10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended April 2, 2006

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number 000-30361

Illumina, Inc.

(Exact name of registrant as specified in its charter)

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

9885 Towne Centre Drive, San Diego, CA	92121
(Address of Principal Executive Offices)	(Zip Code)

(858) 202-4500

(Registrant’s telephone number, including area code)

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

Yes þ            No o

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 o Accelerated filer þ Non-accelerated filer o

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

Yes o            No þ

As of April 14, 2006, there were 41,701,483 shares of the Registrant’s Common Stock outstanding.

ILLUMINA, INC.

INDEX

	Page
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements.		3
Condensed Consolidated Balance Sheets — April 2, 2006 (unaudited) and January 1, 2006.		3
Condensed Consolidated Statements of Operations — Three Months Ended April 2, 2006 and April 3, 2005 (unaudited).		4
Condensed Consolidated Statements of Cash Flows — Three Months Ended April 2, 2006 and April 3, 2005 (unaudited).		5
Notes to Condensed Consolidated Financial Statements.		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		27
Item 4. Controls and Procedures.		28
PART II. OTHER INFORMATION		30
Item 1. Legal Proceedings.		30
Item 1A. Risk Factors.		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		36
Item 3. Defaults upon Senior Securities.		36
Item 4. Submission of Matters to a Vote of Security Holders.		37
Item 5. Other Information.		37
Item 6. Exhibits.		37
SIGNATURES		38
EXHIBIT 10.31
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Illumina, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

	April 2, 2006		January 1, 2006 (1)
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	49,044	$	50,822
Accounts receivable, net		21,427		17,620
Inventory, net		12,926		10,309
Prepaid expenses and other current assets		1,192		959
Total current assets		84,589		79,710
Property and equipment, net		19,215		16,131
Goodwill		2,125		2,125
Intangible and other assets, net		6,597		2,644
Total assets	$	112,526	$	100,610
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	24,579	$	21,600
Current portion of long-term debt		118		118
Total current liabilities		24,697		21,718
Long-term debt, less current portion		25		54
Deferred gain on sale of land and building		2,749		2,843
Other long-term liabilities		6,333		3,498
Commitments and contingencies
Stockholders’ equity		78,722		72,497
Total liabilities and stockholders’ equity	$	112,526	$	100,610

⁽¹⁾ The Condensed Consolidated Balance Sheet at January 1, 2006 has been derived from the audited financial statements as of that date.

See accompanying notes to the condensed consolidated financial statements.

3

Illumina, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended
	April 2, 2006			April 3, 2005
Revenue:
Product revenue	$	23,261		$	12,165
Service and other revenue		5,267			2,691
Research revenue		574			292
Total revenue		29,102			15,148
Costs and expenses:
Cost of product revenue (including non-cash stock compensation expense of $198 and $0, respectively)		7,676			3,937
Cost of service and other revenue (including non-cash stock compensation expense of $52 and $0, respectively)		1,617			662
Research and development (including non-cash stock compensation expense of $958 and $15, respectively)		8,216			5,893
Selling, general and administrative (including non-cash stock compensation expense of $1,923 and $42, respectively)		12,134			6,035
Total costs and expenses		29,643			16,527
Loss from operations		(541	)		(1,379	)
Interest and other income, net		568			195
Income (loss) before income taxes		27			(1,184	)
Provision for income taxes		131			51
Net loss	$	(104	)	$	(1,235	)
Net loss per share, basic and diluted	$	0.00		$	(0.03	)
Shares used in calculating net loss per share, basic and diluted		41,475			38,347

See accompanying notes to the condensed consolidated financial statements.

4

Illumina, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Three Months Ended
	April 2, 2006			April 3, 2005
Operating activities:
Net loss	$	(104	)	$	(1,235	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,100			811
Loss on disposal of property and equipment		20			71
Amortization of premium on investments		—			(14	)
Stock-based compensation expense		3,131			57
Amortization of gain on sale of land and building		(94	)		(94	)
Changes in operating assets and liabilities:
Accounts receivable		(3,742	)		(41	)
Inventory		(3,549	)		(1,172	)
Prepaid expenses and other current assets		(236	)		(623	)
Other assets		54			—
Accounts payable and accrued liabilities		2,961			2,541
Accrued litigation judgment		—			(5,957	)
Other long-term liabilities		2,819			2,331
Net cash provided by (used in) operating activities		2,360			(3,325	)
Investing activities:
Investment in secured convertible debenture		(3,036	)		—
Sales and maturities of available for sale securities		—			3,133
Purchase of property and equipment		(4,192	)		(3,060	)
Net cash provided by (used in) investing activities		(7,228	)		73
Financing activities:
Payments on long-term debt		(29	)		—
Proceeds from issuance of common stock		3,131			1,284
Net cash provided by financing activities		3,102			1,284
Effect of foreign currency translation on cash and cash equivalents		(12	)		132
Net decrease in cash and cash equivalents		(1,778	)		(1,836	)
Cash and cash equivalents at beginning of period		50,822			54,789
Cash and cash equivalents at end of period	$	49,044		$	52,953

See accompanying notes to the condensed consolidated financial statements.

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Illumina, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Principles

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. In management’s opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results for the interim periods presented.

     Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited financial statements should be read in conjunction with the Company’s 2005 audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2006, as filed with the Securities and Exchange Commission (SEC) on March 6, 2006.

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

Fiscal Year

     The Company’s fiscal year consists of 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The quarters ended April 2, 2006 and April 3, 2005 were both 13 weeks.

Reclassifications

     Certain prior period amounts have been reclassified to conform to current period presentation.

Revenue Recognition

     The Company’s revenue is generated primarily from the sale of products and services. Product revenue consists of sales of arrays, reagents, instrumentation and oligos. Service and other revenue consists of revenue received for performing genotyping services, extended warranty sales and revenue earned from milestone payments.

     The Company recognizes revenue in accordance with the guidelines established by SEC Staff Accounting Bulletin (SAB) No. 104. Under SAB No. 104, revenue cannot be recorded until all of the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectibility is reasonably assured. All revenue is recorded net of any applicable allowances for returns or discounts.

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

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     In order to assess whether the price is fixed and determinable, the Company ensures there are no refund rights. If payment terms are based on future performance, the Company defers revenue recognition until the price becomes fixed and determinable. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection of a payment is not reasonably assured, revenue recognition is deferred until the time collection becomes reasonably assured, which is generally upon receipt of payment. Changes in judgments and estimates regarding application of SAB No. 104 might result in a change in the timing or amount of revenue recognized.

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

     While the majority of its sales agreements contain standard terms and conditions, the Company does enter into agreements that contain multiple elements or non-standard terms and conditions. Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables, provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services, or rights to use assets within contractually binding arrangements. Significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the price should be allocated among the deliverable elements, when to recognize revenue for each element, and the period over which revenue should be recognized. The Company recognizes revenue for delivered elements only when it determines that the fair values of undelivered elements are known and there are no uncertainties regarding customer acceptance.

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

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

Cash and Cash Equivalents

     Cash and cash equivalents are comprised of short-term, highly liquid investments primarily consisting of money market-type funds.

Stock-Based Compensation

     On January 2, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. In January 2005, the SEC issued SAB No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes-Merton option-pricing model to

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determine the fair-value of stock-based awards under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation, in prior periods. The Company has elected to use the modified prospective transition method as permitted by SFAS No. 123R and, accordingly, prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock and employee stock purchase plan (ESPP) shares that are ultimately expected to vest as the requisite service is rendered. Stock-based compensation expense for awards granted prior to January 2, 2006 is based on the grant date fair-value as determined under APB No. 25. The Company has recorded an incremental $3.1 million of stock-based compensation expense during the first quarter of 2006 as a result of the adoption of SFAS No. 123R. Net income per share, basic and diluted, were each reduced by $0.07 in the first quarter of 2006 as a result of the adoption of SFAS No. 123R. Stock-based compensation expense capitalized as part of inventory as of April 2, 2006 was approximately $0.1 million. As of April 2, 2006, approximately $27.5 million of total unrecognized compensation cost related to stock options, restricted stock and ESPP shares are expected to be recognized over a weighted-average period of approximately two years.

