Sequenom 10Q 2006 Q3 Quarterly report

Sequenom (SQNM) Inactive 10-Q2006 Q3 Quarterly report

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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 September 30, 2006

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

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 November 1, 2006 was 33,425,533.

SEQUENOM, INC.

FORM 10-Q

INDEX


		Page No.
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – as of September 30, 2006 (unaudited) and December 31, 2005	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (unaudited)	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	18

Item 4.	Controls and Procedures	19

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 6.	Exhibits	34

Signatures		35

Exhibit 10.54
Exhibit 10.55
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I - FINANCIAL INFORMATION

ITEM 1:

FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value and share information)


	September 30, 2006			December 31, 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,884		$	1,885
Short-term investments		26,191			4,158
Restricted cash and investments		1,450			2,571
Accounts receivable, net		3,354			2,321
Inventories, net		3,329			4,161
Other current assets and prepaid expenses		1,020			738

Total current assets		37,228			15,834
Equipment and leasehold improvements, net		4,390			5,621
Intangible assets, net		471			2,316
Restricted cash and investments, net of current portion		54			64
Other assets		587			601

Total assets	$	42,730		$	24,436

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,106		$	3,532
Accrued expenses		4,775			4,981
Accrued acquisition and integration costs		229			226
Deferred revenue		1,110			1,299
Current portion of long-term bank debt		—			200
Current portion of capital lease obligations		—			193

Total current liabilities		9,220			10,431
Deferred revenue, less current portion		179			202
Other long-term liabilities		2,191			413
Long-term accrued acquisition and integration costs, less current portion		778			950
Long-term deferred tax liability		—			697
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, par value $0.001; 5,000,000 shares authorized		—			—
Common stock, par value $0.001; 185,000,000 and 75,000,000 shares authorized at September 30, 2006 and December 31, 2005, respectively; 33,425,533 and 13,409,542 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively (See Note 1)		60			40
Additional paid-in capital		484,552			453,796
Accumulated other comprehensive income		555			467
Accumulated deficit		(454,805	)		(442,560	)

Total stockholders’ equity		30,362			11,743

Total liabilities and stockholders’ equity	$	42,730		$	24,436

See accompanying notes.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in thousands, except per share information)


	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
	(Unaudited)						(Unaudited)
Revenue:
Consumables	$	3,175		$	2,846		$	9,177		$	8,244
MassARRAY and other product related		2,956			1,694			10,456			6,428
Services		350			—			554			—
Research and other		29			27			422			351

Total operating revenue		6,510			4,567			20,609			15,023

Costs and expenses:
Cost of product revenue		2,744			2,032			8,427			7,805
Cost of service revenue		188			—			253			—
Research and development		3,009			2,589			7,900			8,912
Selling and marketing		2,672			2,837			7,776			8,535
General and administrative		2,688			2,380			8,328			8,586
Restructuring charges		2			526			6			314
Amortization of acquired intangibles		504			504			1,511			1,511

Total costs and expenses		11,807			10,868			34,201			35,663

Loss from operations		(5,297	)		(6,301	)		(13,592	)		(20,640	)
Interest income, net		402			75			523			253
Other income (loss), net		22			(44	)		128			207

Loss before income taxes		(4,873	)		(6,270	)		(12,941	)		(20,180	)
Deferred income tax benefit		232			232			695			697

Net loss	$	(4,641	)	$	(6,038	)	$	(12,246	)	$	(19,483	)

Net loss per share, basic and diluted	$	(0.14	)	$	(0.46	)	$	(0.56	)	$	(1.47	)

Weighted average shares outstanding, basic and diluted (See Note 1)		33,423			13,269			21,958			13,262

See accompanying notes.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Nine months ended September 30,
	2006			2005
	(Unaudited)
Operating activities
Net loss	$	(12,246	)	$	(19,483	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense		892			351
Depreciation and amortization		3,085			3,910
Other non-cash items		2,336			397
Deferred income tax benefit		(697	)		(697	)
Changes in operating assets and liabilities:
Inventories		882			624
Accounts receivable		(974	)		101
Other current assets		(252	)		(833	)
Accounts payable and accrued expenses		(723	)		895
Deferred revenue		(256	)		610
Other liabilities		(145	)		620

Net cash used in operating activities		(8,098	)		(13,505	)

Investing activities
Purchase of equipment, leasehold improvements and intangibles		(536	)		(1,672	)
Net change in restricted cash		1,141			1,760
Purchases of marketable investment securities		(32,156	)		(1,700	)
Sales of marketable investment securities		6,946			6,502
Maturities of marketable investment securities		3,176			10,700

