Sequenom (SQNM) 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ending March 31, 2006

¨ 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: 000-29101

SEQUENOM, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	77-0365889
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
3595 John Hopkins Court San Diego, California	92121
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (858) 202-9000

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.  x Yes  ¨ No

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

Large accelerated filer  ¨                     Accelerated filer  ¨                     Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

The number of shares of the Registrant’s Common Stock outstanding as of May 5, 2006 was 40,249,736.

SEQUENOM, INC.

INDEX

		Page No.
PART I - FINANCIAL INFORMATION		3
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – as of March 31, 2006 (unaudited) and December 31, 2005	3
	Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2006 and 2005	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	20
PART II – OTHER INFORMATION		21
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 6.	Exhibits	36

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PART I - FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share information)

	March 31, 2006			December 31, 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,662		$	1,885
Short-term investments, available-for-sale		200			4,158
Restricted cash and investments		2,062			2,571
Accounts receivable, net		2,572			2,321
Inventories, net		3,923			4,161
Other current assets and prepaid expenses		755			738
Total current assets		12,174			15,834
Equipment and leasehold improvements, net		5,045			5,621
Intangible assets, net		1,701			2,316
Restricted cash and investments, net of short-term		64			64
Other assets		599			601
Total assets	$	19,583		$	24,436
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,650		$	3,532
Accrued expenses		4,193			4,981
Accrued acquisition and integration costs		227			226
Deferred revenue		1,472			1,299
Current portion of long-term bank debt		96			200
Current portion of capital lease obligations		136			193
Total current liabilities		8,774			10,431
Deferred revenue, less current portion		117			202
Other long-term liabilities		1,005			413
Long-term accrued acquisition and integration costs, less current portion		893			950
Long-term deferred tax liability		465			697
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, par value $0.001; authorized shares - 5,000,000.		—			—
Common stock, par value $0.001; 75,000,000 shares authorized, 40,249,736 and 40,228,627 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively		40			40
Additional paid-in capital		454,057			453,796
Accumulated other comprehensive income		511			467
Accumulated deficit		(446,279	)		(442,560	)
Total stockholders’ equity		8,329			11,743
Total liabilities and stockholders’ equity	$	19,583		$	24,436

See accompanying notes.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share information)

	Three months ended March 31,
	2006			2005
	(Unaudited)
Revenues:
Consumables	$	2,855		$	2,781
Other product related		3,665			1,309
Services		14			—
Research and other		377			191
Total revenues		6,911			4,281
Costs and expenses:
Cost of product revenue		2,713			2,616
Cost of service revenue		7			—
Research and development		2,464			3,293
Selling and marketing		2,644			2,585
General and administrative		2,658			3,409
Restructuring charges		3			(212	)
Amortization of acquired intangibles		504			503
Total costs and expenses		10,993			12,194
Loss from operations		(4,082	)		(7,913	)
Interest income, net		47			95
Other income, net		83			203
Loss before income taxes		(3,952	)		(7,615	)
Deferred income tax benefit		232			233
Net loss	$	(3,720	)	$	(7,382	)
Net loss per share, basic and diluted	$	(0.09	)	$	(0.19	)
Weighted average shares outstanding, basic and diluted		40,243			39,745

See accompanying notes.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three months ended March 31,
	2006			2005
	(Unaudited)
Operating activities
Net loss	$	(3,720	)	$	(7,382	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense		248			143
Depreciation and amortization		1,071			1,419
Other non-cash items		3			83
Deferred income tax benefit		(232	)		(233	)
Changes in operating assets and liabilities:
Inventories		424			45
Accounts receivable		(232	)		(327	)
Other current assets		(13	)		(357	)
Accounts payable and accrued expenses		(909	)		1,550
Deferred revenue		75			349
Other liabilities		(238	)		52
Net cash used in operating activities		(3,523	)		(4,658	)
Investing activities
Purchase of equipment, leasehold improvements and intangibles		(45	)		(902	)
Net change in restricted cash		510			469
Net change in marketable investment securities		3,967			5,668
Net cash provided by investing activities		4,432			5,235
Financing activities
Payments on capital lease obligations		(57	)		(90	)
Payments of long-term debt		(103	)		(875	)
Proceeds from exercise of stock options and ESPP purchases		13			44
Net cash used in financing activities		(147	)		(921	)
Net increase (decrease) in cash and cash equivalents		762			(344	)
Effect of exchange rate changes on cash and cash equivalents		15			(80	)
Cash and cash equivalents at beginning of period		1,885			3,589
Cash and cash equivalents at end of period	$	2,662		$	3,165

See accompanying notes.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Sequenom, Inc. have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year.

The condensed consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements.

These financial statements should be read in conjunction with the audited financial statements and disclosures thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission (“SEC”).

(2) Liquidity and Capital Resources

We have a history of recurring losses from operations and have an accumulated deficit of $446.3 million as of March 31, 2006. Our capital requirements to sustain operations, including research and development projects, have been and will continue to be significant. As of March 31, 2006, we had available cash and short-term investments totaling $2.9 million and working capital of $3.4 million. During the first quarter of 2006, we incurred a net loss of $3.7 million and used $3.7 million in cash, restricted cash, and short-term investments. These factors raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

On March 30, 2006, we entered into an amended and restated securities purchase agreement with four investors that provides for the sale of common stock and warrants to purchase common stock for gross proceeds to us of $33.0 million not including any proceeds from exercise of the warrants. Under the amended and restated securities purchase agreement, we will issue to the investors, subject to the approval of our stockholders and the satisfaction of various closing conditions, (i) an aggregate of 60,000,000 shares of our common stock and (ii) seven-year warrants to purchase an aggregate of 36,000,000 shares of our common stock at an exercise price of $0.70 per share (subject to certain antidilution protections and other adjustment provisions).

The proposed financing transaction is subject to stockholder approval and various other closing conditions, including no material adverse change in our business, operations, financial condition, or results of operations prior to the closing and only a specified amount of indebtedness outstanding as of the closing. We are in the process of solicitating stockholder approval of the proposed financing transaction, an increase in the authorized number of shares of our common stock, and certain other matters at our annual meeting of stockholders.

If we do not close the proposed financing transaction for any reason, we would be forced to preserve our cash position through a combination of additional cost reduction measures, sales of assets likely at values significantly below their potential worth, or the pursuit of alternative financing transactions that would likely be on terms substantially more disadvantageous to us and dilutive to our stockholders. We would need to augment our cash through additional and possibly repetitive dilutive financings. If we are unable to raise additional funds, we could be forced to discontinue our operations.

(3) Comprehensive Income (Loss)

Statement of Financial Accounting Standards (“SFAS”) No. 130,Reporting Comprehensive Income, requires reporting and displaying comprehensive income (loss) and its components, which, for us, includes net loss and unrealized gains and losses on investments and foreign currency translation gains and losses. In accordance with SFAS No. 130, the accumulated balance of other comprehensive income (loss) is disclosed as a separate component of stockholders’ equity. A summary of our comprehensive loss is as follows (in thousands):

	Three months ended March 31,
	2006			2005
Net loss	$	(3,720	)	$	(7,382	)
Unrealized gains (losses) on available-for-sale securities		8			(19	)
Foreign currency translation adjustments		36			(156	)
Comprehensive loss	$	(3,676	)	$	(7,557	)

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(4) Net Loss Per Share

In accordance with SFAS No. 128,Earnings Per Share, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are comprised of incremental common shares issuable upon the exercise of stock options and warrants, and were excluded from historical diluted net loss per share because of their anti-dilutive effect.

(5) Share-Based Compensation

We maintain several share-based compensation plans under which we may grant incentive stock options and non-qualified stock options to employees, consultants and non-employee directors. Effective January 1, 2006, the benefits provided under these plans are share-based compensation subject to the provisions of SFAS No. 123R,Share-Based Payment. Prior to January 1, 2006, we accounted for share-based compensation related to stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25; therefore, we measured compensation expense for our stock options using the intrinsic value method, that is, as the excess, if any, of the fair market value of our stock at the grant date over the amount required to be paid to acquire the stock, and provided the pro forma disclosures required by SFAS 123 and 148. We elected to use the modified prospective application in adopting SFAS 123R and therefore have not restated results for prior periods. The valuation provisions of SFAS 123R apply to new awards and to awards that are outstanding on the adoption date and subsequently modified or cancelled.

As a result of the adoption of SFAS 123R, our net loss for the three months ended March 31, 2006 includes $248,000 of compensation expense related to our share-based compensation awards. The compensation expense related to our share-based compensation arrangements is recorded as components of research and development expense ($66,000), selling and marketing expense ($37,000) and general and administrative expense ($145,000). SFAS 123R requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as cash inflows from financing activities and cash outflows from operating activities. Due to our net loss position, no tax benefits have been recognized in the cash flow statement.

We issue new shares upon the exercise of stock options.

Share-Based Compensation Plans

Stock Compensation Plans

We maintain several stock option plans under which we may grant incentive stock options and non-qualified stock options to employees, consultants and non-employee directors. Options vest and expire according to terms established at the grant date. Options generally vest over a period of four years from the date of grant and expire ten years from the date of grant. The plans provide for the grant of an aggregate of 4,750,000 shares of common stock. Beginning in 2001, the amount of authorized shares automatically increases by an amount equal to 4% of the outstanding common stock on the last trading day of the prior year, subject to an annual increase limitation of 2,000,000 shares.

On April 10, 2006, our board of directors adopted and authorized us to solicit stockholder approval of a 2006 equity incentive plan, or 2006 plan, as the successor to our current 1999 stock option plan, 1999 plan, to become effective upon its approval at the 2006 annual meeting of stockholders. In connection with the adoption of the 2006 plan, the board terminated the automatical annual increase feature under the current 1999 plan and resolved to cease to grant additional stock awards under the current plan following the effectiveness of the 2006 plan. The aggregate number of shares of common stock that may be issued under the 2006 plan after the effective date of the plan will equal the sum of (i) 10,500,000 shares, plus (ii) the number of shares that remain available for issuance under the 1999 plan, plus (iii) the number of shares subject to any stock awards

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under the 1999 plan that terminate or are forfeited or repurchased and would otherwise be returned to the share reserve under the 1999 plan. If the 2006 plan is approved by our stockholders at our 2006 annual meeting of stockholders, we will grant all stock option awards after that time under the 2006 plan.

Restricted Stock Awards and Deferred Compensation

During the year ended December 31, 2004, we issued 736,500 shares of restricted stock awards with a weighted average grant date fair value of $0.87 per share to certain executive officers and employees. The awards vested one year from the grant date. The deferred compensation for these restricted stock awards was based on the number of shares granted multiplied by the fair market value of the stock on the date of grant and then amortized as share-based compensation expense over the vesting period of the restricted stock. During the year ended December 31, 2005, we recognized approximately $0.3 million of amortization expense upon vesting of the awards.

Employee Stock Purchase Plan

In 1999, we adopted the 1999 Employee Stock Purchase Plan (“1999 ESPP”). As of March 31, 2006, we had reserved 2,016,087 shares of common stock for issuance under the 1999 ESPP. Beginning in 2001, the amount of authorized shares available under the 1999 ESPP automatically increases each January 1st by an amount equal to 1% of the outstanding common stock on the last trading day of the prior year, subject to an annual increase limitation of 500,000 shares. The 1999 ESPP will have a series of concurrent offering periods, each with a maximum duration of 24 months, however, no employee may participate in more than one offering period at a time. Employees may allocate up to 15% of their pay to purchase shares, limited to 1,000 shares per purchase period and $25,000 per calendar year. Shares are purchased semi-annually at 85% of the lower of the beginning or end of the period price. As of March 31, 2006, employees have contributed approximately $10,000 to the 1999 ESPP, and we have not recognized any share-based compensation expense related to the anticipated purchase on July 31, 2006.