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

     The following table illustrates the effect on net loss and basic and diluted net loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during the three months ended April 3, 2005 (in thousands, except per share amounts):

Net loss as reported	$	(1,235	)
Add: Stock-based compensation expense recorded		57
Less: Assumed stock-based compensation expense		(2,400	)
Pro forma net loss	$	(3,578	)
Basic and diluted net loss per share:
As reported	$	(0.03	)
Pro forma	$	(0.09	)

     SFAS No. 123R requires the use of a valuation model to calculate the fair-value of stock-based awards. The Company has elected to use the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period generally commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees.

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     The assumptions used for the three months ended April 2, 2006 and April 3, 2005 and the resulting estimates of weighted-average fair value per share of options granted and for stock purchases under the ESPP during those periods are as follows:

	Three Months Ended
	April 2, 2006			April 3, 2005
Interest rate – stock options		4.36-4.57	%		3.88	%
Interest rate – stock purchases		4.85-4.86	%		4.08	%
Volatility – stock options		76-77	%		91	%
Volatility – stock purchases		76	%		90	%
Expected life – stock options	6 years			5 years
Expected life – stock purchases	6-12 months			6 months
Expected dividend yield		0	%		0	%
Weighted average fair value of options granted	$	14.91		$	6.29
Weighted average fair value of employee stock purchases	$	8.11		$	3.64

Net Loss per Share

     Basic and diluted net loss per share is presented in conformity with SFAS No. 128, Earnings per Share, for all periods presented. In accordance with SFAS No. 128, basic and net loss per share is computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is typically computed using the weighted average number of common and dilutive common equivalent shares from stock options using the treasury stock method. However, for all periods presented, diluted net loss per share is the same as basic net loss per share because the Company reported a net loss and therefore the inclusion of weighted average shares of common stock issuable upon the exercise of stock options would be anti-dilutive.

	Three Months Ended
	April 2, 2006			April 3, 2005
	(In thousands)
Weighted-average shares outstanding		41,515			38,418
Less: Weighted-average shares of common stock subject to repurchase		(40	)		(71	)
Weighted-average shares used in calculating basic and diluted net loss per share		41,475			38,347

     The total number of shares excluded from the calculation of diluted net loss per share, prior to application of the treasury stock method, was 8,189,566 and 6,961,756 for the three months ended April 2, 2006 and April 3, 2005, respectively.

Comprehensive Income (Loss)

     Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss includes unrealized gains and losses on the Company’s available-for-sale securities, changes in the fair value of derivatives designated as effective cash flow hedges, and foreign currency translation adjustments.

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

	Three Months Ended
	April 2, 2006			April 3, 2005
Foreign currency translation adjustments	$	285		$	142
Unrealized loss on investments		(42	)		(7	)
Unrealized gain on cash flow hedges		—			15
Accumulated other comprehensive income (loss)	$	243		$	150

2. Acquisition of CyVera Corporation

     On April 8, 2005, the Company completed its acquisition of 100% of the voting equity interests of CyVera Corporation (CyVera). Pursuant to an Agreement and Plan of Merger, dated as of February 22, 2005 (the Merger Agreement), by and among Illumina, Semaphore Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Illumina (Merger Sub), and CyVera, Merger Sub merged with and into CyVera, with CyVera surviving as a wholly-owned subsidiary of Illumina. The results of CyVera’s operations have been included in the Company’s consolidated financial statements since the acquisition date of April 8, 2005.

     CyVera was created in October 2003 to commercialize its digital microbead technology platform and optical instrumentation/reader concepts. The Company believes that the CyVera technology will be highly complementary to the Company’s own portfolio of products and services; will enhance the Company’s capabilities to service its existing customers; and will accelerate the development of additional technologies, products and services. The Company believes that integrating CyVera’s capabilities with the Company’s technologies will better position the Company to address the emerging biomarker research and development and in-vitro and molecular diagnostic markets.

     Pursuant to the Merger Agreement, the Company issued 1.6 million shares (the Shares) of common stock, paid $2.3 million in cash and assumed the net liabilities of CyVera. In addition, the Company assumed the outstanding stock options of CyVera. Approximately 250,000 of the Shares were deposited into an escrow account with a bank to satisfy any claims for indemnification made by the Company or CyVera pursuant to the Merger Agreement. No claims for indemnification were made and, as of April 8, 2006, the escrow agent has begun the process of releasing the shares from escrow and distributing them to the former stockholders of CyVera.

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

Fair market value of securities issued, net	$	14,433
Cash paid		2,291
Transaction costs		681
Fair market value of options assumed		394
Total purchase price	$	17,799

     The fair value of the Shares was determined based on the average closing price of the Company’s common stock for five trading days preceding, and following, February 22, 2005 (the date the transaction was announced). The Company believes that this time period gives proper consideration to matters such as price fluctuations and quantities traded and represents a reasonable period before and after the date on which the terms of the acquisition were agreed. Based on these closing prices, the Company estimated the fair value of its common stock to be $9.167 per share, which equates to a total fair value of $14.4 million.

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

Cash	$	4
Prepaid expenses		12
Fixed assets		349
Deferred compensation		196
Accounts payable and accrued liabilities		(432	)
Debt assumed		(255	)
Net book value of net liabilities acquired		(126	)
In-process research and development		15,800
Goodwill		2,125
Net assets acquired	$	17,799

     In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the goodwill is not amortized, but will be subject to a periodic assessment for impairment by applying a fair-value-based test. None of this goodwill is expected to be deductible for tax purposes. The Company expects to perform its annual test for impairment of goodwill in May of each year. The Company is required to perform a periodic assessment between annual tests in certain circumstances. As of April 2, 2006, the Company has determined there has been no impairment of goodwill.

     The Company allocated $15.8 million of the purchase price to in-process research and development projects. In-process research and development (IPR&D) represents the estimated fair value of acquired, to-be-completed research projects. At the acquisition date, CyVera’s ongoing research and development initiatives were primarily involved with the development of its microbead technology platform and optical instrumentation/reader concepts. These two projects were approximately 50% and 25% complete at the date of acquisition.

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

     If these projects are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. The Company believes that the foregoing assumptions used in the IPR&D analysis were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability or the events associated with such projects will transpire as estimated. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, the $15.8 million initially allocated to IPR&D was charged to expense in the second quarter of 2005.

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     The following unaudited pro forma information shows the results of the Company’s operations for the three months ended April 3, 2005 as though the acquisition had occurred as of the beginning of that period (in thousands, except per share data):

Revenue	$	15,148
Net loss	$(	2,699	)
Basic and diluted net loss per share	$(	0.07	)

     The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of the beginning of the period presented, or the results that may occur in the future. The pro forma results exclude the non-cash acquired IPR&D charge recorded upon the closing of the acquisition during the second quarter of 2005.

3. Segment Information

     The Company has determined that, in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, it operates in one segment as it only reports operating results on an aggregate basis to chief operating decision makers of the Company.

4. Inventories

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

	April 2, 2006		January 1, 2006
Raw materials	$	5,529	$	4,575
Work in process		5,601		4,546
Finished goods		1,796		1,188
	$	12,926	$	10,309

5. Intangible Assets

     Intangible assets consist of license agreements and acquired technology. The cost of the Company’s license agreements was $844,450 and the Company has amortized $792,117 through April 2, 2006.