Net cash (used in) provided by investing activities		(21,429	)		15,590

Financing activities
Payments on capital lease obligations		(193	)		(345	)
Payments of long-term debt		(200	)		(2,649	)
Proceeds from exercise of stock options and ESPP purchases		26			73
Proceeds from issuance of common stock and warrants		29,865			—

Net cash provided by (used in) financing activities		29,498			(2,921	)

Net decrease in cash and cash equivalents		(29	)		(836	)
Effect of exchange rate changes on cash and cash equivalents		28			(193	)
Cash and cash equivalents at beginning of period		1,885			3,589

Cash and cash equivalents at end of period	$	1,884		$	2,560

See accompanying notes.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006

(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. Certain reclassifications have been made to the prior period amounts to conform to the current presentation.

On May 31, 2006, in conjunction with our annual meeting of stockholders, our stockholders approved amendments to our certificate of incorporation to effect a reverse stock split of our common stock and to increase the number of authorized shares of common stock to 185,000,000. On June 1, 2006, we completed a 1-for-3 reverse stock split of our common stock. Accordingly, all share, warrant, option and per share information for all periods presented has been restated to account for the effect of the reverse stock split.

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 $454.8 million as of September 30, 2006. Our capital requirements to sustain operations, including research and development projects, have been and will continue to be significant. In June 2006, we closed a private placement financing that provided us with approximately $30 million of net proceeds from the sale of common stock and warrants to purchase shares of common stock. As of September 30, 2006, we had available cash and short-term investments totaling $28.1 million and working capital of $28.0 million. During the first nine months of 2006, we incurred a net loss of $12.2 million and used $8.1 million in cash, restricted cash, and short-term investments in our operating activities. We expect that our current cash and short-term investments will be sufficient to fund our operating expenses and capital requirements through at least 2007.

(3) Comprehensive 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 September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Comprehensive loss:
Net loss	$	(4,641	)	$	(6,038	)	$	(12,246	)	$	(19,483	)
Unrealized gains (losses) on available-for-sale securities		—			32			(2	)		38
Foreign currency translation adjustments		17			6			90			(321	)

Comprehensive loss	$	(4,624	)	$	(6,000	)	$	(12,158	)	$	(19,766	)

(4) Net Loss Per Share

In accordance with SFAS No. 128,Earnings Per Share, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net 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) Stockholders’ Equity

In June 2006, we closed a private placement financing that provided us with approximately $30.0 million of net proceeds from the sale of 19,999,998 shares of common stock and seven year warrants to purchase up to an additional 11,999,999 shares of common stock, subject to certain adjustment provisions. In conjunction with the private placement financing and our annual meeting of stockholders, our stockholders approved amendments to our certificate of incorporation to effect a reverse stock split and increase the number of authorized shares of common stock to 185,000,000. On June 1, 2006, we completed a 1-for-3 reverse stock split of our common stock. Accordingly, all share, warrant, option and per share information for all periods presented has been restated to account for the effect of the reverse stock split.

(6) Share-Based Compensation

Effective January 1, 2006, the benefits provided under our share-based compensation plans are 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. 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 and nine months ended September 30, 2006 includes $364,000 and $886,000, respectively, of compensation expense related to our share-based compensation awards. The compensation expense for the three and nine months ended September 30, 2006, respectively, related to our share-based compensation arrangements is recorded as components of research and development expense ($74,000 and $193,000), selling and marketing expense ($45,000 and $116,000) and general and administrative expense ($245,000 and $577,000). 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 condensed consolidated statements of cash flows.

We issue new shares upon the exercise of stock options.

Share-Based Compensation Plans

Stock Compensation Plans

On May 31, 2006, the stockholders approved our 2006 equity incentive plan, or 2006 plan, as the successor to our 1999 stock option plan, or 1999 plan. In connection with the adoption of the 2006 plan, we terminated the automatic annual increase feature under the 1999 plan and resolved to cease to grant additional stock awards under the 1999 plan following the effectiveness of the 2006 plan. The aggregate number of shares of common stock that may be issued under the 2006 plan is 7,282,158, plus the number of shares subject to any stock awards under the 1999 plan that terminate or are forfeited or repurchased and would otherwise have been returned to the share reserve under the 1999 plan.

Restricted Stock Awards and Deferred Compensation

During the year ended December 31, 2004, we issued 245,500 shares of restricted stock awards with a weighted average grant date fair value of $2.61 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, or 1999 ESPP. As of September 30, 2006, we had reserved 662,596 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 166,666 shares. The 1999 ESPP will have a series of concurrent offering periods, each with a maximum duration of 24 months. Shares are purchased semi-annually at 85% of the lower of the beginning or end of the period price. As of September 30, 2006, employees have contributed approximately $9,000 to the current offering period of the 1999 ESPP, and we did not recognized any share-based compensation expense related to the anticipated purchase on January 31, 2007.