Warrants

In connection with the acquisition of Axiom Biotechnologies, the outstanding warrant to purchase 22,000 Axiom ordinary shares at an exercise price of $3.50 was adjusted to be exercisable for 4,604 shares of our common stock at an exercise price of $16.73 per share. This warrant has not been exercised and expires in December 2011.

In connection with the Series C Preferred Stock issued in May 1997, we issued warrants to purchase an aggregate of 106,508 shares of our Series C Preferred Stock at an exercise price of $3.15 per share. These warrants became exercisable for shares of our common stock upon our initial public offering. These warrants expire in May 2007. As of March 31, 2006, 35,083 of these warrants remain outstanding.

In connection with an amendment to our lease for our corporate headquarters in San Diego, California in September 2005, we issued the landlord a warrant to purchase 150,000 shares of our common stock with an exercise price of $0.88 per share. The warrant expires in October 2015. As of March 31, 2006, all of the warrants are exercisable and remain outstanding.

Stock Options

The exercise price of all stock options granted during the three months ended March 31, 2006 and 2005 was equal to the market value on the date of grant and, accordingly, no share-based compensation expense for such options is reflected in operating results for the first three-months of fiscal year 2005. The estimated fair value of each stock option award granted was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for stock option grants during the three months ended March 31, 2006 and 2005:

	Three Months Ended March 31,
	2006		2005
Risk free interest rates	4.6	%	4.5	%
Volatility	101	%	100	%
Dividend yield	0	%	0	%
Expected option term	6.7		6.0

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The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our employee stock options. The expected volatility is based on the historical volatility of our stock. We have not paid any dividends on common stock since our inception and do not anticipate paying dividends on its common stock in the foreseeable future. The computation of the expected option term is based on a weighted-average calculation combining the average life of stock options that have already been exercised or cancelled with the estimated life of all unexercised stock options.

As share-based compensation expense recognized in the Statement of Operations for the first quarter of fiscal 2006 is based on stock option awards ultimately expected to vest, it should be reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be 12.65% in the first quarter of fiscal 2006 based on historical experience. In our pro forma information required under SFAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred. Our determination of fair value is affected by our stock price as well as a number of assumptions that require judgment. The weighted-average fair value of each stock option granted during the three months ended March 31, 2006 and 2005, estimated as of the grant date using the Black-Scholes option valuation model, was $0.53 and $1.32, respectively, per share of our common stock subject to the stock option.

A summary of the status of our stock option plans as of March 31, 2006 and of changes in stock options outstanding under the plans during the three months ended March 31, 2006 is as follows:

Outstanding	Shares Subject to Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	5,487,727		$	4.41
Granted	35,750			0.63
Canceled	(859,802	)		3.72
Exercised	—			—
Outstanding at March 31, 2006	4,663,675		$	4.50	7.0	$	13,530
Options vested and exercisable at March 31, 2006	2,905,338		$	6.46	6.9	$	3,064

For the three months ended March 31, 2006, share-based compensation expense related to stock options was $248,000. As of March 31, 2006, there was $0.8 million of unamortized compensation cost related to unvested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 1.3 years. Cash received from stock option exercises for the three months ended March 31, 2006 and 2005 was $0 and $10,000, respectively.

For stock options granted prior to the adoption of SFAS 123R, the following table illustrates the pro forma effect on net loss and loss per common share as if we had applied the fair value recognition provisions of SFAS 123 in determining share-based compensation for stock option awards under the plan (in thousands, except loss per share data):

	Three months ended March 31, 2005
Net loss as reported	$	(7,382	)
Add: Share-based compensation expense included in reported net loss		140
Deduct: Share-based employee compensation expense determined under fair value based method for all awards	$	(559	)
Net loss, including share-based compensation expense	$	(7,801	)
Net loss per share, basic and diluted, as reported in prior year	$	(0.18	)
Net loss per share, including share-based compensation expense	$	(0.19	)

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(6) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market value. Standard cost, which approximates actual cost, is used to value inventories. The components of inventories were (in thousands):

		March 31, 2006		December 31, 2005
Raw materials	$	2,476	$	2,410
Work in process		88		—
Finished goods		1,359		1,751
Total	$	3,923	$	4,161

Inventories are shown net of excess and obsolescence reserves of $2.1 million and $3.1 million at March 31, 2006 and December 31, 2005, respectively.

(7) Acquisition and Integration Costs

As of March 31, 2006, we had approximately $1.1 million remaining in accrued acquisition costs, relating to the acquisition of Gemini Genomics, plc in 2001. The remaining acquisition liability relates to facility exit costs.

The accrued acquisition cost activity in the three months ended March 31, 2006 was as follows (in thousands):

	Balance at December 31, 2005		Deductions			Balance at March 31, 2006
Costs to close facilities and exit lease commitments	$	1,177	$	(57	)	$	1,120

(8) Restructuring charge

During the third quarter of 2004, we closed our Sequenom Pharmaceuticals business segment, which reduced our headcount by approximately 50 at the end of 2004 compared to our headcount prior to the restructuring. During the first quarter of 2005, we sold certain tangible assets and recovered $0.2 million in excess of the carrying value, which we had previously fully provided for as part of the restructuring charge. We do not expect to incur additional expense or recover additional amounts from exiting this activity.

During the third quarter of 2005, as part of our strategy to stabilize the genetic systems business, we introduced a cost reduction plan, which included a reduction in existing headcount by approximately 30 persons across all departments by the end of 2005 compared to our headcount prior to the plan. We incurred a charge of $0.8 million in 2005 relating to severance and related expenses in connection with this headcount reduction. At March 31, 2006, we had an accrued balance of $0.1 million in respect of the restructuring charges. We expect to pay the remaining amounts due through the second quarter of 2006.

(9) Warranty reserves

We generally provide a one-year warranty on our MassARRAY Compact system and related equipment. We establish an accrual for estimated warranty expenses associated with system sales based on historical amounts. This expense is recorded as a component of cost of product revenue.

Changes in our warranty liability during the three months ended March 31, 2006 were as follows (in thousands):

Balance as of December 31, 2005	$	275
Additions charged to cost of revenues		40
Repairs and replacements		—
Balance as of March 31, 2006	$	315

(10) Litigation

In November 2001, we and certain of our current or former officers and directors were named as defendants in a class action shareholder complaint filed by Collegeware USA in the U.S. District Court for the Southern District of New York (now captioned In re Sequenom, Inc. IPO Securities Litigation) Case No. 01-CV-10831. Similar complaints were filed in the same Court against hundreds of other public companies that conducted initial public offerings of their common stock in the late 1990s and 2000. In the complaint, the plaintiffs allege that our underwriters, certain of our officers and directors and we

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violated the federal securities laws because our registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by and the stock allocation practices of the underwriters. The plaintiffs seek unspecified monetary damages and other relief. In October 2002, our officers and directors were dismissed without prejudice pursuant to a stipulated dismissal and tolling agreement with the plaintiffs. In February 2003, the court dismissed the claim against us brought under Section 10(b) of the Securities Exchange Act of 1934, without giving the plaintiffs leave to amend the complaint with respect to that claim. The court declined to dismiss the claim against us brought under Section 11 of the Securities Act of 1933.

In June 2003, pursuant to the authorization of a special litigation committee of our Board of Directors, we approved in principle a settlement offer by the plaintiffs. In June 2004, we entered into a settlement agreement with the plaintiffs. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement. On February 24, 2006, the Court dismissed litigation filed against certain underwriters in connection with the claims to be assigned to the plaintiffs under the settlement. On April 24, 2006, the Court held a final fairness hearing to determine whether to grant final approval of the settlement. A decision is expected during the summer of 2006. The settlement is still subject to statutory notice requirements as well as final judicial approval. Management does not anticipate that the ultimate outcome of this event will have a material adverse impact on our financial position.

In addition, from time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.

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

All statements in this report that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “will,” “intend,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,” “opportunity,” “goals,” or “should,” the negative of these words or words of similar import. Similarly, statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. These forward-looking statements are or will be, as applicable, based largely on our expectations and projections about future events and future trends affecting our business, and so are or will be, as applicable, subject to risks and uncertainties including but not limited to the risk factors discussed in this report, that could cause actual results to differ materially from those anticipated in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the risk factors discussed elsewhere in Item 1A of Part II of this report under the caption “Risk Factors.” Our expectations and the events, conditions, and circumstances on which these future forward-looking statements are based, will likely change.

SEQUENOM^®, SpectroCHIP^®, and MassARRAY^® are registered trademarks and iPLEX™ is a trademark of SEQUENOM, Inc.

Overview

We are a genetics company committed to providing the best genetic analysis products and services that translate genomic science into superior solutions for the biomedical research and agricultural markets. Our proprietary MassARRAY system, comprised of hardware, software applications, and consumable chips and reagents, is a high performance nucleic acid analysis platform that quantitatively and precisely measures genetic target material and variations therein. In late 2005, we launched our services business which provides genetic analysis services to customers as a complement and as an alternative to our systems product offerings. Our research and development efforts are committed to producing new and improved applications for our MassARRAY system that will deliver greater system versatility and also reduce the cost per data point generated. Our research and development efforts are also directed to the development of diagnostic tests, particularly non-invasive prenatal diagnostics, for use on the MassARRAY system and potentially other platforms.

We derive revenue primarily from sales of our MassARRAY hardware, software and consumable products. Our standard MassARRAY system combines proprietary software applications and DNA sample preparation methods with four basic components:

• proprietary analytical reaction technology and sample preparation and dispensing hardware to prepare DNA for analysis;

• a coated silicon chip known as the SpectroCHIP bioarray;

• a mass spectrometer, which uses an established analytical method that we have adapted for DNA analysis; and

• bioinformatics software that records, calculates, and reports the data generated by the mass spectrometer.

Each of these components contributes to a high level of performance in terms of speed, accuracy, and cost efficiency. We have been selling MassARRAY products since 2000.

We have sold approximately 145 systems worldwide, and MassARRAY technology is accepted as a leading high-performance DNA analysis system. Our list of customers includes clinical research laboratories, biotechnology companies, and government agencies. To maximize market penetration and provide customer support for our expanding user base, we have established direct sales and support personnel serving North America, Europe and Asia, in addition to regional distribution partners in France, India, Israel, Japan, Korea, New Zealand, Singapore, Taiwan, and Turkey.

Genetic analysis is primarily conducted in two key biomedical research market sectors: the academic research market, where we currently focus, and the clinical analysis market, where we are expanding. The research market is a relatively small market and is mainly comprised of academic institutions, which make initial genetic discoveries. However, it is the source of discoveries of new genetic content. The clinical analysis market is significantly larger and takes the genetic analysis a step further to establish the use of genes and genetic markers for the potential benefit of the general population.

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The needs of these markets differ significantly. The academic research market, which requires highest data density per sample, is more tolerant to inconsistencies in data and error rates, and typically has a shorter window of opportunity. Sample throughput is very high. The academic research market is extremely price competitive. The clinical analysis market is typically interested in a defined number of markers per sample, is not as tolerant to inconsistencies and error rates, typically has a longer development cycle, and is less price competitive. Sample throughput requirements are not nearly as high. Considering the clinical analysis market’s requirements and the strengths of the MassARRAY system, including its high sensitivity, specificity, and reproducibility, we believe there is significant opportunity to be more competitive in the clinical analysis market.