6. Warranties

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

     Changes in the Company’s warranty liability during the three months ended April 2, 2006 are as follows (in thousands):

Balance at January 1, 2006	$	751
Additions charged to cost of revenue		433
Repairs and replacements		(241	)
Balance at April 2, 2006	$	943

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7. Accounts Payable and Accrued Liabilities

     Accounts payable and accrued liabilities consist of the following (in thousands):

	April 2, 2006		January 1, 2006
Accounts payable	$	10,582	$	7,390
Compensation		3,912		4,922
Legal and other professional fees		2,711		2,311
Short-term deferred revenue		2,364		1,937
Customer deposits		1,993		1,361
Reserve for product warranties		943		751
Other		2,074		2,928
	$	24,579	$	21,600

8. Stockholders’ Equity

     As of April 2, 2006, the Company had 41,696,733 shares of common stock outstanding, of which 4,813,491 shares were sold to employees and consultants subject to restricted stock agreements. The restricted common shares vest in accordance with the provisions of the agreements, generally over five years. All unvested shares are subject to repurchase by the Company at the original purchase price. As of April 2, 2006, 40,250 shares of common stock were subject to repurchase. In addition, the Company also issued 12,000 shares for a restricted stock award to an employee under the Company’s 2005 Stock and Incentive Plan based on service performance. These shares vest monthly over a three-year period.

     2005 Stock and Incentive Plan

     In June 2005, the stockholders of the Company approved the 2005 Stock and Incentive Plan (the “2005 Stock Plan”). Upon adoption of the 2005 Stock Plan, issuance of options under the Company’s existing 2000 Stock Plan ceased. The 2005 Stock Plan provides that an aggregate of up to 11,542,358 shares of the Company’s common stock be reserved and available to be issued. In addition, the 2005 Stock Plan provides for an automatic annual increase in the shares reserved for issuance by the lesser of 5% of outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, 1,200,000 shares or such lesser amount as determined by the Company’s board of directors. As of April 2, 2006, options to purchase 3,969,167 shares remain available for future grant under the 2005 Stock Plan.

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     The Company’s stock option activity under all stock option plans during the three months ended April 3, 2005 and April 3, 2006 is as follows:

				Weighted-
				Average
	Options			Exercise Price
Outstanding at January 2, 2005		6,205,020		$	6.99
Granted		872,100		$	8.72
Exercised		(117,458	)	$	2.94
Cancelled		(45,159	)	$	5.44
Outstanding at April 3, 2005		6,914,503		$	7.29
Outstanding at January 1, 2006		7,325,431		$	7.96
Granted		1,193,100		$	21.40
Exercised		(287,991	)	$	7.09
Cancelled		(90,893	)	$	12.34
Outstanding at April 2, 2006		8,139,647		$	9.91

     Following is a further breakdown of the options outstanding as of April 2, 2006:

									Weighted
			Weighted						Average
			Average						Exercise
			Remaining		Weighted				Price
Range of	Options		Life		Average		Options		of Options
Exercise Prices	Outstanding		in Years		Exercise Price		Exercisable		Exercisable
$0.03 - 4.64		1,445,075		6.56	$	3.26		872,816	$	3.10
$4.87 – 7.90		1,870,751		7.05	$	6.58		710,436	$	6.63
$7.94 – 8.60		1,439,057		8.39	$	8.49		339,084	$	8.40
$8.70 – 12.35		1,369,784		7.41	$	9.94		605,594	$	9.65
$12.42 – 20.97		1,745,230		9.24	$	17.88		216,282	$	16.42
$21.31 - 45.00		269,750		8.98	$	24.47		48,333	$	25.21
$0.03 - 45.00		8,139,647		7.79	$	9.91		2,792,545	$	7.48

     Aggregate intrinsic value of options outstanding and options exercisable as of April 2, 2006 was $113.1 million and $45.6 million, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $23.75 as of March 31, 2006, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $4.6 million and $0.7 million for the three months ended April 2, 2006 and April 3, 2005, respectively.

     2000 Employee Stock Purchase Plan

     In February 2000, the board of directors and stockholders adopted the 2000 Employee Stock Purchase Plan (the “Purchase Plan”). A total of 4,827,988 shares of the Company’s common stock have been reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods.

     The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The initial offering period commenced in July 2000. In addition, the Purchase Plan provides for annual increases of shares available for issuance under the Purchase Plan beginning with fiscal 2001. 118,740 and 355,731 shares were issued under the Purchase Plan during the three months ended April 2, 2006 and April 3, 2005, respectively. As of April 2, 2006, there were 2,910,590 shares available for issuance under the Purchase Plan.

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9. Commitments and Long-Term Debt

Building Loan

     In July 2000, the Company entered into a ten-year lease to rent space in two newly constructed buildings in San Diego that are now occupied by the Company. That lease contained an option to purchase the buildings together with certain adjacent land that has been approved for construction of an additional building. The Company exercised that option and purchased the properties in January 2002 and assumed a $26.0 million, ten-year mortgage on the property at a fixed interest rate of 8.36%. The Company made monthly payments of $208,974, representing interest and principal, through August 2004.

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

Operating Leases

     In August 2004, the Company entered into a ten-year lease for its San Diego facility after the land and building were sold (as discussed above). Under the terms of the lease, the Company paid a $1.9 million security deposit and is currently paying monthly rent of $328,202 with an annual increase of 3% in each subsequent year through August 2014. The lease contains an option to renew for three additional periods of five years each. In accordance with SFAS No. 13, the Company records rent expense on a straight-line basis and the resulting deferred rent is included in other long-term liabilities in the accompanying condensed consolidated balance sheet. The Company also leases office space for a facility in Connecticut, an additional distribution and storage facility in San Diego and for three foreign facilities located in Japan, Singapore and China under non-cancelable operating leases that expire at various times through December 2008. These leases contain renewal options ranging from one to three years.

10. Legal Proceedings

     The Company has incurred substantial costs in defending itself against patent infringement claims, and expects to devote substantial financial and managerial resources to protect its intellectual property and to defend against the claims described below as well as any future claims asserted against it.

Affymetrix Litigation

     On July 26, 2004, Affymetrix, Inc. (Affymetrix) filed a complaint in the U.S. District Court for the District of Delaware alleging that the use, manufacture and sale of the Company’s BeadArray products and services, including the Company’s Array Matrix and BeadChip products, infringe six Affymetrix patents. Affymetrix seeks an injunction against the sale of products, if any, that are determined to be infringing these patents, unspecified monetary damages, interest and attorneys’ fees. On September 15, 2004, the Company filed its answer to Affymetrix’ complaint, seeking declaratory judgments from the court that it does not infringe the Affymetrix patents and that such patents are invalid, and the Company filed counterclaims against Affymetrix for unfair competition and interference with actual and prospective economic advantage.

     On February 15, 2006, the court allowed the Company to file its first amended answer and counterclaims, adding allegations of inequitable conduct with respect to all six asserted Affymetrix patents, violation of Section 2 of the Sherman Act, and unclean hands. In March 2006, Affymetrix notified the Company of its decision to drop one of the six patents from the suit and of its intention to assert infringement of certain additional claims of the remaining five patents. The Company has filed a motion to preclude Affymetrix from asserting infringement of those additional claims. On April 20, 2006, a claims construction hearing was held. While rulings on the Company’s motion and on the claims construction issues could be issued at any time, the Company expects a ruling on the claims construction issues in the next several weeks. Trial is scheduled for October 16, 2006. The Company believes it has meritorious defenses against each of the infringement claims alleged by Affymetrix and intends to vigorously defend against this suit. However, the Company cannot be sure that it will prevail in this matter. Any unfavorable determination, and in particular, any significant cash amounts required to be paid by the Company or prohibition of the sale of its products and services, could result in a material adverse effect on its business, financial condition and results of operations.

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

     On June 15, 2005, Dr. Anthony Czarnik, a former employee, filed suit against the Company in the U.S. District Court for the District of Delaware seeking correction of inventorship of certain of the Company’s patents and patent applications and alleging that the Company committed inequitable conduct and fraud in not naming him as an inventor. Dr. Czarnik seeks an order requiring the Company and the U.S. Patent and Trademark Office to correct the inventorship of certain of the Company’s patents and patent applications by adding Dr. Czarnik as an inventor, a judgment declaring certain of the Company’s patents and patent applications unenforceable, unspecified monetary damages and attorney’s fees. On August 4, 2005, the Company filed a motion to dismiss the complaint for lack of standing and failure to state a claim. While this motion was pending, Dr. Czarnik filed an amended complaint on September 23, 2005. On October 7, 2005, the Company filed a motion to dismiss the amended complaint for lack of standing and failure to state a claim, and this motion is still pending. There has been no trial date set for this case. The Company believes it has meritorious defenses against this claim.