Warrants

In connection with the acquisition of Axiom Biotechnologies in 2002, the outstanding warrant to purchase 22,000 Axiom ordinary shares at an exercise price of $3.50 was adjusted to be exercisable for 1,535 shares of our common stock at an exercise price of $50.19 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 35,503 shares of our common stock at an exercise price of $9.45 per share upon our initial public offering. These warrants expire in May 2007. As of September 30, 2006, 11,694 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 50,000 shares of our common stock with an exercise price of $2.64 per share. The warrant expires in October 2015. As of September 30, 2006, all of the warrants are exercisable and remain outstanding.

In connection with the private placement financing completed in June 2006, we issued to the investors warrants to purchase an aggregate of 11,999,999 shares of our common stock at an exercise price of $2.10 per share. These warrants expire in June 2013. Additionally, we issued to our placement agent in conjunction with the private placement financing a warrant to purchase an aggregate of 866,666 shares of our common stock at an exercise price of $2.52 per share. This warrant expires in June 2011. As of September 30, 2006, all of the warrants issued in conjunction with the private placement financing are exercisable and remain outstanding.

Stock Options

The exercise price of all stock options granted during the nine months ended September 30, 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 three and nine months ended September 30, 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 and nine months ended September 30, 2006 and 2005:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2006	2005	2006	2005
Risk free interest rates	5.0%	3.9%	4.6% - 5.0%	3.9 – 4.5%
Volatility	101%	94%	101%	94 - 100%
Dividend yield	0%	0%	0%	0%
Expected option term (years)	6.7	6.0	6.7	6.0
Weighted average fair value of stock option grants	$1.49	$2.65	$1.60	$2.80

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.

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% 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.

A summary of the status of our stock option plans as of September 30, 2006 and of changes in stock options outstanding under the plans during the nine months ended September 30, 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	1,829,242		$	13.21
Granted	1,959,912			1.91
Canceled	(694,158	)		10.53
Exercised	—			—

Outstanding at September 30, 2006	3,094,996		$	6.66	8.6	$	500,106

Options vested and exercisable at September 30, 2006	899,063		$	17.53	6.3	$	27,205

As of September 30, 2006, there was $2.6 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 2.64 years. Cash received from stock option exercises for the nine months ended September 30, 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 September 30, 2005			Nine Months Ended September 30, 2005
Net loss as reported	$	(6,038	)	$	(19,483	)
Add: Stock-based compensation expense included in reported net loss	$	89		$	342
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards	$	(413	)	$	(1,387	)

Pro forma net loss	$	(6,362	)	$	(20,528	)

Net loss per share, basic and diluted, as reported	$	(0.46	)	$	(1.47	)
Pro forma net loss per share, basic and diluted	$	(0.48	)	$	(1.55	)

(7) 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):


	September 30, 2006		December 31, 2005
Raw materials	$	2,003	$	2,410
Work in process		17		—
Finished goods		1,309		1,751

Total	$	3,329	$	4,161

Inventories are shown net of excess and obsolescence reserves of $1.9 million and $3.1 million at September 30, 2006 and December 31, 2005, respectively.

(8) Acquisition and Integration Costs

As of September 30, 2006, we had approximately $1.0 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 for the nine months ended September 30, 2006 was as follows (in thousands):


	Balance at December 31, 2005		Deductions			Balance at September 30, 2006
Costs to close facilities and exit lease commitments	$	1,177	$	(171	)	$	1,006

(9) 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 September 30, 2006, we no longer had an accrued balance in respect of the restructuring charges.

(10) 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 nine months ended September 30, 2006 were as follows (in thousands):


Balance as of December 31, 2005	$	405
Additions charged to cost of revenues		1,055
Repairs and replacements		(580	)

Balance as of September 30, 2006	$	880

(11) 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 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. The settlement is still subject to statutory notice requirements as well as final judicial approval. The Court’s decision on final approval of the settlement remains pending. 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.

(12) Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that we recognize the impact of a tax position in our financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN No. 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We do not expect the adoption of FIN No. 48 to have a material impact on our consolidated results of operations and financial position.

In September 2006, the SEC issued SAB No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We do not expect the adoption of SAB No. 108 to have a material impact on our consolidated results of operations and financial position.

