussion and analysis is to provide an overview of the business to help facilitate an understanding of significant factors influencing our historical operating results, financial condition and cash flows and also to convey our expectations of the potential impact of known trends, events, or uncertainties that may impact our future results. The following discussion and analysis should be read in conjunction with “Item 6. Selected Financial Data” and our consolidated financial statements and notes thereto included elsewhere in this Annual Report onForm 10-K. The discussion and analysis in this Annual Report onForm 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, strategies, objectives, expectations, intentions and ~~intentions.~~adequacy of resources. Words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking. Examples of forward-looking statements include, among others, statements regarding the integration of ~~Solexa’s and CyVera’s technology~~our acquired technologies with our existing technology, the commercial launch of new products ~~including products based on Solexa’s and CyVera’s technology,~~ and the duration which our existing cash and other resources is expected to fund our operating activities.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward looking statements. Factors that could cause or contribute to these differences include those discussed in “Item 1A. Risk Factors” as well as those discussed elsewhere. The risk factors and other cautionary statements made in this Annual Report onForm 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report onForm 10-K.

Overview

We are a leading developer, manufacturer and marketer of ~~next-generation life science tools and~~ integrated systems for the large scale analysis of genetic variation and biological function. Using our proprietary technologies, we provide a comprehensive line of products and services that currently serve the sequencing, genotyping and gene expression ~~markets, and~~markets. In the future, we expect to enter the market for molecular diagnostics. Our customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. Our tools provide researchers around the world with the performance, throughput, cost effectiveness and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information from advances in genomics and proteomics. We believe this information will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery and clinical research, allow diseases to be detected earlier and permit better choices of drugs for individual patients.

Our revenue is subject to fluctuations due to the timing of sales of high-value products and service projects, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life science industry and other unpredictable factors that may affect our customer ordering patterns. Any significant delays in the commercial launch or any lack or delay of commercial acceptance of new products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth or cause a sequential decline in quarterly revenue. Due to the possibility of fluctuations in our revenue and net income or loss, we believe quarterly comparisons of our operating results are not a good indication of our future performance.

~~Prior to 2006, we incurred substantial operating losses.~~ As of December ~~31, 2006,~~28, 2008, our accumulated deficit was ~~$104.6~~$332.5 million and total stockholders’ equity was ~~$247.3~~$848.6 million. ~~Losses prior to 2006~~Our losses have principally occurred as a result of acquired in-process research and development (IPR&D) charges of $24.7 million related to our acquisition of Avantome in 2008 and $303.4 million related to our acquisition of Solexa in 2007, the substantial resources required for the research, development and manufacturingscale-up effort required to commercialize our products and services ~~an acquiredin-process~~ ~~research and development charge of $15.8 million related to our acquisition of CyVera in 2005~~ and a charge of ~~$5.9~~$54.5 million in ~~2004~~2007 primarily related to a~~termination-of-employment~~ ~~lawsuit.~~settlement of our litigation with Affymetrix. We expect to continue to incur substantial costs for research ~~development~~ and ~~manufacturingscale-up~~ ~~activities~~development over the next several years. We will also need to increase our selling, general and administrative costs as we build up our sales and marketing infrastructure to expand and support the sale of systems, other products and services.

Critical Accounting Policies and Estimates

General

~~Our discussion and analysis~~The preparation of ~~our financial condition and results of operations is based upon our consolidated~~ financial statements ~~which have been prepared~~ in accordance with U.S. generally accepted accounting ~~principles. The preparation of financial statements~~principles requires ~~that~~ management to make estimates ~~assumptions~~ and ~~judgments with respect to the application of accounting policies~~assumptions that affect the amounts reported ~~amounts~~in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions it believes to be reasonable. Although these estimates are based on management’s best knowledge of ~~assets, liabilities, revenue~~current events and ~~expenses, and~~actions that may impact us in the ~~disclosures of contingent assets and liabilities. Actual~~future, actual results ~~could differ~~may be different from ~~those~~the estimates.

Our ~~significant~~critical accounting policies are ~~described in Note 1 to~~those that affect our ~~consolidated~~ financial ~~statements. Certain accounting policies are deemed critical if 1) they require an accounting estimate to be made based on assumptions that were highly uncertain at the time the estimate was made,~~statements materially and ~~2) changes in the estimate that are reasonably likely to occur,~~involve difficult, subjective or ~~different estimates that we reasonably could have used would have a material effect on our consolidated financial statements.~~

complex judgments by management. Management has discussed the development and selection of these critical accounting policies with the ~~Audit Committee~~audit committee of our ~~Board~~board of ~~Directors,~~directors, and the ~~Audit Committee~~audit committee has reviewed the disclosure. ~~In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above.~~

~~We believe the following critical~~Our accounting policies ~~reflect our~~are more ~~significant estimates and assumptions used~~fully described in ~~the preparation~~Note 1 of the ~~consolidated financial statements.~~Consolidated Financial Statements.

Revenue Recognition

Our revenue is generated primarily from the sale of products and services. Product revenue consists of sales of arrays, reagents, flow cells, instrumentation, oligonucleotides (oligos) and ~~oligos.~~associated freight charges. Service and other revenue consists of revenue received for performing genotyping and sequencing services, extended warranty sales and ~~revenue~~amounts earned ~~from milestone payments.~~under research agreements with government grants, which are recognized in the period during which the related costs are incurred.

We recognize revenue ~~when~~in accordance with the guidelines established by SEC Staff Accounting Bulletin (SAB) No. 104,Revenue Recognition. Under SAB No. 104, revenue cannot be recorded until all of the following criteria have been met: persuasive evidence of an arrangement ~~exists,~~exists; delivery has occurred or services have been ~~rendered,~~rendered; the seller’s price to the ~~customer~~buyer is fixed or ~~determinable~~determinable; and collectibility is reasonably assured. ~~In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met.~~ All revenue is recorded net of any applicable allowances for returns or discounts.

Revenue for product sales is recognized generally upon shipment and transfer of title to the customer, provided no significant obligations remain and collection of the receivables is reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is generally upon shipment. ~~However, in the case of BeadLabs, revenue is recognized upon the completion of installation, training and customer acceptance.~~ Revenue for genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is delivered to the ~~customer or as specific milestones are achieved.~~customer.

~~Some~~In using this fair value hierarchy and the framework established by SFAS No. 157, management may be required to make assumptions of pricing by market participants and assumptions about risk, specifically when using unobservable inputs to determine fair value. These assumptions are judgmental in nature and may significantly affect our agreements contain multiple elements that include milestone payments. Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgement from our collaborator, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inceptionresults of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) the performance obligations for both us and our collaborators after the milestone achievement will continue at a level comparable to the level before the milestone achievement. If all of these criteria are not met, the milestone achievement is recognized over the remaining minimum period of our performance obligations under the agreement. We defer non-refundable upfront fees received under our collaborations and recognize them over the period the related services are provided or over the estimated collaboration term using various factors specific to the collaboration. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

~~Research revenue consists of amounts earned under research agreements with government grants, which is recognized in the period during which the related costs are incurred.~~operations.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate the collectibility of our accounts receivable based on a combination of factors. We regularly analyze customer accounts, review the length of time receivables are outstanding, ~~and~~ review historical loss ~~rates. If~~rates and assess current economic trends that may impact the level of credit losses in the future. Our allowance for doubtful accounts has generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial ~~condition~~stability of our customers, ~~were~~we cannot guarantee that our reserves will continue to ~~deteriorate, additional allowances could~~ be ~~required.~~adequate.

Inventory Valuation

We record adjustments to inventory for potentially excess, obsolete or impaired goods in order to state inventory at net realizable value. We must make assumptions about future demand, market conditions and the release of new products that will ~~supercede~~supersede old ones. We regularly review inventory for excess and obsolete products and components, taking into account product life cycle and development plans, product expiration and quality issues, historical experience and our current inventory levels. If actual market conditions are less favorable than anticipated, additional inventory adjustments could be required.

Contingencies

We are subject to legal proceedings primarily related to intellectual property matters. Based on the information available at the balance sheet dates and through consultation with our legal counsel, we assess the likelihood of any adverse judgments or outcomes of these matters, as well as the potential ranges of probable losses. If losses are probable and reasonably estimable, we will record a liability ~~in accordance with Statement of Financial Accounting Standards (SFAS) No. 5,~~~~Accounting~~and an expense for ~~Contingencies.~~ ~~Currently, we have no such liabilities recorded. This may change in~~ the ~~future depending upon new developments.~~estimated loss.

~~Income Taxes~~

~~In accordance with SFAS No. 109,~~~~Accounting for Income Taxes~~, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction by jurisdiction basis, and includes a review of all available positive and negative evidence.

Due to the adoption of SFAS No. 123 (revised 2004), Share-Based Payment, we recognize excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we follow the~~with-and-without~~ approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us.

Goodwill and Intangible Asset Valuation

We make significant judgments in relation to the valuation of goodwill and intangible assets resulting from acquisitions and litigation settlements.

In determining the carrying amounts of our goodwill and intangible assets arising from acquisitions, we use the purchase method of accounting. The purchase method of accounting ~~for acquisitions~~ requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including ~~in-process research and development (IPR&D).~~IPR&D. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to at least annual impairment tests. The amounts and useful lives assigned to other acquired intangible assets impact future amortization, and the amount assigned to IPR&D is expensed immediately.

Determining the fair values and useful lives of intangible assets ~~especially~~acquired as part of litigation settlements also requires the exercise of judgment. While there are a number of different ~~acceptable~~ generally accepted valuation methods to estimate the value of intangible assets, ~~acquired, we primarily use~~one method used by management is the discounted cash flow method. This method requires significant management judgment to forecast the future operating results used in ~~the~~this type of analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. These judgments can significantly affect our net operating results. Our judgments can also change with respect to the estimated life of intangible assets which could increase or decrease related amortization expense.

SFAS No. 142,Goodwill and Other Intangible ~~Assets.~~Assets, ~~SFAS No. 142~~ requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. If the carrying amount of a reporting unit exceeds its fair value, then a goodwill impairment test is performed to measure the amount of the impairment loss, if any. The goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as in a business combination. Determining the fair value of the implied goodwill is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is reasonably possible that the plans and estimates used to value these assets may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges. ~~As of December 31, 2006, we had $2.1 million of goodwill. This goodwill is reported as a separate line item in the balance sheet.~~ We have performed our annual test of goodwill as of May ~~1, 2006~~30, 2008 noting no impairment. No indicators have arisen since management’s assessment on May 30, 2008 that would require further assessment.

permanent differences, history of earnings, and reliability of forecasting. As of December 28, 2008, we have maintained a valuation allowance only against certain U.S. and foreign deferred tax assets that we concluded have not met the “more likely than not” threshold required under SFAS No. 109.

Due to the adoption of SFAS No. 123R, we recognize excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we follow thewith-and-without approach, excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us.

Effective January 1, 2007, we adopted FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that we recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.

Results of Operations

To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 ~~January 1, 2006, and January 2, 2005~~ stated as a percentage of total revenue.


	Year Ended			Year Ended			Year Ended			Year Ended			Year Ended			Year Ended
	December 31,			January 1,			January 2			December 28,			December 30,			December 31,
	2006			2006			2005			2008			2007			2006

Revenue
Revenue:
Product revenue		84	%		79	%		80	%		93	%		89	%		84	%
Service and other revenue		15			19			16			7			11			16
Research revenue		1			2			4

Total revenue		100			100			100			100			100			100

Costs and expenses:
Cost of product revenue		28			27			23			34			33			28
Cost of service and other revenue		5			4			3			2			3			5
Research and development		18			38			42			17			20			18
Selling, general and administrative		29			38			51			26			27			29
Impairment of manufacturing equipment											1			—			—
Amortization of intangible assets											2			1			—
Acquired in-process research and development		—			22			—			4			83			—
Litigation judgment (settlement), net		—			—			(8	)
Litigation settlements											—			15			—

Total costs and expenses		80			129			111			86			182			80

Income (loss) from operations		20			(29	)		(11	)		14			(82	)		20
Interest income		3			2			2			2			4			3
Interest and other expense, net		—			(1	)		(3	)		—			(1	)		—

Income (loss) before income taxes		23			(28	)		(12	)		16			(79	)		23
Provision for income taxes		1			—			—
Provision (benefit) for income taxes											7			(3	)		1

Net income (loss)		22	%		(28	%)		(12	%)		9	%		(76	)%		22	%

Product revenue ~~increased to $155.8 million~~consists of revenue from the sale of consumables, instruments, oligos and associated freight charges. The increase in product revenue was driven primarily by sales of our Infinium BeadChips, sequencing systems and sequencing consumables. Consumables and instruments constituted 63% and 35% of product revenue for the year ended December ~~31, 2006 from $57.8 million~~28, 2008, respectively, compared to 59% and 37% for the year ended ~~January 1, 2006. The increase in 2006 resulted primarily from higher consumable and BeadStation sales.~~December 30, 2007, respectively.

Consumable revenue increased by $140.2 million over prior year. Growth in consumable revenue was primarily attributable to ~~the launch~~strong demand for our Infinium and ~~shipment~~sequencing products, which led to increased sales of $104.8 million and $35.4 million, respectively. The increase in revenue associated with our ~~whole genome genotyping~~Infinium products ~~the HumanHap300 and HumanHap550 BeadChips. In addition, growth in consumable revenue~~ can be mainly attributed to the strong demand for our Infinium High-Density BeadChips, particularly the Human610-Quad, which we began shipping during the first quarter of 2008. Of the overall increase in Infinium BeadChip sales, approximately 79% is due to new product introductions with higher average selling prices, while the remaining 21% can be attributed to increased volume. The increase in sequencing consumables is primarily attributable to the growth in our installed base of instruments and the progression of customer labs ramping to production scale.

Instrument revenue increased by $64.8 million over prior year, of which $63.0 million was due to increased sales of our sequencing systems. This increase in revenue can be primarily attributed to shipments of our second generation Genome Analyzer, the Genome Analyzer II (GAII). Additionally, during the second quarter of 2008, we launched the iScan System, our next-generation BeadChip scanner to replace the BeadArray ~~Readers, which has nearly doubled since January 1, 2006. Consumable products constituted 66%~~Reader. Any increase in revenue resulting from shipments of this new system was offset by a reduction in sales of our BeadArray Reader as we stopped manufacturing this product ~~revenue for year ended December 31, 2006, compared to 47% in~~upon the ~~year ended January 1, 2006.~~ launch of our iScan System.

We expect to see continued growth in product revenue, which can be ~~partially~~mainly attributed to the anticipated launch of several new products, ~~as well as~~sales of existing products and the growth of our installed base of instruments.

Service and other revenue ~~increased to $27.5 million for the year ended December 31, 2006~~includes revenue generated from ~~$13.9 million for the year ended January 1, 2006.~~genotyping and sequencing service contracts, extended warranty contracts, and research revenue. The increase in service and other revenue is primarily due to ~~the completion~~an increase of ~~several significant Infinium and GoldenGate SNP~~$3.1 million in extended warranty sales coupled with an increase of $2.0 million in sequencing service contracts. This increase was substantially offset by a decline of $4.7 million in our Fast Track genotyping service contracts as we shift more towards CSPro certified customers. CSPro is a collaborative program through which we certify third party service partners using our products to ensure delivery of performance and data quality equivalent to that available from our internal service offering. The decline in service revenue as a result of the shift to CSPro certified customers has been offset by the resulting increase in our consumable sales to these third party service providers. If product sales increase, we expect to see continued increases in the sale of our extended warranty contracts. We ~~introduced our Infinium services in early 2006. We~~also expect sales from SNP genotyping ~~services~~and sequencing service contracts to fluctuate on a yearly and quarterly basis, depending on the mix, ~~and~~the number of contracts ~~that are completed.~~completed and the success of our certified service providers. The timing of

completion of a SNP genotyping ~~services contract~~and sequencing service contracts is highly dependent on the ~~customer’s schedule~~customers’ schedules for delivering the SNPs and samples to us.

Government grants and other research funding decreased to $1.3 million for the year ended December 31, 2006 from $1.8 million for the year ended January 1, 2006, due primarily to the completion of several projects funded by grants from the National Institutes of Health. We do not expect research revenue to be a material component of our revenue going forward.

Cost of Product and Service and Other Revenue


	Year Ended		Year Ended					Year Ended		Year Ended
	December 31,		January 1,		Percentage			December 28,		December 30,		Percentage
	2006		2006		Change			2008		2007		Change
	(In thousands)							(In thousands)

Cost of product revenue	$	51,271	$	19,920		157	%	$	192,868	$	119,991		61	%
Cost of service and other revenue		8,073		3,261		148			12,756		12,445		2

Total cost of product and service and other revenue	$	59,344	$	23,181		156	%	$	205,624	$	132,436		55	%

Cost of ~~product~~revenue, which excludes impairment of manufacturing equipment and ~~service and other revenue~~amortization of intangible assets, represents manufacturing costs incurred in the production process, including component materials, assembly labor and overhead, installation, warranty, packaging and delivery costs, as well as costs associated with performing genotyping and sequencing services on behalf of our customers. ~~Costs related to research~~

The increase in cost of product revenue ~~are included in research~~was primarily driven by higher instrument and ~~development expense.~~consumable sales. Cost of product revenue as a percentage of related revenue was 36% for the year ended December 28, 2008 compared to 37% for the year ended December 30, 2007. The decrease is primarily due to favorable product mix driven by increased sales of our new High-Density Infinium Beadchips, with higher average selling prices as compared to ~~$51.3~~the Infinium Beadchips sold in the prior year. This was partially offset by increased provisions for inventory obsolescence of $7.2 million for the year ended December ~~31, 2006,~~28, 2008 compared to ~~$19.9~~$1.9 million for the year ended ~~January 1, 2006, primarily driven by higher consumable and instrument sales. Cost of product revenue for the year ended~~ December 31, 2006 included stock-based compensation expenses resulting from the adoption of SFAS No. 123R totaling $1.3 million. Gross margin on product revenue increased to 67.1% for the year ended December 31, 2006, compared to 65.5% for the year ended January 1, 2006.30, 2007. The increase in ~~gross margin percentage~~the inventory reserve is primarily associated with product transitions. During the year, we recorded reserves for product obsolescence associated with the launch of our new Infinium Beadchips and the launch of a new sequencing kit. Instrument cost of sales as a percentage of related revenue increased slightly over the prior year due to lower average selling prices mainly associated with promotional campaigns as we launched our next generation Beadarray Reader, the ~~impact~~iScan in the first half of favorable product mix, as well as decreased manufacturing costs. A higher percentage of our revenue in 2006 was generated from the sale of consumables, which generally have a more favorable gross margin than other products. The decrease in manufacturing costs is primarily due to reduced raw material costs as a result of more favorable negotiated contracts with our vendors and improvements in our manufacturing processes. This increase in gross margin was offset, in part, by the impact of stock-based compensation charges, which decreased our gross margin by 83 basis points in 2006 compared to 2005.2008.

Cost of service and other revenue increased ~~to $8.1 million for~~over the prior year ~~ended December 31, 2006, compared to $3.3 million for the year ended January 1, 2006,~~ primarily due to higher ~~service~~extended warranty contract revenue. Cost of service and other revenue ~~for the year ended December 31, 2006 included stock-based~~

~~compensation expenses resulting from the adoption~~as a percentage of ~~SFAS No. 123R totaling $0.2 million. Gross margin on service and other~~related revenue decreased to 70.6% for the year ended December 31, 2006, compared to 76.6% for the year ended January 1, 2006. The decrease is due primarily to a change in the mix of projects, as well as the impact of stock-based compensation charges, the latter having decreased our service and other revenue gross margin by 85 basis points in 2006 compared to 2005.

We expect product mix to continue to affect our future gross margins. However, we expect our market to become increasingly price competitive and our margins may fluctuate from year to year and quarter to quarter.stayed consistent at 31%.

Research and Development Expenses

Year Ended
Year Ended

December 31,
January 1,
Percentage

2006 2006 Change
(In thousands)

Research and development $ 33,373 $ 27,809 20 %


	Year Ended		Year Ended
	December 28,		December 30,		Percentage
	2008		2007		Change
	(In thousands)

Research and development	$	99,963	$	73,943		35	%

Our research and development expenses consist primarily of salaries and other personnel-related expenses, laboratory supplies and other expenses related to the design, development, testing and enhancement of our products. We expense our research and development expenses as they are incurred.

Research and development expenses as a percentage of revenue decreased to 17% for the year ended December 28, 2008 compared to 20% for the year ended December 30, 2007. However, there was an overall increase in research and development expenditures compared to the prior year. Costs to support our BeadArray technology research activities increased ~~to $33.4~~$10.4 million for the year ended December ~~31, 2006,~~28, 2008 compared to ~~$27.8~~the year ended December 30, 2007, primarily due to an overall increase in personnel-related expenses, increased lab and material expenses associated with the establishment of our manufacturing facility in Singapore and the development of new products. The continued development of our Sequencing technology resulted in increased research and development expenditures of $9.1 million for the year ended ~~January 1, 2006. Research and development expenses~~December 28, 2008 compared to the year ended December 30, 2007. In addition, non-cash stock-based compensation expense increased by $4.1 million compared to the year ended December 30, 2007. Accrued compensation expense of $1.5 million

associated with contingent consideration for the ~~years ended December 31, 2006~~Avantome acquisition completed on August 1, 2008 and ~~January 1, 2006 included stock-based compensation~~ expenses ~~primarily resulting from~~related to the ~~adoption~~development of ~~SFAS No. 123R totaling $3.9~~our newly created Diagnostics Business Unit of $0.9 million ~~and $0.1 million, respectively. Exclusive of these stock-based compensation charges,~~also contributed to the increase in research and development ~~expenses~~expense for the year ended December 31, 2006 is primarily due to the development of our recently-acquired VeraCode technology purchased in conjunction with our acquisition of CyVera in April 2005. The Company plans to launch its first products resulting from this acquisition during the first quarter of 2007. Research and development expenses related to the VeraCode technology increased $2.7 million for the year ended December 31, 2006, compared to the year ended January 1, 2006. In addition, costs to support our Oligator technology platform and BeadArray research activities decreased $1.0 million for the year ended December 31, 2006, compared to the year ended January 1, 2006.28, 2008.

We believe a substantial investment in research and development is essential to remaining competitive and expanding into additional markets. Accordingly, we expect our research and development expenses to increase in absolute dollars as we expand our product ~~base and integrate the operations of Solexa into our business.~~base.

Selling, General and Administrative Expenses

Year Ended
Year Ended

December 31,
January 1,
Percentage

2006 2006 Change
(In thousands)

Selling, general and administrative $ 54,057 $ 28,158 92 %


	Year Ended		Year Ended
	December 28,		December 30,		Percentage
	2008		2007		Change
	(In thousands)

Selling, general and administrative	$	148,014	$	101,256		46	%

Our selling, general and administrative expenses consist primarily of personnel costs for sales and marketing, finance, human resources, business development, legal and general management, as well as professional fees, such as expenses for legal and accounting services. Selling, general and administrative expenses ~~increased to $54.1 million~~as a percentage of revenue were 26% for the year ended December ~~31, 2006,~~28, 2008 compared to ~~$28.2 million~~28% for the year ended ~~January 1, 2006.~~December 30, 2007. Selling, general and administrative expenses for the ~~years~~year ended December ~~31, 2006~~28, 2008 and ~~January 1, 2006~~December 30, 2007 included stock-based compensation expenses ~~primarily resulting from the adoption of SFAS No. 123R~~ totaling ~~$8.9~~$28.5 million and ~~$0.2~~$19.4 million, respectively.

Sales and marketing expenses increased ~~$10.6~~$34.1 million ~~during~~for the year ended December ~~31, 2006,~~28, 2008 compared to the year ended ~~January 1, 2006.~~December 30, 2007. The increase is primarily due to increases of ~~$6.5~~$29.3 million attributable to personnel-related expenses, ~~$3.2~~including salaries, benefits and commissions, to support the growth of our business. Included as part of these personnel- related expenses is an increase in employee travel expenses of $4.5 million due to increased headcount and continued international expansion. The remaining $4.8 million variance is comprised of ~~stock-based compensation expense and~~

~~$0.9 million attributable~~increases to ~~other~~ non-personnel-related costs of $2.9 million, consisting mainly of sales and marketing activities for our existing and new ~~products.~~ products and an increase of $1.9 million of non-cash stock-based compensation expense.

General and administrative ~~expenses~~expense increased ~~$15.3~~$12.7 million during the year ended December ~~31, 2006,~~28, 2008 compared to the year ended ~~January 1, 2006,~~December 30, 2007 due to increases of ~~$5.5 million of stock-based compensation expense, $5.3 million in outside legal costs related to the Affymetrix litigation, $3.1~~$10.4 million in personnel-related expenses associated with the growth of our business, $7.2 million of non-cash stock-based compensation expense and ~~$1.4~~$0.9 million in outside consulting ~~costs. Outside consulting~~services offset by a decrease of $5.8 million in legal costs primarily ~~include tax and audit fees and general legal expenses not associated with~~related to the settlement of the Affymetrix ~~litigation.~~litigation during the first quarter of 2008.

We expect our selling, general and administrative expenses to increase in absolute dollars as we expand our staff, add sales and marketing infrastructure ~~incur increased litigation costs~~ and incur additional costs to support the expected growth in our business.

Impairment of Manufacturing Equipment


	Year Ended		Year Ended
	December 28,		December 30,		Percentage
	2008		2007		Change
	(In thousands)

Impairment of manufacturing equipment	$	4,069	$	—		N/A

The impairment of manufacturing equipment resulted from our assessment of recoverability on a portion of our imaging and decoding systems that were no longer being utilized due to the development of our next-generation system and our transition to the Infinium HD product line.

Amortization of Intangible Assets


	Year Ended		Year Ended
	December 28,		December 30,		Percentage
	2008		2007		Change
	(In thousands)

Amortization of intangible assets	$	10,438	$	2,429		330	%

Amortization of intangible assets as a percentage of revenue was 2% and 1%, respectively, for the year ended December 28, 2008 and year ended December 30, 2007. The increase in amortization expense is primarily due to the settlement of our lawsuit with Affymetrix on January 9, 2008, resulting in the recording of an intangible asset of $36.0 million. See Note 5 of Notes to Consolidated Financial Statements for further information regarding this settlement.

We began amortizing this asset during the first quarter of 2008, causing an increase in amortization of intangible assets of $7.8 million for the year ended December 28, 2008. The additional increase of $0.2 million during the year ended December 28, 2008 as compared to the year ended December 30, 2007 represents an additional month of amortization associated with the assets acquired from Solexa that we began amortizing in February 2007.

Acquired In-Process Research and Development


	Year Ended		Year Ended
	December 28,		December 30,		Percentage
	2008		2007		Change
	(In thousands)

Acquired in-process research and development	$	24,660	$	303,400		(92	%)

As a result of the Avantome acquisition in August 2008 and the Solexa acquisition in January 2007, we recorded acquired IPR&D charges of $24.7 million and $303.4 million, respectively. See Note 2 of Notes to Consolidated Financial Statements for further information regarding these acquisitions.

Litigation Settlements


	Year Ended		Year Ended
	December 28,		December 30,		Percentage
	2008		2007		Change
	(In thousands)

Litigation settlements	$	—	$	54,536		(100	%)

During the year ended December 30, 2007, we recorded a charge of $54.5 million associated with two settlement agreements. The total charge is comprised primarily of $54.0 million related to a $90.0 million settlement with Affymetrix entered into on January 9, 2008 for certain patent litigation between the parties. See Note 5 of Notes to Consolidated Financial Statements for further information regarding the Affymetrix settlement.

Interest Income

Year Ended
Year Ended

December 31,
January 1,
Percentage

2006 2006 Change
(In thousands)

Interest income $ 5,368 $ 1,404 282 %


	Year Ended		Year Ended
	December 28,		December 30,		Percentage
	2008		2007		Change
	(In thousands)

Interest income	$	12,519	$	16,026		(22	%)

Interest income on our cash and cash equivalents and investments ~~was $5.4~~decreased $3.5 million ~~and $1.4 million for~~during the ~~years~~year ended December ~~31, 2006 and January 1, 2006, respectively. The increase was due to higher average cash balances and higher effective interest rates~~28, 2008 compared to the ~~prior year.~~year ended December 30, 2007. The decrease was primarily driven by the overall decline in interest rates due to current market conditions coupled with a change in our cash and investment portfolio to a mix of shorter duration maturities and an increased number of agency-rated investments.