11. Invitrogen Corporation Collaboration Agreement

     In December 2004, the Company entered into a strategic collaboration with Invitrogen Corporation (Invitrogen). The goal of the collaboration is to combine the Company’s expertise in oligonucleotide manufacturing with the sales, marketing and distribution capabilities of Invitrogen. In connection with the collaboration, the Company has developed the next generation Oligator® DNA synthesis technology. This technology includes both plate- and tube-based capabilities. Under the terms of the agreement, Invitrogen paid the Company an upfront non-refundable collaboration payment of $2.3 million during the first quarter of 2005. Additionally, Invitrogen made a milestone payment of $1.1 million to the Company in November 2005 upon achievement of a milestone event under the terms of the collaboration.

     The Company began manufacturing and shipping the plate-based and certain tube-based oligo products under the collaboration in the third quarter of 2005 and, therefore, has begun to amortize the upfront collaboration payment of $2.3 million as product revenue over the life of the agreement on a straight-line basis. The unamortized portion of the collaboration payment has been recorded as short- and long-term deferred revenue. The Company recorded the $1.1 million milestone payment in service and other revenue upon achievement of the milestone during the fourth quarter of 2005. The Company recorded revenue related to this milestone payment upon its achievement, as evidenced by acknowledgment from Invitrogen and due to the fact that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) the performance obligations for both the Company and Invitrogen after the milestone achievement will continue at a level comparable to the level before the milestone achievement. In addition, the agreement provides for the transfer of the Company’s Oligator technology into two Invitrogen facilities outside North America. The Company recognizes product revenue upon shipment of collaboration products based on the Company’s actual manufacturing cost. Collaboration profit, as defined in the collaboration agreement, from the sale of collaboration products is divided equally between the two companies and is recorded as product revenue.

12. Investment in Genizon BioSciences Inc.

     In March 2006, the Company entered into a Subscription Agreement for Secured Convertible Debentures with Genizon BioSciences Inc. (Genizon), a Canadian company focused on gene discovery. Pursuant to the agreement, the Company purchased a secured convertible debenture (the debenture) of Genizon and certain warrants for CDN$3.5 million (approximately U.S. $3.0 million). The Company understands Genizon is exclusively using Illumina’s Sentrix® HumanHap300 BeadChip along with the Infinium™ assay to perform whole-genome association studies involving thousands of members of the Quebec Founder Population. The goal of the studies is to provide understanding of the genetic origins and mechanisms of common diseases which may then lead to possible drug targets.

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     The debenture is convertible, automatically upon the occurrence of a “liquidity event,” as defined in the debenture, into Class H Preferred Shares of Genizon. Upon the occurrence of certain events, Illumina may be entitled to receive additional shares of Genizon’s Class H Preferred Shares. The debenture matures two years from issuance and bears interest, payable semiannually, at a rate of 5% per annum for the first year and 12.5% per annum for the second year. Unless the debenture is converted before maturity, 112.5% of the principal amount of the debenture is due upon maturity. Illumina also received warrants to purchase 226,721 shares of Genizon Class H Preferred Shares at an exercise price of $1.5437 per share.

     As of April 2, 2006, the debenture was recorded at face value, which is the fair value, and is classified in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, as an available-for-sale security. The Company has concluded that the purchase of the debenture and the concurrent purchase by Genizon of Illumina’s products are “linked” transactions under guidance contained in EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Since the transactions are considered “linked,” the Company has deferred approximately $2.8 million of revenue as of April 2, 2006, related to the Genizon product shipments. The deferred revenue is classified as a long-term liability as of April 2, 2006. The Company has also deferred approximately $1.0 million of costs related to product shipments to Genizon as a long-term asset as of April 2, 2006. All Genizon shipments that generate revenue over the face value of the debenture will be evaluated under the Company’s revenue recognition policy, which is outlined in Note 1.

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

     This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and notes thereto for the year ended January 1, 2006 included in the Company’s Annual Report on Form 10-K. Operating results are not necessarily indicative of results that may occur in future periods.

     The discussion and analysis in this Quarterly Report on Form 10-Q contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” intend,” “may,” “plan,” “potential,” “predict,” “project,” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Examples of forward-looking statements include, among others, statements regarding the integration of CyVera’s technology with our existing technology, the commercial launch of new products, including products based on CyVera’s technology, and the duration which our existing cash and other resources is expected to fund our operating activities.

     Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in the subsection entitled “Item 1A. Risk Factors.” below as well as those discussed elsewhere. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly revise these forward-looking statements to reflect circumstances or events after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission (SEC).

Overview

     We develop, manufacture and market next-generation tools for the large-scale analysis of genetic variation and biological function. Understanding genetic variation and biological function is critical to the development of personalized medicine, a key goal of genomics. Using our technologies, we have developed a comprehensive line of products that are designed to provide the performance, throughput, cost effectiveness and flexibility necessary to enable researchers in the life sciences and pharmaceutical industries to perform the billions of tests necessary to extract medically valuable information from advances in genomics and proteomics. This information is expected to correlate genetic variation and biological function with particular disease states, enhancing drug discovery and clinical research, allowing diseases to be detected earlier and permitting better choices of drugs for individual patients.

     In 2001, we began commercial sale of short pieces of DNA called oligonucleotides, which we refer to as oligos, manufactured using our proprietary Oligator technology. We believe our Oligator technology is more cost effective than competing technologies, and this advantage enabled us to market our oligos under a price leadership strategy while still achieving attractive gross margins.

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     In 2001, we commercialized the first implementation of our BeadArray technology, the Sentrix Array Matrix. This is a disposable matrix of 96 fiber optic bundles arranged in a pattern that matches the standard 96-well microtiter plate. Each fiber optic bundle performs more than 1,500 unique assays, which enables researchers to perform focused genotyping experiments in a high-throughput format. This format was also used to initiate our single nucleotide polymorphism (SNP) genotyping services product line. As a result of the increasing market acceptance of our high throughput, low cost BeadArray technology, we have entered into genotyping service contracts with many leading genotyping centers.

     Our production-scale BeadLab is a turn-key platform that includes all hardware and software necessary to enable researchers to perform genetic analysis research on what we believe is an unprecedented scale. This system is being marketed to a small number of high throughput genotyping users. As of April 2, 2006, we have installed and recorded revenue for 11 BeadLabs.

     In 2003, we announced the launch of several new products, including 1) a new array format, the Sentrix BeadChip, which significantly expands market opportunities for our BeadArray technology and provides increased experimental flexibility for life science researchers; 2) a gene expression product line on both the Sentrix Array Matrix and the Sentrix BeadChip that allows researchers to analyze a focused set of genes across eight to 96 samples on a single array; and 3) a benchtop SNP genotyping and gene expression system, the BeadStation, for performing moderate-scale genotyping and gene expression using our technology. The BeadStation includes our BeadArray Reader, analysis software and assay reagents and is designed to match the throughput requirements and variable automation needs of individual research groups and core labs. Sales of these products began in the first quarter of 2004 and, as of April 2, 2006, we have shipped 139 BeadStations.

     In late 2004, we announced a strategic collaboration with Invitrogen Corporation (Invitrogen) to synthesize and distribute oligos. In the third quarter of 2005, we began shipping oligo products in connection with this agreement. As part of the agreement, we have developed the next generation of our Oligator DNA synthesis technology, which we have designed to support both plate- and the larger tube-based oligo markets. Invitrogen is responsible for sales, marketing and technical support. Profits from sales of collaboration products are divided equally between the two companies.