We have targeted customers conducting quality genotyping and performing fine mapping studies, candidate gene studies, comparative sequencing, and gene expression and epigenetic analysis in the molecular medicine market. We support epigenetic analysis – the analysis of DNA methylation.

We also plan to broaden the markets to which we sell our product line. We have identified four target segments for potential growth: clinical research and clinical marker validation, the emerging field of molecular medicine, diagnostic service laboratories, and animal testing laboratories.

As of March 31, 2006, our product revenues consisted of revenues from the sales of MassARRAY hardware, software, consumables, and maintenance agreements. The impact of our MassARRAY Compact system, our iPLEX assay, and other new products and product applications on future revenues, margins, expenses, and cash flows remains uncertain and depends on many factors as described in Item 1A of this report under the caption “Risk Factors”.

We have a history of recurring losses from operations and have an accumulated deficit of $446.3 million as of March 31, 2006. Our capital requirements to sustain operations, including research and development projects, have been and will continue to be significant. As of March 31, 2006, we had available cash and short-term investments totaling $2.9 million and working capital of $3.4 million. During the first quarter of 2006, we used $3.7 million in cash, restricted cash, and short-term investments. There is substantial doubt about our ability to continue as a going concern. Based on our current plans, we believe our cash, cash equivalents, and short-term investments will only be sufficient to fund our operating expenses, debt obligations, and capital requirements through the second quarter of 2006 unless we complete the proposed financing transaction discussed below.

On March 30, 2006, we entered into an amended and restated securities purchase agreement with four investors that provides for the sale of common stock and warrants to purchase common stock for gross proceeds to us of $33.0 million not including any proceeds from exercise of the warrants. Under the amended and restated securities purchase agreement, we will issue to the investors, subject to the approval of our stockholders and the satisfaction of various closing conditions, (i) an aggregate of 60,000,000 shares of our common stock and (ii) seven-year warrants to purchase an aggregate of 36,000,000 shares of our common stock at an exercise price of $0.70 per share (subject to certain antidilution protections and other adjustment provisions).

The proposed financing transaction is subject to stockholder approval and various other closing conditions, including no material adverse change in our business, operations, financial condition, or results of operations prior to the closing and only a specified amount of indebtedness outstanding as of the closing. We are seeking approval of the proposed financing transaction, an increase in the authorized number of shares of our common stock, and certain other matters at our annual meeting of stockholders. Please refer to our proxy statement, which is available at www.sec.gov or through our website at www.sequenom.com, for more information.

If we do not complete the proposed financing transaction for any reason, we would be forced to preserve our cash position through a combination of additional cost reduction measures, sales of assets likely at values significantly below their potential worth, or the pursuit of alternative financing transactions that would likely be on terms substantially more disadvantageous to us and dilutive to our stockholders. We would need to augment our cash through additional and possibly repetitive dilutive financings. If we are unable to raise additional funds, we could be forced to discontinue our operations.

Results of Operations for the Three Months Ended March 31, 2006 and 2005

Revenues

Total revenues for the three months ended March 31, 2006 increased to $6.9 million from $4.3 million for the same period in 2005.

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Product revenues are derived from sales of consumables including our SpectroCHIP bioarray chips, MassARRAY systems, maintenance agreements, sales and licensing of our proprietary software, and license fees from end-users.

For the three months ended March 31, 2006 compared to the three months ended March 31, 2005, consumable revenues increased to $2.9 million from $2.8 million mainly due to demand for our iPLEX assay at higher average selling prices.

Other product related revenue was $3.7 million for the three months ended March 31, 2006, compared to $1.3 million for the same period in 2005. The increase of $2.4 million was primarily due to an increase in MassARRAY system hardware sales to $2.8 million for the three months ended March 31, 2006 from $0.7 million for the same period in 2005. Income from other product sales, including MassARRAY system maintenance contracts, software, license fees and royalties, for the three months ended March 31, 2006 and 2005 was $0.8 million and $0.6 million, respectively. During the first quarter of 2006, we recognized $2.3 million of revenue in respect of shipments that took place in 2005 that did not meet our criteria for revenue recognition at the time of shipment. As of March 31, 2006, we had shipped inventory, consisting primarily of hardware, with a cost of $0.4 million to certain customers in respect of purchase orders or contracts received which did not meet our criteria for revenue recognition. We expect to recognize $1.0 million of revenue in respect of these shipments upon receipt of payment from these customers during the quarter ending June 30, 2006.

We recorded service revenues of $14,000 for the three months ended March 31, 2006. We expect service revenues to increase during the remainder of 2006.

Research and other revenues were approximately $0.4 million and $0.2 million, respectively, for the three months ended March 31, 2006 and 2005. The timing of research revenues depends upon our expenditures on grant research and our receipt of grant funding from sponsoring agencies. During the three months ended March 31, 2006, we recognized $0.3 million of revenue related to the license of certain proprietary genetic content to a third party.

Our revenues have historically fluctuated from period to period and likely will continue to fluctuate substantially in the future based upon the unpredictable sales cycle for the MassARRAY Compact system, revenue recognition criteria, and the overall acceptance and demand for our new and existing commercial products and services. While the launch of our iPLEX assay may result in individual customers purchasing less consumables overall compared to prior periods because their assay efficiency has increased, we believe that the iPLEX assay will facilitate an increase in demand for the MassARRAY system that will result in an increase in system sales for 2006 compared to 2005. We do not expect significant revenues for 2006 from sales of our recently launched QGE iPLEX and EpiTYPER assay applications.

Cost of product and service revenues and gross margin

Cost of product revenues for the three months ended March 31, 2006 and 2005 were $2.7 million and $2.6 million, respectively. Gross margins on product sales for the three months ended March 31, 2006 were 58%, compared to 36% for the same period in 2005. Gross margins primarily increased due to lower charges to obsolescence reserves resulting from improvement in inventory management.

Gross margin in future periods may be affected by, among other things, reductions in the selling price for systems and consumables, lower consumable sales per MassARRAY system sold due to factors including but not limited to the degree of acceptance and use of our iPLEX multiplexing assay, the mix of products sold, competitive conditions, sales volumes, discounts offered, inventory reserves and required obsolescence charges, as well as royalty payment obligations on in-licensed technologies.

Cost of service revenues for the three months ended March 31, 2006 were $7,000. Gross margins on service revenues are dependent on the particular contract terms of the work undertaken in each quarter.

Research and development expenses

Research and development expenses decreased to $2.5 million for the three months ended March 31, 2006 from $3.3 million for the same period in 2005. These expenses consisted primarily of salaries and related personnel expenses, product development costs, and expenses relating to work performed under research contracts.

The decrease in expenses of $0.8 million for the three months ended March 31, 2006 compared to the same period in 2005 primarily relates to reduced headcount costs of $0.5 million, $0.1 million lower operating consumable expenses and reduced depreciation charges of $0.2 million.

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Selling and marketing expenses

Selling and marketing expenses for the three months ended March 31, 2006 and 2005 were $2.6 million. These expenses consist primarily of salaries and related expenses for sales and marketing, customer support, and business development personnel and their related department expenses.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2006 were $2.7 million, compared to $3.4 million for the same period in 2005. These expenses consisted primarily of salaries and related expenses for legal, finance and human resource personnel, and their related department expenses.

The decrease of $0.7 million for the three months ended March 31, 2006 from the same period in 2005 was primarily due to a reduction in headcount costs of $0.8 million as a result of severance costs incurred in 2005, offset by increased legal-related expenses of $0.1 million as a result of our financing activities.

Restructuring charges

During the third quarter of 2004, we closed our Sequenom Pharmaceuticals business segment. During the first quarter of 2005, we sold certain tangible assets and recovered $0.2 million in excess of the carrying value, which we had previously fully provided for as part of the restructuring charge. We do not expect to incur additional expense or recover additional amounts from the closure of our Sequenom Pharmaceuticals business segment.

Amortization of acquired intangibles

In connection with the acquisition of Gemini Genomics, plc in 2001, we acquired approximately $18.7 million of intangible assets, including clinical data collections and patent rights. Our intangible assets are being amortized over three to five years.

Net interest income

Net interest income was $47,000 for the three months ended March 31, 2006, compared to $95,000 for the same period in 2005, as increasing interest rates on our investments and reduced levels of debt compensated for lower average investment balances.

Deferred income tax benefit

The deferred tax benefit of $0.2 million for the three months ended March 31, 2006 and 2005 is due to the tax effects related to amortization on our intangible assets, including clinical data collections and patent rights acquired from Gemini Genomics.

We maintain several stock option plans under which we may grant incentive stock options and non-qualified stock options to employees, consultants and non-employee directors. The benefits provided under all of these plans are subject to the provisions of revised Statement of Financial Accounting Standards No. 123 (SFAS 123R), “Share-Based Payment,” which we adopted effective January 1, 2006. We elected to use the modified prospective application in adopting SFAS 123R and therefore have not restated results for prior periods. The valuation provisions of SFAS 123R apply to new awards and to awards that are outstanding on the adoption date and subsequently modified or cancelled. Our results of operations for the first quarter of 2006 were impacted by the recognition of non-cash expense related to the fair value of our share-based compensation awards. Share-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2006 was $0.2 million.

At March 31, 2006, total unrecognized, estimated share-based compensation expense related to unvested stock options granted prior to that date was $0.8 million, which is expected to be recognized over a weighted average period of 1.3 years. Net stock options, after forfeitures and cancellations, granted during each of the three months ended March 31, 2006 and 2005 represented 0% and 0%, respectively, of outstanding shares as of the beginning of each fiscal quarter. Total stock options granted during the three months ended March 31, 2006 and 2005 represented .09% and .11% of outstanding shares as of the end of each fiscal quarter, respectively. For more information about our accounting for share-based compensation expense, see Note 5 to the Financial Statements in Item 1.

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Liquidity and Capital Resources

As of March 31, 2006, cash, cash equivalents, short-term investments and restricted cash totaled $5.0 million, compared to $8.7 million at December 31, 2005. Our cash reserves are held primarily in U.S. Government securities and money market accounts.

We have a history of recurring losses from operations and have an accumulated deficit of $446.3 million as of March 31, 2006. Our capital requirements to sustain operations, including research and development projects, have been and will continue to be significant. As of March 31, 2006, we had available cash and short-term investments totaling $2.9 million and working capital of $3.4 million. There is substantial doubt about our ability to continue as a going concern. Based on our current plans, we believe our cash, cash equivalents, and short-term investments will only be sufficient to fund our operating expenses, debt obligations, and capital requirements through the second quarter of 2006, unless we complete the proposed financing transaction discussed below.

Through March 31, 2006, we funded our capital requirements primarily with the net proceeds of our initial public offering of common stock of approximately $144 million, with private placements of equity securities of approximately $56 million, and with $61 million from the acquisition of Gemini Genomics in 2001.

On March 30, 2006, we entered into an amended and restated securities purchase agreement with four investors that provides for the sale of common stock and warrants to purchase common stock for gross proceeds to us of $33.0 million not including any proceeds from exercise of the warrants. The proposed financing is subject to stockholder approval and the satisfaction of various other closing conditions, including no material adverse change in our business, operations, financial condition or results of operations prior to the closing and only a specified amount of indebtedness outstanding as of the closing. If we do not complete the proposed financing transaction for any reason, we would be forced to preserve our cash position through a combination of additional cost reduction measures, sales of assets likely at values significantly below their potential worth, or the pursuit of alternative financing transactions that would likely be on terms substantially more disadvantageous to us and dilutive to our stockholders. We would need to augment our cash through additional and possibly repetitive dilutive financings. If we are unable to raise additional funds, we could be forced to discontinue our operations.