~~During~~ the year ended December ~~31, 2006, we utilized approximately $25.9~~30, 2007, the provision was reduced by $17.1 million ~~and $16.6 million~~as a result of the release of the valuation allowance against a significant portion of our ~~federal and state net operating loss carryforwards, respectively, to reduce our federal and state income taxes.~~ U.S. deferred tax assets.

As of December ~~31, 2006,~~28, 2008, we had net operating loss carryforwards for federal and state tax purposes of ~~approximately $76.4~~$87.7 million and ~~$39.1~~$148.3 million, ~~respectively;~~respectively, which begin to expire in ~~2022~~2025 and 2013, respectively, unless previously utilized. In addition, we also had U.S. federal and state research and development tax credit carryforwards of ~~approximately $6.4~~$12.6 million and ~~$6.3~~$13.9 million, ~~respectively;~~respectively, which begin to expire in 2018 and 2019, respectively, unless previously utilized.

Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in our ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. Previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December ~~31, 2006.~~28, 2008.

Based ~~upon~~on the available evidence as of December ~~31, 2006,~~28, 2008, we ~~are~~were not able to conclude it iswas more likely than not ~~the remaining~~certain U.S. and foreign deferred tax assets ~~in the U.S.~~ will be realized. Therefore, we have recorded a ~~full~~ valuation allowance of $2.8 million and $12.4 million against ~~the~~certain U.S. and foreign deferred tax assets, respectively. At December 30, 2007, we concluded that it was more likely than not that a significant portion of ~~approximately $36.5 million.~~our deferred tax assets will be realized and, accordingly, we released a portion of our valuation allowance, $17.1 million, of which was recorded as a reduction to the tax provision.

As of December 28, 2008, no material changes have been made to our uncertain tax positions recorded in accordance with FIN No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.

Comparison of Years Ended ~~January 1,~~December 30, 2007 and December 31, 2006 ~~and January 2, 2005~~

Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended ~~January 1,~~December 30, 2007 and December 31, 2006 ~~and January 2, 2005~~ were both 52 ~~and 53 weeks, respectively.~~weeks.

Revenue


	Year Ended		Year Ended					Year Ended		Year Ended
	January 1,		January 2,		Percentage			December 30,		December 31,		Percentage
	2006		2005		Change			2007		2006		Change
	(In thousands)							(In thousands)

Product revenue	$	57,752	$	40,497		43	%	$	326,699	$	155,811		110	%
Service and other revenue		13,935		8,075		73			40,100		28,775		39
Research revenue		1,814		2,011		(10	)

Total revenue	$	73,501	$	50,583		45	%	$	366,799	$	184,586		99	%

Total revenue for the years ended January 1, 2006 and January 2, 2005 was $73.5 million and $50.6 million, respectively. This represents an increase of $22.9 million for 2005, or 45%, compared to 2004.

Product revenue ~~increased to $57.8 million~~consists of revenue from the sale of consumables, instruments, oligos and associated freight charges. Consumables and instruments constituted 59% and 37% of product revenue for the year ended ~~January 1, 2006 from $40.5 million~~December 30, 2007, respectively, compared to 64% and 28% for the year ended ~~January 2, 2005.~~December 31, 2006, respectively. The change in sales associated with our product mix is due to increased sales in instruments primarily attributable to the Genome Analyzer, which was introduced during the first quarter of 2007. Growth in consumable revenue was primarily attributable to strong demand for our Infinium products.

Consumable revenue increased by $93.6 million over prior year, of which $81.1 million primarily represents increased sales volume of our Infinium products. The increase in ~~2005 was primarily~~revenue associated with our Infinium products can be mainly attributed to our HumanHap family of BeadChips, the Human 1M DNA Analysis BeadChip and our iSelect Infinium BeadChips for more focused content applications. Of the overall increase in Infinium BeadChip sales, approximately 82% is due to a higher ~~BeadStation, consumable~~volume of shipments, while the remaining 18% can be attributed to new product introductions and ~~to a lesser extent, oligo sales. Growth in consumable sales~~slightly higher average selling prices.

Instrument revenue increased by $77.6 million over prior year, of which $68.7 million was due to increased sales of our sequencing systems, particularly the ~~launch of several new products, as well as the growth in our installed base of BeadStations. As of January 1, 2006, we had shipped a total of 126 BeadArray Readers.~~Genome Analyzer and cluster stations.

Service and other revenue ~~increased to $13.9 million in 2005~~includes revenue generated from ~~$8.1 million in 2004. The increase in~~genotyping and sequencing service contracts, extended warranty contracts and research revenue. Service and other revenue ~~was~~increased $11.3 million over prior year primarily due to ~~higher demand for third-party~~the completion of several significant Infinium and iSelect custom SNP genotyping service contracts ~~during~~and sequencing services contracts. This increase in services represented $9.9 million of the ~~2005 period. In addition, due to~~variance, while the ~~achievement~~remainder of the difference was generated by an increase in extended warranty contracts of $2.2 million offset by a ~~milestone associated with our collaboration agreement with Invitrogen, we recognized~~decrease in grant revenue of $1.1 million in the fourth quarter of 2005. These increases were partially offset by decreased revenue related to the International HapMap Project. We completed all revenue-generating genotyping services for the International HapMap project early in the first quarter of 2005.$0.8 million. We expect sales from ~~third-party~~ SNP genotyping and sequencing services contracts to fluctuate on a yearly and quarterly basis, depending on the mix and number of contracts that are completed. The timing of completion of a SNP genotyping and sequencing services ~~contract is~~contracts are highly dependent on the ~~customer’s schedule~~customers’ schedules for delivering the SNPs and samples to us.

Cost of product revenue increased to $19.9 million for the year ended January 1, 2006, compared to $11.6 million for the year ended January 2, 2005, due to the significant increase in product revenue. Gross margin on product revenue decreased to 66% for the year ended January 1, 2006, compared to 71% for the year ended January 2, 2005. The decrease in gross margin percentage is primarily due to the ~~impact~~shift in product mix towards instruments mainly attributable to sales of our sequencing systems, which were introduced during the first quarter of 2007. In addition, cost of product ~~mix. A higher~~revenue as a percentage of ~~our~~related revenue was adversely impacted by the increase in ~~2005 was generated from~~non-cash stock-based compensation expense as well as $0.7 million associated with the ~~sale~~amortization of ~~instrumentation, which generally has a lower gross margin than other products. Other factors contributing to the decrease include decreased gross margins~~inventory revaluation costs related to our ~~consumable~~acquisition of Solexa in January 2007. Non-cash stock-based compensation expense was $4.0 million and oligo sales. Lower consumable margins can be primarily attributed to lower average selling prices on consumable sales in 2005, compared to 2004, which were partially offset by decreased manufacturing costs. In addition,$1.3 million for the gross margin associated with oligo products sold as a part of the Invitrogen collaboration was lower when compared to the prior year. The change in oligo gross margin was due to the fact that, under the Invitrogen collaboration, we no longer sell oligos directly. As a result, the gross margin related to this product line decreased; however, the net margin has increased due to the fact that most of the salesperiods ended December 30, 2007 and ~~marketing expenses surrounding the oligo business have shifted to our collaboration partner, Invitrogen.~~December 31, 2006, respectively.

Research and development expenses increased to ~~$27.8~~$73.9 million for the year ended ~~January 1, 2006,~~December 30, 2007 compared to ~~$21.5~~$33.4 million for the year ended ~~January 2, 2005.~~December 31, 2006. Research and development expenses as a percentage of total revenue were 20% for the ~~years~~year ended ~~January 1, 2006 and January 2, 2005 included stock-based compensation expense of approximately $0.1 million and $0.3 million, respectively. Exclusive of these stock-based compensation charges,~~December 30, 2007 compared to 18% for the year ended December 31, 2006. Of the increase infor the year ended December 30, 2007, $27.0 million was due to higher research and development expenses ~~is primarily due to the development expenses incurred to develop our newly-acquired Microbead technology purchased in conjunction~~associated with our acquisition of ~~CyVera~~Solexa in ~~April 2005. Research~~January 2007. Costs to support our BeadArray technology research activities increased $8.5 million for the year ended December 30, 2007 compared to the year ended December 31, 2006, primarily due to an overall increase in personnel-related expenses and increased lab and material expenses. Several new Infinium chip products, including the Human 1M DNA Analysis BeadChip, HumanCNV370-Duo BeadChip and HumanHap550-Duo BeadChip, have been introduced to the market in 2007. In addition, non-cash stock-based compensation expense increased $6.1 million compared to the year ended December 31, 2006. These increases were partially offset by a $1.0 million decrease in research and development expenses related to the VeraCode technology ~~totaled approximately $3.2 million in 2005. Additional factors contributing~~compared to the ~~increased~~year ended December 31, 2006. We began shipping our BeadXpress System, which is based on our VeraCode technology, during the first quarter of 2007. As a result of completing the development of this product, the related research and development expenses during 2005 relate to increased costs of $2.1 million associated with the cost of BeadArray research activities and $1.3 million related to research costs to support our Oligator technology platform. We believe a substantial investment in research and development is essential to remaining competitive and expanding into additional markets. Accordingly, we expect our research and development expenses to increase as we expand our product base and integrate the operations of Solexa into our business.have decreased.

Selling, General and Administrative Expenses

Year Ended
Year Ended

January 1,
January 2,
Percentage

2006 2005 Change
(In thousands)

Selling, general and administrative $ 28,158 $ 25,576 10 %


	Year Ended		Year Ended
	December 30,		December 31,		Percentage
	2007		2006		Change
	(In thousands)

Selling, general and administrative	$	101,256	$	54,057		87	%

During the year ended ~~January 1, 2006,~~December 30, 2007, we recorded ~~$15.8~~$303.4 million of acquired IPR&D resulting from the Solexa acquisition. At the acquisition date, Solexa’s ongoing research and development initiatives were primarily involved with the development of its genetic analysis platform for sequencing and expression profiling. These in-process research and development ~~(IPR&D) resulting from the CyVera acquisition. These amounts~~projects are comprised of Solexa’s reversible terminating nucleotide biochemistry platform, referred to assequencing-by-synthesis (SBS) biochemistry, as well as Solexa’s reagent, analyzer and sequencing services related technologies, which were ~~expensed on~~valued at $237.2 million, $44.2 million, $19.1 million and $2.9 million, respectively, at the acquisition ~~dates because~~date. Although these projects were approximately 95% complete at the ~~acquired technology~~acquisition date, they had not ~~yet~~ reached technological feasibility and had no alternative future ~~uses. At~~use. Accordingly, the amounts allocated to those projects were written off in the first quarter of 2007, the period the acquisition ~~date, CyVera’s ongoing research and development initiatives were primarily the development of its VeraCode technology and the BeadXpress Reader. The IPR&D charge related to the CyVera acquisition~~ was ~~made up of two projects that were approximately 50% and 25% complete at the date of acquisition. The discount rate applied to calculate the IPR&D charge was 30%.~~consummated. Acquisitions of businesses, products or technologies by us in the future may result in substantial charges for acquired IPR&D that may cause fluctuations in our interim or annual operating results. There were no charges resulting from any acquisitions during the same period in ~~2006 or 2004.~~fiscal 2006.

Litigation ~~Judgment (Settlement), net~~Settlements

Year Ended
Year Ended

January 1,
January 2,
Percentage

2006 2005 Change
(In thousands)

Litigation judgment (settlement), net $ — $ (4,201 ) (100 %)


	Year Ended		Year Ended
	December 30,		December 31,		Percentage
	2007		2006		Change
	(In thousands)

Litigation settlements	$	54,536	$	—		N/A

Inan immaterial amount for the year ended ~~January 1,~~December 31, 2006. The increase is primarily related to our convertible debt offering in February 2007. For the years ended December 30, 2007 and December 31, 2006, we recorded ~~approximately~~$0.5 million and $0.4 million, respectively, in ~~losses due to foreign currency transactions compared to $0.2 million in~~net foreign currency transaction losses, ~~for~~respectively. In 2007, these foreign currency exchange losses were offset by $0.5 million of foreign currency exchange gains associated with the ~~year ended January 2, 2005. In addition~~sale of our secured convertible debentures with Genizon BioSciences, Inc. in ~~2005, we recorded $0.3 million related to losses on disposal~~the fourth quarter of ~~assets. There were no gains or losses on disposals in 2004.~~2007.

Provision (benefit) for Income Taxes

Year Ended
Year Ended

January 1,
January 2,
Percentage

2006 2005 Change
(In thousands)

Provision for income taxes $ 163 $ 135 21 %


	Year Ended			Year Ended
	December 30,			December 31,		Percentage
	2007			2006		Change
	(In thousands)

Provision (benefit) for income taxes	$	(10,426	)	$	2,652		(493	%)

The ~~Company’s~~ provision (benefit) for income taxes was ($10.4) million and $2.7 million for the years ended ~~January 1,~~December 30, 2007 and December 31, 2006, respectively. The provision consists of federal, state, and ~~January 2, 2005 consisted of $163,000 and $135,000, respectively, for~~foreign income tax expense ~~related to its foreign operations.~~offset in 2007 by the release of the valuation allowance against a significant portion of our U.S. deferred tax assets.

~~We incurred~~During the year ended December 30, 2007, we utilized $72.9 million and $10.8 million of our federal and state net operating ~~losses for the years ended January 1, 2006~~loss carryforwards, respectively, to reduce our federal and ~~January 2, 2005 and, accordingly, we did not pay any U.S. federal or~~ state income taxes. ~~We have recorded a valuation allowance for the full amount of the resulting net deferred tax asset, as the future realization of the tax benefit is uncertain.~~ As of ~~January 1, 2006,~~December 30, 2007, we had net operating loss carryforwards for federal and ~~California~~state tax purposes of ~~approximately $103.7~~$28.7 million and ~~$40.1~~$99.1 million, respectively, which begin to expire in 2025 and 2015, respectively, unless previously utilized. In addition, we also had U.S. federal and state research and development tax credit

carryforwards of $9.2 million and $9.3 million respectively, which begin to expire in 2018 and ~~2006,~~2019 respectively, unless previously utilized.

As of January 1, 2006, we also had U.S. federal and California research and development tax credit carryforwards of approximately $4.1 million and $3.8 million, respectively. The federal tax credit carryforwards will begin to expire in 2018 and the California carryforwards have no expiration.

~~Our utilization of the net operating losses and credits may be subject to substantial annual limitations pursuant~~Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of our net operating losses and ~~similar state provisions, as a result~~credits may be subject to annual limitations in the event of any significant future changes in our ownership structure. ~~CyVera Corporation had an ownership change upon our acquisition during 2005 and, accordingly, its net operating loss and tax credit carryforwards are subject to annual limitation.~~ These annual limitations may result in the expiration of net operating losses and credits prior to utilization. Previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December 30, 2007.

As of December 30, 2007, we concluded that it is more likely than not that a significant portion of our deferred tax assets will be realized and, accordingly we released a portion of our valuation allowance, $17.1 million of which was recorded as a reduction to the tax provision. In addition, we established current and long term deferred tax assets on the consolidated balance sheets of $26.8 million and $80.1 million, respectively, and decreased the goodwill balances recorded in conjunction with the CyVera and Solexa acquisitions by $2.1 million and $18.4 million, respectively. Based upon the available evidence as of December 30, 2007, we are not able to conclude it is more likely than not certain U.S. and foreign deferred tax assets will be realized. Therefore, we have recorded a valuation allowance of $2.9 million and $25.4 million against certain U.S. and foreign deferred tax assets, respectively.

Liquidity and Capital Resources

Cashflow


	Year Ended			Year Ended			Year Ended			Year Ended			Year Ended			Year Ended
	December 31,			January 1,			January 2,			December 28,			December 30,			December 31,
	2006			2006			2005			2008			2007			2006
	(In thousands)									(In thousands)

Net cash provided (used in) operating activities	$	39,000		$	(9,008	)	$	(19,574	)
Net cash provided by (used in) investing activities		(160,735	)		(1,535	)		57,022
Net cash provided by operating activities										$	87,882		$	56,294		$	39,000
Net cash used in investing activities											(277,249	)		(67,686	)		(160,735	)
Net cash provided by financing activities		109,296			5,963			4,875			337,672			148,292			109,296
Effect of foreign currency translation		3			613			1			3,778			(345	)		3

Net increase (decrease) in cash and cash equivalents	$	(12,436	)	$	(3,967	)	$	42,324		$	152,083		$	136,555		$	(12,436	)

AsHistorically, our sources of ~~December 31, 2006, we had~~ cash have included:


	•	issuance of equity and debt securities, including cash generated from the issuance of our convertible notes in February 2007, our public offering of common stock in August 2008 and the exercise of stock options and participation in our Employee Stock Purchase Plan (ESPP);

	•	cash generated from operations; and

	•	interest income.

Our historical cash equivalents and short-term investments of approximately $130.8 million. We currently invest our funds in U.S. dollar-based, short-term money market mutual funds, corporate bonds, commercial paper, auction rate certificates and treasury notes.outflows have primarily been associated with:


	•	cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development infrastructure and other working capital needs;

	•	cash paid for litigation settlements;

	•	cash used for our stock repurchases;

	•	expenditures related to increasing our manufacturing capacity and improving our manufacturing efficiency;

	•	cash paid for acquisitions; and

	•	interest payments on our debt obligations.

4339

~~Our operating activities generated~~Other factors that impact our cash inflow and outflow include:


	•	significant increases in our product and services revenue. As our product sales have increased significantly since 2001, operating income has increased significantly as well, providing us with an increased source of cash to finance the expansion of our operations; and

	•	fluctuations in our working capital.

We currently invest our funds in treasury notes, commercial paper, auction rate securities, corporate bonds and U.S. dollar-based short maturity mutual funds. We do not hold securities backed by mortgages.

As of ~~$39.0~~December 28, 2008, we had cash, cash equivalents and investments of $696.0 million compared to $386.1 million as of December 30, 2007. Included in the investment balance as of December 28, 2008 were auction rate securities of $55.9 million issued primarily by municipalities and universities. The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of December 28, 2008, the securities continued to fail auction and remained illiquid. As a result, we have recorded an unrealized loss of $8.7 million for the year ended December ~~31, 2006, compared~~28, 2008, resulting in a reduction to the fair value of our auction rate securities to $47.2 million as of December 28, 2008. This value was determined in accordance with SFAS No. 157. We used Level 3 hierarchical inputs, due to the lack of actively traded market data, including management’s assumptions of pricing by market participants and assumptions about risk. We based our fair value determination on estimated discounted future cash flows of interest income over a projected period reflective of the length of time we anticipate it will take the securities to become liquid. Additionally, we classified these securities as long-term investments as of December 28, 2008 as we believe we may not be able to liquidate our investments within the next year. As of December 30, 2007, these securities were classified as short-term as the failures of these auctions did not occur until February 2008.

In November 2008, we signed a settlement agreement allowing us to sell our auction rate securities at par value to UBS at our discretion during the period of June 30, 2010 through July 2, 2012. To account for this settlement agreement, we recorded a put option of $8.7 million and recognized a corresponding gain in earnings during the fourth quarter of 2008. The fair value of the put option was determined using a discounted cash flow approach including estimates of ~~$9.0 million~~interest rates, timing and amount of cash flow, with consideration given to UBS’s financial ability to repurchase the auction rate securities beginning June 30, 2010. The fair value of the put option approximates the difference between the par value and fair value of the auction rate securities. The auction rate securities were previously classified asavailable-for-sale, and unrealized gains and losses were recognized in other comprehensive income. By signing the settlement agreement, we no longer have the intent of holding the auction rate securities until recovery as we will now recover any unrealized loss through the settlement agreement. Accordingly, we elected a one-time transfer of the auction rate securities fromavailable-for-sale to trading and reclassified previously recorded unrealized losses from other comprehensive income to earnings. We will continue to recognize gains and losses in earnings approximately equal to changes in the ~~year ended January 1, 2006. Net~~fair value of the auction rate securities at each balance sheet date. These gains and losses will likely be offset by changes in the fair value of the put option as we elect the fair value option subject to our assessment of the counterparties ability to perform. See Part I Item 1A: “Risk Factors — Negative conditions in the global credit markets may impair the liquidity of a portion of our investment portfolio.”

The primary inflow of cash ~~provided by operating activities in~~during the year ended December ~~31, 2006~~28, 2008 was ~~primarily the result of the following: net income of $40.0 million; $14.3 million related to non-cash stock compensation expense resulting~~ from the ~~adoption~~sale of ~~SFAS No. 123R;~~8,050,000 shares of our common stock to the public in August 2008 at a public offering price of $43.75 per share, raising net proceeds to us of $342.6 million, after deducting underwriting discounts and commissions and offering expenses. Additional cash inflows during this year resulted from the sale and maturity of our investments inavailable-for-sale securities of $411.8 million and $44.3 million from the exercise of our stock options.

The primary cash outflows during the year ended December 28, 2008 were attributable to the purchase ofavailable-for-sale securities for $568.7 million, the one-time payment of $90.0 million made to Affymetrix in accordance with the settlement agreement, the repurchase of an ~~$11.5~~aggregate of 3.1 million ~~increase~~shares of our

common stock for $70.8 million and $59.7 million in ~~accounts payable and accrued liabilities driven by increases in general business activity associated with our sales growth, as well as expenses~~capital expenditures primarily forconstruction-in-progress associated with the expansion of our ~~corporate infrastructure~~San Diego facilities, additions to ~~accommodate this growth; non-cash charges~~manufacturing equipment as well as the development of ~~$6.1~~our manufacturing facility in Singapore. Additionally, on August 1, 2008, we completed our acquisition of Avantome, Inc. As consideration for the acquisition, we paid $25.8 million in cash, including transaction costs, and may pay up to an additional $35.0 million in contingent cash consideration based on the achievement of certain milestones.

Our primary short-term needs for ~~depreciation and amortization; a $5.9 million increase in other long-term liabilities primarily due~~capital, which are subject to ~~deferred~~change, include expenditures related to:


	•	our facilities expansion needs, including costs of leasing additional facilities;

	•	the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;

	•	support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad;

	•	potential strategic acquisitions and investments;

	•	the continued advancement of research and development efforts; and

	•	improvements in our manufacturing capacity and efficiency.

We expect that our product revenue ~~associated with the agreement with Genizon Biosciences~~ and the ~~deCODE genetics collaboration; and a $1.8 million increase in~~resulting operating income, ~~taxes payable. These sources were partially offset by a $21.7 million increase in accounts receivable and a $9.7 million increase in inventory primarily due to our significant sales growth~~as well as the status of ~~151% during the year ended December 31, 2006, compared to the year ended January 1, 2006, which resulted from increased customer demand and introduction~~each of our new products and services into the market; a $5.3 million increase in other assets primarily due to increased long-term cost of sales associated with Genizon and deCODE and capitalized costs associated with the Solexa acquisition; a $1.6 million increase in prepaid expenses and other current assets primarily associated with increased prepaid software licenses and insurance, as well as an increase in interest receivable, $1.4 million for an incremental tax benefit related to stock option exercises and an increase of $0.6 million in deferred income taxes. Netproduct development programs, will significantly impact our cash used in operating activities in the year ended January 1, 2006 was primarily the result of a net loss from operations of $20.9 million, a $6.0 million payment for a litigation judgment, a $7.0 million increase in accounts receivable and a $6.5 million increase in inventory, reduced by a $7.4 million increase in accounts payable and accrued liabilities, a $3.2 million increase in long-term liabilities primarily related to payments received from Invitrogen recorded as deferred revenue, non-cash charges of $4.1 million for depreciation and amortization and a non-cash acquired IPR&D charge of $15.8 million related to the CyVera acquisition.management decisions.

Our ~~investing activities used~~outstanding convertible notes became convertible into cash of $160.7 million in the year ended December 31, 2006, compared to using cash of $1.5 million in the year ended January 1, 2006. Cash used in investing activities in the year ended December 31, 2006 was primarily due to the purchase of~~available-for-sale~~ ~~securities totaling $236.3 million, a $50.0 million investment in Solexa,~~ and, the purchase of a $3.0 million secured convertible debenture in Genizon. Further, $15.1 million was used for the purchase of property and equipment primarily related to the expansion of our manufacturing capacity. Our manufacturing capacity for BeadChips has increased approximately fourfold over the level as of January 1, 2006. These uses of cash were partially offset by $143.8 million provided by sales and maturities of~~available-for-sale~~ securities. Cash used by investing activities in the year ended January 1, 2006 was due to $11.4 million used for the purchase of property and equipment and $2.4 million paid for the acquisition of CyVera, reduced by $12.2 million from the sale or maturity of investment securities used to provide operating funds for our business.

Our financing activities provided $109.3 million in the in the year ended December 31, 2006, compared to $6.0 million in the year ended January 1, 2006. Cash provided by financing activities in the year ended December 31, 2006 was primarily due to $96.5 million in net proceeds from a public stock offering completed in May 2006, as well as proceeds from the issuance of common stock from option exercises and employee stock purchase plan purchases totaling $11.4 million. Cash provided from financing activities in the year ended January 1, 2006 was primarily proceeds from the issuance of common stock from option exercises.

In February 2007, we issued $400 million principal amount of 0.625% Convertible Senior Notes due 2014. The net proceeds from the offering, after deducting the initial purchasers’ discount and offering expenses, were approximately $390.3 million. We used approximately $202 million of the net proceeds to purchaseif applicable, shares of our common stock as of April 1, 2008. The notes continued to be convertible through December 31, 2008. Subsequent to year end, on December 29, 2008, a noteholder converted notes in ~~privately negotiated transactions concurrently with the offering. We used $46.6 million~~an aggregate principal amount of ~~the net proceeds of this offering to pay the cost of convertible note hedge and warrant transactions, which are designed to reduce the potential dilution~~$10.0 million. Generally, upon conversion of a note, we must pay the ~~notes. We intend to use the balance~~conversion value of the net proceeds for other general corporate purposes, which may include acquisitions and additional purchases of our common stock. The notes mature on February 15, 2014 and bear interest semi-annually at a rate of 0.625% per year, payable on February 15 and August 15 of each year, beginning on August 15, 2007. In addition, we maynote in certain circumstances be obligated to pay additional interest. If a “designated event,” as defined in the indenture for the notes, occurs, holders of the notes may require us to repurchase all or a portion of their notes for cash, ~~at a repurchase price equal~~up to the principal amount of the ~~notes to be repurchased, plus accrued and unpaid interest. In addition,~~note. Any excess of the conversion value over the principal amount is payable in shares of our common stock. To reduce the potential equity dilution upon conversion of the notes, we ~~must pay the principal portion in cash. The notes will become convertible only in certain circumstances based on conditions relating~~entered into a hedge transaction. See Note 8 of Notes to ~~the trading price~~Consolidated Financial Statements for further discussion of the ~~notes and our common stock or upon~~terms of the ~~occurrence of specified corporate events. However,~~Convertible Senior Notes. Beginning January 1, 2009 the notes ~~will~~ceased to be convertible ~~at any time from, and including, November 15, 2013 through~~since the ~~third scheduled trading day immediately preceding February 15, 2014.~~trigger for convertibility was not met during the last calendar quarter of 2008. Fluctuations in our stock price could cause the conversion feature to trigger in future quarters, resulting in an impact on our working capital.

We anticipate that our current cash and cash equivalents and income from operations will be sufficient to fund our operating needs for at least the next twelve ~~months.~~months, barring unforeseen circumstances. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital ~~expenditures. However,~~expenditures other than development of our additional facility in Little Chesterford, United Kingdom. The development of this facility is estimated to cost $14.5 million during 2009 although actual costs may vary significantly from our current estimate. Our future capital requirements and the adequacy of our available funds will depend on many factors, ~~including~~including:


	•	our ability to successfully evolve our sequencing and Veracode technologies and to expand our sequencing and SNP genotyping product lines;

	•	scientific progress in our research and development programs and the magnitude of those programs;

	•	competing technological and market developments; and

	•	the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.

As a result of the successful resolution of our legal proceedings with Affymetrix, our ability to successfully commercialize our sequencing systems and to expand our SNP genotyping services product lines, scientific progress in our research and development programs, the magnitude of those programs, competing technological and market developments and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. Therefore,factors listed above, we may require additional funding in the future. Our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.

As of December 31, 2006, we also leased an office and laboratory facility in Connecticut, additional office, distribution and storage facilities in San Diego, and four foreign facilities located in Japan, Singapore, China and the Netherlands under non-cancelable operating leases that expire at various times through July 2011. These leases contain renewal options ranging from one to five years.