     In 2005, we began shipments of Sentrix BeadChips for whole-genome gene expression and whole-genome genotyping. The whole-genome gene expression BeadChips are designed to enable high-performance, cost-effective, whole-genome expression profiling of multiple samples on a single chip, resulting in a dramatic reduction in cost of whole-genome expression analysis. Our whole-genome expression product line includes multi-sample products for both the Human and Mouse Genomes. The whole-genome genotyping BeadChip is designed to scale to high levels of multiplexing without compromising data quality and to provide scientists the ability to query hundreds of thousands of SNPs in parallel. In the second quarter of 2005, we commenced shipment of our first whole-genome genotyping BeadChip, the HumanHap-1, which interrogates more than 100,000 SNPs in parallel.

     In April 2005, we completed the acquisition of CyVera Corporation, a privately-held Connecticut-based company, pursuant to which CyVera became a wholly-owned subsidiary of Illumina. We believe that CyVera’s digital-microbead technology, renamed the VeraCode technology, is highly complementary to our portfolio of products and services. The acquisition is expected to provide us with a comprehensive approach to bead-based assays for biomarker research and development and in-vitro and molecular diagnostic opportunities, including those that require low-complexity as well as high-complexity testing. We expect the first products based on the VeraCode technology to be available in the second half of 2006. The purchase price associated with this transaction was approximately $17.8 million. We allocated $15.8 million of this purchase price to acquired in-process research and development and charged such amount against earnings in the second quarter of 2005.

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     In December 2005, we began shipment of the new Sentrix HumanHap300 Genotyping BeadChip to customers around the world. Using the Infinium assay, which enables us to select virtually any SNP in the genome, the HumanHap300 BeadChip allows analysis of more than 317,000 SNPs. We selected the SNPs for inclusion on the chip in collaboration with a consortium of scientists that are leaders in the genotyping field. We believe this product has quality and performance features that support our expectation that it will become an important discovery tool for researchers seeking to understand the genetic basis of common, yet complex diseases.

     In the first quarter of 2006, we introduced the Sentrix HumanHap240S BeadChip for genome-wide disease association studies. This product is a companion to our Sentrix HumanHap300 BeadChip and enables researchers to interrogate an additional 240,000 SNPs utilizing our Infinium assay. We also introduced the Sentrix HumanHap550 BeadChip in the first quarter of 2006. The Sentrix HumanHap550 BeadChip contains over 550,000 SNPs on a single microarray, and we believe it provides the most comprehensive genomic coverage of any product currently available. The HumanHap550 BeadChip is currently available for commercial shipment.

     Our revenue is subject to fluctuations due to the timing of sales of high-value products and service projects, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life science industry, the timing and amount of government grant funding programs and other unpredictable factors that may affect our customer ordering patterns. Any significant delays in the commercial launch or any lack or delay of commercial acceptance of new products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth in 2006 or cause a sequential decline in quarterly revenues. Due to the possibility of fluctuations in our revenue and net income or loss, we believe quarterly comparisons of our operating results are not a good indication of our future performance.

     We have incurred substantial operating losses since our inception. As of April 2, 2006, our accumulated deficit was $144.7 million and total stockholders’ equity was $78.7 million. These losses have principally occurred as a result of the substantial resources required for the research, development and manufacturing scale up effort required to commercialize our products and services, an acquired in-process research and development charge of $15.8 million related to our acquisition of CyVera and a charge of $5.9 million related to a termination-of-employment lawsuit. We expect to continue to incur substantial costs for research, development and manufacturing scale up activities over the next several years. We will also need to significantly increase our selling, general and administrative costs as we build up our sales and marketing infrastructure to expand and support the sale of systems, other products and services. As a result of the expected increase in expenses, we will need to increase revenue significantly to achieve and sustain profitability.

Critical Accounting Policies and Estimates

General

     Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements requires that management make estimates, assumptions and judgments with respect to the application of accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from those estimates. Our significant accounting policies are described in Note 1 to our condensed consolidated financial statements. Certain accounting policies are deemed critical if 1) they require an accounting estimate to be made based on assumptions that were highly uncertain at the time the estimate was made, and 2) changes in the estimate that are reasonably likely to occur, or different estimates that we reasonably could have used would have a material effect on our condensed consolidated financial statements.

     Management has discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosure. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of the consolidated financial statements.

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Revenue Recognition

          Our revenue is generated primarily from the sale of products and services. Product revenue consists of sales of arrays, reagents, instrumentation and oligos. Service and other revenue consists of revenue received for performing genotyping services, extended warranty sales and revenue earned from milestone payments.

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

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

     In order to assess whether the price is fixed and determinable, we ensure there are no refund rights. If payment terms are based on future performance, we defer revenue recognition until the price becomes fixed and determinable. We assess collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If we determine that collection of a payment is not reasonably assured, revenue recognition is deferred until the time collection becomes reasonably assured, which is generally upon receipt of payment. Changes in judgments and estimates regarding application of SAB No. 104 might result in a change in the timing or amount of revenue recognized.

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

     While the majority of our sales agreements contain standard terms and conditions, we do enter into agreements that contain multiple elements or non-standard terms and conditions. Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables, provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services, or rights to use assets within contractually binding arrangements. Significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the price should be allocated among the deliverable elements, when to recognize revenue for each element, and the period over which revenue should be recognized. We recognize revenue for delivered elements only when we determine that the fair values of undelivered elements are known and there are no uncertainties regarding customer acceptance.

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

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

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Allowance for Doubtful Accounts

     We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate the collectibility of our accounts receivable based on a combination of factors. We regularly analyze customer accounts, review the length of time receivables are outstanding and review historical loss rates. If the financial condition of our customers were to deteriorate, additional allowances could be required.

Inventory Valuation

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

Contingencies

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

Goodwill and Intangible Asset Valuation

     The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including in-process research and development (IPR&D). Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The amounts and useful lives assigned to other acquired intangible assets impact future amortization, and the amount assigned to IPR&D is expensed immediately. Determining the fair values and useful lives of intangible assets especially requires the exercise of judgment. While there are a number of different acceptable generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily use the discounted cash flow method. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. These judgments can significantly affect our net operating results.

     During fiscal 2001, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. If the carrying amount of a reporting unit exceeds its fair value, then a goodwill impairment test is performed to measure the amount of the impairment loss, if any. The goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as in a business combination. Determining the fair value of the implied goodwill is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates

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and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is reasonably possible that the plans and estimates used to value these assets may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges. As of April 2, 2006, we had $2.1 million of goodwill. This goodwill is reported as a separate line item in the balance sheet.

Stock-Based Compensation

     We account for stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment. Under the provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant date based on the award’s fair-value as calculated by the Black-Scholes-Merton (BSM) option-pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including volatility, forfeiture rates, and expected option life. If any of these assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Income Taxes

     We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with SFAS No. 109, Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. As of April 2, 2006, we have recorded a valuation allowance for the full amount of the resulting net deferred tax asset, as the future realization of the tax benefit is uncertain.

Results of Operations

     To enhance comparability, the following table sets forth unaudited condensed consolidated statements of operations for the three months ended April 2, 2006 and April 3, 2005 stated as a percentage of total revenue.

	Three Months Ended
	April 2,			April 3,
	2006			2005
Revenue:
Product revenue		80	%		80	%
Service and other revenue		18			18
Research revenue		2			2
Total revenue		100			100
Costs and expenses:
Cost of product revenue		26			26
Cost of service and other revenue		6			4
Research and development		28			39
Selling, general and administrative		42			40
Total costs and expenses		102			109
Loss from operations		(2	)		(9	)
Interest and other income, net		2			1
Income (loss) before income taxes		0			(8	)
Provision for income taxes		0			0
Net loss		(0	)%		(8	)%

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Three Months Ended April 2, 2006 and April 3, 2005

     Our fiscal year consists of 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The quarters ended April 2, 2006 and April 3, 2005 were both 13 weeks.