We consider the material drivers of our cash flow to be sales volumes, inventory management and operating expenses. Our principal sources of liquidity are our cash, cash equivalents and short-term investments. Cash used in operations for three months ended March 31, 2006 was $3.5 million compared to $4.7 million for the same period in 2005. The use of cash was primarily a result of the net loss of $3.7 million for three months ended March 31, 2006, adjusted for non-cash depreciation and amortization of $1.1 million and $0.2 million of share-based compensation expenses offset by a decrease in accounts payable, accrued expenses and other liabilities totaling $1.1 million. At our current and anticipated level of operating loss, we expect to continue to incur an operating cash outflow on a quarterly basis for the foreseeable future.

Investing activities, other than the changes in our short-term investments and restricted cash, used $45,000 in cash during the three months ended March 31, 2006 due to purchases of capital equipment.

Net cash used by financing activities was $0.1 million for three months ended March 31, 2006 compared to $0.9 million used by financing activities for the same period in 2005. Financing activities during the three months ended March 31, 2006 included net payments of $0.2 million for long-term debt and capital leases and the receipt of proceeds from the exercise of stock options and employee stock purchase plan purchases of $0.1 million.

On September 16, 2005, we received a notice from the Listing Qualifications Department of The NASDAQ Stock Market stating that for the last 30 consecutive business days, the bid price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion under NASDAQ Marketplace Rule 4450(a)(5). Pursuant to NASDAQ Marketplace Rule 4450(e)(2), we were provided until March 15, 2006 to regain compliance. On March 16, 2006, we received a letter from the Listing Qualifications Department of The NASDAQ Stock Market notifying us that our common stock will be delisted, and that we may appeal the staff’s determination to a Listing Qualifications Panel. The letter also stated that, alternatively, we may apply to transfer our common stock to The NASDAQ Capital Market if we satisfy the requirements for initial inclusion on The NASDAQ Capital Market, other than the minimum bid price rule, and that if the application is approved, we will be afforded the remainder of the NASDAQ Capital Market’s additional 180-day compliance period to regain compliance with the minimum bid price rule while on the NASDAQ Capital Market. If we do not return to compliance after the second 180 day period, NASDAQ will issue a letter informing us that they will delist our common stock from the NASDAQ Capital Market. We requested and were granted a hearing with NASDAQ that was held on April 12, 2006 to appeal the proposed delisting. On April 24, 2006, we received a letter from the Nasdaq Listing Qualifications Panel of The Nasdaq Stock Market, Inc. notifying us that we had been granted an extension until June 15, 2006 to comply with Nasdaq’s

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minimum closing bid price requirement of $1.00 per share for ten consecutive trading days. We are seeking approval of a reverse stock split for our common stock from our stockholders at our annual meeting of stockholders on May 31, 2006 in an effort to comply with the minimum closing bid price requirement.

If we fail to continue to meet all applicable NASDAQ National Market or NASDAQ Capital Market requirements in the future and NASDAQ determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease. Such delisting could also adversely affect our ability to obtain financing for the continuation of our operations and/or result in the loss of confidence by investors, suppliers and employees.

The following table summarizes our contractual obligations as of March 31, 2006:

Contractual obligations (In thousands)	Total		Less than one year		1-3 years		After 3 years
Long-term debt	$	96	$	96	$	—	$	—
Capital lease obligations		136		136		—		—
Operating leases		46,208		2,993		10,121		33,094
Open purchase orders		3,027		3,027		—		—
Total contractual obligations	$	49,467	$	6,252	$	10,121	$	33,094

Future operating lease commitments for leases have not been reduced by future minimum sublease rentals to be received through December 2010 aggregating $1.3 million. Open purchase orders are primarily for inventory items and research and development supplies.

In September 2005, we entered into an amendment to our lease for our corporate headquarters in San Diego. The lease amendment provides for the deferral of approximately $3.2 million of the monthly rent payments by reducing the monthly payments through September 30, 2007 and increasing the aggregate monthly payments by the deferred amount for the remaining term of the lease, from October 1, 2007 to September 30, 2012. The total obligation under the lease remains unchanged. The contractual obligation table above reflects the deferral of these rent payments.

Based on our current plans, we believe our cash, cash equivalents and short-term investments will only be sufficient to fund our operating expenses, debt obligations and capital requirements through the second quarter of 2006. Even if we close the proposed financing transaction, our business may require additional investment that we have not yet secured. Including the expected net proceeds from the proposed financing transaction, based on our current plans, we believe our cash, cash equivalents and short-term investments will be sufficient to fund our operating expenses, debt obligations and capital requirements through at least 2007. However, the actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated. These factors include but are not limited to:

• the size of our future operating losses;

• the level of our success in selling our MassARRAY products and services;

• our ability to introduce and sell new products and services, and successfully reduce inventory levels of earlier products;

• the level of our selling, general and administrative expenses;

• our success in and the expenses associated with researching and developing diagnostic products, alone or in collaboration with our partners, and obtaining any required regulatory approval for those products;

• the extent of our research and development pursuits, including our level of investment in MassARRAY product research and development, achieving Good Manufacturing Practice certification, and ASR research and development;

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• the extent to which we enter into, maintain, and derive revenues from licensing agreements, including agreements to out-license our disease gene discoveries, research and other collaborations, joint ventures and other business arrangements;

• the extent to which we acquire, and our success in integrating, technologies or companies;

• the level of our legal expenses including those expenses associated with litigation and with intellectual property protection; and

• regulatory changes and technological developments in our markets.

We had a $3.5 million bank line of credit, which expired on January 31, 2006. As of March 31, 2006, we had outstanding stand-by letters of credit with financial institutions totaling $1.8 million. In April 2006, a $0.6 million letter of credit was cancelled as we paid off the related remaining $0.2 million balance of our asset-backed note and capital lease agreements. A remaining operating lease letter of credit of $1.1 million will remain in place until the expiration of the building lease agreement in December 2010 and will not be drawn down unless we default upon our obligation.

As of March 31, 2006, we were in breach of one of the covenants of our capital leases, which requires us to have in excess of $15 million of unrestricted cash and short-term investments. The lender has waived these breaches, and we provided the lender with a letter of credit for $0.6 million. As discussed above, in April 2006, we paid off the remaining $0.2 million balance of our asset-backed note and capital leases and the related letter of credit was cancelled. We have no commitments for any additional debt financings.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Short-Term Investments

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the fair value of the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and interest rates later rise, the fair value of the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities rated BBB or above by Standard & Poors. Our investment policy includes a minimum quality rating for all new investments. If an investment we hold falls below this level, we research the reasons for the fall and determine if we should continue to hold the investment in order to minimize our exposure to market risk of the investment. We have not experienced any significant losses in our investment portfolio as a result of rating changes. The average duration of all of our investments has generally been less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is provided.

Foreign currency rate fluctuations

We have foreign subsidiaries whose functional currencies are the Great British Pound, or GBP, and the Euro, or EUR. The subsidiaries’ accounts are translated from the relevant functional currency to the U.S. dollar using the current exchange rate in effect at the balance sheet date, for balance sheet accounts, and using the average exchange rate during the period for revenues and expense accounts. The effects of translation are recorded as a separate component of stockholders’ equity. Our subsidiaries conduct their business with customers in local currencies. Exchange gains and losses arising from these transactions are recorded using the actual exchange differences on the date of the transaction. We have not taken any action to reduce our exposure to changes in foreign currency exchange rates, such as options or futures contracts, with respect to transactions with our subsidiaries or transactions with our customers where the invoicing currency is not the U.S. dollar.

The table below sets forth our currency exposure (i.e., those transactional exposures that give rise to the net currency gains and losses recognized in the income and expenditure account) on our net monetary assets and liabilities. These exposures consist of our monetary assets and liabilities that are not denominated in the functional currency used by us or our subsidiary having the asset or liability.

	As of March 31, 2006 Net foreign monetary assets/(liabilities)
Functional currency of operations	US dollars		GBP
	($ in millions)
Euro	$	0.9	$	0.2

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A movement of 10% in the US dollar to Euro exchange rate would create an unrealized gain or loss of approximately $94,000. A movement of 10% in the US dollar to pound exchange rate would create an unrealized gain or loss of approximately $42,000.

We had no off balance sheet, or unrecognized, gains and losses in respect of financial instruments used as hedges at the beginning or end of the period ended March 31, 2006. We had no deferred gains or losses during the period covered.

Inflation

We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented.

Item 4. Controls and Procedures

We have established and maintain disclosure controls and procedures that are designed to ensure that we record, process, summarize, and report information we are required to disclose in our periodic reports filed with the Securities and Exchange Commission in the manner and within the time periods specified in the SEC’s rules and forms. We also design our disclosure controls to ensure that the information is accumulated and communicated to our management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure. We also maintain internal controls and procedures that are designed to ensure that we comply with applicable laws and our established financial policies. 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 accounting principles generally accepted in the United States.

We have evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is timely made in accordance with the Exchange Act and the rules and regulations of the Securities and Exchange Commission. This evaluation was made under the supervision and with the participation of management, including our principal executive officer and principal financial officer as of March 31, 2006. Our management does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our principal executive officer and principal financial officer have concluded, based on their review, that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were effective as of March 31, 2006 to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In November 2001, we and certain of our current or former officers and directors were named as defendants in a class action shareholder complaint filed by Collegeware USA in the U.S. District Court for the Southern District of New York (now captioned In re Sequenom, Inc. IPO Securities Litigation) Case No. 01-CV-10831. Similar complaints were filed in the same Court against hundreds of other public companies that conducted initial public offerings of their common stock in the late 1990s and 2000. In the complaint, the plaintiffs allege that our underwriters, certain of our officers and directors and we violated the federal securities laws because our registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by and the stock allocation practices of the underwriters. The plaintiffs seek unspecified monetary damages and other relief. In October 2002, our officers and directors were dismissed without prejudice pursuant to a stipulated dismissal and tolling agreement with the plaintiffs. In February 2003, the court dismissed the claim against us brought under Section 10(b) of the Securities Exchange Act of 1934, without giving the plaintiffs leave to amend the complaint with respect to that claim. The court declined to dismiss the claim against us brought under Section 11 of the Securities Act of 1933.

In June 2003, pursuant to the authorization of a special litigation committee of our Board of Directors, we approved in principle a settlement offer by the plaintiffs. In June 2004, we entered into a settlement agreement with the plaintiffs. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement. On February 24, 2006, the Court dismissed litigation filed against certain underwriters in connection with the claims to be assigned to the plaintiffs under the settlement. On April 24, 2006, the Court held a final fairness hearing to determine whether to grant final approval of the settlement. A decision is expected during the summer of 2006. In addition, the settlement is still subject to statutory notice requirements as well as final judicial approval. Management does not anticipate that the ultimate outcome of this event will have a material adverse impact on our financial position.

In addition, from time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.

Item 1A. Risk Factors

The following is a summary of the many risks we face in our business. You should carefully read these risks and uncertainties in evaluating our business. The risk factors in this report have been revised to incorporate changes to our risk factors from those included in our annual report on Form 10-K for the year ended December 31, 2005.

If we fail to complete our previously announced proposed financing and do not otherwise obtain the capital necessary to fund our operations when needed, we could be forced to discontinue our operations.

As of March 31, 2006, we had available cash, cash equivalents, and investments of approximately $2.9 million. Based on our current plans, we believe our cash, cash equivalents and short-term investments will only be sufficient to fund our operating expenses, debt obligations and capital requirements through the second quarter of 2006. Without additional capital, meeting our working capital needs under a continuation of our current business model would prove difficult beyond the second quarter. The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 31, 2005 included an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern. During the past year we undertook a number of actions to reduce our monthly cash requirements, including, among other things, reductions in workforce and related payroll costs, reductions in the growth of executive compensation, reductions or deferrals in facility costs, and other cost-cutting measures. However, these actions will not permit us to continue as a going concern past the second quarter of 2006 without additional capital.