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

(13) Subsequent Events

On November 3, 2006, we entered into a Supply Agreement with Bruker Daltonics Inc., pursuant to which Bruker will continue to supply us with mass spectrometers for incorporation into our MassARRAY^® Compact System products, as well as related spare parts. During the term of the Supply Agreement, which ends on December 31, 2008, we are obligated to purchase exclusively from Bruker and Bruker is obligated to supply exclusively to us, subject to certain forecast provisions, our requirements for linear MALDI-TOF mass spectrometers. Subject to certain permitted variances, we have agreed to purchase a minimum number of mass spectrometers for approximately $3.8 million for periodic deliveries in 2007.

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 research services to customers as a complement or 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 and commercialization plans are also directed to the development and commercialization of diagnostic tests, particularly non-invasive prenatal diagnostics, for use on the MassARRAY system and 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:

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

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a coated silicon chip known as the SpectroCHIP bioarray;

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

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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.

MassARRAY technology is accepted as a leading high-performance DNA analysis system. Our customers include clinical research laboratories, biotechnology companies, academic institutions 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 and is the source 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.

The needs of these markets differ significantly. The academic research market requires very high data density per sample, high sample throughput and is price competitive. The clinical analysis market is typically interested in a well defined number of markers per sample, 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 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, genetic service laboratories, and animal testing laboratories.

Our product revenues consist of revenues from the sales of MassARRAY hardware, software, consumables, and maintenance agreements. The impact of our MassARRAY Compact system, our iPLEX and iPLEX Gold assays, 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 $454.8 million as of September 30, 2006. Our capital requirements to sustain operations, including research and development, have been and will continue to be significant. As of September 30, 2006, we had available cash and short-term investments totaling $28.1 million and working capital of $28.0 million. On June 6, 2006, we completed a financing transaction involving the sale of 19,999,998 shares of common stock and warrants to purchase an aggregate of 11,999,999 shares of our common stock, which resulted in net proceeds to us of approximately $30.0 million. Based on our current cash availability and plans, we believe our cash, cash equivalents, and short-term investments will be sufficient to fund our operating expenses and capital requirements through at least 2007.

Results of Operations for the Three and Nine Months Ended September 30, 2006 and 2005

Revenues

Total revenues for the three months ended September 30, 2006 increased to $6.5 million from $4.6 million for the same period in 2005. Total revenues for the nine months ended September 30, 2006 increased to $20.6 million from $15.0 million for the same period in 2005.

For the three and nine months ended September 30, 2006 compared to the three and nine months ended September 30, 2005, consumable revenues increased to $3.2 million and $9.2 million, respectively, from $2.8 million and $8.2 million primarily due to increased demand for our iPLEX assay.

MassARRAY and other product related revenue was $2.9 million and $10.5 million, respectively, for the three and nine months ended September 30, 2006, compared to $1.7 million and $6.4 million, respectively, for the same periods in 2005. The increase of $1.2 million for the three months ended September 30, 2006 compared to the three months ended September 30, 2005 was primarily due to an increase in MassARRAY system hardware sales to $2.4 million for the three months ended September 30, 2006 from $1.0 million for the same period in 2005. The increase of $4.0 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was primarily due to an increase in MassARRAY system hardware sales to $8.8 million for the nine months ended September 30, 2006 from $4.6 million for the same period in 2005. Revenue from other product sales, including MassARRAY system maintenance contracts, license fees and royalties, for the three months ended September 30, 2006 and 2005 was $0.5 million and $0.7 million, respectively. Revenue from other product sales, including MassARRAY system maintenance contracts, license fees and royalties, for the nine months ended September 30, 2006 and 2005 was $1.6 million and $1.8 million, respectively.

We recorded service revenues of $0.4 million and $0.6 million, respectively, for the three and nine months ended September 30, 2006. We expect service revenues to continue to increase during the remainder of 2006.

Research and other revenues were approximately $29,000 and $0.4 million, respectively, for the three and nine months ended September 30, 2006 compared to $27,000 and $0.4 million, respectively, for the three and nine months ended September 30, 2005. The timing of research revenues depends upon our expenditures on grant research and our receipt of grant funding from sponsoring agencies. During the nine months ended September 30, 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.

Cost of product and service revenues and gross margin

Cost of product revenues for the three and nine months ended September 30, 2006 were $2.7 million and $8.4 million, respectively, compared to $2.0 million and $7.8 million, respectively in the same periods of 2005. Gross margins on product sales for the three and nine months ended September 30, 2006 were 56% and 59%, respectively, compared to 55% and 47%, respectively for the same periods 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 and nine months ended September 30, 2006 were $0.2 million and $0.3 million, respectively. 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 increased to $3.0 million for the three months ended September 30, 2006 from $2.6 million for the same period in 2005, and decreased to $7.9 million in the nine months ended September 30, 2006 from $8.9 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 increase in research and development expenses of $0.4 million for the three months ended September 30, 2006 compared to the same period in 2005 primarily relates to increased consulting on research and development projects of $0.3 million and increased operating supplies of $0.1 million. The decrease in research and development expenses of $1.0 million for the nine months ended September 30, 2006 compared to the same period in 2005 primarily relates to reduced salaries, personnel and related allocation costs of $1.1 million, lower depreciation charges of $0.3 million, partially offset by higher spending on consulting for research and development projects of $0.4 million.