~~As of December 31, 2006, our contractual~~Contractual obligations ~~were (in thousands):~~

Payments Due by Period
Less Than
More Than

Contractual Obligation
Total 1 Year 1 – 3 Years 1 – 5 Years 5 Years

Operating leases $ 37,899 $ 5,320 $ 10,410 $ 9,371 $ 12,798

Total $ 37,899 $ 5,320 $ 10,410 $ 9,371 $ 12,798

~~The above table does not include~~represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of December 28, 2008, aggregated by type (amounts in thousands):

Payments Due by Period (1),(2)
Less Than
More Than

Contractual Obligation
Total 1 Year 1 – 3 Years 3 – 5 Years 5 Years

Long-term debt obligations(3) $ 413,750 $ 2,500 $ 5,000 $ 5,000 $ 401,250
Operating leases 158,240 11,032 22,945 23,378 100,885
Amounts due under executive deferred compensation plan 1,348 — — — —

Total $ 573,338 $ 13,532 $ 27,945 $ 28,378 $ 502,135

(1) Excludes $35.0 million of contingent cash consideration we may be required to pay pursuant to our purchase agreement with Avantome based on the achievement of certain milestones. We have not included this amount in the table above because the commitment does not have a fixed funding date and is subject to certain conditions. See Note 2 of Notes to the Consolidated Financial Statements for further discussion of our acquisition of Avantome.
(2) Excludes $23.8 million of uncertain tax benefits under FIN 48. We have not included this amount in the table above because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 12 of Notes to the Consolidated Financial Statements for further discussion of our uncertain tax positions.
(3) The “long-term debt obligations” in the above table include the principal amount of our Convertible Senior Notes and interest payments totaling 0.625% per annum. See Note 8 of Notes to Consolidated Financial Statements for further discussion of the terms of the Convertible Senior Notes.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements is included in Note 1 of Notes to Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures ~~About~~about Market Risk.

Interest Rate Sensitivity

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The fair market value of fixed rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate securities may decline as a result of decreases in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not

42

materially affect the fair value of our interest sensitive financial instruments. For example, if a 100 basis point change in overall interest rates were to occur in 2009, our interest income would change by approximately $6.4 million in relation to amounts we would expect to earn, based on our cash, cash equivalents, and short-term investments as of December 28, 2008.

Market Price Sensitive Instruments

In order to potentially reduce equity dilution, we entered into convertible note hedge transactions, entitling us to purchase up to 18,322,320 shares of our common stock at a strike price of $21.83 per share, subject to adjustment. In addition, we sold to the counterparties warrants exercisable on a net-share basis, for up to 18,322,320 shares of our common stock at a strike price of $31.435 per share, subject to adjustment. The anti-dilutive effect of the note hedge transactions, if any, could be partially or fully offset to the extent the trading price of our common stock exceeds the strike price of the warrants on the exercise dates of the warrants, which occur during 2014, assuming the warrants are exercised.

Foreign Currency Exchange Risk

~~Although most of our revenue is realized~~We have operations in ~~U.S. dollars, some portions of our revenue are realized in foreign currencies.~~the Americas, Europe and Asia-Pacific. As a result, our financial position, results ~~could~~of operations and cash flows can be affected by ~~factors such as changes~~fluctuations in foreign currency exchange ~~rates or weak economic conditions in foreign markets.~~rates. The functional ~~currencies~~currency for each of our subsidiaries ~~are their respective local currencies.~~is the U.S. dollar. Accordingly, we remeasure the ~~accounts~~monetary assets and liabilities of ~~these operations are translated from the local currency~~our foreign subsidiaries to the U.S. dollar ~~using~~at month-end exchange rates and remeasure the ~~current~~nonmonetary assets and liabilities to the U.S. dollar at historical rates. Income and expense amounts related to monetary assets and liabilities are remeasured to the U.S. dollar at the weighted average exchange ~~rate~~rates in effect during the relevant period, and income and expense accounts related to nonmonetary assets and liabilities are remeasured to the U.S. dollar at historical exchange rates. Remeasurement gains and losses are recognized as income, or expense, in the period of occurrence.

In addition, many of our reporting entities conduct a portion of their business in currencies other than the entity’s U.S. functional currency. These transactions give rise to receivables and payables that are denominated in currencies other than the entity’s functional currency. The value of these receivables and payables is subject to changes in exchange rates because they may become worth more or less than they were worth at the ~~balance sheet date for~~time we entered into the ~~balance sheet accounts,~~transaction due to changes in exchange rates. Both realized and using the average exchange rate during the period for revenue and expense accounts. The effects of translation are recorded in accumulated other comprehensive income as a separate component of stockholders’ equity.

Periodically, we hedge significant foreign currency firm sales commitments and accounts receivable with forward contracts. We only use derivative financial instruments to reduce foreign currency exchange rate risks; we do not hold any derivative financial instruments for trading or speculative purposes. We primarily use forward exchange contracts to hedge foreign currency exposures and they generally have terms of one year or less. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on the value of these ~~foreign~~receivables and payables are included in the determination of net income. The net currency ~~forward contracts are reported in other comprehensive income. Realized gains and losses~~exchange gain recognized on business transactions was $1.9 million for the ~~effective portion are recognized with the underlying hedge transaction. As of~~year ended December ~~31, 2006, we had no foreign currency forward contracts outstanding. The notional settlement amount of the foreign currency forward contracts outstanding at December 31, 2006~~28, 2008 and ~~January 1, 2006 were $0 and $0.1 million, respectively. As of January 1, 2006, we had one outstanding contract with an immaterial fair value, representing an unrealized gain, which was~~is included in other ~~current assets at January 1, 2006. We settled foreign exchange contracts~~income and expense in the consolidated statements of ~~$0.1 million and $5.2 million for the years ended December 31, 2006 and January 1, 2006, respectively. We did not hold any derivative financial instruments prior to fiscal 2004.~~operations.

Item 8.   Financial Statements and Supplementary Data.

The Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements begin onpage F-1 immediately following the signature page and are incorporated herein by reference.

Our fiscal year is 52 or 53 weeks ending on the Sunday closest to December 31, with quarters of 13 or 14 weeks ending on the Sunday closest to March 31, June 30 and September 30. The years ended December 31, 2006 and January 1, 2006 were both 52 weeks. The year ended January 2, 2005 was 53 weeks.
Item 9.   Changes In and Disagreements ~~With~~with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.   Controls and Procedures.

We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.

47

operation of our disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act), as of December ~~31, 2006.~~28, 2008. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December ~~31, 2006,~~28, 2008, our disclosure controls and procedures ~~are~~were effective to ensure that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officers, or persons performing similar ~~functons,~~functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management have concluded that the disclosure controls and procedures are effective at the reasonable assurance level. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

An evaluation was also performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of any change in our internal control over financial reporting that occurred during the fourth quarter of ~~2006~~2008 and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ~~That~~The evaluation did not identify any such change.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) ~~and15d-15(f)~~. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We conducted an evaluation of the effectiveness of our 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 our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December ~~31, 2006.~~

~~Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report onForm 10-K,~~ ~~has issued an attestation report on management’s assessment of the~~28, 2008. The effectiveness of our internal control over financial reporting as of December ~~31, 2006. This~~28, 2008 has been audited by Ernst & Young LLP, an independent registered accounting firm, as stated in their report which ~~expresses an unqualified opinion on management’s assessment of and the effectiveness of our internal controls over financial reporting as of December 31, 2006,~~ is included herein.

4844

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ~~ON INTERNAL~~
~~CONTROL OVER FINANCIAL REPORTING~~

To The Board of Directors and Stockholders of

Illumina, Inc.

We have audited ~~management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that~~ Illumina, Inc. ~~maintained effective~~’s internal control over financial reporting as of December ~~31, 2006,~~28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Illumina, Inc.’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.~~reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on ~~management’s assessment and an opinion on the effectiveness of~~ the company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, ~~evaluating management’s assessment,~~assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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 financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely 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 the policies or procedures may deteriorate.

In our opinion, ~~management’s assessment that~~ Illumina, Inc. ~~maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Illumina, Inc.,~~ maintained, in all material respects, effective internal control over financial reporting as of December ~~31, 2006,~~28, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Illumina, Inc. as of December ~~31, 2006~~28, 2008 and ~~January 1, 2006,~~December 30, 2007, and the related consolidated statements of operations, ~~shareholders’~~stockholders’ equity, and cash flows for each of the three years in the period ended December ~~31, 2006~~28, 2008 of Illumina, Inc. and our report dated February ~~23, 2007~~24, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Diego, California

February ~~23, 2007~~24, 2009

4945

Item 9B.   Other Information.

None.

PART III

Item 10.   Directors, ~~and~~ Executive Officers ~~of the Registrant.~~and Corporate Governance.

(a) Identification of Directors. Information concerning our directors is incorporated by reference from the section entitled “Proposal One: Election of Directors” to be contained in our definitive Proxy Statement with respect to our ~~2007~~2009 Annual Meeting of Stockholders to be filed with the SEC no later than April ~~30, 2007.~~27, 2009.

(b) Identification of Executive Officers. Information concerning our executive officers is set forth under “Executive Officers” in Part I of this Annual Report onForm 10-K and is incorporated herein by reference.

(c) Compliance with Section 16(a) of the Exchange Act. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the section entitled “Compliance with Section 16(a) of the Securities Exchange Act” to be contained in our definitive Proxy Statement with respect to our ~~2007~~2009 Annual Meeting of Stockholders to be filed with the SEC no later than April ~~30, 2007.~~27, 2009.

(d) Information concerning the audit committee financial expert as defined by the SEC rules adopted pursuant to the Sarbanes-Oxley Act of 2002 is incorporated by reference from our definitive Proxy Statement with respect to our ~~2007~~2009 Annual Meeting of Stockholders to be filed with the SEC no later than April ~~30, 2007.~~27, 2009.

Code of Ethics

We have adopted a code of ethics for our directors, officers and employees, which is available on our website at www.illumina.com in the Investor Information section under “Corporate.” The information on, or that can be accessed from, our website is not incorporated by reference into this report.

Item 11.   Executive Compensation.

Information concerning executive compensation is incorporated by reference from the sections entitled “Executive Compensation and Other Information” to be contained in our definitive Proxy Statement with respect to our ~~2007~~2009 Annual Meeting of Stockholders to be filed with the SEC no later than April ~~30, 2007.~~27, 2009.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information concerning the security ownership of certain beneficial owners and management and information covering securities authorized for issuance under equity compensation plans is incorporated by reference from the ~~section~~sections entitled “Ownership of Securities” and “Equity Compensation Plan Information” to be contained in our definitive Proxy Statement with respect to our ~~2007~~2009 Annual Meeting of Stockholders to be filed with the SEC no later than April ~~30, 2007.~~27, 2009.

50

~~Equity Compensation Plan Information~~

The following table presents information about our common stock that may be issued upon the exercise of options, warrants and rights under all our existing equity compensation plans as of December 31, 2006. We currently have two active equity compensation plans, the 2000 employee stock purchase plan and the 2005 stock incentive plan, which replaced the 2000 stock plan. Prior to our initial public offering, we granted options under our 1998 stock incentive plan. All of these plans have been approved by our stockholders. Options outstanding include options granted under the 1998 stock incentive plan, the 2000 stock plan and the 2005 stock incentive plan.

(c) Number of

Securities

Remaining

Available for

Future Issuance

(a) Number of
Under Equity

Securities to be
(b) Weighted-
Compensation

Issued Upon
Average
Plans (Excluding

Exercise of
Exercise Price
Securities

Outstanding
of Outstanding
Reflected in

Plan Category
Options Options Column (a))

Equity compensation plans approved by security holders 8,359,120 $ 13.94 5,527,502 (1)(2)
Equity compensation plans not approved by security holders — — —

Total 8,359,120 $ 13.94 5,527,502

~~Please refer to Note 6 to the consolidated financial statements included in this Annual Report onForm 10-K~~ ~~for a description of our equity compensation plans.~~
~~(1)~~ Includes 2,764,566 available for grant under our 2005 stock incentive plan. The 2005 stock incentive plan provides for an automatic annual increase in the shares reserved for issuance by the lesser of (1) five percent of outstanding shares of our common stock on the last day of the immediately preceding fiscal year, (2) 1,200,000 shares or (3) a lesser amount as determined by our Board of Directors.
~~(2)~~ Includes 2,762,936 shares available for grant under our 2000 employee stock purchase plan. The 2000 employee stock purchase plan provides for an automatic annual increase in the shares reserved for issuance by the lesser of (1) three percent of outstanding shares of our common stock on the last day of the immediately preceding fiscal year or (2) 1,500,000 shares.

Item 13. Certain Relationships and Related ~~Transactions.~~Transactions, and Director Independence.

Information concerning certain relationships and related transactions, and director independence is incorporated by reference from the sections entitled “Proposal One: Election of Directors,” “Executive Compensation and Other Information” and “Certain Transactions” to be contained in our definitive Proxy Statement with respect to our ~~2007~~2009 Annual Meeting of Stockholders to be filed with the SEC no later than April ~~30, 2007.~~27, 2009.

46

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as a part of this report:

(1) Consolidated Financial Statements:

Page

Index to Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December ~~31, 2006~~28, 2008 and ~~January 1, 2006~~December 30, 2007
F-3
Consolidated Statements of Operations for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 ~~January 1, 2006, and January 2, 2005~~
F-4
Consolidated Statements of Stockholders’ Equity for the ~~period from~~years ended December 28, ~~2003 to~~2008, December 30, 2007 and December 31, 2006
F-5
Consolidated Statements of Cash Flows for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 ~~January 1, 2006 and January 2, 2005~~
F-6
Notes to Consolidated Financial Statements
F-7
(2)Financial Statement Schedule:

~~(2)~~~~Financial Statement Schedule:~~
Valuation and Qualifying Account and Reserves for the ~~three years ended~~period from January 1, 2006 to December ~~31, 2006~~28, 2008 ~~F-37~~F-36
(3)Exhibits:

~~(3)~~ ~~Exhibits:~~

Exhibit

Number

Description of Document

2 .1(16) Agreement and Plan of Merger, dated as of November 12, 2006, among Solexa, Inc., Callisto Acquisition Corp. and the Registrant.
3 .1(2) Corrected Amended and Restated Certificate of Incorporation.
3 .2(30) Amended Bylaws.
3 .3(5) Certificate of Designation for Series A Junior Participating Preferred Stock (included as an exhibit to exhibit 4.3).
4 .1(1) Specimen Common Stock Certificate.
4 .2(1) Second Amended and Restated Stockholders Rights Agreement, dated November 5, 1999, by and among the Registrant and certain stockholders of the Registrant.
4 .3(5) Rights Agreement, dated as of May 3, 2001, between the Registrant and Equiserve Trust Company, N.A.
4 .4(35) Indenture related to the 0.625% Convertible Senior Notes due 2014, dated as of February 16, 2007, between the Registrant and the Bank of New York, as trustee.
4 .5(36) Registration Rights Agreement, dated as of February 16, 2007, between the Registrant and the Purchasers named therein.
+10 .1(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers.
+10 .2(1) 1998 Incentive Stock Plan.
+10 .3(33) Amended 2000 Employee Stock Purchase Plan.
10 .4(1) Sublease Agreement dated August 1998 between Registrant and Gensia Sicor Inc. for the Registrant’s principal offices.
10 .5(1) License Agreement dated May 1998 between Tufts and Registrant (with certain confidential portions omitted).
10 .6(1) Master Loan and Security Agreement, dated March 6, 2000, by and between Registrant and FINOVA Capital Corporation.
+10 .7(1) 2000 Stock Plan.
10 .8(1) Eastgate Pointe Lease, dated July 6, 2000, between Diversified Eastgate Venture and Registrant.

Exhibit

Number

Description of Document

3 .1(2) Amended and Restated Certificate of Incorporation.
3 .2 Amended Bylaws.
3 .3(5) Certificate of Designation for Series A Junior Participating Preferred Stock (included as an exhibit to exhibit 4.3).
4 .1(1) Specimen Common Stock Certificate.
4 .2(1) Second Amended and Restated Stockholders Rights Agreement, dated November 5, 1999, by and among the Registrant and certain stockholders of the Registrant.
4 .3(5) Rights Agreement, dated as of May 3, 2001, between the Registrant and Equiserve Trust Company, N.A.
4 .4(35) Indenture related to the 0.625% Convertible Senior Notes due 2014, dated as of February 16, 2007, between the Registrant and the Bank of New York, as trustee.
4 .5(36) Registration Rights Agreement, dated as of February 16, 2007, between the Registrant and the Purchasers named therein.
+10 .1(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers.
+10 .2(1) 1998 Incentive Stock Plan.
+10 .3(7) 2000 Employee Stock Purchase Plan, as amended and restated through July 20, 2006.
10 .4(1) Sublease Agreement dated August 1998 between Registrant and Gensia Sicor Inc. for the Registrant’s principal offices.
10 .5(37) License Agreement dated May 1998 between Tufts and Registrant.
10 .6(10) Master Loan and Security Agreement, dated March 6, 2000, by and between Registrant and FINOVA Capital Corporation.
+10 .7(20) 2000 Stock Plan, as amended and restated through March 21, 2002.

5247


Exhibit	Exhibit			Exhibit
Number	Number		Description of Document	Number		Description of Document

	10	.9(1)	Option Agreement and Joint Escrow Instructions, dated July 6, 2000, between Diversified Eastgate Venture and Registrant.	10	.8(12)	Eastgate Pointe Lease, dated July 6, 2000, between Diversified Eastgate Venture and Registrant.
	10	.10(4)	First Amendment to Joint Development Agreement dated March 27, 2001 between Registrant and PE Corporation, now known as Applied Biosystems Group (with certain confidential portions omitted).	10	.9(19)	Option Agreement and Joint Escrow Instructions, dated July 6, 2000, between Diversified Eastgate Venture and Registrant.
	10	.11(6)	First Amendment to Option Agreement and Escrow Instructions dated May 25, 2001 between Diversified Eastgate Venture and Registrant.	10	.10(4)	First Amendment to Joint Development Agreement dated March 27, 2001 between Registrant and PE Corporation, now known as Applied Biosystems Group (with certain confidential portions omitted).
	10	.12(13)	Second Amendment to Option Agreement and Escrow Instructions dated July 18, 2001 between Diversified Eastgate Venture and Registrant.	10	.11(6)	First Amendment to Option Agreement and Escrow Instructions dated May 25, 2001 between Diversified Eastgate Venture and Registrant.
	10	.13(14)	Third Amendment to Option Agreement and Escrow Instructions dated September 27, 2001 between Diversified Eastgate Venture and Registrant.	10	.12(13)	Second Amendment to Option Agreement and Escrow Instructions dated July 18, 2001 between Diversified Eastgate Venture and Registrant.
	10	.14(15)	First Amendment to Eastgate Pointe Lease dated September 27, 2001 between Diversified Eastgate Venture and Registrant.	10	.13(14)	Third Amendment to Option Agreement and Escrow Instructions dated September 27, 2001 between Diversified Eastgate Venture and Registrant.
	10	.15(8)	Replacement Reserve Agreement, dated as of January 10, 2002, between the Registrant and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund.	10	.14(15)	First Amendment to Eastgate Pointe Lease dated September 27, 2001 between Diversified Eastgate Venture and Registrant.
	10	.16(17)	Loan Assumption and Modification Agreement, dated as of January 10, 2002, between the Registrant, Diversified Eastgate Venture and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund.	10	.15(8)	Replacement Reserve Agreement, dated as of January 10, 2002, between the Registrant and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund.
	10	.17(18)	Tenant Improvement and Leasing Commission Reserve Agreement, dated as of January 10, 2002, between the Registrant and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund.	10	.16(17)	Loan Assumption and Modification Agreement, dated as of January 10, 2002, between the Registrant, Diversified Eastgate Venture and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund.
	+10	.18(32)	2000 Employee Stock Purchase Plan as amended and restated through July 20, 2006.	10	.17(18)	Tenant Improvement and Leasing Commission Reserve Agreement, dated as of January 10, 2002, between the Registrant and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust Mortgage Income Fund.
	+10	.19(20)	2000 Stock Plan as amended and restated through March 21, 2002.	+10	.18(42)	Solexa Share Option Plan for Consultants.
	10	.20(21)	Non-exclusive License Agreement dated January 2002 between Amersham Biosciences Corp. and Registrant (with certain confidential portions omitted).	+10	.19(43)	Solexa Enterprise Management Incentive Plan.
	10	.21(22)	License Agreement dated June 2002 between Dade Behring Marburg GmbH and Registrant (with certain confidential portions omitted).	10	.20(21)	Non-exclusive License Agreement dated January 2002 between Amersham Biosciences Corp. and Registrant (with certain confidential portions omitted).
	10	.22(23)	Purchase and Sale Agreement and Escrow Instructions dated June 18, 2004 between Bernardo Property Advisors, Inc. and Registrant.	10	.21(22)	License Agreement dated June 2002 between Dade Behring Marburg GmbH and Registrant (with certain confidential portions omitted).
	10	.23(24)	Single Tenant Lease dated August 18, 2004 between BioMed Realty Trust Inc. and Registrant.	10	.22(23)	Purchase and Sale Agreement and Escrow Instructions dated June 18, 2004 between Bernardo Property Advisors, Inc. and Registrant.
	10	.24(25)	Settlement and Cross License Agreement dated August 18, 2004 between Applera Corporation and Registrant (with certain confidential portions omitted).	10	.23(24)	Single Tenant Lease dated August 18, 2004 between BMR-9885 Towne Centre Drive LLC and Registrant.
	10	.28(26)	Collaboration Agreement dated December 17, 2004 between Invitrogen Incorporated and Registrant (with certain confidential portions omitted).	10	.24(25)	Settlement and Cross License Agreement dated August 18, 2004 between Applera Corporation and Registrant (with certain confidential portions omitted).
	10	.29(27)	Offer letter for Christian O. Henry dated April 26, 2005.	10	.25	Amended Solexa 2005 Equity Incentive Plan
	10	.30(28)	Forms of Stock Option Agreement under 2000 Stock Plan.	10	.26	Amended Solexa 1992 Stock Option Plan
	10	.31(29)	Secured Convertible Debenture Indenture between Genizon BioSciences Inc., Computershare Trust Company of Canada and the Registrant, dated March 24, 2006.	10	.27(41)	Solexa Unapproved Company Share Option Plan
	10	.32(30)	Joint Development and Licensing Agreement dated May 15, 2006 between deCODE genetics, ehf. and Registrant (with certain confidential portions omitted).	10	.28(26)	Collaboration Agreement dated December 17, 2004 between Invitrogen Corporation and Registrant (with certain confidential portions omitted).
	10	.33(31)	Form of Change in Control Severance Agreement between the Registrant and Jay T. Flatley.	10	.29(27)	Offer letter for Christian O. Henry dated April 26, 2005.
	10	.34(31)	Form of Change in Control Severance Agreement between the Registrant and Christian O. Henry.	10	.30(28)	Forms of Stock Option Agreement under 2000 Stock Plan.
	10	.35(31)	Form of Change in Control Severance Agreement between the Registrant and Tristan B. Orpin.	10	.31(29)	Secured Convertible Debenture Indenture between Genizon BioSciences Inc., Computershare Trust Company of Canada and the Registrant, dated March 24, 2006.
	10	.36(31)	Form of Change in Control Severance Agreement between the Registrant and John R. Stuelpnagel.	10	.32(30)	Joint Development and Licensing Agreement dated May 15, 2006 between deCODE genetics, ehf. and Registrant (with certain confidential portions omitted).
	10	.37(31)	Form of Change in Control Severance Agreement between the Registrant and Arthur L. Holden.	10	.33	Amended and Restated Change in Control Severance Agreement between the Registrant and Jay T Flatly.
	10	.38(31)	Form of Change in Control Severance Agreement between the Registrant and Christian G. Cabou.	10	.34	Form of Change in Control Severance Agreement between the Registrant and its executive officers.
				10	.35	Form of Restricted Stock Unit Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan.
				10	.36	[Reserved]
				10	.37	[Reserved]
				10	.38	[Reserved]
				10	.39(34)	Securities Purchase Agreement, dated as of November 12, 2006, between Solexa, Inc. and the Registrant.
				10	.40(50)	Lease between The Irvine Company LLC and the Registrant, dated September 29, 2006.
				10	.41(37)	Amended and Restated Lease between BMR-9885 Towne Centre Drive LLC and the Registrant for the 9885 Towne Centre Drive property, dated January 26, 2007.
				10	.42(37)	Lease between BMR-9885 Towne Centre Drive LLC and the Registrant for the 9865 Towne Centre Drive property, dated January 26, 2007.


(17)		Incorporated by reference to exhibit 10.19 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002.

(18)		Incorporated by reference to the exhibit 10.20 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002.

(19)		Incorporated by reference to ~~the~~ exhibit ~~10.21~~10.12 filed with our Registration Statement onForm ~~10-Q~~S-1 (FileNo. ~~000-30361)~~333-33922) ~~for the quarterly period ended March 31, 2002~~ filed ~~May 13, 2002.~~July 19, 2000.

(20)		Incorporated by reference to the exhibit 10.22 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002.

(21)		Incorporated by reference to exhibit 10.24 filed with Amendment No. 1 to our Registration Statement onForm S-3 (FileNo. 333-111496) filed March 2, 2004.

(22)		Incorporated by reference to exhibit 10.23 filed with our Amendment No. 1 to our Registration Statement onForm S-3 (FileNo. 333-111496) filed March 2, 2004.

(23)		Incorporated by reference to exhibit 10.25 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 27, 2004 filed August 6, 2004.

(24)		Incorporated by reference to exhibit 10.26 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004.

(25)		Incorporated by reference to exhibit 10.27 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended October 3, 2004 filed November 12, 2004.

(26)		Incorporated by reference to exhibit 10.28 filed with ourForm 10-K (FileNo. 000-30361) for the year ended January 2, 2005 filed March 8, 2005.

(27)		Incorporated by reference to exhibit 10.33 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended July 3, 2005 filed August 8, 2005.

(28)		Incorporated by reference to exhibit 10.29 filed with ourForm 10-K (FileNo. 000-30361) for the year ended January 2, 2005 filed March 8, 2005.

(29)		Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended April 2, 2006 filed May 8, 2006.

(30)		Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended July 2, 2006 filed August 2, 2006.

(31)		~~Incorporated by reference to the same numbered exhibit filed with ourForm 8-K~~ ~~(FileNo. 000-30361)~~ ~~filed August 23, 2006.~~[Reserved]

(32)		~~Incorporated by reference to exhibit 10.13 filed with ourForm 10-Q~~ ~~(FileNo. 000-30361)~~ ~~for the quarterly period ended October 1, 2006 filed October 30, 2006.~~[Reserved]

(33)		~~Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q~~ ~~(FileNo. 000-30361)~~ ~~for the quarterly period ended October 1, 2006, filed October 30, 2006.~~[Reserved]

(34)		Incorporated by reference to exhibit 10.1 filed with ourForm 8-K (FileNo. 000-30361) filed November 13, 2006.


(35)		Incorporated by reference to exhibit 4.1 filed with ourForm 8-K (FileNo. 000-30361) filed February ~~16,2007.~~16, 2007.

(36)		Incorporated by reference to exhibit 4.2 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007.

(37)		Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended April 1, 2007 filed May 3, 2007.

(38)		[Reserved]

(39)		[Reserved]

(40)		[Reserved]

(41)		Incorporated by reference to exhibit 99.3 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007.

(42)		Incorporated by reference to exhibit 99.4 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007.

(43)		Incorporated by reference to exhibit 99.5 filed with ourForm 8-K (FileNo. 000-30361) filed November 26, 2007.

(44)		Incorporated by reference to exhibit 10.1 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007.

(45)		Incorporated by reference to exhibit 10.2 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007.

(46)		Incorporated by reference to exhibit 10.3 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007.

(47)		Incorporated by reference to exhibit 10.4 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007.

(48)		Incorporated by reference to exhibit 10.5 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007.

(49)		Incorporated by reference to exhibit 10.6 filed with ourForm 8-K (FileNo. 000-30361) filed February 16, 2007.

(50)		Incorporated by reference to the same numbered exhibit filed with our Annual Report onForm 10-K (FileNo. 000-30361) for the year ended December 31, 2006 filed February 28, 2007.

Supplemental Information

No Annual Report to stockholders or proxy materials has been sent to stockholders as of the date of this report. The Annual Report to stockholders and proxy material will be furnished to our stockholders subsequent to the filing of this Annual Report onForm 10-K and we will furnish such material to the SEC at that time.

5551

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February ~~28, 2007.~~25, 2009.

Illumina, ~~Inc~~.Inc.