On March 30, 2006, we entered into an amended and restated securities purchase agreement under which we agreed to sell and issue to four investors an aggregate of 60,000,000 shares of our common stock, and related warrants to purchase up to an aggregate of 36,000,000 shares of our common stock for gross proceeds of $33.0 million not including any proceeds from the exercise of the warrants. Completion of this proposed financing is subject to the satisfaction of certain conditions, some of which are outside of our control, including but not limited to:

• stockholder approval of the proposed financing and an amendment to our certificate of incorporation to increase the authorized number of shares of common stock;

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• no material adverse change in our business, operations, financial condition or results of operations;

• no breaches of covenants that place restrictions on the operation of our business without the approval of the new investors; and

• no more than specifically permitted levels of indebtedness.

If we do not complete the proposed financing for any reason, we would be forced to preserve our cash position through a combination of additional cost reduction measures, sales of assets likely at values significantly below their potential worth, or the pursuit of alternative financing transactions that would likely be on terms substantially more disadvantageous to us and dilutive to our stockholders. We would need to augment our cash through additional and possibly repetitive dilutive financings. If we are unable to raise additional funds, we could be forced to discontinue our operations.

Even if we complete the proposed financing, we may need additional capital to support our growth, which will result in additional dilution to our stockholders.

Even if we complete the proposed financing, our business may require additional investment that we have not yet secured. Including the expected net proceeds from the proposed financing, based on our current plans, we believe our cash, cash equivalents and short-term investments will be sufficient to fund our operating expenses, debt obligations and capital requirements through at least 2007. However, the actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated. These factors include but are not limited to:

• the size of our future operating losses;

• the level of our success in selling our MassARRAY products and services;

• the terms and conditions of sales contracts, including extended payment terms;

• our ability to introduce and sell new products and services, and successfully reduce inventory levels of earlier products;

• the level of our selling, general and administrative expenses;

• our success in and the expenses associated with researching and developing diagnostic products, alone or in collaboration with our partners, and obtaining any required regulatory approval for those products;

• the extent of our research and development pursuits, including our level of investment in MassARRAY product research and development, and diagnostic assay research and development;

• the extent to which we enter into, maintain, and derive revenues from licensing agreements, including agreements to out-license our disease gene discoveries, research and other collaborations, joint ventures and other business arrangements;

• the extent to which we acquire, and our success in integrating, technologies or companies;

• the level of our legal expenses including those expenses associated with litigation and with intellectual property protection;

• the level of our expenses associated with the audit of our financial statements and our internal control over financial reporting as well as compliance with other corporate governance and regulatory developments or initiatives; and

• regulatory changes and technological developments in our markets.

General market conditions or the market price of our common stock may not support capital raising transactions such as an additional public or private offering of our common stock or other securities. In addition, our ability to raise additional capital

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may be dependent upon our stock being quoted on the NASDAQ National Market or upon obtaining shareholder approval. There can be no assurance that we will be able to satisfy the criteria for continued listing on NASDAQ or that we will be able to obtain shareholder approval if it is necessary. If we are unable to obtain additional funds on a timely basis or on terms favorable to us, we may be required to cease or reduce further commercialization of our products, to cease or reduce certain research and development projects, to sell some or all of our technology or assets or business units or to merge all or a portion of our business with another entity. If we raise additional funds by selling shares of our capital stock, the ownership interest of our current stockholders will be diluted. Insufficient funds may require us to delay, scale back, or eliminate some or all of our activities, and if we are unable to obtain additional funding, there is substantial doubt about our ability to continue as a going concern.

If completed, our proposed financing will result in substantial dilution of the percentage ownership of our stockholders.

Stockholders will incur immediate and substantial dilution of their percentage ownership of our common stock if our recently proposed financing is completed. The aggregate ownership of all holders of our outstanding common stock immediately prior to closing of the proposed financing will be reduced to approximately 40% of outstanding shares of our common stock after closing, or 30% assuming exercise in full of the warrants issued as part of the proposed financing.

If the proposed financing is completed, the investors in the proposed financing will acquire shares of common stock and warrants representing substantially more than a majority of shares of our common stock.

If the proposed financing is completed, the investors in the proposed financing would acquire shares of our common stock and warrants to acquire such shares representing up to approximately 70% of our then outstanding common stock, assuming the full investment of $33.0 million and the exercise in full of the warrants to be issued in the proposed financing. In connection with soliciting stockholder approval of the proposed financing, we are required to request that our stockholders approve amendments to our certificate of incorporation and bylaws to remove the classification of our board of directors effective upon the closing of the financing. If the stockholders do not approve this proposal, we are required to resubmit this proposal to our stockholders after the closing of the financing. Once the board is no longer classified, all directors will be subject to election by the stockholders at each annual meeting of stockholders. Immediately following completion of the proposed financing, those investors would hold a sufficient portion of our outstanding shares so as to permit them, if they chose to act in concert, to approve all actions requiring stockholder approval, including the election of directors, a merger, business combination or other strategic or financing transaction that would require stockholder approval, without obtaining the approval of any other stockholder.

Our Stock May Be Delisted From The NASDAQ National Market.

The NASDAQ National Market imposes, among other requirements, listing maintenance standards as well as minimum bid and public float requirements. In recent months our common stock has traded below $1.00 per share and the closing bid price of our common stock has been below $1.00 per share. On September 16, 2005, we received a notice from the Listing Qualifications Department of The NASDAQ Stock Market stating that for the last 30 consecutive business days, the bid price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion under NASDAQ Marketplace Rule 4450(a)(5). Pursuant to NASDAQ Marketplace Rule 4450(e)(2), we were provided until March 15, 2006 to regain compliance. On March 16, 2006, we received a letter from the Listing Qualifications Department of The NASDAQ Stock Market notifying us that our common stock would be delisted, and that we may appeal the staff’s determination to a Listing Qualifications Panel. The notice also stated that, alternatively, we may apply to transfer our common stock to The NASDAQ Capital Market if we satisfy the requirements for initial inclusion on The NASDAQ Capital Market, other than the minimum bid price rule, and that if the application is approved, we would be afforded the remainder of the NASDAQ Capital Market’s additional 180-day compliance period to regain compliance with the minimum bid price rule while on the NASDAQ Capital Market. If we did not satisfy the requirements for initial inclusion on The NASDAQ Capital Market, we would not be able to take advantage of this additional 180-day period. Even if we did satisfy the initial listing requirements, if we did not return to compliance after the second 180 day period, NASDAQ would issue a letter informing us that they would delist our common stock from the NASDAQ Capital Market. We requested and were granted a hearing with NASDAQ that was held on April 12, 2006 to appeal the proposed delisting. On April 24, 2006, we received a letter from the Nasdaq Listing Qualifications Panel of The Nasdaq Stock Market, Inc. notifying us that we had been granted an extension until June 15, 2006 to comply with Nasdaq’s minimum closing bid price requirement of $1.00 per share for ten consecutive trading days. If we continue to fail to meet all applicable NASDAQ National Market or NASDAQ Capital Market requirements in the future and NASDAQ determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease. Such delisting could also adversely affect our ability to obtain financing for the continuation of our operations and/or result in the loss of confidence by investors, suppliers and employees.

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We have limited experience.

Many of our technologies are at an early stage of discovery and development. We continue to commercialize new products and create new applications for our products. We have recently changed our business focus to pursue diagnostic applications for our MassARRAY technology including non-invasive prenatal testing. We have limited or no experience in these applications of our technology and operating in these markets. You should evaluate us in the context of the uncertainties and complexities affecting an early stage company developing products and applications for the life science industries and experiencing the challenges associated with entering into new markets that are highly competitive. We need to make significant investments to ensure our products perform properly and are cost-effective, and we will likely need to apply for and obtain certain regulatory approvals to sell our products for diagnostic applications and it is uncertain whether such approvals will be granted. Even if we develop products for commercial use and obtain all necessary regulatory approval, we may not be able to develop products that are accepted in the genomic, diagnostic, clinical research, pharmaceutical, or other markets or the emerging field of molecular medicine and that can be marketed and sold successfully.

We have a history of operating losses, anticipate future losses and may never become profitable.

We have experienced significant operating losses in each period since our inception. At March 31, 2006, our accumulated deficit was approximately $446.3 million. These losses have resulted principally from expenses incurred in research and development, from selling, general, and administrative expenses associated with our operations, our significant lease obligations, and the write-down to the carrying value of acquired goodwill and intangibles. We expect to incur operating losses in the future as a result of expenses associated with research and product development, production, marketing and selling, general and administrative expenses, and our significant lease obligations, as well as expenses associated with consolidating and completing the integration of any business or technology that we may acquire in the future. To achieve profitability, we would need to generate significant additional revenue with significant gross margins. It is uncertain when, if ever, we will become profitable, or cash-flow positive. Even if we were to become profitable, we might not be able to sustain or increase profitability on a quarterly or annual basis.

Our operating results may fluctuate significantly.

Our revenues and results of operations may fluctuate significantly, depending on a variety of factors, including the following:

• the status of and any developments with respect to our proposed financing;

• our ability to manage costs and expenses and effectively implement our business strategy;

• our success in selling, and changes in the demand for, our products and services including our MassARRAY Compact benchtop version and iPLEX multiplexing application, and demand for services and products for genotyping, DNA methylation (epigenetic analysis) and QGE (gene expression analysis);

• our success in depleting or reducing current product inventories in view of new or upcoming product introductions;

• the pricing of our products and services and those of our competitors;

• variations in the timing of payments from customers and collaborative partners and the recognition of these payments as revenues;

• the timing and cost of any new product or service offerings by us;

• our ability to develop new applications and products, such as diagnostic assays, and the success of such applications and products;

• the potential need to acquire licenses to new technology or to use our technology in new markets, which could require us to pay unanticipated license fees and royalties in connection with licenses we may need to acquire;

• our research and development progress;

• our ability to promote, and license or sell, candidate disease gene markers that may lead to future diagnostic products;

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• the cost, quality and availability of our consumable chips, also known as SpectroCHIP bioarrays, oligonucleotides, DNA samples, tissue samples, reagents and related components and technologies;

• material developments in our customer and supplier relationships;

• our ability to clinically validate any potential diagnostic related products and obtain regulatory approval of any potential products; and

• expenses related to, and the results of, any litigation or other legal proceedings.

Further, our revenues and operating results are difficult to predict because they depend on the number, timing, and type of MassARRAY system placements that we make during the year, the number, timing, and types of software licensed or sold, and the quantity and timing of consumables sales for the installed base of systems. Changes in the relative mix of our MassARRAY system and consumables sales can have a significant impact on our gross margin, as consumable sales typically have margins significantly higher than MassARRAY system sales. Our revenues and operating results are also difficult to predict because they depend upon the completion of milestones and the duration of and progress made under collaborative research and commercialization programs with partners. The absence of or delay in generating revenues could cause significant variations in our operating results from year to year and could result in increased operating losses.

We believe that period-to-period comparisons of our financial results will not necessarily be meaningful. You should not rely on these comparisons as an indication of our future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, our stock price will likely fall.

We have a history of generating a large percentage of our revenue at the end of each quarterly accounting period.