Selling and marketing expenses

Selling and marketing expenses for the three months ended September 30, 2006 and 2005 were $2.7 million and $2.8 million, respectively. Selling and marketing expenses for the nine months ended September 30, 2006 and 2005 were $7.8 million and $8.5 million, respectively. These expenses consisted primarily of salaries and related expenses for sales and marketing, customer support, and business development personnel and their related department expenses.

The decrease in selling and marketing expenses of $0.1 million for the three months ended September 30, 2006 compared to the same period in 2005 primarily relates to reduced depreciation charges of $0.2 million, partially offset by increased spending to establish direct sales in China of $0.1 million. The decrease in selling and marketing expenses of $0.7 million for the nine months ended September 30, 2006 compared to the same period in 2005 primarily relates to reduced depreciation charges of $0.5 million, lower promotional and advertising expense $0.3 million, lower operating supplies of $0.2 million, and lower miscellaneous costs of $0.1 million, offset by increased salaries, personnel and related allocations of $0.2 million and increased spending to establish direct sales in China of $0.2 million.

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2006 were $2.7 million, compared to $2.4 million for the same period in 2005. General and administrative expenses for the nine months ended September 30, 2006 were $8.3 million, compared to $8.6 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 increase of $0.3 million for the three months ended September 30, 2006 from the same period in 2005 was primarily due to an increase in share-based payment expenses of $0.2 million and patent related legal fees of $0.1 million. The decrease of $0.3 million for the nine months ended September 30, 2006 from the same period in 2005 primarily relates to reduced salaries and personnel costs of $1.1 million partially offset by increases in share-based payment expense of $0.4 million and legal related expenses of $0.4 million.

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 $0.4 million and $0.5 million, respectively, for the three and nine months ended September 30, 2006, compared to $0.1 million and $0.3 million, respectively, for the same periods in 2005. The increase was primarily due to the increased cash balance as a result of our private placement of common stock and warrants in June 2006.

Deferred income tax benefit

The deferred tax benefit of $0.2 and $0.7 million, respectively, for the three and nine months ended September 30, 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.

Share-based compensation

The benefits provided under our share compensation plan is 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 three and nine months ended September 30, 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 and nine months ended September 30, 2006 was $0.4 million and $0.9 million, respectively.

At September 30, 2006, total unrecognized, estimated share-based compensation expense related to unvested stock options granted prior to that date was $2.6 million, which is expected to be recognized over a weighted average period of 2.64 years. Net stock options, after forfeitures and cancellations, granted during each of the three months ended September 30, 2006 and 2005 represented 0.9% and 0%, respectively, of outstanding shares as of the beginning of each fiscal quarter. Total stock options granted during the three months ended September 30, 2006 and 2005 represented 1.1% and 0% 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 6 to the Condensed Consolidated Financial Statements included in Item 1 of this report.

Liquidity and Capital Resources

As of September 30, 2006, cash, cash equivalents, short-term investments and restricted cash totaled $29.6 million, compared to $8.7 million at December 31, 2005. Our cash reserves are held primarily in federal, state and local municipality government securities and money market accounts.

Through September 30, 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 $86 million, and with $61 million from the acquisition of Gemini Genomics in 2001.

In June 2006, we closed a private placement financing that provided us with approximately $30 million of net proceeds from the sale of common stock and warrants to purchase shares of common stock.

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 during the nine months ended September 30, 2006 was $8.1 million compared to $13.5 million for the same period in 2005. The use of cash was primarily a result of the net loss of $12.2 million during the nine months ended September 30, 2006, adjusted for non-cash depreciation and amortization of $3.1 million, other non-cash items of $2.3 million, share-based compensation expenses of $0.9 million and a decrease in inventories of $0.9 million offset by an increase in accounts receivable of $1.0 million, a decrease in deferred tax liability of $0.7 million, an increase in other assets of $0.3 million and 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 $0.5 million in cash during the nine months ended September 30, 2006 compared to $1.7 million for the same period of 2005 related to the purchases of capital equipment.

Net cash provided by financing activities was $29.5 million during the nine months ended September 30, 2006 compared to $2.9 million used by financing activities for the same period in 2005. Financing activities during the nine months ended September 30, 2006 included net receipts of $29.9 million from the issuance of common stock and warrants to purchase common stock, partially offset by net payments of $0.4 million for long-term debt and capital leases.