By
/s/  Jay T. Flatley
Jay T. Flatley
President and Chief Executive Officer

February ~~28, 2007~~25, 2009

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Jay T. Flatley and Christian O. Henry, and each or any one of them, his true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report onForm 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that saidattorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report onForm 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/  Jay T. Flatley

Jay T. Flatley President, Chief Executive Officer
and Director (Principal
Executive Officer) February ~~28, 2007~~25, 2009

/s/  Christian O. Henry

Christian O. Henry Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) February ~~28, 2007~~25, 2009

~~/s/~~  ~~John R. Stuelpnagel~~

~~John R. Stuelpnagel~~ ~~Senior Vice President, Chief~~
~~Operating Officer and Director~~ ~~February 28, 2007~~
/s/  William H. Rastetter

William H. Rastetter Chairman of the Board of Directors February ~~28, 2007~~25, 2009

/s/  ~~Daniel M. Bradbury~~A. Blaine Bowman

~~Daniel M. Bradbury~~A. Blaine Bowman Director February ~~28, 2007~~25, 2009

/s/  Daniel M. Bradbury

Daniel M. Bradbury Director February 25, 2009
/s/  Karin Eastham

Karin Eastham Director February ~~28, 2007~~25, 2009

5652

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Illumina, Inc.

We have audited the accompanying consolidated balance sheets of Illumina, Inc. as of December ~~31, 2006~~28, 2008 and ~~January 1, 2006,~~December 30, 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December ~~31, 2006.~~28, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits 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 statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Illumina, Inc., at December ~~31, 2006~~28, 2008 and ~~January 1, 2006,~~December 30, 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December ~~31, 2006,~~28, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, Illumina, Inc. changed its method of accounting for share-based payments in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ~~the effectiveness of~~ Illumina, Inc.’s internal control over financial reporting as of December ~~31, 2006,~~28, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February ~~23, 2007~~24, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Diego, California
February ~~23, 2007~~24, 2009

F-2

ILLUMINA, INC.

CONSOLIDATED BALANCE SHEETS

December 31,
January 1,
December 28,
December 30,

2006 2006 2008 2007
(In thousands) (In thousands)

ASSETS
ASSETS
ASSETS
Current assets:
Cash and cash equivalents $ 38,386 $ 50,822 $ 327,024 $ 174,941
Short-term investments 92,418 — 313,051 211,141
Accounts receivable, net 39,984 17,620 133,266 83,119
Inventory, net 20,169 10,309 73,431 53,980
Deferred tax assets — current portion 8,635 26,934
Prepaid expenses and other current assets 2,769 959 9,530 12,640

Total current assets 193,726 79,710 864,937 562,755
Property and equipment, net 25,634 16,131 89,436 46,274
Investment in Solexa 67,784 —
Long-term investments 55,900 —
Goodwill 2,125 2,125 228,734 228,734
Intangible and other assets, net 11,315 2,644
Intangible assets, net 47,755 58,116
Deferred tax assets — long term portion 78,321 80,245
Other assets, net 12,017 11,608

Total assets $ 300,584 $ 100,610 $ 1,377,100 $ 987,732

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 9,853 $ 7,390 $ 29,204 $ 24,311
Litigation settlements payable — 90,536
Accrued liabilities 23,860 14,210 80,355 50,852
Current portion of long-term debt 63 118 399,999 16

Total current liabilities 33,776 21,718 509,558 165,715
Long-term debt, less current portion — 54 — 400,000
Deferred gain on sale of land and building 2,468 2,843 2,314 2,485
Deferred income tax liabilities 6,987 —
Other long-term liabilities 10,011 3,498 16,632 7,854
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2006 and January 1, 2006 — —
Common stock, $0.01 par value, 120,000,000 shares authorized, 46,857,512 shares issued and outstanding at December 31, 2006, 41,294,003 shares issued and outstanding at January 1, 2006 469 413
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding at December 28, 2008 and December 30, 2007 — —
Common stock, $0.01 par value, 320,000,000 shares authorized, 138,936,582 shares issued and outstanding at December 28, 2008, 125,607,354 shares issued and outstanding at December 30, 2007 1,389 1,256
Additional paid-in capital 340,197 216,766 1,499,708 1,043,674
Deferred compensation — (354 )
Accumulated other comprehensive income 11,294 258 2,406 1,347
Accumulated deficit (104,618 ) (144,586 ) (332,500 ) (382,977 )
Treasury stock, at cost (17,927,983 shares at December 28, 2008 and 14,819,090 shares at December 30, 2007) (322,407 ) (251,622 )

Total stockholders’ equity 247,342 72,497 848,596 411,678

Total liabilities and stockholders’ equity $ 300,584 $ 100,610 $ 1,377,100 $ 987,732

See accompanying notes to ~~the~~ consolidated financial statements

F-3

ILLUMINA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended
Year Ended
Year Ended
Year Ended
Year Ended
Year Ended

December 31,
January 1,
January 2,
December 28,
December 30,
December 31,

2006 2006 2005 2008 2007 2006
(In thousands, except per share amounts) (In thousands, except per share amounts)

Revenue
Product revenue $ 155,811 $ 57,752 $ 40,497 $ 532,390 $ 326,699 $ 155,811
Service and other revenue 27,486 13,935 8,075 40,835 40,100 28,775
Research revenue 1,289 1,814 2,011

Total revenue 184,586 73,501 50,583 573,225 366,799 184,586

Costs and expenses:
Cost of product revenue (including non-cash stock compensation expense of $1,289, $0, and $0, respectively) 51,271 19,920 11,572
Cost of service and other revenue (including non-cash stock compensation expense of $235, $0, and $0, respectively) 8,073 3,261 1,687
Research and development (including non-cash stock compensation expense of $3,891, $84, and $348, respectively) 33,373 27,809 21,462
Selling, general and administrative (including non-cash stock compensation expense of $8,889, $186, and $496, respectively) 54,057 28,158 25,576
Cost of product revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) 192,868 119,991 51,271
Cost of service and other revenue 12,756 12,445 8,073
Research and development 99,963 73,943 33,373
Selling, general and administrative 148,014 101,256 54,057
Impairment of manufacturing equipment 4,069 — —
Amortization of intangible assets 10,438 2,429 —
Acquired in-process research and development — 15,800 — 24,660 303,400 —
Litigation judgment (settlement), net — — (4,201 )
Litigation settlements — 54,536 —

Total costs and expenses 146,774 94,948 56,096 492,768 668,000 146,774

Income (loss) from operations 37,812 (21,447 ) (5,513 ) 80,457 (301,201 ) 37,812
Interest income 5,368 1,404 941 12,519 16,026 5,368
Interest and other expense, net (560 ) (668 ) (1,518 ) (2,070 ) (3,610 ) (560 )

Income (loss) before income taxes 42,620 (20,711 ) (6,090 ) 90,906 (288,785 ) 42,620
Provision for income taxes 2,652 163 135
Provision (benefit) for income taxes 40,429 (10,426 ) 2,652

Net income (loss) $ 39,968 $ (20,874 ) $ (6,225 ) $ 50,477 $ (278,359 ) $ 39,968

Net income (loss) per basic share $ 0.90 $ (0.52 ) $ (0.17 ) $ 0.43 $ (2.57 ) $ 0.45

Net income (loss) per diluted share $ 0.82 $ (0.52 ) $ (0.17 ) $ 0.38 $ (2.57 ) $ 0.41

Shares used in calculating basic net income (loss) per share 44,501 40,147 35,845 116,855 108,308 89,002

Shares used in calculating diluted net income (loss) per share 48,754 40,147 35,845 133,607 108,308 97,508

See accompanying notes to ~~the~~ consolidated financial statements

F-4

ILLUMINA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Accumulated

Additional
Other
Total

Common Stock Paid-In
Deferred
Comprehensive
Accumulated
Stockholders’

Shares Amount Capital Compensation Income (Loss) Deficit Equity
(In thousands)

Balance as of December 28, 2003 32,887 $ 329 $ 165,314 $ (1,103 ) $ 335 $ (117,487 ) $ 47,388
Issuance of common stock for cash 5,278 53 30,454 — — — 30,507
Repurchase of restricted common stock (44 ) (1 ) (12 ) — — — (13 )
Amortization of deferred compensation — — — 844 — — 844
Reversal of deferred compensation related to unvested stock options and restricted stock of terminated employees — — (103 ) 103 — — —
Comprehensive loss:
Unrealized loss on available-for sale securities — — — — (305 ) — (305 )
Unrealized loss on hedging contracts — — — — (46 ) — (46 )
Foreign currency translation adjustment — — — — 112 — 112
Net loss — — — — — (6,225 ) (6,225 )

Comprehensive loss (6,464 )

Balance as of January 2, 2005 38,121 381 195,653 (156 ) 96 (123,712 ) 72,262
Issuance of common stock for cash 1,592 16 6,030 — — — 6,046
Issuance of common stock in conjunction with an acquisition 1,580 16 14,812 — — — 14,828
Deferred compensation related to unvested CyVera stock options assumed — — — (197 ) — — (197 )
Compensation expense related to acceleration of options for terminated employees — — 79 — — — 79
Deferred compensation related to a restricted stock award 1 — 192 (192 ) — — —
Amortization of deferred compensation — — — 191 — — 191
Comprehensive income (loss):
Unrealized gain onavailable-for-sale securities
— — — — 29 — 29
Unrealized gain on hedging contracts — — — — 56 — 56
Foreign currency translation adjustment — — — — 77 — 77
Net loss — — — — — (20,874 ) (20,874 )

Comprehensive loss (20,712 )

Balance as of January 1, 2006 41,294 413 216,766 (354 ) 258 (144,586 ) 72,497
Issuance of common stock for cash 5,559 56 114,440 — — — 114,496
May 2006 offering costs — — (6,530 ) — — — (6,530 )
Deferred compensation related to a restricted stock award 4 — — — — — —
Stock-based compensation expense — — 14,082 354 — — 14,436
Incremental tax benefit related to stock options exercised — — 1,439 — — — 1,439
Comprehensive income (loss):
Unrealized gain onavailable-for-sale securities, net of deferred tax
— — — — 10,693 — 10,693
Unrealized gain on hedging contracts — — — — (10 ) — (10 )
Foreign currency translation adjustment — — — — 353 — 353
Net income — — — — — 39,968 39,968

Comprehensive income 51,004

Balance as of December 31, 2006 46,857 $ 469 $ 340,197 $ — $ 11,294 $ (104,618 ) $ 247,342

Accumulated

Additional
Other
Total

Common Stock Paid-In
Deferred
Comprehensive
Accumulated
Treasury Stock Stockholders’

Shares Amount Capital Compensation Income Deficit Shares Amount Equity
(In thousands)

Balance as of January 1, 2006 82,588 $ 826 $ 216,353 $ (354 ) $ 258 $ (144,586 ) — $ — $ 72,497
Issuance of common stock 11,126 112 114,384 — — — — — 114,496
May 2006 offering costs — — (6,530 ) — — — — — (6,530 )
Stock-based compensation — — 14,082 354 — — — — 14,436
Incremental tax benefit related to stock options exercised — — 1,439 — — — — — 1,439
Comprehensive income:
Unrealized gain on available-for-sale securities, net of deferred tax — — — — 10,693 — — — 10,693
Unrealized loss on hedging contracts — — — — (10 ) — — — (10 )
Foreign currency translation adjustment — — — — 353 — — — 353
Net income — — — — — 39,968 — — 39,968

Comprehensive income 51,004

Balance as of December 31, 2006 93,714 $ 938 $ 339,728 $ — $ 11,294 $ (104,618 ) — $ — $ 247,342
Issuance of common stock 4,654 46 30,044 — — — — — 30,090
Issuance of common stock for the acquisition of Solexa, Inc. 26,442 264 530,460 — — — — — 530,724
Fair value of options assumed from Solexa, Inc. — — 75,334 — — — — — 75,334
Convertible note hedge — — (139,040 ) — — — — — (139,040 )
Warrants issued in connection with the convertible debt issuance — — 92,440 — — — — — 92,440
Warrants exercised 798 8 6,067 — — — — — 6,075
Stock-based compensation — — 33,926 — — — — — 33,926
Incremental tax benefit related to stock options exercised — — 20,086 — — — — — 20,086
Incremental tax benefit related to convertible debt issuance — — 54,629 — — — — — 54,629
Repurchases of common stock — — — — — — (14,819 ) (251,622 ) (251,622 )
Comprehensive loss:
Unrealized loss on available-for-sale securities, net of deferred tax — — — — (10,529 ) — — — (10,529 )
Foreign currency translation adjustment — — — — 582 — — — 582
Net loss — — — — — (278,359 ) — — (278,359 )

Comprehensive loss (288,306 )

Balance as of December 30, 2007 125,608 $ 1,256 $ 1,043,674 $ — $ 1,347 $ (382,977 ) (14,819 ) $ (251,622 ) $ 411,678
Issuance of common stock in conjunction with secondary offering, net of issuance costs 8,050 80 342,570 — — — — — 342,650
Issuance of common stock under employee stock plans 4,923 49 44,281 — — — — — 44,330
Warrants exercised 356 4 2,987 — — — — — 2,991
Stock-based compensation — — 47,695 — — — — — 47,695
Incremental tax benefit related to stock options exercised — — 18,501 — — — — — 18,501
Repurchases of common stock — — — — — — (3,109 ) (70,785 ) (70,785 )
Comprehensive income:
Unrealized gain on available-for-sale securities, net of deferred tax — — — — 920 — — — 920
Foreign currency translation adjustment — — — — 139 — — — 139
Net income — — — — — 50,477 — — 50,477

Comprehensive income 51,552

Balance as of December 28, 2008 138,937 $ 1,389 $ 1,499,708 $ — $ 2,406 $ (332,500 ) (17,928 ) $ (322,407 ) $ 848,596

See accompanying notes to ~~the~~ consolidated financial statements

F-5

ILLUMINA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended
Year Ended
Year Ended
Year Ended
Year Ended
Year Ended

December 31,
January 1,
January 2,
December 28,
December 30,
December 31,

2006 2006 2005 2008 2007 2006
(In thousands) (In thousands)

Cash flows from operating activities:
Net income (loss) $ 39,968 $ (20,874 ) $ (6,225 ) $ 50,477 $ (278,359 ) $ 39,968
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Acquired in-process research and development — 15,800 — 24,660 303,400 —
Depreciation and amortization 6,083 4,116 3,956
Amortization of increase in inventory valuation — 942 —
Amortization of intangible assets 10,438 2,429 —
Amortization of debt issuance costs 1,374 1,176 —
Depreciation expense 17,285 11,464 6,032
Loss on disposal of property and equipment 116 293 — 262 15 116
Amortization of premium on investments — (14 ) 354
Non-cash stock-based compensation expense 14,304 270 844
Impairment of manufacturing equipment 4,069 — —
Stock-based compensation expense 47,688 33,746 14,304
Incremental tax benefit related to stock options exercised (1,439 ) — — (18,501 ) (20,086 ) (1,439 )
Amortization of gain on sale of land and building (375 ) (375 ) (156 ) (170 ) (187 ) (375 )
Changes in operating assets and liabilities:
Accounts receivable (21,733 ) (7,039 ) (7,202 ) (57,672 ) (37,060 ) (21,733 )
Inventory (9,728 ) (6,502 ) (1,785 ) (19,560 ) (27,130 ) (9,728 )
Prepaid expenses and other current assets (1,591 ) 290 (29 ) 2,322 (6,127 ) (1,591 )
Deferred income taxes (548 ) — — 38,692 (11,408 ) (548 )
Other assets (5,263 ) 395 (2,041 ) (1,815 ) 2,612 (5,212 )
Accounts payable 2,438 3,193 697 4,840 12,262 2,438
Litigation settlements payable (54,536 ) 54,536 —
Accrued income taxes 1,809 144 84 2,377 1,586 1,809
Accrued liabilities 9,066 4,070 1,874 29,339 15,901 9,066
Litigation judgment — (5,957 ) 567
Other long-term liabilities 5,893 3,182 (512 ) 6,313 (3,418 ) 5,893
Advance payment from former collaborator — — (10,000 )

Net cash provided by (used in) operating activities 39,000 (9,008 ) (19,574 )
Net cash provided by operating activities 87,882 56,294 39,000

Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired — (2,388 ) —
Cash (paid for) obtained in acquisition, including cash paid for transaction costs (24,666 ) 72,075 —
Investment in secured convertible debentures (3,036 ) — — — — (3,036 )
Sale of secured convertible debentures — 3,593 —
Investment in Solexa (50,000 ) — — — — (50,000 )
Purchases ofavailable-for-sale securities
(236,331 ) — (6,603 ) (568,707 ) (598,383 ) (236,331 )
Sales and maturities ofavailable-for-sale securities
143,846 12,248 26,348 411,817 479,415 143,846
Proceeds from sale of land and building, net of fees — — 40,667
Purchase of property and equipment (15,114 ) (11,395 ) (3,355 ) (59,693 ) (24,301 ) (15,114 )
Acquisition of intangible assets (100 ) — (35 )
Cash paid for intangible assets (36,000 ) (85 ) (100 )

Net cash provided by (used in) investing activities (160,735 ) (1,535 ) 57,022
Net cash used in investing activities (277,249 ) (67,686 ) (160,735 )

Cash flows from financing activities:
Payments on long-term debt (109 ) (83 ) (25,387 ) (15 ) (95 ) (109 )
Payments on equipment financing — — (232 )
Proceeds from issuance of convertible debt, net of issuance costs — 390,269 —
Purchase of convertible note hedges — (139,040 ) —
Proceeds from warrant exercises 2,991 98,515 —
Common stock repurchases (70,785 ) (251,622 ) —
Proceeds from secondary offering, net of issuance cost 342,650 — —
Proceeds from issuance of common stock 107,966 6,046 30,507 44,330 30,179 107,966
Incremental tax benefit related to stock options exercised 1,439 — — 18,501 20,086 1,439
Repurchase of common stock — — (13 )

Net cash provided by financing activities 109,296 5,963 4,875 337,672 148,292 109,296

Effect of foreign currency translation on cash and cash equivalents 3 613 1 3,778 (345 ) 3

Net increase (decrease) in cash and cash equivalents (12,436 ) (3,967 ) 42,324 152,083 136,555 (12,436 )
Cash and cash equivalents at beginning of the year 50,822 54,789 12,465 174,941 38,386 50,822

Cash and cash equivalents at end of the year $ 38,386 $ 50,822 $ 54,789 $ 327,024 $ 174,941 $ 38,386

Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 11 $ 15 $ 1,368
Cash paid for interest $ 2,553 $ 1,378 $ 11

Cash (refunded) paid for income taxes $ (1,653 ) $ 2,581 $ 1,392

See accompanying notes to ~~the~~ consolidated financial statements

F-6

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Organization and Summary of Significant Accounting Policies

Organization and Business

Illumina, Inc. (the Company) was incorporated on April 28, 1998. The Company is a leading developer, manufacturer and marketer of ~~next-generation life-science tools and~~ integrated systems for the large-scale analysis of genetic variation and biological function. Using the Company’s proprietary technologies, the Company provides a comprehensive line of products and services that currently serve the sequencing, genotyping and gene expression ~~markets, and the~~markets. The Company also expects to enter the market for molecular diagnostics. The Company’s customers include leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. The Company’s tools provide researchers around the world with the performance, throughput, cost effectiveness and flexibility necessary to perform the billions of genetic tests needed to extract valuable medical information from advances in genomics and proteomics. The Company believes this information will enable researchers to correlate genetic variation and biological function, which will enhance drug discovery and clinical research, allow diseases to be detected earlier and permit better choices of drugs for individual patients.

Basis of Presentation

The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Fiscal Year

The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended December 28, 2008, December 30, 2007 and December 31, 2006 ~~and January 1, 2006~~ were ~~both~~all 52 weeks.

~~Reclassifications~~

~~Certain prior year amounts have been reclassified to conform to current year presentation.~~

Use of Estimates

The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses ~~goodwill~~ and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

Cash Equivalents and ~~Cash Equivalents~~Investments

Cash ~~and cash~~ equivalents are comprised of short-term, highly liquid investments ~~primarily~~with maturities of 90 days or less from the date of purchase.

Short-term investments consist of U.S. Treasury and U.S. government agency securities, municipal notes, corporate notes and bonds and commercial paper. All short-term investments have been designated as available-for-sale securities recorded at estimated fair value with the related unrealized gains and losses included in ~~money market-type funds.~~accumulated other comprehensive income, a component of stockholders’ equity. The Company accounts for investments in debt and equity instruments in accordance with SFAS, No. 115,Accounting for Certain Investments in Debt and Equity Securitiesand FASB Staff Position, or FSP,No. 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, orFSP 115-1. Management determines the appropriate classification of such securities at the time of purchase and reevaluates such classification as of each balance sheet date. The Company follows the guidance provided byFSP 115-1, to assess whether investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in Interest and other expense, net in the consolidated statements of operations.

F-7

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Investments~~

~~The Company applies Statement~~Long-term investments are comprised of ~~Financial Accounting Standards (SFAS) No. 115,~~~~Accounting for Certain Investments in Debt~~the Company’s auction rate securities and ~~Equity Securities~~,a put option related to ~~its investments. Under SFAS No. 115,~~the Company’s settlement agreement with UBS that gives the Company ~~classifies~~the right to sell its ~~investments as“available-for-sale”~~auction rate securities to UBS at par value at a future date. Both the auction rate securities and ~~records such assets~~the put option are recorded at estimated fair value ~~in the balance sheet, with~~and unrealized gains and losses, if any, ~~reported~~are recognized in ~~stockholders’ equity. As~~Interest income on the consolidated statements of ~~December 31, 2006,~~operations. Historically, the Company’s ~~excess cash balances were primarily invested in marketable debt securities, including commercial paper,~~ auction rate ~~certificates and corporate bonds and notes, with strong credit ratings or short maturity mutual funds providing similar financial returns. The~~securities were classified as available-for-sale securities, however, during the fourth quarter of fiscal 2008, the Company ~~limits~~reclassified the ~~amount of investment exposure as~~auction rate securities from available-for-sale to ~~institutions, maturity and investment type. The cost of securities sold is determined based on the specific identification method. The Company did not record any gross realized gains~~trading securities. See Note 4 for the years ended December 31, 2006 or January 1, 2006. For the year ended January 2, 2005, gross realized gains totaled $453,750. Gross realized losses totaled approximately $35,000, $0, and $0 for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively. Further, there were no investments that have been in a continuous unrealized loss position for greater than twelve months as of December 31, 2006.

~~Restricted Cash~~

As of December 31, 2006, restricted cash, included in cash and cash equivalents, consisted of bank guarantees totaling approximately $250,000 associated with two sales contracts during 2006. Both guarantees are scheduled to be released during 2007. There was no restricted cash as of January 1, 2006.further detailed discussion.

Fair Value of Financial Instruments

The carrying amounts of ~~certain~~financial instruments such as cash equivalents, foreign cash accounts, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate the related fair values due to the short-term maturities of these instruments. The estimated fair value of the convertible senior notes is determined by using available market information as of the latest trading date prior to the Company’s fiscal year-end provided by a third party financial institution. The fair value of the Company’s ~~financial instruments, including cash~~convertible notes at December 28, 2008 and ~~cash equivalents, accounts~~December 30, 2007 are $473.0 million and ~~notes receivable, accounts payable and accrued liabilities, approximate fair value.~~$596.3 million, respectively.

Accounts ~~and Notes~~ Receivable

Trade accounts receivable are recorded at the net invoice value and ~~notes receivable~~ are ~~recorded at contractual value plus earned interest. Interest income on notes receivable is recognized according to the terms of each related agreement.~~not interest bearing. The Company considers receivables past due based on the contractual payment terms. The Company reviews its exposure to amounts receivable and reserves specific amounts if collectibility is no longer reasonably assured. The Company also reserves a percentage of its trade receivable balance based on collection ~~history.~~history and current economic trends that might impact the level of future credit losses. The Company re-evaluates such reserves on a regular basis and adjusts its reserves as needed.

Concentrations of Risk

~~Cash~~The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities and other factors could negatively impact the Company’s operating results.

The Company is also subject to risks related to its financial instruments including its cash and cash equivalents, investments and accounts ~~receivable are financial instruments that potentially subject the Company to concentrations of credit risk.~~receivable. Most of the Company’s cash and cash equivalents as of December ~~31, 2006~~28, 2008 were deposited with financial institutions in the United States and the Company’s investment policy restricts the amount of credit exposure to any one issuer to 5% of the portfolio at the time of purchase and to any one ~~type~~industry sector, as defined by Bloomberg classifications, to 25% of ~~investment, other than~~the portfolio at the time of purchase. There is no limit to the percentage of the portfolio that may be maintained in securities issued by the ~~U.S. Government.~~U.S government and money market funds. The Company has historically not experienced significant credit losses from investments and accounts receivable. The Company performs a regular review of customer activity and associated credit risks and generally does not require collateral. The Company maintains an allowance for doubtful accounts based upon a percentage of its trade receivable balance based on collection history and re-evaluates such reserves on a regular basis.risks.

~~F-8~~

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

currency exchange fluctuations, longer payment cycles and greater difficulty in accounts receivable collection. The Company is also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. The risks of international sales are mitigated in part by the extent to which sales are geographically distributed.

Inventories

Inventories are stated at the lower of ~~standard~~ cost ~~(which approximates actual cost)~~(on a first in, first out basis) or market. Inventory includes raw materials and finished goods that may be used in the research and development process and such items are expensed as ~~consumed.~~consumed or expired. Provisions for slow moving, excess and obsolete inventories are provided based on product life cycle and development plans, product expiration and quality issues, historical experience and inventory levels.

Property and Equipment

Property and equipment are stated at cost, subject to review of impairment, and depreciated over the estimated useful lives of the assets (generally three to seven years) using the straight-line method. Amortization of leasehold improvements is computed over the shorter of the lease term or the estimated useful life of the related assets. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.

Goodwill, Intangible Assets

~~Intangible assets consist of license agreements~~ and acquired technology. The cost of the Company’s license agreements was $944,450 and the Company has amortized $836,450 through December 31, 2006. Amortization expense related to license agreements for the years ending December 31, 2006, January 1, 2006 and January 2, 2005 was $51,083, $292,033 and $300,000, respectively. The licenses will be fully amortized by 2010.

Other Long-Lived Assets

Goodwill represents the excess of cost over fair value of net assets acquired. Intangible assets include acquired technology, customer relationships, other license agreements and licensed technology (capitalized as part of the Affymetrix litigation). The cost of identified intangible assets is amortized on a straight-line basis over periods ranging from three to ten years unless the expected benefit pattern is declining, in which case an accelerated method is used.

The Company regularly performs reviews to determine if the carrying values of the long-lived assets are impaired. In accordance with SFAS ~~No.~~142,Goodwill and Other Intangible Assets,goodwill and other intangible assets that have indefinite useful lives are reviewed for impairment at least annually during the second fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. The Company performed its annual impairment test of goodwill as of May 30, 2008, utilizing a test that begins with an estimate of the fair value of the reporting unit or intangible asset, noting no impairment and has determined there has been no impairment indicators for goodwill through December 28, 2008. A review of intangible assets that have finite useful lives and other long-lived assets is performed when an event occurs indicating the potential for impairment in accordance with SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assetsif. If indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, the Company measures the future discounted cash flows associated with the use of the asset and adjusts the value of the asset accordingly. ~~While~~Factors that would necessitate an impairment assessment include a significant decline in the Company’s ~~historical operating~~stock price and ~~cash flow losses are indicators~~market capitalization compared to its net book value, significant changes in the ability of ~~impairment, the Company believes the current and future~~a particular asset to generate positive cash flows ~~to be received from~~and significant changes in the ~~long-lived assets recorded at December 31, 2006 will exceed~~Company’s strategic business objectives and utilization of the ~~assets’ carrying value, and accordingly the Company has not recognized any impairment losses through December 31, 2006.~~asset.

F-9

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reserve for Product Warranties

The Company generally provides a one-year warranty on instrumentation. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with system sales. This expense is recorded as a component of cost of revenue.

Revenue Recognition

The Company’s revenue is generated primarily from the sale of products and services. Product revenue consists of sales of arrays, reagents, flow cells, instrumentation, oligonucleotides (oligos) and ~~oligos.~~associated freight charges. Service and other revenue consists of revenue received for performing genotyping and sequencing services, extended warranty sales and ~~revenue~~amounts earned ~~from milestone payments.~~under research agreements with government grants, which are recognized in the period during which the related costs are incurred.