Due to the way that many customers in our target markets allocate and spend their budgeted funds for acquisition of our products, a large percentage of our sales are booked at the end of each quarterly accounting period. Because of this timing of our sales, we may not be able to reliably predict order volumes and our quarterly revenues. A sales delay of only a few days may significantly impact our quarter-to-quarter comparisons. If our quarterly revenues fall below the expectations of securities analysts and investors, our stock price may decline. Similarly, if we are unable to ship our customer orders on time, or if extended payment terms are required, there could be a material adverse effect on revenues for a given quarter.

A reduction in revenues from sales of MassARRAY products would harm our business.

The demand for MassARRAY systems and consumables has changed over time, and any decline in demand will reduce our total revenues. We expect that sales of MassARRAY systems and consumables will account for most of our total revenues for the foreseeable future. Also, our competitors have offered low priced fee-for-service genotyping services and technologies to the DNA analysis marketplace. These factors and the following factors, among others, would reduce the demand for MassARRAY products:

• competition from other products or failure of our products or applications, particularly the iPLEX application, to perform as expected;

• changes in fiscal policies and the economy which negatively impact customer buying decisions; and

• negative publicity or evaluations, particularly with respect to product warranty and repair and troubleshooting services provided to existing customers.

Our revenues are subject to the risks faced by pharmaceutical, diagnostic, and biotechnology companies and governmental and other research institutions.

We expect that our revenues in the foreseeable future will be derived primarily from MassARRAY system products provided to pharmaceutical and biotechnology companies, laboratories, companies and institutions that service the livestock industry, and governmental and other research institutions. Our operating results could fluctuate substantially due to reductions and delays in research and development expenditures by these customers. These reductions and delays could result from factors such as:

• uncertainty about our ability to fund operations and supply products to customers;

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• changes in economic conditions and possible country-based boycotts;

• changes in government programs that provide funding;

• changes in the regulatory environment affecting health care and health care providers;

• pricing pressures and reimbursement policies;

• market-driven pressures on companies to consolidate and reduce costs; and

• other factors affecting research and development spending.

None of these factors are within our control. We have broadened the markets to which we sell our products and applications and continue to develop new applications and products for use in new markets. We are targeting customers in clinical research and clinical marker validation, the emerging field of molecular medicine, diagnostic service laboratories, and animal testing laboratories. We have limited or no experience operating in these potential markets and, as a result, may be unable to develop products and applications that allow us to penetrate these markets or successfully generate any revenue from sales in these markets. We will have limited ability to forecast future demand for our existing and any new products and applications in these markets.

We depend on sales of our consumable chips and other MassARRAY consumables for a significant portion of our revenues.

Sales of our consumable chips and other consumables for the MassARRAY system are an important source of revenue. It is possible that our new iPLEX mulitplexing application may result in lower volumes of consumable chip purchases by customers, which in turn could cause revenues to decline. Revenues from MassARRAY consumables totaled approximately 41% of our total revenues for the three months ended March 31, 2006, compared to 65% of our total revenues for the three months ended March 31, 2005. Factors which may limit the use of our consumable chips and other consumables or otherwise adversely affect our revenues from consumables include:

• the extent of our customers’ level of utilization of their MassARRAY systems;

• the extent to which customers increase multiplexing levels using the iPLEX application;

• failure to sell additional MassARRAY systems;

• the termination of contracts with or adverse developments in our relations with suppliers of our consumables;

• the training of customer personnel; and

• the acceptance of our technology by our customers.

If our customers are unable to adequately prepare samples for our MassARRAY system, the overall market demand for our products may decline.

Before using the MassARRAY system, customers must prepare samples by following several steps that are subject to human error, including DNA isolation and DNA amplification. If DNA samples are not prepared appropriately, or the proposed assays are too complex, the MassARRAY system may not generate a reading or a correct reading. If our customers experience these difficulties, they might achieve lower levels of throughput than specified for the system. If our customers are unable to generate expected levels of throughput, they might not continue to purchase our consumables, they could express their discontent with our products to others, or they could collaborate with others to jointly benefit from the use of our products. Any or all of these actions would reduce the overall market demand for our products. From time to time, we have experienced customer complaints regarding data quality and difficulty in processing more complex assays.

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The sales cycles for our products are lengthy, and we may expend substantial funds and management effort with no assurance of successfully selling our products or services.

The sales cycles for our MassARRAY system products are typically lengthy. Our sales and licensing efforts require the effective demonstration of the benefits, value, and differentiation and validation of our products and services, and significant training of multiple personnel and departments within a potential customer organization. We may be required to negotiate agreements containing terms unique to each prospective customer or licensee which would lengthen the sales cycle. We may expend substantial funds and management effort with no assurance that we will sell our products or services. In addition, this lengthy sales cycle makes it more difficult for us to accurately forecast revenue in future periods and may cause revenues and operating results to vary significantly in such periods.

We may not be able to successfully adapt our products for commercial applications.

A number of potential applications of our MassARRAY technology, including diagnostic applications, may require significant enhancements in our core technology or the licensing of third-party intellectual property rights or technologies. If we are unable to complete the development, introduction, or scale-up of any product, or if any of our new products or applications, such as gene expression analysis, epigenetic analysis or iPLEX multiplexing, do not achieve a significant level of market acceptance, our business, financial condition and results of operations could be seriously harmed. We may fail to sustain the market acceptance of our products that have been already established, such as our MassARRAY systems, or of new products and applications. Sustaining or achieving market acceptance will depend on many factors, including demonstrating to customers that our technology is cost competitive or superior to other technologies and products that are available now or that may become available in the future. We believe that our revenue growth and profitability will substantially depend on our ability to overcome significant technological challenges and successfully introduce our newly developed products, applications, and services into the marketplace.

We have limited commercial production capability and experience and may encounter production problems or delays, which could result in lower revenue.

We partially assemble the MassARRAY system and partially manufacture our consumable chips and MassARRAY kits. To date, we have only produced these products in moderate quantities. We may not be able to maintain acceptable quality standards as we continue or ramp up production. To achieve anticipated customer demand levels, we will need to scale-up our production capability and maintain adequate levels of inventory while manufacturing our products at a reasonable cost. We may not be able to produce sufficient quantities to meet market demand or manufacture our product at a reasonable cost. If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements with third parties. This reliance could reduce our gross margins and expose us to the risks inherent in relying on others. We might not be able to successfully outsource our production or enter into licensing or other arrangements with these third parties, which would adversely affect our business.

We depend on third-party products and services and limited sources of supply to develop and manufacture our products.

We rely on outside vendors to supply certain products and the components and materials used in our products. Some of these products, components and materials are obtained from a single supplier or a limited group of suppliers. Our MassARRAY system is comprised of several components, of which the following are currently obtained from a single supplier: Bruker Daltonics, Inc. supplies our mass spectrometers, Samsung Electronics Co., Ltd. supplies our nanodispensers (also known as pintools), and Majer Precision Engineering, Inc. supplies the pins for the pintools. We also have sole suppliers for certain of our consumable products. In the event of any adverse developments with these vendors, our product supply may be interrupted which would have an adverse impact on our business. In the past, we have experienced quality problems with and delays in receiving components used to produce our consumable chips, and also had technical difficulties with our pin-tool nanoliter dispenser device. We have also experienced software and operational difficulties with our MassARRAY Compact system. Our reliance on outside vendors generally and a sole or a limited group of suppliers in particular involves several risks, including:

• the inability to obtain an adequate supply of properly functioning, required products, components, and materials due to capacity constraints, product defects, a discontinuance of a product by a supplier, or other supply constraints;

• reduced control over quality and pricing of products, components, and materials; and

• delays and long lead times in receiving products, components, or materials from vendors.

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We may not derive any revenues from our gene discoveries.

Our gene target discoveries are very early stage discoveries and we may not be able to license them and even if we do license them, they may not result in revenues for us and may not result in marketable products. Our technologies and approach to gene discovery may not enable any licensee to successfully identify the specific genes that cause or predispose individuals to the complex diseases that were the targets of our efforts. The diseases we targeted are generally believed to be caused by a number of genetic and environmental factors. It may not be possible to address such diseases through gene-based therapeutic or diagnostic products. Even if specific genes are identified, our discoveries may not lead to the development of commercial products, or otherwise generate revenue.

We and our licensees and collaborators may not be successful in developing or commercializing diagnostic or other products using our products, services, or discoveries.

Development of diagnostic or other products by us, our licensees, or our collaborators are subject to risks of failure inherent in the development and commercial viability of any such product, such as demand for such product. These risks further include the possibility that such product would:

• be found to be toxic, ineffective, unreliable, or otherwise inadequate or otherwise fail to receive regulatory approval;

• be difficult or impossible to manufacture on a commercial scale;

• be uneconomical to market;

• fail to be successfully commercialized if adequate reimbursement from government health administration authorities, private health insurers, and other organizations for the costs of these products is unavailable;

• be impossible to commercialize because they infringe on the proprietary rights of others or compete with products marketed by others that are superior; or

• fail to be commercialized prior to the successful marketing of similar products by competitors.

If a licensee discovers diagnostic products or we or a collaborator discover diagnostic or other products using our technology, products, services, or discoveries, we may rely on that licensee or collaborator (hereafter referred to as “partner”) for product development, regulatory approval, manufacturing, and marketing of those products before we can realize revenue and some or all of the milestone payments, royalties, or other payments we may be entitled to under the terms of the licensing or collaboration agreement. If we are unable to successfully achieve milestones or our partners fail to develop successful products, we will not earn the revenues contemplated. Our agreements may allow our partners significant discretion in electing whether to pursue any of these activities. We cannot control the amount and timing of resources our partners may devote to our programs or potential products. As a result, we cannot be certain that our partners will choose to develop or commercialize any products or will be successful in doing so. In addition, if a partner is involved in a business combination, such as a merger or acquisition, or changes its business focus, its performance under its agreement with us may suffer and, as a result, we may not generate any revenues or only limited revenues from the royalty, milestone, and similar payment provisions contained in our agreement with that partner.

We may not successfully obtain regulatory approval of any diagnostic or other product which we or our licensing or collaborative partners develop.

Products that we or our collaborators develop in the molecular medicine, diagnostic, or other markets, depending on their intended use, may be regulated as medical devices by the FDA and comparable agencies of other countries and require either premarket approval (PMA) or 510(k) clearance from the FDA, prior to marketing. The 510(k) clearance process usually takes from three to twelve months from submission, but can take longer. The premarket approval process is much more costly, lengthy, uncertain, and generally takes from six months to two years or longer from submission. In addition, commercialization of any diagnostic or other product that our licensees or collaborators or we develop would depend upon successful completion of preclinical testing and clinical trials. Preclinical testing and clinical trials are long, expensive, and uncertain processes, and we do not know whether we, our licensees or any of our collaborators, would be permitted or able to undertake clinical trials of any potential products. It may take us or our licensees or collaborators many years to complete any such testing, and failure could occur at any stage. Preliminary results of trials do not necessarily predict final results, and acceptable results in early trials may not be repeated in later trials. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Delays or rejections of potential products may be encountered based on changes in regulatory policy

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for product approval during the period of product development and regulatory agency review. If our projects reach clinical trials, we or our licensees or collaborators could decide to discontinue development of any or all of these projects at any time for commercial, scientific, or other reasons.

If the validity of the consents from volunteers were to be challenged, we could be forced to stop using some of our resources, which would hinder our gene discovery outlicensing efforts and our diagnostic product development efforts.