The following table summarizes our contractual obligations as of September 30, 2006:


Contractual obligations (In thousands)	Total		Less than one year		1-3 years		After 3 years
Operating leases	$	45,081	$	3,149	$	11,797	$	30,135
Open purchase orders		1,603		1,603		—		—

Total contractual obligations	$	46,684	$	4,752	$	11,797	$	30,135

Future operating lease commitments for leases have not been reduced by future minimum sublease rentals to be received through December 2010 aggregating $1.1 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. As of September 30, 2006, we have recorded $2.2 million as deferred rent.

In November 2006, we entered into a Supply Agreement with Bruker Daltonics Inc., pursuant to which Bruker will continue to supply us with mass spectrometers for incorporation into our MassARRAY^® Compact System products, as well as related spare parts. Subject to certain permitted variances, we have agreed to purchase a minimum number of mass spectrometers for approximately $3.8 million for periodic deliveries in 2007. The Supply Agreement ends on December 31, 2008.

Based on our current plans, we believe our cash, cash equivalents and short-term investments will be sufficient to fund our operating expenses 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:

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the size of our future operating losses;

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the level of our or our distributors’ success in selling our MassARRAY products and services;

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

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

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the level of our selling, general and administrative expenses;

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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;

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the level of our success in launching and selling diagnostic products and services;

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the extent of our research and development pursuits, including our level of investment in MassARRAY product research and development, and diagnostic, including non-invasive prenatal, assay 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;

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

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

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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

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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 September 30, 2006, we had outstanding stand-by letters of credit with financial institutions totaling $1.3 million. An operating lease letter of credit of $1.1 million will remain in place until the expiration of our building lease agreement in December 2010 and will not be drawn down unless we default upon our obligation.

As of September 30, 2006, we have no commitments for any additional debt financings.

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, and government and non-government debt securities rated BBB or above by Standard & Poor’s. 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.

A movement of 10% in the US dollar to Euro exchange rate would create an unrealized gain or loss of approximately $0.1 million. A movement of 10% in the US dollar to pound exchange rate would create an unrealized gain or loss of approximately $13,000.

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 nine months ended September 30, 2006. We had no deferred gains or losses during the three and nine months ended September 30, 2006.

Inflation

We do not believe that inflation has had a material adverse impact on our business or operating results during the three and nine months ended September 30, 2006.

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 September 30, 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 September 30, 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.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

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. In addition, the settlement is still subject to statutory notice requirements as well as final judicial approval. The Court’s decision on final approval of the settlement remains pending. 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. The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC.

We may need additional capital to support our growth, which will result in additional dilution to our stockholders.*

Our business may require additional investment that we have not yet secured. As of September 30, 2006, we have available cash, cash equivalents and short-term investments of approximately $28.1 million. We believe our cash, cash equivalents and short-term investments will be sufficient to fund our operating expenses 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 or our distributors’ success in selling our MassARRAY products and services including the new iPLEX Gold product which provides greater efficiency and which could reduce overall consumables usage by customers;

•

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

•

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

•

the level of our selling, general and administrative expenses;

•

the extent of our investment in diagnostic technology, including non-invasive prenatal technology, development, commercialization, and regulatory approval;

•

the level of our success in launching and selling any diagnostic products and services;

•

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;

•

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 may be dependent upon our stock being quoted on the NASDAQ Global 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 the investors in our June 2006 private placement choose to act together, they may be able to control our operations and act in a manner that advances their best interests and not necessarily those of other stockholders.

The investors in our June 2006 private placement beneficially own approximately 60% of our common stock based on the number of shares of our common stock outstanding on September 30, 2006. Upon the exercise in full of the warrants issued in the private placement (assuming no cashless exercise), these investors would control up to approximately 70% of the voting power of our capital stock based on the number of shares of our common stock outstanding on September 30, 2006. These stockholders, acting together, have substantial control over us. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders. These stockholders hold nearly all of the shares needed to approve amendments to our Bylaws and Certificate of Incorporation to remove certain supermajority voting provisions, permit stockholders holding a majority of our outstanding shares to call special meetings of stockholders, and permit stockholder actions by written consent. Pursuant to the securities purchase agreement entered into with the investors in our private placement, we are required to call a special meeting of stockholders within 60 days of the request of any two directors nominated by the investors for the purpose of seeking approval of these amendments to our Bylaws and Certificate of Incorporation or any other action that is proposed in good faith by at least three of our directors for legitimate corporate purposes. The approval of these amendments to our Bylaws and Certificate of Incorporation would provide even greater control to the investors in the private placement if they elect to act together.