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. All revenue is recorded net of any applicable allowances for returns or discounts.

Revenue for product sales is recognized generally upon shipment and transfer of title to the customer, provided no significant obligations remain and collection of the receivables is reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is generally upon shipment. ~~However, in the case of BeadLabs, revenue is recognized upon the completion of installation, training and the receipt of customer acceptance.~~ Revenue for genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is delivered to the ~~customer or as specific milestones are achieved.~~customer.

In order to assess whether the price is fixed and determinable, the Company ensures there are no refund rights. If payment terms are based on future performance, the Company defers revenue recognition until the price becomes fixed and determinable. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection of a payment is not reasonably assured, revenue recognition is deferred until the time collection becomes reasonably assured, which is generally upon receipt of payment.

Sales of instrumentation generally include a standard one-year warranty. The Company also sells separately priced maintenance (extended warranty) contracts, which are generally for one or two years, upon the expiration of the initial warranty. Revenue for extended warranty sales is recognized ratably over the term of the extended warranty period. Reserves are provided for estimated product warranty expenses at the time the associated revenue is recognized. If the Company were to experience an increase in warranty claims or if costs of servicing its warrantied products were greater than its estimates, gross margins could be adversely affected.

~~F-10~~

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

While the majority of its sales agreements contain standard terms and conditions, the Company does enter into agreements that contain multiple elements or non-standard terms and conditions. Emerging Issues Task Force (EITF)No. 00-21,Revenue Arrangements with Multiple Deliverables,provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services, or rights to use assets within contractually binding arrangements. ~~Significant contract interpretation~~For arrangements with multiple elements, revenue recognition is ~~sometimes required to determine~~based on the ~~appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate~~individual units of accounting ~~for revenue recognition purposes,~~determined to exist in the arrangement. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis and ~~if so, how~~there is objective and reliable evidence of the fair value of the undelivered items. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. The fair value of an item is generally the price ~~should~~charged for the product, if the item is regularly sold on a stand-alone basis. When objective and reliable evidence of fair value exists for all units of accounting in an arrangement, the arrangement consideration is generally allocated to each unit

F-10

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of accounting based upon its relative fair value. In those instances when objective and reliable evidence of fair value exists for the undelivered items but not for the delivered items, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of arrangement consideration allocated to the delivered items equals the total arrangement consideration less the aggregate fair value of the undelivered items. When the Company is unable to establish stand-alone value for delivered items or when fair value of undelivered items has not been established, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be ~~allocated among the deliverable elements, when to recognize revenue~~determined for ~~each element, and the period over which revenue should be recognized.~~any remaining undelivered elements. The Company recognizes revenue for delivered elements only when it determines that the fair values of undelivered elements are known and there are no uncertainties regarding customer acceptance.

Some of the Company’s agreements contain multiple elements that include milestone payments. Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgement from the Company’s collaborator, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) the performance obligations for both the Company and its collaborators after the milestone achievement will continue at a level comparable to the level before the milestone achievement. If all of these criteria are not met, the milestone achievement is recognized over the remaining minimum period of the Company’s performance obligations under the agreement. The Company defers non-refundable upfront fees received under its collaborations and recognizes them over the period the related services are provided or over the estimated collaboration term using various factors specific to the collaboration. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

A third source of revenue, research revenue, consists of amounts earned under research agreements with government grants, which is recognized in the period during which the related costs are incurred. All revenue is recorded net of any applicable allowances for returns or discounts.

Shipping and Handling Expenses

Shipping and handling expenses are included in cost of product revenue and totaled ~~$1.8~~$3.7 million, ~~$1.3~~$2.2 million and ~~$0.5~~$1.8 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, ~~January 1, 2006 and January 2, 2005,~~ respectively.

Research and Development

Research and development expenses consist of costs incurred for internal and grant-sponsored research and development. Research and development expenses include salaries, contractor fees, facilities costs, utilities and allocations of benefits. Expenditures relating to research and development are expensed in the period incurred.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs were ~~$1.9~~$3.4 million, ~~$1.2~~$2.8 million and ~~$0.8~~$1.9 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, ~~January 1, 2006 and January 2, 2005,~~ respectively.

~~F-11~~

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Income Taxes

In accordance with SFAS No. 109,Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a ~~jurisdiction by jurisdiction~~jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income over the foreseeable future, determination of cumulative pre-tax book income after permanent differences, history of earnings, and reliability of forecasting. As of December 28, 2008, the Company maintained a valuation allowance only against certain U.S. and foreign deferred tax assets that the Company concluded did not meet the “more likely than not” threshold required under SFAS No. 109.

Due to the adoption of SFAS No. ~~123 (revised 2004), Share-Based Payment,~~123R, the Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows thewith-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company.

~~Foreign Currency Translation~~

The functional currencies of the Company’s wholly-owned subsidiaries are their respective local currencies. Accordingly, all balance sheet accounts of these operations are translated to U.S. dollars using the exchange rates in effect at the balance sheet date, and revenues and expenses are translated using the average exchange rates in effect during the period. The gains and losses from foreign currency translation of these subsidiaries’ financial statements are recorded as a separate component of stockholders’ equity under the caption “accumulated other comprehensive income (loss).”

~~F-12~~F-11

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Effective January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires recognition of the impact of a tax position in the Company’s financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.

Functional Currency

Historically, the Company identified the local currency as the functional currency in each of its foreign subsidiaries, and the effects of translation were recorded as other comprehensive income (loss). During the third quarter of 2008, the Company reorganized its international structure to execute a more efficient relationship between product development, product manufacturing and sales. The reorganization increased the foreign subsidiaries’ anticipated dependence on the U.S. entity for management decisions, financial support, production assets and inventory, thereby making the foreign subsidiaries more of a direct and integral component of the U.S. entity’s operations. As a result, the Company reassessed the primary economic environment of its foreign subsidiaries and determined the subsidiaries are more U.S. dollar based, resulting in a U.S. dollar functional currency determination. As a result of this change, beginning in the third quarter of 2008, the Company remeasures its foreign subsidiaries’ assets and liabilities and income and expense accounts related to nonmonetary assets and liabilities to the U.S. dollar and records the net gains or losses resulting from remeasurement in its consolidated statements of operations within interest and other expense, net.

Stock-Based Compensation

~~On January 2, 2006,~~The Company accounts for share-based compensation using the ~~Company adopted~~fair value recognition provisions of SFAS ~~No. 123 (revised 2004)~~123(R),Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. In January 2005, the SEC issued SAB No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using ~~the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25,~~~~Accounting for Stock Issued to Employees~~~~, and instead generally requires that such transactions be accounted for using a fair-value-based method. The Company uses~~ the Black-Scholes-Merton option-pricing model to ~~determine the fair-value of stock-based awards under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123,~~~~Accounting for Stock-Based Compensation~~, in prior periods. The Company has elected to use the modified prospective transition method as permitted by SFAS No. 123R and, accordingly, prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock and employee stock purchase plan (ESPP) shares that are ultimately expected to vest as the requisite service is rendered. Stock-based compensation expense for awards granted prior to January 2, 2006 is based on the grant date fair-value as determined under APB No. 25. For the year ended December 31, 2006, the Company has recorded an incremental $14.3 million, respectively, of stock-based compensation expense as a result of the adoption of SFAS No. 123R. Net income per diluted share was reduced by $0.29 for the year ended December 31, 2006 as a result of the adoption of SFAS No. 123R. Stock-based compensation expense capitalized as part of inventory as of December 31, 2006 was approximately $0.1 million. As of December 31, 2006, approximately $46.8 million of total unrecognized compensation cost related to stock options, restricted stock and ESPP shares are expected to be recognized over a weighted-average period of approximately two years.

Prior to the adoption of SFAS No. 123R, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25. The Company applied the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148,~~Accounting for Stock-Based Compensation — Transition and Disclosure~~, as if the fair-value-based method had been applied in measuring stock-based compensation expense. Under APB Opinion No. 25, when the exercise price of the Company’s employee stock options was not less than the market price of the underlying stock on the date of the grant, no compensation expense was recognized.

~~F-13~~

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~The following table illustrates the effect on net loss and basic and diluted net loss per share as if the Company had applied~~estimate the fair value ~~recognition provisions~~ of ~~SFAS No. 123 to stock-based compensation during~~stock options granted and stock purchases under the ~~specified reporting periods (in thousands, except per share data):~~

Year Ended
Year Ended

January 1,
January 2,

2006 2005

Net loss as reported $ (20,874 ) $ (6,225 )
Add: Stock-based compensation expense recorded 270 844
Less: Assumed stock-based compensation expense (8,393 ) (10,302 )

Pro forma net loss $ (28,997 ) $ (15,683 )

Basic and diluted net loss per share:
As reported $ (0.52 ) $ (0.17 )

Pro forma $ (0.72 ) $ (0.44 )

~~SFAS No. 123R requires the use of a valuation~~Employee Stock Purchase Plan (ESPP). This model ~~to calculate the fair-value of stock-based awards. The Company has elected to use the Black-Scholes-Merton option-pricing model, which~~ incorporates various assumptions including volatility, expected life, and interest rates. ~~The~~Historically, the Company used an expected stock-price volatility isassumption that was primarily based on historical realized volatility of the underlying stock during a period of time. Beginning the third quarter of 2007, volatility was determined by equally weighing the historical and implied volatility of the Company’s common stock. The historical volatility of the Company’s common stock over the most recent period is generally commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The implied volatility is calculated from the implied market volatility of exchange-traded call options on the Company’s common stock. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees.

F-12

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share of options granted and for stock purchases under the ESPP during those periods are as follows:


	Year Ended	Year Ended	Year Ended	Year Ended	Year Ended	Year Ended
	December 31,	January 1,	January 2,	December 28,	December 30,	December 31,
	2006	2006	2005	2008	2007	2006

Interest rate — stock options	4.73%	4.08%	3.25%	2.31 - 3.52%	3.68 - 4.90%	4.73%
Interest rate — stock purchases	4.08 - 4.85%	3.25 - 4.08%	3.25 - 3.31%	1.88 - 4.71%	4.71 - 4.86%	4.08 -4.85%
Volatility — stock options	76%	90%	97%	51 - 65%	55 - 70%	76%
Volatility — stock purchases	76 - 90%	90 - 103%	97 - 103%	53 - 69%	69 - 76%	76 - 90%
Expected life — stock options	6 years	5 years	5 years	5 - 6 years	6 years	6 years
Expected life — stock purchases	6 - 12 months	6 - 24 months	6 - 12 months	6 - 12 months	6 - 12 months	6 - 12 months
Expected dividend yield	0%	0%	0%	0%	0%	0%
Weighted average fair value per share of options granted	$18.88	$7.38	$5.25	$18.31	$12.86	$9.44
Weighted average fair value per share of employee stock purchases	$4.76	$1.81	$1.36	$11.45	$7.33	$2.38

The fair value of restricted stock units granted during the years ended December 28, 2008 and December 30, 2007 was based on the market price of our common stock on the date of grant. No restricted stock units were granted during the year ended December 31, 2006.

As of December 28, 2008, $152.8 million of total unrecognized compensation cost related to stock options, restricted stock and ESPP shares issued to date is expected to be recognized over a weighted-average period of approximately 1.9 years.

Total share-based compensation expense for employee stock options and stock purchases consists of the following (in thousands, except per share data):

Year Ended
Year Ended
Year Ended

December 28,
December 30,
December 31,

2008 2007 2006

Cost of product revenue $ 4,710 $ 4,045 $ 1,289
Cost of service and other revenue 400 279 235
Research and development 14,086 10,016 3,891
Selling, general and administrative 28,492 19,406 8,889

Share-based compensation expense before taxes 47,688 33,746 14,304
Related income tax benefits (15,844 ) (11,005 ) —

Share-based compensation expense, net of taxes $ 31,844 $ 22,741 $ 14,304

Net share-based compensation expense per share of common stock:
Basic $ 0.27 $ 0.21 $ 0.16

Diluted $ 0.24 $ 0.21 $ 0.15

~~F-14~~F-13

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net Income ( Loss) per Share

On July 22, 2008, the Company announced a two-for-one stock split in the form of a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share and per share amounts have been restated to reflect the stock split for all periods presented.

Basic and diluted net income (loss) per share of common ~~share~~stock is presented in conformity with SFAS No. 128,Earnings per Share,for all periods presented. In accordance with SFAS No. 128, basic net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the period, less shares held in treasury and shares subject to repurchase. Diluted net income (loss) per share is ~~typically~~ computed using the weighted average number of common and dilutive common equivalent shares from ~~stock options~~the Company’s Convertible Senior Notes, equity awards, warrants sold in connection with the Convertible Senior Notes and warrants assumed in the acquisition of Solexa, Inc. (Solexa) using the treasury stock method. The following table presents the calculation of weighted-average shares used to calculate basic and diluted net income (loss) per share (in thousands):


	Year Ended			Year Ended			Year Ended			Year Ended		Year Ended			Year Ended
	December 31,			January 1,			January 2,			December 28,		December 30,			December 31,
	2006			2006			2005			2008		2007			2006

Weighted-average shares outstanding		44,537			40,199			36,165			116,855		108,328			89,074
Less: Weighted-average shares of common stock subject to repurchase		(36	)		(52	)		(320	)		—		(20	)		(72	)

Weighted-average shares used in calculating basic net income (loss) per share		44,501			40,147			35,845			116,855		108,308			89,002
Plus: Effect of dilutive potential common shares		4,253			—			—
Plus: Effect of dilutive Convertible Senior Notes											6,653		—			—
Plus: Effect of dilutive equity awards											5,373		—			8,506
Plus: Effect of dilutive warrants sold in connection with the Convertible Senior Notes											2,487		—			—
Plus: Effect of dilutive warrants assumed in the acquisition of Solexa											2,239		—			—

Weighted-average shares used in calculating diluted net income (loss) per share		48,754			40,147			35,845			133,607		108,308			97,508

Weighted average shares excluded from calculation due to anti-dilutive effect											370		42,882			401

The total number of shares excluded from the calculation of diluted net loss per share, prior to application of the treasury stock method for options and shares of restricted stock, was 7,368,181 and 6,360,023 for the years ended January 1, 2006, and January 2, 2005, respectively, as their effect was antidilutive.

Comprehensive Income

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive ~~income.~~income (loss). Other comprehensive income (loss) includes unrealized gains and losses on the Company’savailable-for-sale securities ~~that are excluded from net income, changes in the fair value of derivatives designated as effective as cash flow hedges,~~ and foreign currency translation adjustments. The Company has disclosed comprehensive income as a component of stockholders’ equity.

The components of accumulated other comprehensive income are as follows (in thousands):


	Year Ended		Year Ended
	December 31,		January 1,		December 28,		December 30,
	2006		2006		2008		2007

Foreign currency translation adjustments		601		248	$	2,103	$	1,183
Unrealized gain onavailable-for-sale securities, net of deferred tax		10,693		—		303		164
Unrealized gain on cash flow hedges		—		10

Total other comprehensive income	$	11,294	$	258	$	2,406	$	1,347

F-14

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recent Accounting Pronouncements

Adopted Accounting Pronouncements

During fiscal 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”. In February 2008, the FASB issued Staff PositionNo. FSP 157-2, “Effective Date of FASB Statement No. 157”(FSP 157-2), which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. The adoption of this statement did not have a material impact on the Company’s consolidated statements of operations or financial condition. On October 10, 2008, the FASB issued FSPNo. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active”(FSP 157-3) that clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial assets is not active.FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The Company considered the additional guidance with respect to the valuation of its financial assets and liabilities and their corresponding designation within the fair value hierarchy. All short-term investments were valued using quoted prices in active markets or Level 1 hierarchical inputs. Long-term investments were valued using Level 3 hierarchical inputs due to the lack of trading in the secondary market of these instruments. Refer to Notes 3 and 4.

During fiscal 2008, the Company adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on acontract-by-contract basis. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The adoption of SFAS No. 159 impacted the accounting for the put option recorded as a result of the signed settlement agreement with UBS AG (UBS) in November 2008. Refer to Note 4.

New Accounting Pronouncements

SFAS No. 141(R),Business Combinations, was issued in December of 2007. SFAS No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and sets forth what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact the adoption of this pronouncement will have on the Company’s consolidated financial statements.

SFAS No. 160,Interests in Consolidated Financial Statements — an amendment of ARB No. 51,which impacts the accounting for minority interest in the consolidated financial statements of filers, was also issued in December 2007. The statement requires the reclassification of minority interest to the equity section of the balance sheet and the results from operations attributed to minority interest to be included in net income. The related minority interest impact on earnings would then be disclosed in the summary of other comprehensive income. The statement is applicable for all fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this standard will require prospective treatment. The Company is currently evaluating the impact, if any, the adoption of this pronouncement will have on the Company’s consolidated financial statements.

F-15

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In December 2007 the Financial Accounting Standards Board (FASB) ratified EITF Issue07-1,Accounting for Collaborative Arrangements. EITF Issue07-1 focuses on defining a collaborative arrangement as well as the accounting for transactions between participants in a collaborative arrangement and between the participants in the arrangement and third parties. The EITF concluded that both types of transactions should be reported in each participant’s respective income statement. EITF Issue07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and should be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating the impact, if any, the adoption of this pronouncement will have on the Company’s consolidated financial statements.

In May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board Opinions (APB)14-1,Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)(FSP APB14-1 or the FSP) that significantly impacts the accounting for convertible debt. The FSP requires issuers of convertible debt that may be settled fully or partially in cash upon conversion to account separately for the liability and equity components of the convertible debt. The liability component is measured so that the effective interest expense associated with the convertible debt reflects the issuer’s borrowing rate at the date of issuance for similar debt instruments without the conversion feature. This FSP applies to our Convertible Senior Notes and will be effective for us beginning on December 29, 2009. This FSP will be applied retrospectively to all periods that will be presented in our consolidated financial statements beginning after December 29, 2009. Upon adoption, we will retrospectively record a decrease in the book value of our 0.625% Convertible Senior Notes of approximately $150.0 million as of December 28, 2008, an increase in additional paid-in capital and a cumulative effect of a change in accounting principles in our consolidated financial statements, and we will begin recording an additional non-cash interest expense ranging from approximately $20.0 million to 30.0 million per year. The additional interest expense, net of taxes, will reduce net income by a range of approximately $13.0 million to $20.0 million per year. We will continue to record this additional interest expense over the expected life of the debt. These amounts represent management’s best estimates of the effects the adoption of this pronouncement will have on the Company’s consolidated financial statements, however actual amounts may vary significantly from our current estimate.

In October 2008, the FASB issued FASB FSPSFAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157,Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective upon issuance, including for prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in FASB Statement No. 154,Accounting Changes and Error Corrections. However, the disclosure provisions in Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The Company believes the impact of this pronouncement on the Company’s consolidated financial statements to be immaterial.


2.	Acquisitions

~~Acquisition of CyVera Corporation~~Avantome, Inc.

On ~~April 8, 2005,~~August 1, 2008, the Company completed its acquisition of ~~100% of~~Avantome, Inc. (Avantome), a privately-held Delaware corporation. As consideration for the ~~voting equity interests of CyVera Corporation (CyVera). Pursuant~~acquisition, the Company paid $25.8 million in cash, including transaction costs, and may pay up to an ~~Agreement and Plan~~additional $35.0 million in contingent cash consideration based on the achievement of Merger, dated as of February 22, 2005 (the Merger Agreement), by and among Illumina, Semaphore Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Illumina (Merger Sub), and CyVera, Merger Sub merged with and into CyVera, with CyVera surviving as a wholly owned subsidiary of Illumina. The results of CyVera’s operations have been included in the Company’s consolidated financial statements since the acquisition date of April 8, 2005.

~~CyVera was created in October 2003 to commercialize its technology and optical instrumentation/reader concepts (BeadXpress Reader).~~certain milestones. The Company ~~believes that the CyVera technology, branded VeraCode, is highly complementary to the Company’s own portfolio~~assumed $1.1 million in net assets, and recorded a charge of ~~products~~$24.7 million for purchased in-process research and ~~services and will enhance the Company’s capabilities to service its existing customers as well as accelerate~~development (IPR&D) primarily associated with the development of ~~additional technologies, products and services.~~Avantome’s low-cost, long read-length sequencing technology. The Company believes that integrating CyVera’s capabilities with the Company’s technologies will better position the Company to address the emerging biomarker research and development and in-vitro and molecular diagnostic markets. The Company plans to begin shipments of its first products resulting from this acquisition during the first quarter of 2007.amount

Pursuant to the Merger Agreement, the Company issued 1.6 million shares (the Shares) of Illumina common stock, paid $2.3 million in cash and assumed the net liabilities of CyVera. In addition, the Company assumed the outstanding stock options of CyVera. Approximately 250,000 of the Shares were deposited into an escrow account with a bank to satisfy any claims for indemnification made by the Company or CyVera pursuant to the Merger Agreement. No claims for indemnification were made and the escrow agent released the shares from escrow during the second quarter of 2006.

The results of CyVera’s operations have been included in the accompanying consolidated financial statements from the date of the acquisition. The total cost of the acquisition is as follows (in thousands):

Fair market value of securities issued, net $ 14,433
Cash paid 2,291
Transaction costs 681
Fair market value of options assumed 394

Total purchase price $ 17,799

F-16

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The fair value of the Shares~~

allocated to IPR&D was expensed upon acquisition as it was determined ~~based on~~that the ~~average closing~~underlying project had not reached technological feasibility and had no alternative future use. The Company has assessed the contingent consideration payable in accordance with the provisions of SFAS No. 141,Business Combinations, andEITF 95-8,Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.Contingent consideration of $11.0 million will be recorded as compensation expense over a three-year period as this consideration is earned by the former primary shareholders of Avantome contingent upon their employment with the Company for three years. The remaining contingent consideration of $24.0 million will be recorded as additional purchase price if and when certain milestones are achieved or the amount due is determinable beyond a reasonable doubt.

The results of Avantome’s operations have been included in the Company’s ~~common stock for five trading days preceding, and following, February 22, 2005 (the~~consolidated financial statements since the acquisition date of August 1, 2008. Pro forma results of operations have not been presented because the transaction was announced). The Company believes that this time period gives proper consideration to matters such as price fluctuations and quantities traded and represents a reasonable period before and after the date on which the termseffects of the acquisition were ~~agreed.~~ not material.

Solexa, Inc.

On January 26, 2007, the Company completed its acquisition of Solexa, a Delaware corporation, in a stock-for-stock merger transaction. The Company issued 26.2 million shares of its common stock as consideration for this merger.

The purchase price of the acquisition is as follows (in thousands):

Fair market value of securities issued $ 527,067
Fair market value of change of control bonuses and related taxes 8,182
Transaction costs not included in Solexa net tangible assets acquired 8,138
Fair market value of vested stock options, warrants and restricted stock assumed 75,334

Total purchase price $ 618,721

Based on ~~these closing prices,~~the estimated fair values at the acquisition date, the Company ~~estimated~~allocated $303.4 million to IPR&D, $62.2 million to tangible assets acquired and liabilities assumed and $24.4 million to intangible assets. The remaining excess of the purchase price over the fair value of ~~its common stock~~net assets acquired of $228.7 million was allocated to ~~be $9.167 per share, which equates to a total fair value of $14.4 million.~~goodwill.

The ~~final purchase price allocation is shown below (in thousands):~~

Cash $ 4
Prepaid expenses 12
Fixed assets 349
Deferred compensation on unvested stock options assumed 196
Accounts payable and accrued liabilities (432 )
Debt assumed (255 )

Net book value of net liabilities assumed (126 )
In-process research and development 15,800
Goodwill 2,125

$ 17,799

~~F-17~~

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~In accordance with SFAS No. 142,~~~~Goodwill and Other Intangible Assets,~~results of Solexa’s operations have been included in the goodwill is not amortized, but will be subject to a periodic assessment for impairment by applying a fair-value-based test. None of this goodwill is expected to be deductible for tax purposes. The Company performs its annual test for impairment of goodwill in May of each year. The Company is required to perform a periodic assessment between annual tests in certain circumstances. The Company has performed its annual test of goodwill as of May 1, 2006 and has determined there was no impairment of goodwill during 2006.

The Company allocated $15.8 million of the purchase price to in-process research and development projects. In-process research and development (IPR&D) represents the valuation of acquired, to-be-completed research projects. AtCompany’s consolidated financial statements since the acquisition date ~~CyVera’s ongoing research and development initiatives were primarily involved with the development~~ of its VeraCode technology and the BeadXpress Reader. These two projects were approximately 50% and 25% complete at the date of acquisition, respectively. As of December 31, 2006, these two projects were approximately 90% and 80% complete, respectively.

The value assigned to purchased IPR&D was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projections used to value the IPR&D were, in some cases, reduced based on the probability of developing a new technology, and considered the relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The resulting net cash flows from such projects are based on the Company’s estimates of cost of sales, operating expenses, and income taxes from such projects. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, discount rates of 30% were considered appropriate for the IPR&D. The Company believes that these discount rates were commensurate with the projects’ stage of development and the uncertainties in the economic estimates described above.

If these projects are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. The Company believes that the foregoing assumptions used in the IPR&D analysis were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were charged to expense in the second quarter of 2005.

January 26, 2007. The following unaudited pro forma information shows the results of the Company’s operations for the ~~years ended January 1, 2006 and January 2, 2005~~specified reporting periods as though the acquisition had occurred as of the beginning of ~~the periods presented~~that period (in thousands, except per share data):

Year Ended
Year Ended

January 1,
January 2,

2006 2005

Revenue $ 73,501 $ 50,583
Net loss (6,234 ) (9,965 )
Net loss per share, basic and diluted (0.15 ) (0.27 )

Year Ended
Year Ended

December 30,
December 31,

2007 2006

Revenue $ 366,854 $ 187,103
Net income (loss) $ 17,388 $ (38,957 )
Net income (loss) per share, basic $ 0.16 $ (0.34 )
Net income (loss) per share, diluted $ 0.15 $ (0.34 )

~~F-18~~

ILLUMINA, INC.

~~Recent Accounting Pronouncements~~

~~In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48,~~~~Accounting for Uncertainty in Income Taxes~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — ~~an interpretation of FASB Statement No. 109~~, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that the Company recognize the impact of a tax position in its financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN No. 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company does not expect the adoption of FIN No. 48 to have a material impact on its consolidated results of operations and financial position, and the Company is continuing to evaluate the impact, if any, the adoption of FIN No. 48 will have on its disclosure requirements.

~~In September 2006, the FASB issued SFAS No. 157,~~~~Fair Value Measurements.~~ SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies only to fair value measurements that are already required or permitted by other accounting standards. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on its consolidated results of operations and financial position.(Continued)


2.3.	Balance Sheet Account Details

The following is a summary of short-term investments ~~as of December 31, 2006~~ (in thousands):


												December 28, 2008
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value

U.S. Treasury securities and obligations of U.S. government agencies	$	9,498	$	5	$	(9	)	$	9,494	$	218,964	$	1,544	$	—		$	220,508
Debt securities issued by the states of the United States and political subdivisions of the states		17,200		—		—			17,200
Corporate debt securities		65,787		7		(70	)		65,724		92,301		547		(305	)		92,543

Total	$	92,485	$	12	$	(79	)	$	92,418	$	311,265	$	2,091	$	(305	)	$	313,051

December 30, 2007
Gross
Gross

Amortized
Unrealized
Unrealized
Estimated

Cost Gains Losses Fair Value

U.S. Treasury securities and obligations of U.S. government agencies $ 42,648 $ 108 $ — $ 42,756
Debt securities issued by the states of the United States and political subdivisions of the states 14,675 — — 14,675
Corporate debt securities 153,547 252 (89 ) 153,710

Total $ 210,870 $ 360 $ (89 ) $ 211,141

Gross realized losses on sales of available-for-sale securities were immaterial for the years ended December 28, 2008, December 30, 2007 and December 31, 2006. Gross realized gains on sales of available-for-sale securities totaled $0.6 million for the year ended December 28, 2008 and were immaterial for the years ended December 30, 2007 and December 31, 2006. As of December 28, 2008, all of the Company’s investments in a gross unrealized loss position had been in such position for less than twelve months. Impairments are not considered other than temporary as the Company has the intent and ability to hold these investments until maturity.
Contractual maturities of short-term investments at December 28, 2008 were as follows (in thousands):

Estimated

Fair Value

Due within one year $ 204,774
After one but within five years 108,277

Total $ 313,051

Accounts receivable consist of the following (in thousands):

December 28,
December 30,

2008 2007

Accounts receivable from product and service sales $ 132,564 $ 82,144
Other receivables 1,840 1,515

134,404 83,659
Allowance for doubtful accounts (1,138 ) (540 )

Total $ 133,266 $ 83,119

F-18

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Inventory, net, consists of the following (in thousands):

December 28,
December 30,

2008 2007

Raw materials $ 32,501 $ 27,098
Work in process 34,063 20,321
Finished goods 6,867 6,561

Total $ 73,431 $ 53,980

Property and equipment consist of the following (in thousands):

December 28,
December 30,

2008 2007

Leasehold improvements $ 26,637 $ 4,531
Manufacturing and laboratory equipment 83,317 50,384
Computer equipment and software 27,490 18,772
Furniture and fixtures 4,167 3,691

141,611 77,378
Accumulated depreciation and amortization (52,175 ) (31,104 )

Total $ 89,436 $ 46,274

Depreciation expense was $17.3 million, $11.5 million and $6.0 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
Accrued liabilities consist of the following (in thousands):

December 28,
December 30,

2008 2007

Compensation $ 30,330 $ 17,410
Short-term deferred revenue 15,862 7,541
Taxes 9,456 8,298
Reserve for product warranties 8,203 3,716
Customer deposits 6,583 5,266
Accrued royalties 2,695 1,867
Legal and other professional fees 1,708 4,276
Other 5,518 2,478

Total $ 80,355 $ 50,852

4. Long-term Investments
The Company has $55.9 million (at cost) in auction rate securities issued primarily by municipalities and universities. The auction rate securities are held in a brokerage account with UBS. These securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through auctions. The Company’s entire auction rate portfolio is currently rated AAA or AA by a rating agency.
The markets for auction rate securities effectively ceased when the vast majority of auctions failed in February 2008, preventing investors from selling their auction rate securities. As of December 28, 2008, the securities continued to fail auction and remained illiquid. As a result, the Company recorded an unrealized loss of $8.7 million for the year ended December 28, 2008, resulting in a reduction to the fair value of the

F-19

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Gross realized losses on sales ofavailable-for-sale~~

Company’s auction rate securities ~~totaled approximately $35,000, $0~~to $47.2 million. This unrealized loss was determined in accordance with SFAS No. 157,Fair Value Measurements.