We have attempted to ensure that all clinical data and genetic and other biological samples that we receive from our subsidiaries and our clinical collaborators have been collected from volunteers who have provided our collaborators or us with appropriate consents for the data and samples provided for purposes which extend to include our gene discovery outlicensing activities and diagnostic product development activities. We have attempted to ensure that data and samples that have been collected by our clinical collaborators are provided to us on an anonymous basis. We have also attempted to ensure that the volunteers from whom our data and samples are collected do not retain or have conferred on them any proprietary or commercial rights to the data or any discoveries derived from them. Our clinical collaborators are based in a number of different countries, and to a large extent we rely upon our clinical collaborators for appropriate compliance with the voluntary consents provided and with local law and regulation. That our data and samples come from and are collected by entities based in different countries results in complex legal questions regarding the adequacy of consents and the status of genetic material under a large number of different legal systems. The consents obtained in any particular country could be challenged in the future, and those consents could prove invalid, unlawful or otherwise inadequate for our purposes. Any findings against us, or our clinical collaborators, could deny us access to or force us to stop using some of our clinical or genetic resources, which would hinder our gene discovery outlicensing efforts and our diagnostic product development efforts. We could become involved in legal challenges, which could consume a substantial proportion of our management and financial resources.

If we cannot obtain licenses to patented SNPs and genes, we could be prevented from obtaining significant revenue or becoming profitable.

The U.S. Patent and Trademark Office has issued and continues to issue patents claiming SNP and gene discoveries and their related associations and functions. If certain SNPs and genes are patented, we will need to obtain rights to those SNPs and genes to develop, use, and sell related assays and other types of products or services utilizing such SNPs and genes. Required licenses may not be available on commercially acceptable terms. If we were to fail to obtain licenses to certain patented SNPs and genes, we might never achieve significant revenue from our gene discovery outlicensing efforts or from diagnostic product development.

If the medical relevance of SNPs is not demonstrated or is not recognized by others, we may have less demand for our products and services and may have less opportunity to enter into diagnostic product development and commercialization collaborations with others.

Some of the products we hope to develop involve new and unproven approaches or involve applications in markets that we are only beginning to explore. They are based on the assumption that information about genes and SNPs may help scientists better understand complex disease processes. Scientists generally have a limited understanding of the role of genes and SNPs in diseases, and few products based on gene discoveries have been developed. We cannot be certain that genetic information will play a key role in the development of diagnostics or other products in the future, or that any genetic-based findings would be accepted by diagnostic, pharmaceutical, or biotechnology companies or by any other potential market or industry segment. If we or our customers or collaborators are unable to generate valuable information that can be used to develop diagnostics or other products, the demand for our products, applications, and services will be reduced and our business will be harmed.

We may not be able to form and maintain the collaborative relationships or the rights to third-party intellectual property and technologies that our business strategy requires and such relationships may lead to disputes over technology rights or product revenue, royalties, or other payments.

We form research collaborations and licensing arrangements with collaborators to operate our business successfully. To succeed, we will have to maintain our existing relationships and establish additional collaborations and licensing arrangements. Our current strategy includes pursuing partnering opportunities with larger companies interested in or involved in the development of pharmaceutical and diagnostic products to potentially advance our disease gene discoveries and related targets toward drug or diagnostic development. Our strategy also includes obtaining licenses to third-party intellectual property rights and technologies, such as our exclusive license to non-invasive prenatal diagnostic rights that we acquired from Isis Innovation Ltd, to potentially expand our product portfolio and generate additional sources of revenue. We cannot be sure that we will be able to establish any additional research collaborations, licensing arrangements, or other partnerships

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necessary to develop and commercialize products or that we can do so on terms favorable to us. If we are unable to establish these collaborations or licensing arrangements, we may not be able to successfully develop any diagnostic or other products or applications and generate any milestone, royalty, or other revenue from sales of these products or applications. If our collaborations or licensing arrangements are not successful or we are not able to manage multiple collaborations successfully, our programs will suffer and we may never generate any revenue from sales of products based on licensed rights or technologies or under these collaborative or licensing arrangements. If we increase the number of collaborations or licensing agreements, it will become more difficult to manage the various relationships successfully and the potential for conflicts among the collaborators and licensees or licensors will increase. Conflicts with our collaborators, licensees or licensors, or other factors may lead to disputes over technology or intellectual property rights or product revenue, royalties, or other payments which may adversely effect our business.

In addition, our government grants provide the government certain license rights to inventions resulting from funded work. Our business could be harmed if the government exercises those rights.

Because we exclusively licensed our non-invasive prenatal diagnostic rights from Isis Innovation Ltd. any dispute with Isis may adversely affect our ability to develop and commercialize diagnostic tests based on these licensed rights.

In October 2005, we entered into an exclusive license to non-invasive prenatal diagnostic rights with Isis Innovation Ltd. We intend to use the rights that we acquired under the license to develop non-invasive prenatal nucleic acid based tests. If there is any dispute between us and Isis Innovation regarding our rights under the license agreement, our ability to develop and commercialize these diagnostic tests may be adversely affected and could delay or completely terminate our product development efforts for these diagnostic tests.

If we do not succeed in obtaining development and marketing rights for products developed in collaboration with others, our revenue and profitability could be reduced.

Our business strategy includes, in part, the development of diagnostic and other products in collaboration with others, or utilizing the technology of others, and we intend to obtain commercialization or royalty rights to those products or technologies. If we are unable to obtain such rights, or are unable to do so on favorable financial terms, our revenue and profitability could be reduced. To date, we have initiated limited activities towards commercializing products developed in collaboration with, or utilizing the technology of, others. Even if we obtain commercialization rights, commercialization of products may require resources that we do not currently possess and may not be able to develop or obtain, or commercialization may be financially unattractive based upon the revenue-sharing terms offered by potential licensors or provided for in the relevant agreement.

Ethical, privacy, or other concerns about the use of genetic information could reduce demand for our products and services.

Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities may limit or otherwise regulate the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Such concerns may lead individuals to refuse to use genetics tests even if permitted. Any of these scenarios could reduce the potential markets for our products and services, which would seriously harm our business, financial condition, and results of operations.

If we breach any of the terms of our license or supply agreements, or these agreements are otherwise terminated or modified, the termination or modification of such agreements could result in our loss of access to critical components and could delay or suspend our commercialization efforts.

We have sourced or licensed components of our technology from other parties. For example, Bruker Daltonics supplies our mass spectrometers, Samsung Electronics supplies our pintools, and Majer Precision Engineering supplies the pins for the pintools. Our failure to maintain continued supply of such components, particularly in the case of sole suppliers, or the right to use these components would seriously harm our business, financial condition, and results of operations. With respect to our agreements with suppliers, our agreement with Samsung expired in October 2005, and our agreement with Bruker Daltonics may not be terminated without cause by either party prior to its expiration in 2006. In the event of any adverse developments with these vendors, our product supply may be interrupted which would have an adverse impact on our business. Changes to or termination of our agreements or inability to renew our agreements with these parties could result in the loss of access to these aspects of our technology or other intellectual property rights or technologies that we may acquire from time to time and could impair, delay, or suspend our commercialization efforts. While we negotiate for agreement

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periods or notice of termination periods that provide us reasonable periods of time to secure alternative supplies, and require that such agreements may not be terminated without advance notice arbitrarily or without good reason, such as uncured breach or insolvency, such provisions may not provide us with adequate time to secure alternative supplies, provide us with access to alternative technologies on commercially acceptable terms, or otherwise provide us with adequate protection.

We may not successfully integrate acquired businesses.

We may acquire additional businesses or technologies, or enter into other strategic transactions. Managing acquisitions entails numerous operational and financial risks, including:

• the inability to retain key employees of any acquired businesses or hire enough qualified personnel to staff any new or expanded operations;

• the impairment of relationships with key customers of acquired businesses due to changes in management and ownership of the acquired businesses;

• the inability to sublease on financially acceptable terms excess leased space or terminate lease obligations of acquired businesses that are not necessary or useful for the operation of our business;

• the exposure to federal, state, local and foreign tax liabilities in connection with any acquisition or the integration of any acquired businesses;

• the exposure to unknown liabilities;

• higher than expected acquisition and integration expenses that would cause our quarterly and annual operating results to fluctuate;

• increased amortization expenses if an acquisition results in significant intangible assets;

• combining the operations and personnel of acquired businesses with our own, which would be difficult and costly;

• disputes over rights to acquired technologies or with licensors or licensees of those technologies; and

• integrating or completing the development and application of any acquired technologies, which would disrupt our business and divert management’s time and attention.

We may not be able to successfully compete in the biotechnology industry.

The biotechnology industry is highly competitive. We expect to compete with a broad range of companies in the United States and other countries that are engaged in the development and production of products, applications, services, and strategies to analyze genetic information and strategies to develop and commercialize therapeutic, diagnostic, and other products for customers in the clinical research and clinical marker validation and molecular medicine fields as well as diagnostic service laboratories, animal testing & food safety labs, and customers in other markets. They include:

• biotechnology, pharmaceutical, diagnostic, chemical, and other companies;

• academic and scientific institutions;

• governmental agencies; and

• public and private research organizations.

Many of our competitors have much greater financial, technical, research, marketing, sales, distribution, service, and other resources than we do. Our competitors may offer broader product lines and services and have greater name recognition than we do. Several companies are currently making or developing products that compete with our products. Our competitors may develop or market technologies or products that are more effective or commercially attractive than our current or future products, or that may render our technologies or products obsolete.

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We may potentially compete with our customers, which may adversely affect our business.

We have sold MassARRAY systems worldwide to pharmaceutical and biotechnology companies, academic research centers, and government laboratories. Some of our customers use our DNA analysis products to perform genetics studies on their own disease populations for potential diagnostic and drug target identification in the same or similar manner as we have done. Although there are many potential disease areas and diagnostic applications, our customers may develop diagnostic assays or may target diseases areas that may overlap with those that we have chosen to pursue. In such cases we may potentially compete against our customers. Competition from our customers may adversely affect our or our collaborators’ ability to successfully commercialize diagnostic products.

Our ability to compete in the market may decline if we lose some of our intellectual property rights.

Our success will depend on our ability to obtain and protect patents on our technology, to protect our trade secrets, and to maintain our rights to licensed intellectual property or technologies. Our patent applications or those of our licensors may not result in the issue of patents in the United States or other countries. Our patents or those of our licensors may not afford meaningful protection for our technology and products. Others may challenge our patents or those of our licensors, and as a result, our patents or those of our licensors could be narrowed or invalidated or become unenforceable. Competitors may develop products similar to ours that do not conflict with our patents or patent rights. Others may develop products for use with the MassARRAY system in violation of our patents or those of our licensors, or by operating around our patents or license agreements, which could reduce sales of our consumables. To protect or enforce our patent rights, we may initiate interference proceedings, oppositions, or litigation against others. For example, in December 2001, we filed a complaint for declaratory judgment of patent non-infringement and invalidity against Myriad Genetics, Inc., in response to letters received from Myriad and its attorneys in which Myriad asserted its belief that we were engaging in activities that infringed Myriad’s purported patent rights under a specific U.S. patent. In March 2002, we entered into a settlement agreement under which we acquired ownership of such patent rights and all parties agreed to dismiss the lawsuit with prejudice, and such dismissal was subsequently ordered by the court. As a result of the settlement, our products and services were not affected. However, these activities are expensive, take significant time and divert management’s attention from other business concerns. The patent position of biotechnology companies generally is highly uncertain and involves complex legal and factual questions that are often the subject of litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under biotechnology patents. There is a substantial backlog of biotechnology patent applications at the U.S. Patent and Trademark Office, and the approval or rejection of patent applications may take several years.

Our success will depend partly on our ability to operate without infringing on or misappropriating the proprietary rights of others.