Revenue

	Three Months Ended
	April 2,		April 3,		Percentage
	2006		2005		Change
	(in thousands)
Product revenue	$	23,261	$	12,165		91	%
Service and other revenue		5,267		2,691		96	%
Research revenue		574		292		97	%
Total revenue	$	29,102	$	15,148		92	%

     Total revenue for the three months ended April 2, 2006 and April 3, 2005 was $29.1 million and $15.1 million, respectively. This represents an increase of $14.0 million, or 92%, as compared to the three months ended April 3, 2005.

     Product revenue increased to $23.3 million for the three months ended April 2, 2006, from $12.2 million for the three months ended April 3, 2005. The increase resulted primarily from higher consumable and BeadStation sales. Growth in consumable sales was primarily attributable to the launch of the HumanHap300 BeadChip. In addition, growth in consumable revenue can be attributed to the growth in our installed base of BeadStations. Consumable products constituted 50% of product revenue in the first quarter of 2006, as compared to 34% in the first quarter of 2005. As of April 2, 2006, we have shipped a total of 139 BeadStations and 11 BeadLabs. We expect to see continued growth in product revenue which can be partially attributed to the launch of several new products, as well as the growth of our installed base of BeadStations and BeadLabs.

     Service and other revenue increased to $5.3 million for the three months ended April 2, 2006, from $2.7 million for the three months ended April 3, 2005, due primarily to higher demand for our SNP genotyping service contracts during the three months ended April 2, 2006. We expect sales from SNP genotyping services contracts to fluctuate on a quarterly basis, depending on the mix and number of contracts that are completed. The timing of completion of a SNP genotyping services contract is highly dependent on the customer’s schedule for selecting the SNPs and delivering their samples to us.

     Government grants and other research funding increased to $0.6 million for the three months ended April 2, 2006, from $0.3 million for the three months ended April 3, 2005, due primarily to an increase in internal research spending for our grants from the National Institutes of Health. We expect government grants to remain a small percentage of total revenue in the future as we increase our focus on commercial operations.

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Cost of Product and Service and Other Revenue

	Three Months Ended
	April 3,		April 3,		Percentage
	2005		2005		Change
	(in thousands)
Cost of product revenue	$	7,676	$	3,937		95	%
Cost of service and other revenue		1,617		662		144	%
Total cost of product and service and other revenue	$	9,293	$	4,599		102	%

     Cost of product and service and other revenue represents manufacturing costs incurred in the production process, including component materials, assembly labor and overhead, installation, warranty, packaging and delivery costs, as well as costs associated with performing genotyping services on behalf of our customers. Costs related to research revenue are included in research and development expense. Cost of product and service and other revenue increased to $9.3 million for the three months ended April 2, 2006, as compared to $4.6 million for the three months ended April 3, 2005, due primarily to the significant increase in product revenue. Gross margin on product and service and other revenue was 67% and 69% for the three months ended April 2, 2006 and April 3, 2005, respectively.

     Cost of product revenue increased to $7.7 million for the three months ended April 2, 2006, as compared to $3.9 million for the three months ended April 3, 2005, driven by higher consumable sales. Gross margin on product revenue decreased to 67% for the three months ended April 2, 2006, from 68% for the three months ended April 3, 2005, due primarily to lower margins associated with oligo products sold as a part of the Invitrogen collaboration. The change in oligo gross margin is due to the fact that, under the Invitrogen collaboration, we no longer sell oligos directly. As a result, the gross margin related to this product line decreased; however, the net margin has increased due to the fact that most of the sales and marketing expenses surrounding the oligo business have shifted to our collaboration partner, Invitrogen. In addition, gross margin on product revenue was unfavorably impacted by a $0.2 million increase in stock-based compensation expense recognized as cost of product revenue resulting from the adoption of SFAS No. 123R.

     Cost of service and other revenue increased to $1.6 million for the three months ended April 2, 2006, as compared to $0.7 million for the three months ended April 3, 2005, primarily due to higher service revenue. Gross margin on service and other revenue decreased to 69% for the three months ended April 2, 2006, as compared to 75% for the three months ended April 3, 2005, primarily due to a change in the mix of projects and decreased average selling prices related to two projects. In addition, gross margin on service and other revenue was unfavorably impacted by a $0.1 million increase in stock-based compensation expense recognized as cost of service and other revenue resulting from the adoption of SFAS No. 123R.

     We expect product mix to continue to affect our future gross margins. However, we expect our market to become increasingly price competitive and our margins may fluctuate. We expect product and services and other gross margin to range between 66% and 69% for fiscal year 2006, depending upon the mix of product and services and other revenue for the year and in any given quarter.

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Research and Development Expenses

	Three Months Ended
	April 2,		April 3,		Percentage
	2006		2005		Change
	(in thousands)
Research and development	$	8,216	$	5,893		39	%

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

     Research and development expenses increased to $8.2 million for the three months ended April 2, 2006, as compared to $5.9 million for the three months ended April 3, 2005. The increase in research and development expenses is primarily due to the development of our recently-acquired digital microbead technology purchased in conjunction with our acquisition of CyVera in April 2005. Research and development expenses related to the digital microbead technology totaled approximately $1.5 million for the three months ended April 2, 2006. In addition, research and development expenses were unfavorably impacted by a $1.0 million increase in stock-based compensation expense resulting from the adoption of SFAS No. 123R. We believe a substantial investment in research and development is essential to remaining competitive and expanding into additional markets. Accordingly, we expect our research and development expenses to increase in absolute dollars as we expand our product base, but decrease as a percentage of revenue in future periods.

Selling, General and Administrative Expenses

	Three Months Ended
	April 2,		April 3,
	2006		2005		Percentage Change
	(in thousands)
Selling, general and administrative	$	12,134	$	6,035		101	%

     Our selling, general and administrative expenses consist primarily of personnel costs for sales and marketing, finance, human resources, business development and general management, as well as professional fees, such as expenses for legal and accounting services. Selling, general and administrative expenses increased $6.1 million to $12.1 million for the three months ended April 2, 2006, as compared to $6.0 million for the three months ended April 3, 2005. Selling, general and administrative expenses increased $1.9 million during the three months ended April 2, 2006, as compared to the three months ended April 3, 2005, due to increased stock-based compensation expenses resulting from the adoption of SFAS No. 123R as of January 1, 2006. Exclusive of these stock-based compensation charges, our sales and marketing expenses increased $1.2 million during the three months ended April 2, 2006, as compared to the three months ended April 3, 2005, of which $1.0 million is attributable to personnel-related expenses for the build-out of our sales force and customer support staff, and $0.2 million is attributable to other non-personnel-related costs, mainly sales and marketing activities for our existing and new products. General and administrative expenses, exclusive of stock-based compensation expense, increased $3.0 million in the three months ended April 2, 2006, as compared to the three months ended April 3, 2005, of which $1.8 million is attributable to outside legal costs related to the Affymetrix patent infringement litigation, $0.8 million is attributable to higher personnel-related costs associated with the growth of our business and $0.4 million is attributable to higher outside consulting costs.

     We expect our selling, general and administrative expenses to accelerate in absolute dollars as we expand our staff, add sales and marketing infrastructure, and incur increased litigation costs and additional costs to support the commercialization and support of an increasing number of products.

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Interest and Other Income, Net

	Three Months Ended
	April 2,		April 3,		Percentage
	2006		2005		Change
	(in thousands)
Interest and other income, net	$	568	$	195		191	%

     Interest income on our cash and cash equivalents and investments was $0.5 million for the three months ended April 2, 2006 as compared to $0.3 million for the three months ended April 3, 2005. The increase is primarily due to higher effective interest rates on our short-term investments.

     In the three months ended April 2, 2006, we recorded approximately $76,000 in gains due to foreign currency transactions, as compared to approximately $42,000 in losses for the three months ended April 3, 2005. We also recorded approximately $20,000 in losses on disposals of equipment in the three months ended April 2, 2006, as compared to approximately $71,000 in losses on disposals of equipment in the three months ended April 3, 2005.