As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels including the following:


	•	Level 1 — Quoted prices in active markets for identical assets or liabilities.

	•	Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value hierarchy gives the highest priority to Level 1 and ~~$0 for~~ the ~~years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively. As of December 31, 2006, all~~lowest priority to Level 3. In determining the fair value of the Company’s ~~investments~~auction rate securities, the Company considered trades in the secondary market. However, due to the recent auction failures of the auction rate securities in the marketplace and the lack of trading in the secondary market of these instruments, there was insufficient observable auction rate security market information available to directly determine the fair value of the Company’s investments. As a ~~gross~~result, the value of these auction rate securities and resulting unrealized loss ~~position had been~~was determined using Level 3 hierarchical inputs. These inputs include management’s assumptions of pricing by market participants, including assumptions about risk. In accordance with SFAS No. 157, the Company used the concepts of fair value based on estimated discounted future cash flows of interest income over a projected five year period reflective of the length of time until the Company’s securities are expected to become liquid or potentially get repurchased. In preparing this model, the Company used historical data of the rates upon which a majority of the auction rate securities’ contractual rates were based, such as the LIBOR and average trailing twelve-month90-day Treasury interest rate spreads, to estimate future interest rates. The Company also considered the discount factors, taking into account the credit ratings of the auction rate securities, using a discount rate of 5%. The Company obtained information from multiple sources, including UBS, to determine a reasonable range of assumptions to use in ~~such position for less than 12 months.~~valuing the auction rate securities. The Company’s model was corroborated by a separate comparable cash flow analysis prepared by UBS. To understand the sensitivity of the Company’s valuation, the liquidity factor and estimated remaining life was varied. Variations in those results were evaluated and it was determined the factors and valuation method chosen were reasonable and representative of the Company’s auction rate security portfolio.

The Company ~~also recorded an unrealized gain, net of tax, of $10.8 million~~classified these securities as long-term assets since the Company believes it may not be able to liquidate its investments without significant loss within the next year. As of December ~~31, 2006, related~~30, 2007, these securities were classified as short-term since the failures of these auctions did not occur until February 2008.

As a result of the auction rate failures, various regulatory agencies initiated investigations into the sales and marketing practices of several banks and broker-dealers, including UBS, which sold auction rate securities, alleging violations of federal and state laws. Along with several other broker-dealers, UBS subsequently reached a settlement with the federal and state regulators that required them to repurchase auction rate securities from certain investors at par at some future date. In November 2008 the Company signed a settlement agreement to sell its auction rate securities at par value to UBS during the period of June 30, 2010 through July 2, 2012 (the Settlement). In accepting the Settlement, the Company released UBS from any claims relating to the ~~investment in common stock~~marketing and sale of ~~Solexa (see Note 10). The net unrealized gain~~auction rate securities. Although the Company expects to sell its auction rates securities under the Settlement, if the Settlement is ~~classified as a part of accumulated other comprehensive income in~~not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation to buy the ~~stockholders’ equity section~~Company’s auction rate securities. In lieu of the ~~consolidated balance sheet.~~

~~Contractual maturities of short-term investments at December 31, 2006 were as follows (in thousands):~~

Estimated

Fair Value

Due within one year $ 20,250
After one but within five years 72,168

Total $ 92,418

~~Accounts receivable consist~~acceptance of the ~~following (in thousands):~~

December 31,
January 1,

2006 2006

Accounts receivable from product and service sales $ 39,627 $ 17,055
Notes receivable from product sales 112 441
Accounts receivable from government grants 167 180
Other receivables 416 257

40,322 17,933
Allowance for doubtful accounts (338 ) (313 )

Total $ 39,984 $ 17,620

~~Inventory, net, consists of~~Settlement, the ~~following (in thousands):~~auction rate securities will continue to accrue interest as

December 31,
January 1,

2006 2006

Raw materials $ 8,365 $ 4,575
Work in process 8,907 4,546
Finished goods 2,897 1,188

Total $ 20,169 $ 10,309

F-20

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Property and equipment consist~~

determined by the auction process or the terms outlined in the prospectus of the ~~following (in thousands):~~

December 31,
January 1,

2006 2006

Leasehold improvements $ 1,760 $ 819
Manufacturing and laboratory equipment 30,523 19,430
Computer equipment and software 10,383 8,121
Furniture and fixtures 3,114 2,139

45,780 30,509
Accumulated depreciation and amortization (20,146 ) (14,378 )

Total $ 25,634 $ 16,131

auction rate securities if the auction process fails. In addition to offering to repurchase the Company’s auction rate securities, as part of the Settlement, UBS has agreed to provide the Company with a “no net cost” loan up to 75% of the par value of the auction rate securities until June 30, 2010. Per the terms of the Settlement, the interest rate on the loan will approximate the weighted average interest or dividend rate payable to the Company by the issuer of any auction rate securities pledged as collateral.

~~Depreciation expense was $6.1 million, $3.8~~UBS’s obligations under the Settlement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Settlement. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Settlement.
To account for the Settlement, the Company recorded a separate freestanding asset (put option) of $8.7 million and ~~$3.7 million~~recognized a corresponding gain in earnings during the fourth quarter of 2008. The fair value of the put option is included in long-term investments on the balance sheet as of December 28, 2008 with the corresponding gain classified as interest income in the consolidated statement of operations for the ~~years~~year ended December ~~31, 2006, January 1, 2006~~28, 2008. The put option does not meet the definition of a derivative instrument under SFAS No. 133, therefore, the Company elected to measure the put option at fair value under SFAS No. 159. The Company valued the put option using a discounted cash flow approach including estimates of interest rates, timing and ~~January 2, 2005, respectively.~~amount of cash flow, with consideration given to UBS’s financial ability to repurchase the auction rate securities beginning June 30, 2010. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.

~~Accrued liabilities consist~~Prior to accepting the UBS offer, the Company recorded its auction rate securities as available-for-sale investments, and therefore recorded resulting unrealized gains or losses in accumulated other comprehensive income in its statements of stockholders’ equity. By signing the settlement agreement, the Company no longer had the intent of holding the auction rate securities until recovery as management now has the intent to exercise its put option during the period June 30, 2010 to July 3, 2012. As a result, the Company elected a one-time transfer of the ~~following (in thousands):~~

December 31,
January 1,

2006 2006

Compensation $ 8,239 $ 4,922
Legal and other professional fees 3,831 2,311
Taxes 1,804 939
Reserve for product warranties 996 751
Customer deposits 3,703 1,361
Short-term deferred revenue 3,382 1,937
Short-term deferred gain on sale of building 375 375
Other 1,530 1,614

Total $ 23,860 $ 14,210

auction rate securities from available-for-sale to trading in accordance with SFAS No. 115. Prior to its agreement with UBS, management’s intent was to hold the auction rate securities until the earlier of anticipated recovery in market value or maturity. Upon transfer to trading securities, the Company immediately recognized a loss of $8.7 million, included in interest income for the amount of the unrealized loss not previously recognized in earnings. The Company will continue to recognize gains and losses in earnings approximating the changes in the fair value of the auction rate securities at each balance sheet date. These gains and losses are expected to be approximately offset by changes in the fair value of the put option.

3.5. ~~Derivative Financial Instruments~~Intangible Assets

~~SFAS No. 133,~~~~Accounting for Derivative Instruments~~The Company’s intangible assets are comprised primarily of acquired core technology and ~~Hedging Activities,~~~~requires that~~customer relationships from the acquisition of Solexa and licensed technology from the Affymetrix settlement entered into on January 9, 2008. As a result of this settlement, the Company agreed, without admitting liability, to make a one-time payment to Affymetrix of $90.0 million. In return, Affymetrix agreed to dismiss with prejudice all ~~derivatives be recognized on~~lawsuits it had brought against the ~~balance sheet at their fair value. Changes~~Company, and the Company agreed to dismiss with prejudice its counterclaims in the ~~fair value~~relevant lawsuits. Affymetrix also agreed not to sue the Company or its affiliates or customers for making, using or selling any of ~~derivatives are recorded each period in~~the Company’s current ~~earnings~~products, evolutions of those products or ~~other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if~~services related to those products. In addition, Affymetrix agreed that, for four years, it ~~is,~~will not sue the ~~type of hedge transaction. The~~ Company ~~assesses, both at its inception and on an on-going basis, whether~~for making, using or selling the ~~derivatives~~Company’s products or services that are ~~used~~based on future technology developments. The covenant not to sue covers all fields other than photolithography, the process by which Affymetrix manufactures its arrays and a field in ~~hedging transactions are highly effective in offsetting~~which the ~~changes in cash flows of hedged items.~~Company does not operate.
Of the total $90.0 million payment made on January 25, 2008, $36.0 million was recorded as licensed technology and classified as an intangible asset. The ~~Company also assesses hedge ineffectiveness on a quarterly basis and records the gain or loss related~~remaining $54.0 million was charged to ~~the ineffective portion to current earnings to the extent significant.~~expense during

F-21

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Periodically,~~ the ~~Company hedges significant foreign currency firm sales commitments~~fourth quarter of 2007. This allocation was determined in accordance with SFAS No. 5,Accounting for Contingencies, and ~~accounts receivable with forward contracts.~~EITF 00-21 using the concepts of fair value based on the past and estimated future revenue streams related to the products covered by the patents previously under dispute. The value of the licensed technology is the benefit derived, calculated using estimated discounted cash flows and future revenue projections, from the perpetual covenant not to sue for damages related to the sale of the Company’s current products. The Company ~~only uses derivative financial instruments to reduce foreign currency exchange~~utilized an annual discount rate ~~risks;~~of 9.25% when preparing this model. The effective life of the ~~Company does not hold any derivative financial instruments for trading~~licensed technology extends through 2015, the final expiry date of all patents considered in valuing the intangible asset. The related amortization is based on the higher of the percentage of usage or ~~speculative purposes.~~the straight-line method. The ~~Company primarily uses forward exchange contracts to hedge foreign currency exposures~~percentage of usage was determined using actual and ~~they generally have terms~~projected revenues generated from products covered by the patents previously under dispute.

Acquired core technology and customer relationships are being amortized on a straight-line basis over their effective useful lives of ~~one year or less. These contracts have been designated~~ten and three years, respectively. The amortization of the Company’s intangible assets is excluded from cost of product revenue and is separately classified as ~~cash flow hedges and accordingly, to~~amortization of intangible assets on the ~~extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in other comprehensive income. Realized gains and losses for~~Company’s consolidated statements of operations.

The following is a summary of the ~~effective portion are recognized~~Company’s amortizable intangible assets as of the respective balance sheet dates (in thousands):

December 28, 2008 December 30, 2007
Gross Carrying
Accumulated
Intangibles,
Gross Carrying
Accumulated
Intangibles,

Amount Amortization Net Amount Amortization Net

Licensed technology $ 36,000 $ (7,788 ) $ 28,212 $ 36,000 $ — $ 36,000
Core technology 23,500 (4,504 ) 18,996 23,500 (2,154 ) 21,346
Customer relationships 900 (575 ) 325 900 (275 ) 625
License agreements 1,154 (932 ) 222 1,029 (884 ) 145

Total intangible assets, net $ 61,554 $ (13,799 ) $ 47,755 $ 61,429 $ (3,313 ) $ 58,116

Amortization expense associated with the underlying hedge transaction. As of December 31, 2006, the Company had no foreign currency forward contracts outstanding. The notional settlement amount of the foreign currency forward contracts outstanding at December 31, 2006 and January 1, 2006 were $0 and $0.1 million, respectively. As of January 1, 2006, the Company had one outstanding contract with an immaterial fair value, representing an unrealized gain, andintangible assets was ~~included in other current assets at January 1, 2006. The Company settled foreign exchange contracts of $0.1~~$10.4 million and ~~$5.2~~$2.4 million for the years ended December ~~31, 2006~~28, 2008 and December 30, 2007, respectively. There was no amortization of intangibles for the year ended January 1, ~~2006, respectively. The Company did not hold any derivative financial instruments prior to fiscal 2004.~~2006.

~~On February 16, 2007,~~The estimated annual amortization of intangible assets for the ~~Company issued $400 million principal amount~~next five years is shown in the following table (in thousands). Actual amortization expense to be reported in future periods could differ from these estimates as a result of 0.625% Convertible Senior Notes due 2014 (the Notes), which included the exercise of the initial purchasers’ option to purchase up to an additional $50 million aggregate principal amount of Notes. In connection with the offering of the notes, the Company entered into convertible note hedge transactions with the initial purchasers~~and/or~~ their affiliates (the counterparties) entitling the Company to purchase shares of the Company’s common stock at an initial strike price of $43.66 per share, subject to adjustment. In addition, the Company sold to these counterparties warrants to acquire shares of the Company’s common stock at an initial strike price of $62.87 per share, subject to adjustment. See Note 15 for further discussion of these transactions.acquisitions, divestitures, asset impairments and other factors.

2009 $ 6,749
2010 6,462
2011 6,425
2012 6,618
2013 6,518
Thereafter 14,983

Total $ 47,755

4.6. Impairment of Manufacturing Equipment
During fiscal 2008, the Company implemented next-generation imaging and decoding systems to be used in manufacturing. These systems were developed to increase existing capacity and allow the Company to transition to the Infinium High-Density (HD) product line. As a result of this transition, the demand for products manufactured on the previous infrastructure was reduced and certain systems were no longer being

F-22

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

utilized. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, a non-cash impairment charge of $4.1 million was recorded in the second quarter of fiscal 2008 for the excess machinery. This charge is included as a separate line item in the Company’s consolidated statement of operations. There was no change to useful lives and related depreciation expense of the remaining assets as the Company believes these estimates are currently reflective of the period the assets will be used in operations.


7.	Warranties ~~and Maintenance Contracts~~

The Company generally provides a one-year warranty on sequencing, genotyping and gene expression systems. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with system sales. This expense is recorded as a component of cost of product revenue. Estimated warranty expenses associated with extended maintenance contracts are recorded as cost of revenue ratably over the term of the maintenance contract.

Changes in the Company’s ~~warranty liability during the three years ended~~reserve for product warranties from January 1, 2006 through December ~~31, 2006~~28, 2008 are as follows (in thousands):


Balance as of December 28, 2003	$	230
Additions charged to cost of revenue		603
Repairs and replacements		(446	)

Balance as of January 2, 2005		387
Additions charged to cost of revenue		1,094
Repairs and replacements		(730	)

Balance as of January 1, 2006		751		$	751
Additions charged to cost of revenue		1,379			1,379
Repairs and replacements		(1,134	)		(1,134	)

Balance as of December 31, 2006	$	996			996
Additions charged to cost of revenue					4,939
Repairs and replacements					(2,219	)

Balance as of December 30, 2007					3,716
Additions charged to cost of revenue					13,044
Repairs and replacements					(8,557	)

Balance as of December 28, 2008				$	8,203


8.	Convertible Senior Notes

On February 16, 2007, the Company issued $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014 (the Notes), which included the exercise of the initial purchasers’ option to purchase up to an additional $50.0 million aggregate principal amount of Notes. The net proceeds from the offering, after deducting the initial purchasers’ discount and offering expenses, were $390.3 million. The Company will pay 0.625% interest per annum on the principal amount of the Notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year. The Company made interest payments of $1.3 million and $1.2 million on February 15, 2008 and August 15, 2008, respectively. The Notes mature on February 15, 2014.

The Notes will be convertible into cash and, if applicable, shares of the Company’s common stock, $0.01 par value per share, based on a conversion rate, subject to adjustment, of 45.8058 shares per $1,000 principal amount of Notes (which represents a conversion price of $21.83 per share), only in the following circumstances and to the following extent: (1) during the fivebusiness-day period after any five consecutive trading period (the measurement period) in which the trading price per Note for each day of such measurement period was less than 97% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter after the calendar quarter ending March 30, 2007, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately

~~F-22~~F-23

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events; and (4) the Notes will be convertible at any time on or after November 15, 2013 through the third scheduled trading day immediately preceding the maturity date. The requirements of the second condition above were satisfied during the first, second and third quarters of 2008. Accordingly, the Company’s outstanding convertible notes became convertible into cash and, if applicable, shares of common stock, during the period from, and including April 1, 2008 through, and including, December 31, 2008. During the fourth quarter of 2008, the requirements of this same condition were no longer satisfied, accordingly, the Notes will no longer be convertible during the period from, and including January 1, 2009 through, and including March 31, 2009 unless another conversion condition is satisfied during this period. Generally, upon conversion of a Note, the Company will pay the conversion value of the Note in cash, up to the principal amount of the Note. Any excess of the conversion value over the principal amount is payable in shares of the Company’s common stock. As of December 28, 2008, the principal amount of these Notes was classified as current liabilities as the Notes were still convertible through December 31, 2008.

In connection with the offering of the Notes in February 2007, the Company entered into convertible note hedge transactions (the hedge) with the initial purchasersand/or their affiliates (the counterparties) entitling the Company to purchase up to 18,322,320 shares of the Company’s common stock at a strike price of $21.83 per share, subject to adjustment. In addition, the Company sold to these counterparties warrants (the warrants) exercisable, on a cashless basis, for up to 18,322,320 shares of the Company’s common stock at a strike price of $31.435 per share, subject to adjustment. The cost of the hedge that was not covered by the proceeds from the sale of the warrants was $46.6 million and was reflected as a reduction of additional paid-in capital. The hedge is expected to reduce the potential equity dilution upon conversion of the Notes to the extent the Company exercises the note hedges to purchase shares from the counterparties to deliver to converting noteholders. However, the warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock exceeds the strike price of the warrants on the exercise dates of the warrants, which occur during 2014, and the warrants are exercised.


5.9.	Commitments ~~and Long-term Debt~~

~~Building Loan~~

~~In July 2000, the Company entered into a10-year~~ lease to rent space in two newly constructed buildings in San Diego that are now occupied by the Company. That lease contained an option to purchase the buildings together with certain adjacent land that has been approved for construction of an additional building. The Company exercised that option and purchased the properties in January 2002 and assumed a $26.0 million,~~10-year~~ mortgage on the property at a fixed interest rate of 8.36%. The Company made monthly payments of $208,974, representing interest and principal, through August 2004. The Company did not record interest expense related to this loan for the years ended December 31, 2006 or January 1, 2006. Interest expense related to this loan was $1.4 million for the year ended January 2, 2005.

In June 2004, the Company entered into a conditional agreement to sell its land and buildings for $42.0 million and to lease back such property for an initial term of ten years. The sale was completed in August 2004 at which time the lease was signed. After the repayment of the remaining $25.2 million debt and other related transaction expenses, the Company received $15.5 million in net cash proceeds. The Company removed the land and net book value of the buildings of $36.9 million from its balance sheet, deferred the resulting $3.7 million gain on the sale of the property, and is amortizing the deferred gain over the lease term in accordance with SFAS No. 13,~~Accounting for Leases.~~

The Company leased a portion of the space to a tenant under a lease which expired in June 2004. Rental income was recorded as an offset to the Company’s facility costs. There was no rental income for the years ended December 31, 2006 and January 1, 2006. For the year ended January 2, 2005, rental income was $409,517.

~~Capital Leases~~

In April 2000, the Company entered into a $3,000,000 loan arrangement to be used at its discretion to finance purchases of capital equipment. The loan was secured by the capital equipment financed. As of January 1, 2005, all loan payments were made, the underlying equipment was purchased and the loan arrangement was closed. Depreciation of equipment under capital leases was included in depreciation expense. Interest expense related to capital leases was $10,500 for the year ended January 2, 2005. The Company did not have any capital leases during the years ended December 31, 2006 and January 1, 2006.

Operating Leases

~~In August 2004,~~The Company leases office and manufacturing facilities under various noncancellable operating lease agreements. Facilities leases generally provide for periodic rent increases, and many contain escalation clauses and renewal options. Certain leases require the Company ~~entered into a ten-year lease for its~~to pay property taxes and routine maintenance. The Company is headquartered in San Diego, ~~facility after~~California and leases facilities in Hayward, California, the ~~land~~United Kingdom, The Netherlands, Japan, Singapore, Australia and ~~building~~China.

Annual future minimum payments under these operating leases as of December 28, 2008 were sold (as discussed above). Under the terms of the lease, the Company paid a $1.9 million security deposit and is paying monthly rent of $318,643 for the first year with an annual increase of 3% in each subsequent year through 2014. The current monthly rent under this lease is $338,048. On February 14, 2007, the Company extended this lease. The terms of the new lease provide for monthly rent increases each year to a maximum of $504,710 per month during the last year of the lease, which is now 2023. The Company has the option to extend the term of the lease for three additional five-year periods. In accordance with SFAS No. 13, the Company records rent expense on a straight-line basis and the resulting deferred rent is included in other long-term liabilities in the accompanying consolidated balance sheet.as follows (in thousands):

2009 $ 11,032
2010 11,122
2011 11,823
2012 11,920
2013 11,458
Thereafter 100,885

Total $ 158,240

~~F-23~~F-24

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2006, the Company also leased an office and laboratory facility in Connecticut, additional office, distribution and storage facilities in San Diego, and four foreign facilities located in Japan, Singapore, China and the Netherlands under non-cancelable operating leases that expire at various times through June 2011. These leases contain renewal options ranging from one to five years.

~~As of December 31, 2006, annual future minimum payments under these operating leases were as follows (in thousands):~~

2007 5,320
2008 5,335
2009 5,075
2010 4,659
2011 4,712
2012 and thereafter 12,798

Total $ 37,899

Rent expense, net of amortization of the deferred gain on sale of property, was ~~$4,723,041, $4,737,218,~~$10.7 million, $7.7 million and ~~$1,794,234~~$4.7 million for the years ended December 28, 2008, December 30, 2007 and December 31, 2006, ~~January 1, 2006 and January 2, 2005,~~ respectively.

6.10. Stockholders’ Equity

Common ~~stock~~Stock

AsOn July 22, 2008, the Company announced a two-for-one stock split in the form of a 100% stock dividend with a record date of September 10, 2008 and a distribution date of September 22, 2008. Share and per share amounts have been restated to reflect the stock split for all periods presented.
On August 12, 2008, a total of 8,050,000 shares were sold to the public at a public offering price of $43.75 per share, raising net proceeds to the Company of $342.6 million, after deducting underwriting discounts and commissions and offering expenses.
On December ~~31, 2006,~~28, 2008, the Company had ~~46,857,512~~121,008,599 shares of common stock outstanding, of which 4,814,744 shares were sold to employees and consultants subject to restricted stock agreements. The restricted common shares vest in accordance with the provisions of the agreements, generally over five years. All unvested shares are subject to repurchase by the Company at the original purchase price. As of December 31, 2006, 36,000 shares of common stock were subject to repurchase. In addition, the Company also issued 12,000 shares for a restricted stock award to an employee under the Company’s new 2005 Stock and Incentive Plan based on service performance. These shares vest monthly over a three-year period.outstanding.

Stock Options
~~2005 Stock and Incentive Plan~~

In June 2005, the stockholders of the Company approved the 2005 Stock and Incentive Plan (the 2005 Stock Plan). Upon adoption of the 2005 Stock Plan, issuance of options under the Company’s existing 2000 Stock Plan ceased. Additionally, in connection with the acquisition of Solexa, the Company assumed stock options granted under the 2005 Solexa Equity Incentive Plan (the 2005 Solexa Equity Plan). The 2005 Stock Plan ~~provides~~and the 2005 Solexa Equity Plan initially provided that an aggregate of up to ~~11,542,358~~24,571,238 shares of the Company’s common stock be reserved and available to be issued. ~~In addition, the~~The 2005 Stock Plan provides for an automatic annual increase in the shares reserved for issuance by the lesser of 5% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, ~~1,200,000~~2,400,000 shares or such lesser amount as determined by the Company’s board of directors.

~~F-24~~

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~The~~ Additionally, during the Company’s Annual Meeting of Stockholders held on May 16, 2008, the stockholders ratified an amendment to increase the maximum number of shares of common stock ~~option activity~~authorized for issuance under ~~all stock option plans from~~the 2005 Stock Plan by 2,400,000 shares. As of December 28, ~~2003 through December 31, 2006 is as follows:~~

Weighted-

Average

Options Exercise Price

Outstanding at December 28, 2003 5,228,874 $ 6.95
Granted 1,453,400 $ 7.08
Exercised (139,768 ) $ 1.98
Cancelled (337,486 ) $ 8.80

Outstanding at January 2, 2005 6,205,020 $ 6.99
Granted 2,992,300 $ 10.02
Exercised (869,925 ) $ 4.66
Cancelled (1,001,964 ) $ 11.00

Outstanding at January 1, 2006 7,325,431 $ 7.96
Granted 2,621,050 $ 27.24
Exercised (1,273,119 ) $ 7.28
Cancelled (314,242 ) $ 12.44

Outstanding at December 31, 2006 8,359,120 $ 13.94

~~At December 31, 2006,~~2008, options to purchase ~~approximately 2,901,704~~6,777,903 shares ~~were exercisable and 2,764,566 shares remain~~remained available for future ~~grant.~~grant under the 2005 Stock Plan and 2005 Solexa Equity Plan.

~~Following~~On January 29, 2008, the Company’s board of directors approved the New Hire Stock and Incentive Plan, which provides for the issuance of options and shares of restricted stock to newly hired employees. There is ~~a further breakdown~~no set number of ~~the options outstanding as of December 31, 2006:~~shares reserved for issuance under this Plan.