If the investors in our private placement sell their shares which have been registered under the Securities Act, the market price of our common stock may decline significantly.

The shares of common stock issued to the investors in our private placement, as well as any shares issuable upon exercise of the warrants issued to the investors, have been registered under the Securities Act of 1933, as amended, or Securities Act, and such shares are freely transferable without restriction under the Securities Act (but may be subject to the short-swing profit rules and other restrictions on affiliates under the Securities Exchange Act of 1934, as amended). If a large number of shares are sold into the public market, the market price of our common stock may decline significantly.

We have limited experience.*

Many of our technologies, particularly our non-invasive prenatal and other molecular diagnostic technologies, are at an early stage of discovery and development. We continue to commercialize new products and create new applications for our products. We are developing diagnostic applications for our MassARRAY technology and for other platforms including non-invasive prenatal tests, and plan to eventually commercialize ourselves, or with a partner, a research-use-only test for Rhesus D using a real-time PCR platform. 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 September 30, 2006, our accumulated deficit was approximately $454.8 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:

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

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

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

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

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

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

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our ability to develop new applications and products, such as non-invasive prenatal or other diagnostic assays, and the success of such applications and products;

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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;

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our research and development progress and how rapidly we are able to achieve technical milestones, including the milestone of sufficient fetal DNA enrichment with respect to our non-invasive prenatal technologies;

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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;

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material developments in our customer and supplier relationships;

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our ability to clinically validate any potential non-invasive prenatal or other diagnostic related products and obtain regulatory approval of any potential products; and

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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 activities of our distributors and 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 manner in which 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:

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

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

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negative publicity or evaluations, particularly with respect to product warranty and repair and troubleshooting services provided to existing customers and with respect to our recently acquired license rights to perform gender testing for social or lifestyle purposes.

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 academic institutions, 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:

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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;

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changes in government programs that provide funding;

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changes in the regulatory environment affecting health care and health care providers, and for example, recent draft FDA guidance which, if effected may impose additional restrictions on CLIA licensed laboratories performing research-use-only tests;

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pricing pressures and reimbursement policies;

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

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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, genetic 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 and iPLEX Gold mulitplexing applications may result in lower volumes of consumable chip purchases by customers on a per system basis, which in turn could cause revenues to decline. Revenues from MassARRAY consumables totaled approximately 44% of our total revenues for the nine months ended September 30, 2006, compared to 55% of our total revenues for the nine months ended September 30, 2005. Factors which may limit the use of our consumable chips and other consumables or otherwise adversely affect our revenues from consumables include:

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

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the extent to which customers increase multiplexing levels using the iPLEX and iPLEX Gold applications;

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failure to sell additional MassARRAY systems;

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

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the training of customer personnel; and

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the acceptance of our technology by our customers.

We may not be able to generate any revenue from non-invasive prenatal research-use only or diagnostic tests, or any other tests we may develop.*

During the past year, we have committed significant research and development resources to the development of research-use only and diagnostic tests, particularly non-invasive prenatal tests, for use on our MassARRAY system and other platforms. Although we currently anticipate launching our first research use only test, a test for Rhesus D, in the first half of 2007, there is no guarantee that we will successfully launch this or any other tests for any use. We have no experience in manufacturing, selling, marketing or distributing diagnostic or other tests. If we, or our partners, are not able to successfully market or sell non-invasive prenatal research-use only or diagnostic tests or other tests we may develop for any reason, including the failure to obtain any required regulatory approvals, we will not generate any revenue from the sale of such tests. Even if we are able to develop non-invasive prenatal research-use only or diagnostic or other tests for sale in the marketplace, a number of factors could impact our ability to generate any significant revenue from the sale of such tests, including the following:

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reliance on third-party CLIA-certified (Clinical Laboratory Improvement Amendments, 1988) laboratories, which are subject to routine governmental oversight and inspections for continued operation pursuant to CLIA, to process tests that we develop;

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our non-invasive prenatal Rhesus D test, if successfully launched, will be for research use only and may never be approved for commercial use;

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reliance on third parties to manufacture any non-invasive prenatal research-use only or diagnostic or other tests that we may develop;

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the availability of alternative and competing tests or products;

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compliance with federal, state and foreign regulations for the sale and marketing of research-use only or diagnostic or other tests, including non-invasive prenatal tests;

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the accuracy rates of such tests, including rates of false-negatives and/or false-positives;

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concerns regarding the safety or effectiveness of non-invasive prenatal or other tests;

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changes in the regulatory environment affecting health care and health care providers, including changes in laws regulating laboratory testing;

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the extent and success of our sales and marketing efforts;

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pricing pressures and changes in third-party payor reimbursement policies;

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general changes or developments in the market for women’s health diagnostics;

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ethical issues concerning the appropriate use of the information resulting from the diagnostic or other tests; and

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the refusal by women to undergo such tests for moral, religious or other reasons, or based on perceptions about the safety or reliability of such tests.