Provision for Income Taxes

	Three Months Ended
	April 2,		April 3,		Percentage
	2006		2005		Change
	(in thousands)
Provision for income taxes	$	131	$	51		157	%

     Our provision for income taxes consists primarily of expenses related to estimated foreign income taxes, totaling approximately $111,000 and $51,000 for the three months ended April 2, 2006 and April 3, 2005, respectively. In addition, we have estimated U.S. federal and state income taxes of $20,000 in the three months ended April 2, 2006. Since we have incurred losses in both the three months ended April 2, 2006 and April 3, 2005, our federal and state income taxes are minimal. As of April 2, 2006, we have recorded a valuation allowance for the full amount of the resulting net deferred tax asset, as the future realization of the tax benefit is uncertain. In the first quarter of 2006, we completed a formal Section 382 and 383 analysis, which resulted in approximately $0.2 million of our net operating loss carryforwards being limited.

Liquidity and Capital Resources

     As of April 2, 2006, we had cash, cash equivalents and investments of $49.0 million. We currently invest our funds in U.S. dollar-based, short-term money market mutual funds.

     Our operating activities generated cash of $2.4 million in the three months ended April 2, 2006, as compared to a use of cash of $3.3 million in the three months ended April 3, 2005. Net cash provided by operating activities in the three months ended April 2, 2006 was primarily the result of a $3.0 million increase in accounts payable and accrued liabilities, a $2.8 million increase in long-term liabilities primarily related to payments received from Genizon BioSciences Inc. recorded as deferred revenue, non-cash charges of $1.1 million for depreciation and amortization and $3.1 million related to non-cash stock compensation expense resulting from the adoption of SFAS No. 123R. These sources were partially offset by a $3.5 million increase in inventory and a $3.7 million increase in

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accounts receivable. The accounts receivable and inventory increases are primarily due to our significant sales growth of 92% in the first quarter of 2006, as compared to the first quarter of 2005, which resulted from increased customer demand and our introduction of new products and services into the market. The increase in accounts payable and accrued liability balances was primarily driven by increases in general business activity associated with such sales growth, as well as expenses associated with the expansion of our corporate infrastructure to accommodate this growth. Net cash used in operating activities in the three months ended April 3, 2005 was primarily the result of a net loss of $1.2 million, a $5.9 million payment for a litigation judgment and a $1.2 million increase in inventory. These usages were reduced, in part, by a $2.5 million increase in accounts payable and accrued liabilities, a $2.3 million increase in long-term liabilities primarily related to payments received from Invitrogen Corporation recorded as deferred revenue, and non-cash charges of $0.8 million for depreciation and amortization.

     Our investing activities used cash of $7.2 million in the three months ended April 2, 2006, as compared to cash provided by investing activities of $0.1 million in the three months ended April 3, 2005. Cash used in investing activities in the three months ended April 2, 2006 was due in part to the payment of $4.2 million for the purchase of property and equipment primarily related to the expansion of our manufacturing capacity. We have tripled our manufacturing capacity for BeadChips over the level at the end of the second quarter of 2005. In addition, we used cash of $3.0 million to purchase a secured convertible debenture in Genizon BioSciences Inc. Cash provided in investing activities in the three months ended April 3, 2005 was due to $3.1 million from the sale or maturity of investment securities used to provide operating funds for our business, which was almost entirely offset by $3.1 million for the purchase of property and equipment.

     Our financing activities provided $3.1 million in the three months ended April 2, 2006, as compared to $1.3 million in the three months ended April 3, 2005. Cash provided by financing activities in both the three months ended April 2, 2006 and April 3, 2005 was due primarily to proceeds from the issuance of common stock from option exercises.

     While we anticipate that our current cash and cash equivalents, revenue from sales and funding from grants will be sufficient to fund our anticipated operating needs, we may choose to raise additional capital due to market conditions or strategic considerations, such as an acquisition, even if we believe we have sufficient funds for our current or future operating plans. Further, any additional equity financing may be dilutive to our then existing stockholders and may adversely affect their rights and debt financing may carry covenants that could restrict our operations. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditures. However, our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize our SNP genotyping and gene expression systems and extensions to those products and to expand our oligos and SNP genotyping services product lines, scientific progress in our research and development programs, the magnitude of those programs, competing technological and market developments, the successful resolution of our legal proceedings with Affymetrix, the success of our collaboration with Invitrogen and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. Therefore, we may require additional funding in the future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Sensitivity

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

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Foreign Currency Exchange Risk

     Although most of our revenue is denominated in U.S. dollars, some portions of our revenue are realized in foreign currencies. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. The functional currencies of our subsidiaries are their respective local currencies. Accordingly, the accounts of these operations are translated from the local currency to the U.S. dollar using the current exchange rate in effect at the balance sheet date for the balance sheet accounts, and using the average exchange rate during the period for revenue and expense accounts. The effects of translation are recorded in accumulated other comprehensive income as a separate component of stockholders equity.

     Exchange gains and losses arising from transactions denominated in foreign currencies are recorded in operations. In July 2004, we began hedging significant foreign currency firm sales commitments and accounts receivable with forward contracts. We only use derivative financial instruments to reduce foreign currency exchange rate risks; we do not hold any derivative financial instruments for trading or speculative purposes. Our forward exchange contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in other comprehensive income. Realized gains and losses for the effective portion are recognized with the underlying hedge transaction. There were no forward foreign currency forward contracts outstanding at April 2, 2006. The notional settlement amount of the foreign currency forward contracts outstanding at January 1, 2006 was $0.1 million. As of January 1, 2006, we had one foreign currency forward contract outstanding. This contract had a fair value of $882, representing an unrealized gain, and was included in other current assets at January 1, 2006. For the three months ended April 2, 2006 and April 3, 2005, there were no amounts recognized in earnings due to hedge ineffectiveness and we settled foreign exchange contracts of $0.1 million and $1.7 million, respectively.

Item 4. Controls and Procedures.

     We have established and maintain disclosure controls and procedures 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 chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure. We also maintain internal controls and procedures 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 U.S. generally accepted accounting principles.

     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 chief executive officer and chief financial officer as of April 2, 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.

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     The chief executive officer and chief 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 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 rules and forms. In addition, no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting has occurred during the first quarter of 2006.

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

     We have incurred substantial costs in defending ourselves against patent infringement claims and expect to devote substantial financial and managerial resources to protect our intellectual property and to defend against the claims described below as well as any future claims asserted against us.

Affymetrix Litigation

     On July 26, 2004, Affymetrix, Inc. (Affymetrix) filed a complaint in the U.S. District Court for the District of Delaware alleging that the use, manufacture and sale of our BeadArray products and services, including our Array Matrix and BeadChip products, infringe six Affymetrix patents. Affymetrix seeks an injunction against the sale of products, if any, that are determined to be infringing these patents, unspecified monetary damages, interest and attorneys’ fees. On September 15, 2004, we filed our answer to Affymetrix’ complaint, seeking declaratory judgments from the court that we do not infringe the Affymetrix patents and that such patents are invalid, and we filed counterclaims against Affymetrix for unfair competition and interference with actual and prospective economic advantage.

     On February 15, 2006, the court allowed us to file our first amended answer and counterclaims, adding allegations of inequitable conduct with respect to all six asserted Affymetrix patents, violation of Section 2 of the Sherman Act, and unclean hands. In March 2006, Affymetrix notified us of its decision to drop one of the six patents from the suit and of its intention to assert infringement of certain additional claims of the remaining five patents. We have filed a motion to preclude Affymetrix from asserting infringement of those additional claims. On April 20, 2006, a claims construction hearing was held. While rulings on our motion and on the claims construction issues could be issued at any time, we expect a ruling on the claims construction issues in the next several weeks. Trial is scheduled for October 16, 2006. We believe we have meritorious defenses against each of the infringement claims alleged by Affymetrix and intend to vigorously defend against this suit. However, we cannot be sure that we will prevail in this matter. Any unfavorable determination, and in particular, any significant cash amounts required to be paid by us or prohibition of the sale of our products and services, could result in a material adverse effect on our business, financial condition and results of operations.

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

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

ITEM 1A. Risk Factors.