Weighted

Weighted
Average

Average
Weighted
Exercise Price

Range of
Options
Remaining Life
Average
Options
of Options

Exercise Prices
Outstanding in Years Exercise Price Exercisable Exercisable

$0.03 - 5.75 1,475,729 6.22 $ 3.85 964,006 $ 3.65
$5.99 - 8.30 1,455,333 6.04 $ 7.00 686,164 $ 7.32
$8.35 - 9.40 1,465,961 7.75 $ 8.67 451,603 $ 8.78
$9.44 - 20.03 1,408,012 7.55 $ 12.67 589,545 $ 12.23
$20.97 - 26.92 1,417,584 9.01 $ 22.18 175,329 $ 21.30
$26.94 - 45.69 1,136,501 9.58 $ 34.00 35,057 $ 35.18

$ 0.03 - 45.69 8,359,120 7.61 $ 13.94 2,901,704 $ 8.51

F-25

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s stock option activity under all stock option plans from January 1, 2006 through December 28, 2008 is as follows:

Weighted-

Average

Options Exercise Price

Outstanding at January 1, 2006 14,650,862 $ 3.98
Granted 5,242,100 $ 13.62
Exercised (2,546,238 ) $ 3.64
Cancelled (628,484 ) $ 6.22

Outstanding at December 31, 2006 16,718,240 $ 6.97
Options assumed through business combination 2,848,664 $ 10.69
Granted 7,569,016 $ 20.32
Exercised (4,358,572 ) $ 6.03
Cancelled (1,929,480 ) $ 11.19

Outstanding at December 30, 2007 20,847,868 $ 12.13
Granted 3,091,108 $ 34.23
Exercised (4,571,855 ) $ 8.52
Cancelled (1,232,917 ) $ 19.93

Outstanding at December 28, 2008 18,134,204 $ 16.26

The following is a further breakdown of the options outstanding as of December 28, 2008:

Weighted

Weighted
Average

Average
Weighted
Exercise Price

Range of
Options
Remaining Life
Average
Options
of Options

Exercise Prices
Outstanding in Years Exercise Price Exercisable Exercisable

$0.05-3.95 2,195,626 4.14 $ 2.94 1,706,512 $ 2.91
$3.97-4.85 1,813,554 5.38 $ 4.34 1,023,641 $ 4.37
$4.94-10.49 2,907,761 6.27 $ 8.44 1,496,162 $ 8.28
$10.66-16.19 1,890,491 7.35 $ 13.79 787,957 $ 13.50
$16.27-19.61 2,619,364 7.81 $ 18.24 893,047 $ 18.24
$19.71-20.04 2,227,638 7.22 $ 20.03 701,138 $ 20.04
$20.12-29.78 1,819,970 8.80 $ 24.51 336,421 $ 24.62
$30.09-33.80 1,840,600 9.12 $ 32.61 218,044 $ 32.51
$34.43-42.02 589,200 9.33 $ 38.51 5,000 $ 41.75
$44.38 230,000 9.60 $ 44.38 — $ —

$0.05-44.38 18,134,204 7.06 $ 16.26 7,167,922 $ 10.94

The weighted average remaining life in years of options exercisable is 6.37 years as of December 28, 2008.
The aggregate intrinsic value of options outstanding and options exercisable as of December ~~31, 2006~~28, 2008 was ~~$212.3~~$192.4 million and ~~$89.4~~$105.4 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price per share on the last trading day of the fiscal period, which was ~~$39.31~~$25.36 as of December ~~29, 2006,~~26, 2008, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $136.6 million, $72.1 million and $34.0 million for the ~~year~~years ended December 28, 2008, December 30, 2007 and December 31, ~~2006.~~2006, respectively.

F-26

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~2000~~ Employee Stock Purchase Plan

In February 2000, the board of directors and stockholders adopted the 2000 ~~Employee Stock Purchase Plan (the Purchase Plan).~~ESPP. A total of ~~4,827,988~~15,467,426 shares of the Company’s common stock have been reserved for issuance under the ~~Purchase Plan.~~ESPP. The ~~Purchase Plan~~ESPP permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods.

The price at which stock is purchased under the ~~Purchase Plan~~ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The initial offering period commenced in July 2000. In addition, beginning with fiscal 2001, the ~~Purchase Plan~~ESPP provides for annual increases of shares available for issuance by the lesser of 3% of the number of outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, ~~1,500,000~~3,000,000 shares or such lesser amount as determined by the Company’s board of directors. ~~266,394, 717,164~~Shares totaling 276,198, 266,962 and ~~585,855 shares~~532,788 were issued under the ~~2000 Employee Stock Purchase Plan~~ESPP during fiscal ~~2006, 2005~~2008, 2007 and ~~2004,~~2006, respectively. As of December ~~31, 2006,~~28, 2008, there were ~~2,762,936~~10,794,162 shares available for issuance under the ~~Purchase Plan.~~ESPP.

Restricted Stock Units

In 2007 the Company began granting restricted stock units pursuant to its 2005 Stock and Incentive Plan as part of its periodic employee equity compensation review program. Restricted stock units are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. Restricted stock units granted during 2007 vest over four years as follows: 15% vest on the first and second anniversaries of the grant date, 30% vest on the third anniversary of the grant date and 40% vest on the fourth anniversary of the grant date. Effective January 2008, the Company changed the vesting schedule for grants of new restricted stock units. Currently, restricted stock units vest 15% on the first anniversary of the grant date, 20% on the second anniversary of the grant date, 30% on the third anniversary of the grant date and 35% on the fourth anniversary of the grant date.

A summary of the Company’s restricted stock unit activity and related information in the fiscal year ended December 28, 2008 is as follows:


	Restricted Stock Units(1)

Outstanding at December 31, 2006		—
Awarded		395,500
Vested		—
Cancelled		(1,000	)

Outstanding at December 30, 2007		394,500
Awarded		1,287,504
Vested		(55,638	)
Cancelled		(47,090	)

Outstanding at December 28, 2008		1,579,276


(1)		Each stock unit represents the fair market value of one share of common stock.

The weighted average grant-date fair value per share for the restricted stock units was $34.53 and $25.69 for the years ended December 28, 2008 and December 30, 2007, respectively. No restricted stock units were outstanding as of December 31, 2006.

Based on the closing price per share of the Company’s common stock of $25.36 on December 26, 2008, the total pretax intrinsic value of all outstanding restricted stock units on that date was $40.0 million.

F-27

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Warrants

In conjunction with its acquisition of Solexa, Inc. on January 26, 2007, the Company assumed 4,489,686 warrants issued by Solexa prior to the acquisition. During the year ended December 28, 2008, there were 401,362 warrants exercised, resulting in cash proceeds to the Company of $3.0 million. As of December 28, 2008, 252,164 of the assumed warrants had expired.

A summary of all warrants outstanding as of December 28, 2008 is as follows:

Number of Shares
Exercise Price Expiration Date

238,510 $ 7.27 4/25/2010
864,040 $ 7.27 7/12/2010
809,246 $ 10.91 11/23/2010
1,125,734 $ 10.91 1/19/2011
18,322,320(1) $ 31.44 2/15/2014

21,359,850

(1) Represents warrants sold in connection with the offering of the Company’s Convertible Senior Notes (See Note 8).
Treasury Stock
In connection with its issuance of $400.0 million principal amount of 0.625% Convertible Senior Notes due 2014 on February 16, 2007, the Company repurchased 11.6 million shares of its outstanding common stock for $201.6 million in privately negotiated transactions concurrently with the offering.
On February 20, 2007, the Company executed aRule 10b5-1 trading plan to repurchase up to $75.0 million of its outstanding common stock over a period of six months. The Company repurchased 3.2 million shares of its common stock under this plan for $50.0 million. As of December 30, 2007, this plan had expired.
On October 23, 2008, the board of directors authorized a $120.0 million stock repurchase program. As of December 28, 2008 the Company had repurchased 3.1 million shares for $70.8 million under the plan in open-market transactions or through privately negotiated transactions in compliance withRule 10b-18 under the Securities Exchange Act of 1934. As of December 28, 2008, $49.2 million remains authorized for future repurchases under the program.
Stockholder Rights Plan

On May 3, 2001, the ~~Board~~board of ~~Directors~~directors of the Company declared a dividend of one preferred share purchase right (a Right) for each outstanding share of common stock of the Company. The dividend was payable on May 14, 2001 (the Record Date) to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one unit consisting of one-thousandth of a share of its Series A Junior Participating Preferred Stock at a price of $100 per unit. The Rights will be exercisable if a person or group hereafter acquires beneficial ownership of 15% or more of the outstanding common stock of the Company or announces an offer for 15% or more of the outstanding common stock. If a person or group acquires 15% or more of the outstanding common stock of the Company, each Right will entitle its holder to purchase, at the exercise price of the right, a number of shares of common stock having a market value of two times the exercise price of the right. If the Company is acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company’s common stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of common shares of the acquiring

F-28

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~Affymetrix Litigation~~

~~On July 26, 2004, Affymetrix, Inc. (Affymetrix) filed a complaint~~the Company. From time to time, the Company may also be parties to other litigation in the ~~U.S. District Court for~~ordinary course of business. While the ~~District~~results of Delaware alleging that the use, manufacture and sale of the Company’s BeadArray products and services, including the Company’s Array Matrix and BeadChip products, infringe six Affymetrix patents. Affymetrix seeks an injunction against the sale of products, if any ~~that~~litigation are determined to be infringing these patents, unspecified monetary damages, interest and attorneys’ fees. On September 15, 2004, the Company filed its answer to Affymetrix’ complaint, seeking declaratory judgments from the court that ituncertain, management does not ~~infringe~~believe the ~~Affymetrix patents and that such patents are invalid, and the Company filed counterclaims against Affymetrix for unfair competition and interference with actual and prospective economic advantage.~~

On February 15, 2006, the court allowed the Company to file its first amended answer and counterclaims, adding allegations of inequitable conduct with respect to all six asserted Affymetrix patents, violation of Section 2 of the Sherman Act, and unclean hands. In March 2006, Affymetrix notified the Companyultimate resolution of its decision to drop one of the six patents from the suit, and of its intention to assert infringement of certain additional claims of the remaining five patents. The Company has filed a motion to preclude Affymetrix from asserting infringement of those additional claims. That motion is still pending at this time. On June 30, 2006, the court dismissed the patent Affymetrix had sought to withdraw from the suit. Affymetrix and the Company filed summary judgment motions by the July 14, 2006 court-established deadline. On August 16, 2006, the court issued a ruling on the Markman (claim construction) hearing it had held on April 20, 2006. The Company believes the court’s Markman opinion construed several key claim terms in favor of the Company and did not adversely affect the Company’s defenses and pending counterclaims in any material respect. At the request of the parties, trial has been rescheduled to March 5, 2007 from October 16, 2006. A pre-trial conference was held on February 8, 2007 during which the court established a multi-phase trial structure with the first phase of the trial to begin on March 5, 2007, and addressed related issues. The Company believes it has meritorious defenses against each of the infringement claims alleged by Affymetrix and intends to defend vigorously against this suit. However, the Company cannot be sure that itlegal matters will ~~prevail in this matter. Any unfavorable determination, and in particular, any significant cash amounts required to be paid by the Company or prohibition of the sale of its products and services, could~~ result in a material adverse ~~effect on its business, financial condition and results of operations.~~

~~Dr. Anthony W. Czarnik v. Illumina, Inc.~~

On June 15, 2005, Dr. Anthony Czarnik, a former employee, filed suit against the Company in the U.S. District Court for the District of Delaware seeking correction of inventorship of certain of the Company’s patents and patent applications, and alleging that the Company committed inequitable conduct and fraud in not naming him as an inventor. Dr. Czarnik seeks an order requiring the Company and the U.S. Patent and Trademark Office to correct the inventorship of certain of the Company’s patents and patent applications by adding Dr. Czarnik as an inventor, a judgment declaring certain of the Company’s patents and patent applications unenforceable, unspecified monetary damages and attorney’s fees. On August 4, 2005, the Company filed a motion to dismiss the complaint for lack of standing and failure to state a claim. While this motion was pending, Dr. Czarnik filed an amended complaint on September 23, 2005. On October 7, 2005, the Company filed a motion to dismiss the amended complaint for lack of standing and failure to state a claim. On July 13, 2006, the court granted the Company’s motion to dismiss the counts of Dr. Czarnik’s complaint dealing with correction of inventorship in pending applications and inequitable conduct. On July 27, 2006, the Company filed its answerimpact to the two remaining counts of the amended complaint (correction of inventorship in issued patents, and fraud). There has been no trial date set for this case. The Company believes it has meritorious defenses against these claims.Company.

~~F-27~~

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Applied Biosystems Litigation

On December 26, 2006, ~~the~~ Applied Biosystems ~~Group of~~Inc. (Applied Biosystems), formerly known as Applera Corporation (currently known as Applied Biosystems LLC, a wholly owned subsidiary of Life Technologies Corporation), filed suit in California Superior Court, Santa Clara County, against Solexa ~~which~~(which was acquired by the Company ~~acquired in astock-for-stock~~ ~~merger~~ on January 26, ~~2007. Applied Biosystems’~~2007). This State Court action ~~against Solexa, which was filed in California state court in Santa Clara County, seeks~~related to the ownership of several patents ~~coveringSequencing-by-Ligation~~ ~~technologies. Solexa filed its answer to the complaint by the required deadline. The patents at issue were~~ assigned in 1995 to Solexa’s predecessor company (Lynx Therapeutics) by a former employee ~~Dr.~~(Dr. Stephen ~~Macevicz,~~Macevicz), who is the inventor of these patents and is named as a co-defendant in the suit. The Macevicz patents are directed to methods for sequencing DNA (US Pat. Nos. 5,750,341 and 6,306,597) using successive rounds of oligonucleotide probe ligation(sequencing-by-ligation), and to a probe (5,969,119) used in connection with these sequencing methods. Lynx ~~which~~ was originally a unit of Applied Biosystems but was spun out ofin 1992. On May 31, 2007, Applied Biosystems ~~in 1992. The patents at issue~~filed a second suit, this time against the Company, in the U.S. District Court for the Northern District of California. This second suit ~~relate~~sought a declaratory judgment of non-infringement of the Macevicz patents that were the subject of the State Court action mentioned above. Both suits were later consolidated in the U.S. District Court for the Northern District of California, San Francisco Division. By these consolidated actions, Applied Biosystems was seeking ownership of the three Macevicz patents, unspecified costs and damages, and a declaration of non-infringement and invalidity of these patents. Applied Biosystems was not asserting any claim for patent infringement against the Company.

On January 5, 2009, the case went to ~~methods for sequencing DNA using successive rounds~~trial in two phases. The first phase addressed the determination of ~~oligonucleotide~~ownership of thepatents-in-suit, and the second phase addressed whether these patents were infringed and valid. On January 14, 2009, at the end of the first phase, a federal jury determined that Solexa was the rightful owner of all three Macevicz patents. On January 27, 2009, the same jury found that Applied Biosystems did not infringe the ’119 probe ~~ligation(Sequencing-by-Ligation).~~patent, and that the ’119 patent was valid. In August 2008, the court had ruled that Applied Biosystems’ two-base system did not infringe the ’341 and ’597 patents. Prior to the jury finding of non-infringement of the ’119 patent, Applied Biosystems conceded that its one-base system infringed claim 1 of the ’597 patent and Solexa conceded invalidity of that same claim under the court’s construction of that claim. Both parties reserved the right to appeal the court’s construction of claim 1 of the ’597 patent, among other things.

The Company’s ~~new Illumina~~ Genome Analyzer ~~system uses~~products use a different technology, ~~DNA~~calledSequencing-by-Synthesis (SBS), which ~~the Company believes~~ is not covered by any of the patents at issue in the suit. The Company also believes that the MPSS technology used by Lynx did not use the methods covered by these patents, and in any event Solexa no longer uses the MPSS technologies. The Company believes the suit is not material to its current or future business, andMacevicz patents. In addition, the Company has no plans to use any of theSequencing-by-Ligation technologies covered by ~~the patents at issue in the suit. Applied Biosystems does not assert any claim for patent infringement in the suit.~~

~~Termination-of-Employment~~ ~~Lawsuit~~

In March 2001, a complaint seeking damages of an unspecified amount was filed against the Company by Dr. Anthony W. Czarnik, a former employee, in the Superior Court of the State of California in connection with the employee’s termination of employment with the Company. In June 2002, a California Superior Court judgment was rendered against the Company and the Company recorded a $7.7 million charge in its financial results for the second quarter of 2002 to cover total damages and remaining expenses. The Company appealed the decision, and in December 2004, the Fourth Appellate District Court of Appeal, in San Diego, California, reduced the amount of the award. The Company recorded interest expense on the $7.7 million during the appeal based on the statutory rate. As a result of the revised judgment, the Company reduced the $9.2 million liability on its balance sheet to $5.9 million and recorded a gain of $3.3 million as a litigation judgment in the fourth quarter of 2004. In January 2005, the Company paid the $5.9 million and removed the liability from its balance sheet.

~~Litigation with Applera Corporation’s Applied Biosystems Group~~

In 1999, the Company entered into a joint development agreement with Applied Biosystems Group, an operating group of Applera Corporation, under which the companies agreed to jointly develop a SNP genotyping system that would combine the Company’s BeadArray technology with Applied Biosystems’ assay chemistry and scanner technology. In conjunction with the agreement, Applied Biosystems agreed to provide the Company with non-refundable research and development support of $10.0 million, all of which was paid by December 2001 and recorded as a liability on the Company’s balance sheet as of January 2, 2005. In December 2002, Applied Biosystems initiated a patent infringement suit and sought to compel arbitration of an alleged breach of the joint development agreement. The Company initiated a suit in state court seeking to enjoin the arbitration and alleged that Applied Biosystems had breached the joint development agreement. In August 2004, the Company entered into a settlement and cross-license agreement with Applera. As a result of the settlement, the Company removed the $10.0 million liability from its balance sheet, made a payment of $8.5 million to Applera and recorded a gain of $1.5 million as a litigation settlement.

~~F-28~~

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


8.	~~Collaborative Agreements~~

~~Invitrogen Corporation~~

In December 2004, the Company entered into a strategic collaboration with Invitrogen Corporation (Invitrogen). The goal of the collaboration is to combine the Company’s expertise in oligonucleotide manufacturing with the sales, marketing and distribution capabilities of Invitrogen. In connection with the collaboration, the Company has developed the next generation Oligator DNA synthesis technology. This technology includes both plate- and tube-based capabilities. Under the terms of the agreement, Invitrogen paid the Company an upfront non-refundable collaboration payment of $2.3 million during the first quarter of 2005. Additionally, Invitrogen made a milestone payment of $1.1 million to the Company in November 2005 upon achievement of a milestone event under the terms of the collaboration.

The Company began manufacturing and shipping the plate-based and certain tube-based oligo products under the collaboration in the third quarter of 2005 and, therefore, has begun to amortize the upfront collaboration payment of $2.3 million as product revenue over the life of the agreement on a straight-line basis. The unamortized portion of the collaboration payment has been recorded as short- and long-term deferred revenue. The Company recorded the $1.1 million milestone payment in service and other revenue upon achievement of the milestone during the fourth quarter of 2005. The Company recorded revenue related to this milestone payment upon its achievement, as evidenced by acknowledgment from Invitrogen and due to the fact that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) the performance obligations for both the Company and Invitrogen after the milestone achievement will continue at a level comparable to the level before the milestone achievement. In addition, the agreement provides for the transfer of the Company’s Oligator technology into two Invitrogen facilities outside North America. The Company recognizes product revenue upon shipment of collaboration products based on the Company’s actual manufacturing cost. Collaboration profit, as defined in the collaboration agreement, from the sale of collaboration products is divided equally between the two companies and is recorded as product revenue.

~~deCODE genetics~~

In May 2006, the Company and deCODE genetics, ehf. (deCODE) executed a Joint Development and Licensing Agreement (the Development Agreement). Pursuant to the Development Agreement, the parties agreed to collaborate exclusively to develop, validate and commercialize specific diagnostic tests for variants in genes involved in three disease-related pathways: the gene-encoding leukotriene A4 hydrolase, linked to heart attack; the gene-encoding transcription factor 7-like 2 (TCF7L2), linked to type 2 diabetes; and the gene-encoding BARD1, linked to breast cancer. The Company and deCODE are developing diagnostic tests based on these ~~variants for use on the Company’s BeadXpress system.~~patents.

F-29

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


12.	Income Taxes

~~Under the agreement, the Company will be responsible for the manufacturing, marketing and selling of the diagnostic products.~~ The ~~companies will share the development costs of these products and split the profits from sales of the diagnostics tests. The Development Agreement may be terminated~~income (loss) before income taxes summarized by region is as to a particular product under development if one party decides to discontinue funding the development of that product, and may be terminated in whole by either party if the other party commits an uncured material breach, files for bankruptcy or becomes insolvent. Under a separate supply agreement, the Company installed instrumentation at deCODE that will enable deCODE to perform whole genome association studies on up to 100,000 samples using the Company’s Sentrix HumanHap300 BeadChips and associated reagents. The Company has deferred approximately $2.0 million of revenue for instruments installed during the third quarter of 2006 under guidance provided by SFAS No. 48,~~Revenue Recognition When Right of Return Exists.~~ This amount is classified as a long-term liability as of December 31, 2006. The Company has also deferred approximately $1.3 million of costs related to product shipments to deCODE, which are classified as a long-term asset as of December 31, 2006.follows (in thousands):

Year Ended
Year Ended
Year Ended

December 28,
December 30,
December 31,

2008 2007 2006

United States $ 64,424 $ 58,445 $ 42,612
Foreign 26,482 (347,230 ) 8

Total income (loss) before income taxes $ 90,906 $ (288,785 ) $ 42,620

~~International HapMap Project~~

The ~~Company was the recipient of a grant from the National Institutes of Health covering its participation in the first phase~~provision (benefit) for income taxes consists of the ~~International HapMap Project, which is a $100 million, internationally funded successor project~~following (in thousands):

Year Ended
Year Ended
Year Ended

December 28,
December 30,
December 31,

2008 2007 2006

Current:
Federal $ 13,868 $ 18,564 $ 1,125
State 2,134 4,801 1,177
Foreign 5,042 (2,172 ) 903

Total current provision 21,044 21,193 3,205
Deferred:
Federal 17,656 (20,254 ) —
State 2,103 (11,622 ) —
Foreign (374 ) 257 (553 )

Total deferred provision 19,385 (31,619 ) (553 )

Total tax provision (benefit) $ 40,429 $ (10,426 ) $ 2,652

The provision (benefit) for income taxes reconciles to the ~~Human Genome Project that will help identify a map of genetic variations that may be used~~amount computed by applying the federal statutory rate to perform disease-related research. The Company was awarded a $9.1 million grant from the National Institutes of Health in September 2002 to perform genotyping services in connection with the first phase of the International HapMap Project that covered basic research activities, the development of SNP assays and the genotyping performed on those assays. For the year ending December 31, 2006, the Company did not record any revenue related to this project. For the years ending January 1, 2006 and January 2, 2005, the Company recorded revenue related to this project totaling $0.8 million and $4.6 million, respectively.income (loss) before taxes as follows (in thousands):

Year Ended
Year Ended
Year Ended

December 28,
December 30,
December 31,

2008 2007 2006

Tax at federal statutory rate $ 31,817 $ (101,075 ) $ 14,945
State, net of federal benefit 4,242 (9,672 ) 1,963
Alternative minimum tax — — 1,125
Research and other credits (4,060 ) (3,118 ) (3,096 )
Acquired in-process research & development 9,508 116,916 —
Adjustments to deferred tax balances — — (3,258 )
Change in valuation allowance (149 ) (17,125 ) (10,038 )
Permanent differences 1,449 653 573
Foreign rate adjustments (2,619 ) 3,160 430
Other 241 (165 ) 8

Total tax provision (benefit) $ 40,429 $ (10,426 ) $ 2,652

F-30

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	~~Investment in Genizon BioSciences Inc.~~

In January 2006, Genizon BioSciences Inc. (Genizon), a Canadian company focused on gene discovery, purchased from the Company approximately $1.9 million in equipment and committed to purchase an additional $4.3 million in consumables. The Company understands that Genizon is using the Company’s HumanHap300 BeadChip along with the Infinium assay to perform whole-genome association studies involving thousands of members of the Quebec Founder Population. The goal of the studies is to provide understanding of the genetic origins and mechanisms of common diseases which may then lead to possible drug targets.

In March 2006, the Company entered into a Subscription Agreement for Secured Convertible Debentures with Genizon. Pursuant to the agreement, the Company purchased a secured convertible debenture (the debenture) of Genizon and certain warrants for CDN$3.5 million (approximately U.S. $3.0 million).

The debenture is convertible, automatically upon the occurrence of a “liquidity event,” as defined in the debenture, into Class H Preferred Shares of Genizon. Upon the occurrence of certain events, Illumina may be entitled to receive additional shares of Genizon’s Class H Preferred Shares. The debenture matures two years from issuance and bears interest, payable semiannually, at a rate of 5% per annum for the first year and 12.5% per annum for the second year. Unless the debenture is converted before maturity, 112.5% of the principal amount of the debenture is due upon maturity. The Company also received warrants to purchase 226,721 shares of Genizon Class H Preferred Shares at an exercise price of $1.5437 per share.

~~As of December 31, 2006, the debenture was recorded at face value, which is the fair value, and is classified in accordance with SFAS No. 115,~~~~Accounting for Certain Investments in Debt and Equity Securities~~~~, as anavailable-for-sale~~ ~~security.~~

~~The Company has concluded that the purchase of the debenture and the concurrent purchase by Genizon of the Company’s products are “linked” transactions under guidance contained in EITFNo. 00-21.~~ Since the transactions are considered “linked,” the Company has deferred approximately $3.0 million of revenue (the face value of the Debentures) as of December 31, 2006, related to the Genizon product shipments. The deferred revenue is classified as a long-term liability as of December 31, 2006. This amount is expected to remain in deferred revenue until Genizon settles the Debenture in cash or when a liquidity event occurs that generates cash or a security that is readily convertible into cash. The Company has also deferred approximately $1.1 million of costs related to product shipments to Genizon as a long-term asset as of December 31, 2006. All Genizon shipments that generate revenue over the face value of the debenture will be evaluated under the Company’s revenue recognition policy, which is outlined in Note 1.


~~10.~~	~~Investment in Solexa~~

On November 12, 2006, the Company entered into a definitive securities purchase agreement with Solexa in which the Company invested approximately $50 million in Solexa in exchange for 5,154,639 newly issued shares of Solexa common stock in conjunction with the merger of the two companies, completed on January 26, 2007. This investment was valued at $67.8 million as of December 31, 2006, which represented a market value of $13.15 per share of Solexa common stock.

~~F-31~~

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a ~~jurisdiction by jurisdiction~~jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Based ~~upon~~on the available evidence as of December ~~31, 2006,~~28, 2008, the Company iswas not able to conclude it is more likely than not ~~the remaining~~certain U.S. and foreign deferred tax assets ~~in the U.S.~~ will be realized. Therefore, the Company ~~has~~ recorded a ~~full~~ valuation allowance of $2.8 million and $12.4 million against ~~the~~certain U.S. and foreign deferred tax assets, respectively. At December 30, 2007, the Company had concluded that it is more likely than not that a significant portion of ~~approximately $36.5 million.~~

Aits deferred tax ~~liability~~assets will be realized and, accordingly the Company released a portion of ~~approximately $7.0~~its valuation allowance, $17.1 million ~~has been~~of which was recorded ~~against~~as a reduction to the ~~unrealized gain on the investment in Solexa, which is included in accumulated other comprehensive income, as of December 31, 2006.~~tax provision.

As of December ~~31, 2006,~~28, 2008, the Company had net operating loss carryforwards for federal and state tax purposes of ~~approximately $76.4~~$87.7 million and ~~$39.1~~$148.3 million, ~~respectively;~~respectively, which begin to expire in ~~2022~~2025 and 2013, respectively, unless previously utilized. In addition, the Company also had U.S. federal and state research and development tax credit carryforwards of ~~approximately $6.4~~$12.6 million and ~~$6.3~~$13.9 million, ~~respectively;~~respectively, which begin to expire in 2018 and 2019, respectively, unless previously utilized.

As of December 28, 2008, the valuation allowance includes $14.0 million of pre-acquisition deferred tax assets of Solexa. Prior to the adoption of SFAS 141(R) to the extent any of these assets were recognized, the adjustment would have been applied first to reduce to zero any goodwill related to the acquisition, and then an a reduction to the tax provision.

Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of the Company’s net operating losses and credits may be subject to annual limitations in the event of any significant future changes in ~~it’s~~its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. Previous limitations due to Section 382 and 383 have been reflected in the deferred tax assets as of December ~~31, 2006.~~28, 2008.

F-31

ILLUMINA, INC.

Included in the deferred tax assets as of December 31, 2006 are approximately $2.7 million of pre-acquisition deferred tax assets of CyVera Corporation. To the extent these assets are recognized, the adjustment will be applied first to reduce to zero any goodwill relatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Due to the ~~acquisition, and then as a reduction~~adoption of SFAS No. 123R, the Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the ~~income~~Company follows thewith-and-without approach excluding any indirect effects of the excess tax ~~provision.~~

~~Not included in the deferred tax assets as of December 31, 2006 is approximately $14.7 million of~~deductions. Under this approach, excess tax benefits related to ~~employee stock plans. When~~share-based compensation are not deemed to be realized until after the utilization of all other tax ~~benefit~~benefits available to the Company. During 2008, the Company realized $18.5 million of ~~these assets~~such excess tax benefits, and accordingly recorded a corresponding credit to additional paid in capital. As of December 28, 2008, the Company has $36.5 million of unrealized excess tax benefits associated with share-based compensation. These tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the ~~income~~ tax provision.