We may be accused of infringing on the patent rights or misappropriating the proprietary rights of others. From time to time, we receive letters from companies regarding their issued patents and patent applications alleging or suggesting possible infringement. Generally these letters are offers to license and fail to provide adequate evidence or state the basis for a reasonable claim that we are engaging in any infringing activity. In addition, in August 2004, we were named as a defendant in a complaint filed by a former employee, who asserts a claim for ownership and patent rights for all inventions claimed in patents to which he contributed while employed in Germany. These patents are asserted to include coverage for key elements of our MassARRAY technology, among other patents. In April 2005, we entered into a settlement with the plaintiff providing for dismissal of the complaint with prejudice and a complete and full release of all claims against us. Dismissal of the complaint was entered by the court on April 25, 2005. Intellectual property litigation is costly, and, even if we prevail, the cost of such litigation would adversely affect our business, financial condition, and results of operations. Litigation is also time consuming and would divert management’s attention and resources away from our operations and other activities. If we were not to prevail in any litigation, in addition to any damages we would have to pay, we could be required to stop the infringing activity or obtain a license. Any required license might not be available to us on acceptable terms. Some licenses might be non-exclusive, and our competitors could have access to the same technology licensed to us. If we were to fail to obtain a required license or were unable to design around a patent, we would be unable to sell or continue to develop some of our products, which would have a material adverse affect on our business, financial condition, and results of operations.

The rights we rely upon to protect the intellectual property underlying our products may not be adequate, which could enable others to use our technology and reduce our ability to compete with them.

We require our employees, consultants, advisors, and collaborators to execute confidentiality agreements and in certain cases, assignment or license agreements. We cannot guarantee that these agreements will provide us with adequate intellectual property ownership or protection against improper or unauthorized use or disclosure of confidential information or inventions. In some situations, these agreements may conflict with or be subject to the rights of others with whom our

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employees, consultants, advisors, or collaborators have prior employment or consulting relationships. In some situations, these agreements or relationships may conflict with or be subject to foreign law which may provide us with less favorable rights or treatment than under U.S. law. Others may gain access to our inventions, trade secrets or independently develop substantially equivalent proprietary materials, products, information, and techniques.

If we cannot attract and retain highly-skilled personnel, our growth might not proceed as rapidly as we intend.

The success of our business will depend on our ability to identify, attract, hire, train, retain, maintain, and motivate highly skilled personnel, particularly sales, scientific, medical, and technical personnel, for our future success. Competition for highly skilled personnel is intense, and we might not succeed in attracting and retaining these employees. If we cannot attract and retain the personnel we require, we would not be able to expand our business as rapidly as we intend. In particular, if we lose any key member of our management team, we may not be able to find suitable replacements and our business may be harmed as a result. During the past 18 months, we have had substantial turnover in our management team and have engaged in substantial headcount reductions. If our management team is not able to effectively manage us through these restructuring changes and transitions, our business, financial condition, and results of operations may be adversely affected. We do not carry “key person” insurance covering any of our officers or other employees.

If we do not effectively manage our business as it evolves, it could affect our ability to pursue opportunities and expand our business.

Evolution in our business has placed and may continue to place a significant strain on our personnel, facilities, management systems, and resources. We will need to continue to improve our operational and financial systems and managerial controls and procedures and train and manage our workforce. We will have to maintain close coordination among our various departments. If we fail to effectively manage the evolution of our business and the significant restructuring changes that we have experienced, our ability to pursue business opportunities, expand our business, and sell our products and applications in new markets may be adversely affected.

We are subject to risks associated with our foreign operations.

We expect that a significant portion of our sales will continue to be made outside the United States. Approximately 43% and 52% of our sales were made outside of the United States in the three months ended March 31, 2006 and 2005, respectively. A successful international effort will require us to develop relationships with international customers and collaborators, including distributors. We may not be able to identify, attract, retain, or maintain suitable international customers or collaborators. Expansion into international markets will require us to establish and grow foreign operations, hire additional personnel to run these operations, and maintain good relations with our foreign customers and collaborators or distributors. International operations also involve a number of risks not typically present in domestic operations, including:

• currency fluctuation risks;

• changes in regulatory requirements;

• costs and risks of deploying systems in foreign countries;

• licenses, tariffs, and other trade barriers;

• political and economic instability and possible country-based boycotts;

• difficulties in staffing and managing foreign operations;

• potentially adverse tax consequences;

• the burden of complying with a wide variety of complex foreign laws and treaties; and

• different rules, regulations, and policies governing intellectual property protection and enforcement.

Our international operations are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether tariffs or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries.

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If our production and laboratory facilities are damaged, our business would be seriously harmed.

Our only production facility is located in San Diego, California, where we also have laboratories. Damage to our facilities due to war, fire, natural disaster, power loss, communications failure, terrorism, unauthorized entry, or other events could prevent us from conducting our business for an indefinite period, could result in a loss of important data or cause us to cease development and production of our products. We cannot be certain that our limited insurance to protect against business interruption would be adequate or would continue to be available to us on commercially reasonable terms, or at all.

Responding to claims relating to improper handling, storage or disposal of hazardous chemicals, and radioactive and biological materials which we use could be time consuming and costly.

We use controlled hazardous and radioactive materials in the conduct of our business, as well as biological materials that have the potential to transmit disease. The risk of accidental contamination or injury from these materials cannot be completely eliminated. If an accident with these substances occurs, we could be liable for any damages that result, which could seriously harm our business. Additionally, an accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs. Such damage and any expense resulting from delays, disruptions, or any claims may not be covered by our insurance policies.

We may not have adequate insurance if we become subject to product liability or other claims.

Our business exposes us to potential product liability and other types of claims. We have product and general liability insurance that covers us against specific product liability and other claims up to an annual aggregate limit of $5 million. Any claim in excess of our insurance coverage would have to be paid out of our cash reserves, which would have a detrimental effect on our financial condition. It is difficult to determine whether we have obtained sufficient insurance to cover potential claims. Also, we cannot assure you that we can or will maintain our insurance policies on commercially acceptable terms, or at all.

Our stock price has been and may continue to be volatile, and your investment could suffer a decline in value.

The trading price of our common stock has been volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including but not limited to:

• actual or anticipated variations in quarterly and annual operating results;

• the status of and any developments with respect to our proposed financing;

• announcements of technological innovations by us or our competitors;

• our success in entering into, and the success in performing under, licensing and product development and commercialization agreements with others;

• changes in securities analysts’ earnings projections or securities analysts’ recommendations;

• general market conditions out of our control.

The stock market in general, and the NASDAQ National Market and the market for life sciences companies in particular, have experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of the listed companies. There have been dramatic fluctuations in the market prices of securities of biotechnology and pharmaceutical companies. These price fluctuations may be rapid and severe and may leave investors little time to react. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. Sharp drops in the market price of our common stock expose us to securities class-action litigation. Such litigation could result in substantial expenses and a diversion of management’s attention and resources, which would seriously harm our business, financial condition, and results of operations. For example, in November 2001, we and certain of our current or former officers and directors were named as defendants in a class action shareholder complaint filed by Collegeware USA, which alleged that the underwriters in our initial public offering, certain of our officers and directors and we violated the federal securities laws because our registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by and the stock allocation practices of the underwriters. Similar complaints were filed against hundreds of other public companies that conducted initial public offerings

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of their common stock in the late 1990s and 2000. Additional information regarding this complaint and the settlement pending before the court is included under Item 1 of Part II of this report.

We have adopted anti-takeover provisions that may limit the ability of another party to acquire us and may prevent or frustrate any stockholder’s attempt to change the direction or management of us and that could cause our stock price to decline.

Various provisions of our certificate of incorporation and bylaws and Delaware law may discourage or prevent a third party from acquiring us, even if doing so would benefit our stockholders. In addition, these provisions may prevent or frustrate any stockholder attempt to change our direction or management. These provisions provide for, among other things, a classified board of directors, by which approximately one third of the directors are elected each year, advance notice requirements for proposals that can be acted upon at stockholder meetings and limitations on who may call stockholder meetings. In October 2001, we adopted a stockholder rights plan. Pursuant to our stockholders rights plan, each share of our outstanding common stock has an associated preferred share purchase right. The rights will not trade separately from our common stock until, and are exercisable only upon, the acquisition or potential acquisition by a person or group of or the tender offer for 15% or more of our common stock. In connection with the proposed financing, we amended our stockholder rights plan so that it would not be triggered by the proposed financing and would terminate automatically immediately prior to the closing of the financing. In connection with soliciting stockholder approval of the proposed financing, we are required to request that our stockholders approve amendments to our certificate of incorporation and bylaws effective upon the closing of the financing to (i) remove the classification of our board of directors (ii) remove the prohibition on stockholders acting by written consent, (iii) remove the requirement that certain actions must be approved either by a supermajority of 66 ²/3% of the directors or by the holders of a supermajority of 66 ²/3% of the shares outstanding and (iv) allow the holders of a majority of the shares outstanding to call special meetings as well as to update the bylaws generally. If the stockholders do not approve these proposals, we are required to resubmit these proposals to our stockholders after the closing of the financing. Once the board is no longer classified, all directors will be subject to stockholder approval at each annual meeting of stockholders. In October 2004, we entered into an agreement with Siemens AG whereby we agreed to provide Siemens with written notice of written offers from a third party involving the sale of, transfer of, or license to, all or substantial parts of our assets or the acquisition of the majority of our shares, and agreed to consider any written bid for the same or substantially the same assets or shares submitted by Siemens for a 30 business day period following such notification. We provided notice to Siemens in connection with the proposed financing and they elected to participate as a purchaser. As a result of these provisions, we could delay, deter or prevent a takeover attempt or third party acquisition that our stockholders consider to be in their best interests, including a takeover attempt that results in the payment of a premium for our common stock. The anti-takeover effect of these provisions will be substantially reduced in connection with the closing of the proposed financing. Our board of directors, without further approval of the stockholders, is authorized to issue “blank check” preferred stock and to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences and any other rights, preferences, privileges, and restrictions applicable to this preferred stock. The issuance of preferred stock could adversely affect the voting power of the holders of our common stock, making it more difficult for a third party to gain control of us, discouraging premium bids for our common stock or otherwise adversely affecting the market price of our common stock.

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Item 6. Exhibits

(a) Exhibits

Exhibit Number	Description of Document
3.1(1)	Amended and Restated Certificate of Incorporation of the Registrant
3.2(2)	Bylaws of Registrant, as amended
3.3(3)	Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock
4.1(1)	Specimen common stock certificate
4.2(3)	Rights Agreement dated as of October 22, 2001 between the Registrant and American Stock and Transfer & Trust Company.
4.3(4)	Amendment to Rights Agreement dated March 27, 2006 between the Registrant and American Stock Transfer & Trust Company.
10.41(5)	Amended and Restated Securities Purchase Agreement dated March 30, 2006 by and between the Registrant, ComVest Investment Partners II LLC, LB I Group Inc., Pequot Private Equity Fund IV, L.P. and Siemens Venture Capital Gmbh
10.42 (5)	Form of Registration Rights Agreement to be entered into by and among the Registrant, ComVest Investment Partners II LLC, LB I Group Inc., Pequot Private Equity Fund IV, L.P. and Siemens Venture Capital Gmbh
10.43(5)	Form of Warrant to be issued pursuant to the Amended and Restated Securities Purchase Agreement dated March 30, 2006.
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).
31.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).
32.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) and 15d-14(b).
32.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) and 15d-14(b).

(1) Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (No. 333-91665), as amended.

(2) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.

(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed October 23, 2001.

(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed March 28, 2006.

(5) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed April 3, 2006.

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SIGNATURE

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

	Sequenom, INC.
Dated: May 15, 2006	By:	/s/ HARRY STYLLI
		Harry Stylli
		President and Chief Executive Officer

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