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.

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 research-use-only and diagnostic applications for non-invasive prenatal and other molecular testing, may require significant enhancements in our core technology or the in-licensing of 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 has been 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. For example, we have recently experienced crystallized matrix on some of our chips which has interfered with chip performance. 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, problems with matrix crystallization on our 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:

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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;

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

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

We and our licensees and collaborators may not be successful in developing or commercializing diagnostic products, including non-invasive prenatal diagnostic products, 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:

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

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be difficult or impossible to manufacture on a commercial scale;

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be uneconomical to market;

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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;

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

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

If a licensee discovers or develops diagnostic products or we or a collaborator discover or develop 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 non-invasive prenatal or other diagnostic product, or other product which we or our licensing or collaborative partners develop and we may not be able to successfully partner with CLIA licensed laboratories with respect to research-use-only products.*

Products that we or our collaborators develop in the molecular medicine, diagnostic, non-invasive prenatal 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. Also, recent draft guidance from the FDA suggests changes in regulations that would be applicable to CLIA laboratories which, if such regulations become effective, could burden and delay our ability to partner or collaborate with CLIA laboratories with respect to our commercialization plans for research-use-only products. 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 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 analysis 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 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 and gender determination testing 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., which we amended in October 2006 to include exclusive rights to intellectual property for non-invasive prenatal gender determination testing for social and lifestyle purposes. We intend to use the rights that we acquired under the license to develop non-invasive prenatal nucleic acid based tests, including gender determination tests. If there is any dispute between us and Isis 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 non-invasive prenatal 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. In November 2006, we entered into a new supply agreement with Bruker to purchase a minimum number of mass spectrometers. We have minimum purchase obligations under our supply agreement with Bruker. As a result, in the event that demand for our products declines or does not meet our forecasts, we could have excess inventory or increased expenses or our margins could decrease which could have an adverse impact on our financial condition and business. 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 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:

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

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

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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;

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

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the exposure to unknown liabilities;

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

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

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

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

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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:

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

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academic and scientific institutions;

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governmental agencies; and

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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.

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 asserted a claim for ownership and patent rights for all inventions claimed in patents to which he contributed while employed in Germany. These patents were 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. 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 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 several years, 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 46% and 50% of our sales were made outside of the United States during the nine months ended September 30, 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:

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currency fluctuation risks;

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changes in regulatory requirements;

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costs and risks of deploying systems in foreign countries;

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licenses, tariffs, and other trade barriers;

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political and economic instability and possible country-based boycotts;

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difficulties in staffing and managing foreign operations;

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potentially adverse tax consequences;

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

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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.

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:

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actual or anticipated variations in quarterly and annual operating results;

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announcements of technological innovations by us or our competitors;

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

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securities analysts’ earnings projections or securities analysts’ recommendations;

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general market conditions out of our control.

The stock market in general, and The NASDAQ Global 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 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 and 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 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.

Item 6.

Exhibits

(a)

Exhibits


Exhibit Number		Description of Document

3.1(1)		Restated Certificate of Incorporation of the Registrant.

3.2(1)		Restated Bylaws of Registrant, as amended.

3.3(1)		Certificate of Elimination of the Certificate of Designation of Series A Junior Participating Preferred Stock.

4.1(1)		Specimen Common Stock Certificate of the Registrant.

10.53(2)		Letter Agreement dated August 15, 2006 between Registrant and Paul W. Hawran.

10.54*		Amendment to Exclusive License of Technology Agreement dated October 19, 2006 between the Registrant and Isis Innovation Limited.

10.55*		Supply Agreement dated November 3, 2006 between the Registrant and Bruker Daltonics, Inc.

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 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

*	Certain confidential portions of this Exhibit have been omitted pursuant to a request for confidential treatment. Omitted portions have been filed separately with the SEC.

(1)	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed June 6, 2006.

(2)	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed August 25, 2006.

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: November 13, 2006	By:	/s/ HARRY STYLLI
		Harry Stylli
		President and Chief Executive Officer

Dated: November 13, 2006	By:	/s/ JOHN SHARP
		John Sharp
		Vice President, Finance and Treasurer (Principal Financial and Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Good

As of September 30, 2006

Net foreign monetary
assets/(liabilities)

Functional currency of operations

US dollars

($ in millions)