The Company’s manufacturing operations in Singapore operate under various tax holidays and incentives that begin to expire in 2018. For the year ended December 28, 2008, these tax holidays and incentives resulted in an approximate $1.9 million decrease to the tax provision and an increase to net income per diluted share of $0.01.

Residual ~~United States~~U.S. income taxes have not been provided on ~~approximately $0.8~~$14.7 million of undistributed earnings of foreign subsidiaries as of December ~~31, 2006~~28, 2008, since the earnings are considered to be ~~permanently~~indefinitely invested in the operations of such subsidiaries.

~~In July 2006, FASB issued~~Effective January 1, 2007, the Company adopted FIN No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires ~~that the Company recognize~~recognition of the impact of a tax position in ~~its~~the Company’s financial statements only if that position is more likely than not of being sustained ~~on audit,~~upon examination by taxing authorities, based on the technical merits of the position. The ~~provisions~~adoption of FIN No. 48 ~~are effective as of the beginning of~~did not result in an adjustment to the Company’s ~~2007 fiscal year, with the~~opening stockholders’ equity since there was no cumulative effect offrom the change in accounting ~~principle recorded as an adjustment to opening retained earnings.~~ principle.

The following table summarizes the gross amount of the Company’s uncertain tax positions (in thousands):

Balance at December 31, 2007 $ 21,376
Increases related to current year tax positions 2,402

Balance at December 28, 2008 $ 23,778

As of December 28, 2008, $7.7 million of the Company’s uncertain tax positions would reduce the Company’s annual effective tax rate, if recognized.
The Company does not expect its uncertain tax positions to change significantly over the ~~adoption~~next 12 months. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense. As of ~~FIN No. 48~~December 28, 2008, no interest or penalties have been accrued related to ~~have a material impact on its consolidated results of operations and financial position, and~~the Company’s uncertain tax positions. Tax years 1992 to 2008 remain subject to future examination by the major tax jurisdictions in which the Company is ~~continuing~~subject to ~~evaluate the impact, if any, the adoption of FIN No. 48 will have on its disclosure requirements.~~tax.

~~12.~~13. ~~Retirement Plan~~Employee Benefit Plans
Retirement Plan

The Company has a 401(k) savings plan covering substantially all of its employees. Company contributions to the plan are discretionary. During the ~~year~~years ended December 28, 2008, December 30, 2007 and December 31, 2006, the Company made matching contributions of $2.6 million, $1.4 million and $0.4 ~~million. No~~million, respectively.

F-32

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Executive Deferred Compensation Plan

For the Company’s executives and members of the board of directors, the Company adopted the Illumina, Inc. Deferred Compensation Plan (the Plan) that became effective January 1, 2008. Eligible participants can contribute up to 80% of their base salary and 100% of all other forms of compensation into the Plan, including bonus, commission and director fees. The Company has agreed to credit the participants’ contributions with earnings that reflect the performance of certain independent investment funds. On a discretionary basis, the Company may also make employer contributions to participant accounts in any amount determined by the Company. The vesting schedules of employer contributions are at the sole discretion of the Compensation Committee. However, all employer contributions shall become 100% vested upon the occurrence of the participant’s disability, death or retirement or a change in control of the Company. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment with the Company for any reason or at a later date to comply with the restrictions of Section 409A. As of December 28, 2008, no employer contributions were made ~~during~~to the Plan.

In January 2008, the Company also established a rabbi trust for the benefit of its directors and executives under the Plan. In accordance with FASB Interpretation (FIN) No. 46,Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, andEITF 97-14,Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, the Company has included the assets of the rabbi trust in its consolidated balance sheet since the trust’s inception. As of December 28, 2008, the assets of the trust and liabilities of the Company were $1.3 million. The assets and liabilities are classified as other assets and accrued liabilities, respectively, on the Company’s balance sheet as of December 28, 2008. Changes in the values of the assets held by the rabbi trust accrue to the Company.

14. Segment Information, Geographic Data and Significant Customers

During the first quarter of 2008, the Company reorganized its operating structure into a newly created Life Sciences Business Unit, which includes all products and services related to the research market, namely the BeadArray, BeadXpress and Sequencing product lines. The Company also created a Diagnostics Business Unit to focus on the emerging opportunity in molecular diagnostics. For the year ended December 28, 2008, the Company had limited activity related to the Diagnostics Business Unit, and operating results were reported on an aggregate basis to the chief operating decision maker of the Company, the chief executive officer. In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, the Company operated in one reportable segment for the year ended December 28, 2008.

The Company had revenue in the following regions for the years ended ~~January 1,~~December 28, 2008, December 30, 2007 and December 31, 2006 (in thousands):

Year Ended
Year Ended
Year Ended

December 28,
December 30,
December 31,

2008 2007 2006

United States $ 280,064 $ 207,692 $ 103,043
United Kingdom 67,973 34,196 22,840
Other European countries 127,397 75,360 32,600
Asia-Pacific 72,740 35,155 15,070
Other markets 25,051 14,396 11,033

Total $ 573,225 $ 366,799 $ 184,586

Net revenues are attributable to geographic areas based on the region of destination.

F-33

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~13. Segment Information, Geographic Data and Significant Customers~~

~~The Company has determined that, in accordance with SFAS No. 131,~~~~Disclosures about Segments of an Enterprise and Related Information~~, it operates in one segment as it only reports operating results on an aggregate basis to the chief operating decision maker of the Company, our chief executive officer. The Company had revenue in the following regions for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 (in thousands):

Year Ended
Year Ended
Year Ended

December 31,
January 1,
January 2,

2006 2006 2005

United States $ 103,043 $ 45,480 $ 24,166
Europe 55,440 17,551 12,528
Asia 15,070 6,850 9,703
Other 11,033 3,620 4,186

Total $ 184,586 $ 73,501 $ 50,583

The Company had no customer that provided more than 10% of total revenue in the years ended December 31, 2006 and January 1, 2006 and one customer that provided approximately 14% of total revenue in the year ended January 2, 2005 (exclusive of revenue recorded from the National Institutes of Health). Revenue from the National Institutes of Health accounted for approximately 1%, 1% and 13% of total revenue for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively.

~~14.~~15. Quarterly Financial Information (unaudited)

The following financial information reflects all normal recurring adjustments, except as noted below, which are, in the opinion of management, necessary for a fair statement of the results and cash flows of interim periods. Summarized quarterly data for fiscal ~~2006~~2008 and ~~2005~~2007 are as follows (in thousands except per share data):

First Quarter Second Quarter Third Quarter Fourth Quarter

2006:
Total revenue $ 29,102 $ 41,577 $ 53,472 $ 60,435
Total cost of revenue 9,293 13,576 16,356 20,119
Net income (loss) (104 ) 6,768 16,162 17,142
Historical net income (loss) per share, basic (0.00 ) 0.16 0.35 0.37
Historical net income (loss) per share, diluted (0.00 ) 0.14 0.32 0.34
2005:
Total revenue $ 15,148 $ 15,824 $ 19,516 $ 23,013
Total cost of revenue 4,599 4,734 6,599 7,249
Net income (loss) (1,235 ) (18,539 )(1) (1,426 ) 326
Historical net income (loss) per share, basic (0.03 ) (0.46 ) (0.03 ) 0.01
Historical net income (loss) per share, diluted (0.03 ) (0.46 ) (0.03 ) 0.01

First Quarter(1) Second Quarter Third Quarter Fourth Quarter

2008:
Total revenue $ 121,861 $ 140,177 $ 150,260 $ 160,927
Total cost of revenue (excluding impairment of manufacturing equipment and amortization of intangible assets) 46,081 50,459 54,430 54,654
Net income (loss) 13,428 15,398 (7,288 ) 28,939
Net income (loss) per share, basic 0.12 0.14 (0.06 ) 0.24
Net income (loss) per share, diluted 0.11 0.12 (0.06 ) 0.22
Net cash (used in) provided by operating activities (26,755 ) 37,222 27,298 50,117
Net cash used in investing activities (44,123 ) (37,384 ) (164,520 ) (31,222 )
Net cash provided by (used in) financing activities 15,979 14,171 356,936 (49,414 )
2007:
Total revenue $ 72,150 $ 84,535 $ 97,510 $ 112,604
Total cost of revenue (excluding amortization of intangible assets) 25,120 30,141 37,078 40,097
Net income (loss) (298,076 ) 9,264 14,503 (4,050 )
Net income (loss) per share, basic (2.79 ) 0.09 0.14 (0.04 )
Net income (loss) per share, diluted (2.79 ) 0.08 0.12 (0.04 )
Net cash provided by operating activities 14,643 24,482 5,316 11,853
Net cash used in investing activities (34,410 ) (69,514 ) (32,143 ) 68,381
Net cash provided by financing activities 104,950 2,464 10,433 30,445

The sum of the net income (loss) per share for each of the four quarters within each fiscal year presented may not equate to the net income (loss) per share reported for the full fiscal year because different numbers of shares were outstanding during the years presented.

(1) ~~During~~The Company reclassified $36.0 million from cash provided by operating activities to cash used in investing activities in the ~~second~~first quarter of ~~2005,~~2008 for the ~~Company recorded a $15.8 million charge related~~portion of the litigation payment relating to ~~acquired in-process research and development from the CyVera acquisition.~~intangible assets.

F-35

~~ILLUMINA, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~15.~~ ~~Subsequent Events~~
~~Acquisition of Solexa, Inc.~~
~~On January 26, 2007, the Company completed a merger with Solexa, Inc. (Solexa), a Delaware corporation, in astock-for-stock~~ merger transaction. In connection with the merger, Solexa shareholders received 0.344 of a share of the Company’s common stock in exchange for each share of Solexa common stock held. The Company issued approximately 13.1 million shares of its common stock as consideration for this merger. As a result of the merger, Solexa became a direct, wholly-owned subsidiary of the Company.
~~Convertible Senior Notes~~
On February 16, 2007, the Company issued $400 million principal amount of 0.625% Convertible Senior Notes due 2014 (the Notes), which included the exercise of the initial purchasers’ option to purchase up to an additional $50 million aggregate principal amount of Notes. The net proceeds from the offering, after deducting the initial purchasers’ discount and offering expenses, were approximately $390.3 million. The Company will pay 0.625% interest per annum on the principal amount of the Notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year, starting on August 15, 2007. The Company used approximately $202 million of the net proceeds to purchase shares of its common stock in privately negotiated transactions concurrently with the offering.
The Notes will be convertible into cash and, if applicable, shares of the Company’s common stock, $0.01 par value per share, based on an initial conversion rate, subject to adjustment, of 22.9029 shares per $1,000 principal amount of Notes (which represents an initial conversion price of approximately $43.66 per share), only in the following circumstances and to the following extent: (1) during the five~~business-day~~ period after any five consecutive trading period (the measurement period) in which the trading price per note for each day of such measurement period was less than 97% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter after the calendar quarter ending March 31, 2007, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events; and (4) the notes will be convertible at any time on or after November 15, 2013 through the third scheduled trading day immediately preceding the maturity date.
~~In connection with the offering of the notes, the Company entered into convertible note hedge transactions with the initial purchasersand/or~~ their affiliates (the counterparties) entitling the Company to purchase shares of the Company’s common stock at an initial strike price of $43.66 per share, subject to adjustment. In addition, the Company sold to these counterparties warrants to acquire shares of the Company’s common stock at an initial strike price of $62.87 per share, subject to adjustment. The note hedge transactions and the warrants each cover a number of shares that is generally equal to the maximum number of shares that are issuable upon conversion of the notes. The cost of the convertible note hedge transactions that was not covered by the proceeds from the sale of the warrants was approximately $46.6 million. These transactions are expected to reduce the potential equity dilution upon conversion of the notes if the daily volume-weighted average price per share of the Company’s common stock exceeds the strike price of the convertible note hedge transactions. The warrant transactions could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock during the measurement period at maturity of the warrants exceeds the strike price of the warrants.

~~F-36~~


			Page

PART I
	Item 1	Business	2
	Item 1A	Risk Factors	1813
	Item 1B	Unresolved Staff Comments	2519
	Item 2	Properties	2519
	Item 3	Legal Proceedings	2620
	Item 4	Submission of Matters to a Vote of Security Holders	2720

PART II

	Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2821
	Item 6	Selected Financial Data	2922
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of ~~Operation~~Operations	3024
	Item 7A	Quantitative and Qualitative Disclosures about Market Risk	4642
	Item 8	Financial Statements and Supplementary Data	4743
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	4743
	Item 9A	Controls and Procedures	4743
	Item 9B	Other Information	5046

PART III

	Item 10	Directors, ~~and~~ Executive Officers ~~of the Registrant~~and Corporate Governance	5046
	Item 11	Executive Compensation	5046
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	5046
	Item 13	Certain Relationships and Related Transactions, and Director Independence	5146
	Item 14	Principal ~~Accounting~~Accountant Fees and Services	5147

PART IV

	Item 15	Exhibits and Financial Statement Schedule	5247
Signatures			5652
Financial Statements			F-1
EXHIBIT ~~10.40~~3.2
EX-10.25
EX-10.26
EX-10.33
EX-10.34
EXHIBIT ~~21.1~~10.35
~~EXHIBIT 23.1~~EX-10.43
~~EXHIBIT 31.1~~EX-14
~~EXHIBIT 31.2~~EX-21.1
~~EXHIBIT 32.1~~EX-23.1
~~EXHIBIT 32.2~~EX-31.1
EX-31.2
EX-32.1
EX-32.2


	2006
	High		Low

First Quarter	$	27.98	$	16.10
Second Quarter		32.00		21.60
Third Quarter		40.00		27.02
Fourth Quarter		45.87		32.20


	•	Level 1 — Quoted prices in active markets for identical assets or liabilities.

	•	Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


	Payments Due by Period
			Less Than						More Than
Contractual Obligation	Total		1 Year		1 – 3 Years		1 – 5 Years		5 Years

Operating leases	$	37,899	$	5,320	$	10,410	$	9,371	$	12,798

Total	$	37,899	$	5,320	$	10,410	$	9,371	$	12,798


	Payments Due by Period (1),(2)
			Less Than						More Than
Contractual Obligation	Total		1 Year		1 – 3 Years		3 – 5 Years		5 Years

Long-term debt obligations(3)	$	413,750	$	2,500	$	5,000	$	5,000	$	401,250
Operating leases		158,240		11,032		22,945		23,378		100,885
Amounts due under executive deferred compensation plan		1,348		—		—		—		—

Total	$	573,338	$	13,532	$	27,945	$	28,378	$	502,135


(1)		Excludes $35.0 million of contingent cash consideration we may be required to pay pursuant to our purchase agreement with Avantome based on the achievement of certain milestones. We have not included this amount in the table above because the commitment does not have a fixed funding date and is subject to certain conditions. See Note 2 of Notes to the Consolidated Financial Statements for further discussion of our acquisition of Avantome.

(2)		Excludes $23.8 million of uncertain tax benefits under FIN 48. We have not included this amount in the table above because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. See Note 12 of Notes to the Consolidated Financial Statements for further discussion of our uncertain tax positions.

(3)		The “long-term debt obligations” in the above table include the principal amount of our Convertible Senior Notes and interest payments totaling 0.625% per annum. See Note 8 of Notes to Consolidated Financial Statements for further discussion of the terms of the Convertible Senior Notes.


Item 7A.	*Quantitative and Qualitative Disclosures ~~About~~about Market Risk.*


Item 8.	*Financial Statements and Supplementary Data.*


Item 9.	*Changes In and Disagreements ~~With~~with Accountants on Accounting and Financial Disclosure.*


Item 10.	*Directors, ~~and~~ Executive Officers ~~of the Registrant.~~and Corporate Governance.*


Item 3.	*Legal Proceedings.*


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.*


~~(1)~~		Includes 2,764,566 available for grant under our 2005 stock incentive plan. The 2005 stock incentive plan provides for an automatic annual increase in the shares reserved for issuance by the lesser of (1) five percent of outstanding shares of our common stock on the last day of the immediately preceding fiscal year, (2) 1,200,000 shares or (3) a lesser amount as determined by our Board of Directors.

~~(2)~~		Includes 2,762,936 shares available for grant under our 2000 employee stock purchase plan. The 2000 employee stock purchase plan provides for an automatic annual increase in the shares reserved for issuance by the lesser of (1) three percent of outstanding shares of our common stock on the last day of the immediately preceding fiscal year or (2) 1,500,000 shares.


Item 13.	*Certain Relationships and Related ~~Transactions.~~Transactions, and Director Independence.*


Item 14.	*Principal ~~Accounting~~Accountant Fees and Services.*


	Page

Index to Consolidated Financial Statements		F-1
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December ~~31, 2006~~28, 2008 and ~~January 1, 2006~~December 30, 2007		F-3
Consolidated Statements of Operations for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 ~~January 1, 2006, and January 2, 2005~~		F-4
Consolidated Statements of Stockholders’ Equity for the ~~period from~~years ended December 28, ~~2003 to~~2008, December 30, 2007 and December 31, 2006		F-5
Consolidated Statements of Cash Flows for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 ~~January 1, 2006 and January 2, 2005~~		F-6
Notes to Consolidated Financial Statements		F-7
(2)Financial Statement Schedule:
~~(2)~~~~Financial Statement Schedule:~~
Valuation and Qualifying Account and Reserves for the ~~three years ended~~period from January 1, 2006 to December ~~31, 2006~~28, 2008		~~F-37~~F-36
(3)Exhibits:


+		Management contract or corporate plan or arrangement

(1)		Incorporated by reference to the same numbered exhibit filed with our Registration Statement onForm ~~S-1(333-33922)~~S-1 (FileNo. 333-33922) filed April 3, 2000, as amended.

(2)		Incorporated by reference to ~~the same numbered~~ exhibit 3.1 filed with our ~~Annual Report on~~Form ~~10-K~~8-K (FileNo. 000-30361) ~~for the year ended December 31, 2000~~ filed ~~March 29, 2001.~~on September 23, 2008.

(3)		~~[reserved]~~Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 29, 2008 filed July 25, 2008.

(4)		Incorporated by reference to exhibit 10.13 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2001 filed May 8, 2001.

(5)		Incorporated by reference to the same numbered exhibit filed with our Registration Statement onForm 8-A (FileNo. 000-30361) filed May 14, 2001.

(6)		Incorporated by reference to exhibit 10.15 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended June 30, 2001 filed August 13, 2001.

(7)		Incorporated by reference to ~~the same numbered~~ exhibit 10.3 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended ~~September~~October 1, 2006 filed October 30, ~~2001 filed November 14, 2001.~~2006.

(8)		Incorporated by reference to exhibit 10.18 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended March 31, 2002 filed May 13, 2002.

(9)		Incorporated by reference to ~~the same numbered~~ exhibit 10.44 filed with ~~Amendment No. 1 to~~ our ~~Registration Statement on~~Form ~~S-3~~10-K (FileNo.~~333-111496)~~ 000-30361) for the fiscal year ended December 30, 2007 filed ~~March 2, 2004.~~February 26, 2008.


(10)		Incorporated by reference to ~~the same numbered~~ exhibit 10.9 filed with our ~~Annual Report~~Registration Statement onForm ~~10-K~~S-1/A (FileNo. ~~000-30361)~~333-33922) ~~for the year ended December 28, 2003~~ filed ~~March 12, 2004.~~July 3, 2000.

(11)		Incorporated by reference to the same numbered exhibit filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended ~~June 27, 2004~~March 30, 2008 filed ~~August 6, 2004.~~April 28, 2008.

(12)		Incorporated by reference to ~~the same numbered~~ exhibit 10.11 filed with our Registration Statement onForm ~~10-Q~~S-1/A (FileNo. ~~000-30361)~~333-33922) ~~for the quarterly period ended October 3, 2004~~ filed ~~November 12, 2004.~~July 19, 2000.

(13)		Incorporated by reference to exhibit 10.16 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001.

(14)		Incorporated by reference to exhibit 10.17 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001.

(15)		Incorporated by reference to exhibit 10.18 filed with ourForm 10-Q (FileNo. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001.

(16)		Incorporated by reference to exhibit 2.1 filed with ourForm 8-K (FileNo. 000-30361) filed November 13, 2006.


/s/ Jay T. Flatley Jay T. Flatley	President, Chief Executive Officer and Director (Principal Executive Officer)	February ~~28, 2007~~25, 2009

/s/ Christian O. Henry Christian O. Henry	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	February ~~28, 2007~~25, 2009

~~/s/~~ ~~John R. Stuelpnagel~~ ~~John R. Stuelpnagel~~	~~Senior Vice President, Chief~~ ~~Operating Officer and Director~~	~~February 28, 2007~~

/s/ William H. Rastetter William H. Rastetter	Chairman of the Board of Directors	February ~~28, 2007~~25, 2009

/s/ ~~Daniel M. Bradbury~~A. Blaine Bowman ~~Daniel M. Bradbury~~A. Blaine Bowman	Director	February ~~28, 2007~~25, 2009

/s/ Daniel M. Bradbury Daniel M. Bradbury	Director	February 25, 2009

/s/ Karin Eastham Karin Eastham	Director	February ~~28, 2007~~25, 2009


/s/ ~~Paul Grint~~Jack Goldstein Jack Goldstein ~~Paul Grint~~	Director	February ~~28, 2007~~25, 2009

/s/ ~~David R. Walt~~Paul Grint Paul Grint ~~David R. Walt~~	Director	February ~~28, 2007~~25, 2009

/s/ ~~Jack Goldstein~~David R. Walt David R. Walt ~~Jack Goldstein~~	Director	February ~~28, 2007~~

~~/s/~~ ~~A. Blaine Bowman~~ ~~A. Blaine Bowman~~	~~Director~~	~~February 28, 2007~~

~~Roy Whitfield~~	~~Director~~	~~February 28, 2007~~25, 2009


													Accumulated
							Additional						Other						Total
	Common Stock						Paid-In			Deferred			Comprehensive			Accumulated			Stockholders’
	Shares			Amount			Capital			Compensation			Income (Loss)			Deficit			Equity
	(In thousands)

Balance as of December 28, 2003		32,887		$	329		$	165,314		$	(1,103	)	$	335		$	(117,487	)	$	47,388
Issuance of common stock for cash		5,278			53			30,454			—			—			—			30,507
Repurchase of restricted common stock		(44	)		(1	)		(12	)		—			—			—			(13	)
Amortization of deferred compensation		—			—			—			844			—			—			844
Reversal of deferred compensation related to unvested stock options and restricted stock of terminated employees		—			—			(103	)		103			—			—			—
Comprehensive loss:
Unrealized loss on available-for sale securities		—			—			—			—			(305	)		—			(305	)
Unrealized loss on hedging contracts		—			—			—			—			(46	)		—			(46	)
Foreign currency translation adjustment		—			—			—			—			112			—			112
Net loss		—			—			—			—			—			(6,225	)		(6,225	)

Comprehensive loss																				(6,464	)

Balance as of January 2, 2005		38,121			381			195,653			(156	)		96			(123,712	)		72,262
Issuance of common stock for cash		1,592			16			6,030			—			—			—			6,046
Issuance of common stock in conjunction with an acquisition		1,580			16			14,812			—			—			—			14,828
Deferred compensation related to unvested CyVera stock options assumed		—			—			—			(197	)		—			—			(197	)
Compensation expense related to acceleration of options for terminated employees		—			—			79			—			—			—			79
Deferred compensation related to a restricted stock award		1			—			192			(192	)		—			—			—
Amortization of deferred compensation		—			—			—			191			—			—			191
Comprehensive income (loss):
Unrealized gain onavailable-for-sale securities		—			—			—			—			29			—			29
Unrealized gain on hedging contracts		—			—			—			—			56			—			56
Foreign currency translation adjustment		—			—			—			—			77			—			77
Net loss		—			—			—			—			—			(20,874	)		(20,874	)

Comprehensive loss																				(20,712	)

Balance as of January 1, 2006		41,294			413			216,766			(354	)		258			(144,586	)		72,497
Issuance of common stock for cash		5,559			56			114,440			—			—			—			114,496
May 2006 offering costs		—			—			(6,530	)		—			—			—			(6,530	)
Deferred compensation related to a restricted stock award		4			—			—			—			—			—			—
Stock-based compensation expense		—			—			14,082			354			—			—			14,436
Incremental tax benefit related to stock options exercised		—			—			1,439			—			—			—			1,439
Comprehensive income (loss):
Unrealized gain onavailable-for-sale securities, net of deferred tax		—			—			—			—			10,693			—			10,693
Unrealized gain on hedging contracts		—			—			—			—			(10	)		—			(10	)
Foreign currency translation adjustment		—			—			—			—			353			—			353
Net income		—			—			—			—			—			39,968			39,968

Comprehensive income																				51,004

Balance as of December 31, 2006		46,857		$	469		$	340,197		$	—		$	11,294		$	(104,618	)	$	247,342


Fair market value of securities issued, net	$	14,433
Cash paid		2,291
Transaction costs		681
Fair market value of options assumed		394

Total purchase price	$	17,799


Fair market value of securities issued	$	527,067
Fair market value of change of control bonuses and related taxes		8,182
Transaction costs not included in Solexa net tangible assets acquired		8,138
Fair market value of vested stock options, warrants and restricted stock assumed		75,334

Total purchase price	$	618,721


Cash	$	4
Prepaid expenses		12
Fixed assets		349
Deferred compensation on unvested stock options assumed		196
Accounts payable and accrued liabilities		(432	)
Debt assumed		(255	)

Net book value of net liabilities assumed		(126	)
In-process research and development		15,800
Goodwill		2,125

	$	17,799


			December 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. Treasury securities and obligations of U.S. government agencies	$	42,648	$	108	$	—		$	42,756
Debt securities issued by the states of the United States and political subdivisions of the states		14,675		—		—			14,675
Corporate debt securities		153,547		252		(89	)		153,710

Total	$	210,870	$	360	$	(89	)	$	211,141


	Estimated
	Fair Value

Due within one year	$	204,774
After one but within five years		108,277

Total	$	313,051


3.5.	~~Derivative Financial Instruments~~Intangible Assets


	December 28, 2008							December 30, 2007
	Gross Carrying		Accumulated			Intangibles,		Gross Carrying		Accumulated			Intangibles,
	Amount		Amortization			Net		Amount		Amortization			Net

Licensed technology	$	36,000	$	(7,788	)	$	28,212	$	36,000	$	—		$	36,000
Core technology		23,500		(4,504	)		18,996		23,500		(2,154	)		21,346
Customer relationships		900		(575	)		325		900		(275	)		625
License agreements		1,154		(932	)		222		1,029		(884	)		145

Total intangible assets, net	$	61,554	$	(13,799	)	$	47,755	$	61,429	$	(3,313	)	$	58,116


2009	$	6,749
2010		6,462
2011		6,425
2012		6,618
2013		6,518
Thereafter		14,983

Total	$	47,755


				Weighted-
				Average
	Options			Exercise Price

Outstanding at December 28, 2003		5,228,874		$	6.95
Granted		1,453,400		$	7.08
Exercised		(139,768	)	$	1.98
Cancelled		(337,486	)	$	8.80

Outstanding at January 2, 2005		6,205,020		$	6.99
Granted		2,992,300		$	10.02
Exercised		(869,925	)	$	4.66
Cancelled		(1,001,964	)	$	11.00

Outstanding at January 1, 2006		7,325,431		$	7.96
Granted		2,621,050		$	27.24
Exercised		(1,273,119	)	$	7.28
Cancelled		(314,242	)	$	12.44

Outstanding at December 31, 2006		8,359,120		$	13.94


									Weighted
			Weighted						Average
			Average		Weighted				Exercise Price
Range of	Options		Remaining Life		Average		Options		of Options
Exercise Prices	Outstanding		in Years		Exercise Price		Exercisable		Exercisable

$0.03 - 5.75		1,475,729		6.22	$	3.85		964,006	$	3.65
$5.99 - 8.30		1,455,333		6.04	$	7.00		686,164	$	7.32
$8.35 - 9.40		1,465,961		7.75	$	8.67		451,603	$	8.78
$9.44 - 20.03		1,408,012		7.55	$	12.67		589,545	$	12.23
$20.97 - 26.92		1,417,584		9.01	$	22.18		175,329	$	21.30
$26.94 - 45.69		1,136,501		9.58	$	34.00		35,057	$	35.18

$ 0.03 - 45.69		8,359,120		7.61	$	13.94		2,901,704	$	8.51