     There have been no material changes to the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 1, 2006. Our business is subject to various risks, including those described below. In addition to the other information included in this Form 10-Q, the following issues could adversely affect our operating results or our stock price.

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

     Our commercial success depends in part on our non-infringement of the patents or proprietary rights of third parties and the ability to protect our own intellectual property. As described above under “Part II. Other Information. Item 1. Legal Proceedings,” Affymetrix, Inc. filed a complaint against us in July 2004, alleging infringement of six of its patents.

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     On April 20, 2006, a claims construction hearing was held as part of this proceeding. We expect a ruling related to the claims construction within the next several weeks, but there is no fixed time for such a ruling. At issue is the meaning of 15 terms, and depending on the court’s ruling on each of the 15 terms, or a mix of rulings across all the terms, an advantage (or at least the perception of an advantage) may be obtained by one party or the other as to one or more issues. We are not able to predict the timing or the substance of the court’s rulings. Any adverse ruling or perception of an adverse ruling may have an adverse impact on our stock price, and such impact may be disproportionate to the actual import of the ruling itself.

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

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

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

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

     We are currently ramping up our capacity to meet our anticipated demand for our products. Although we have significantly increased our manufacturing capacity and we believe that we have sufficient plans in place to ensure we have adequate capacity to meet our business plan in 2006, there are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility and launch new products. As a result, we may experience difficulties in meeting customer, collaborator and internal demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Additionally, in the past, we have experienced variations in manufacturing conditions that have temporarily reduced production yields. Due to the intricate nature of manufacturing products that contain DNA, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products, or to produce them economically, prevent us from achieving expected performance levels or cause us to set prices that hinder wide adoption by customers.

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We have not yet achieved annual operating profitability and may not be able to do so.

     We have incurred net losses each year since our inception. As of April 2, 2006, our accumulated deficit was $144.7 million and we incurred a net loss of $0.1 million for the three months ended April 2, 2006. We may not be profitable in 2006, due in part to the impact of SFAS No. 123R, which is expected to add additional expense of $12.0 million to $15.0 million in 2006. Our ability to achieve annual profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level of our expenses. We expect to continue incurring significant expenses related to research and development, sales and marketing efforts to commercialize our products and the continued development of our manufacturing capabilities. In addition, we expect that our selling and marketing expenses will increase at a higher rate in the future as a result of the launch of new products. As a result, we expect that our operating expenses will increase significantly as we grow and, consequently, we will need to generate significant additional revenue to achieve and maintain profitability. Even if we maintain profitability, we may not be able to increase profitability on a quarterly basis.

The growth and profitability of our oligo business depends on a third party.

     In December 2004, we entered into a collaboration agreement with Invitrogen to sell and market our oligos worldwide. Under the terms of the collaboration, Invitrogen is responsible for sales, marketing and technical support, while we are responsible for the manufacture of the collaboration products. As Invitrogen is solely responsible for the sales and marketing support of the collaboration, our continued growth and profitability related to these products depends on the extent to which Invitrogen is successful in penetrating the oligo market and selling the collaboration products. If Invitrogen is not successful in selling the collaboration products, our business, financial condition and results of operations may suffer.

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

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

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

     Market acceptance will depend on many factors, including:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We may encounter difficulties in integrating recently completed or future acquisitions that could adversely affect our business.

     In April 2005, we acquired CyVera Corporation and may in the future acquire technology, products or businesses related to our current or future business. We have limited experience in acquisition activities and may have to devote substantial time and resources in order to complete acquisitions. Further, these potential acquisitions entail risks, uncertainties and potential disruptions to our business. For example, we may not be able to successfully integrate a company’s operations, technologies, products and services, information systems and personnel into our business. An acquisition may further strain our existing financial and managerial resources, and divert management’s attention away from our other business concerns. In connection with the CyVera acquisition, we assumed certain liabilities and hired certain employees of CyVera, which is expected to continue to result in an increase in our research and development expenses and capital expenditures. There may also be unanticipated costs and liabilities associated with an acquisition that could adversely affect our operating results.

We may encounter difficulties in managing our growth. These difficulties could increase our losses.

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

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We may need additional capital in the future. If additional capital is not available on acceptable terms, we may have to curtail or cease operations.

     Our future capital requirements will be substantial and will depend on many factors including our ability to successfully market our genetic analysis systems and services, the need for capital expenditures to support and expand our business, the progress and scope of our research and development projects, the filing, prosecution and enforcement of patent claims, the outcome of our legal proceedings with Affymetrix, the defense of any future litigation involving us and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. We anticipate that our current cash and cash equivalents, revenue from sales and funding from grants will be sufficient to fund our anticipated operating needs, barring unforeseen developments. However, this expectation is based upon on our current operating plan, which may change as a result of many factors. Consequently, we may need additional funding in the future. Our inability to raise capital would seriously harm our business and product development efforts. In addition, we may choose to raise additional capital due to market conditions or strategic considerations, such as an acquisition, even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity, the issuance of these securities could result in dilution to our stockholders.

     We have no credit facility or committed sources of capital available as of April 2, 2006. To the extent operating and capital resources are insufficient to meet future requirements, we will have to raise additional funds to continue the development and commercialization of our technologies. These funds may not be available on favorable terms, or at all. If adequate funds are not available on attractive terms, we may be required to curtail operations significantly or to obtain funds by entering into financing, supply or collaboration agreements on unattractive terms.

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

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

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

A significant portion of our sales are to international customers.

     Approximately 47% and 64% of our revenue for the three months ended April 2, 2006 and April 3, 2005, respectively, was derived from customers outside the United States. We intend to continue to expand our international presence and export sales to international customers and we expect the total amount of non-U.S. sales to continue to grow. Export sales entail a variety of risks, including:

• currency exchange fluctuations;

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

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

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

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

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

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

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

     Our revenue is subject to fluctuations due to the timing of sales of high-value products and services projects, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life sciences industry, the timing and amount of government grant funding programs and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experience quarter-to-quarter fluctuations in revenue resulting in the potential for a sequential decline in quarterly revenue. A large portion of our expenses are relatively fixed, including expenses for facilities, equipment and personnel. In addition, we expect operating expenses to continue to increase significantly. Accordingly, if revenue does not grow as anticipated, we may not be able to achieve and maintain profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth in 2006 or cause a sequential decline in quarterly revenues. Due to the possibility of fluctuations in our revenue and expenses, we believe that quarterly comparisons of our operating results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price probably would decline.

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

     None.

Item 3. Defaults Upon Senior Securities.

     None.

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

     None.

Item 5. Other Information.

     None.

Item 6. Exhibits.

Exhibit Number	Description of Document
10.31	Secured Convertible Debenture Indenture between Genizon BioSciences Inc., Computershare Trust Company of Canada and Illumina, Inc., dated March 24, 2006.
31.1	Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Jay T. Flatley 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 Christian O. Henry pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

               Illumina, Inc.                (Registrant)

Date: May 8, 2006	/s/ Christian O. Henry      Christian O. Henry
	Vice President and Chief Financial Officer

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EX-10.31

Exhibit 10.31

GENIZON BIOSCIENCES INC.
(As Issuer)

- and -

COMPUTERSHARE TRUST COMPANY OF CANADA
(as Trustee)

SECURED CONVERTIBLE DEBENTURE INDENTURE

Bearing formal date of March 24, 2006

STIKEMAN ELLIOTT LLP

     THIS INDENTURE is entered into on this 27^th day of March, 2006

BETWEEN:	COMPUTERSHARE TRUST COMPANY OF CANADA (the “Trustee”), a trust company organized and existing under the laws of Canada, having its head office at Toronto, Ontario, and a place of business at 1500 University Street, Suite 700, Montreal, Québec, H3A 3S8;
AND:	GENIZON BIOSCIENCES INC. (the “Corporation”), a corporation incorporated under the laws of Canada, having its head office and principal place of business at 880 McCaffrey, St. Laurent, Québec, H4T 2C7;

RECITALS:

WHEREAS the Corporation is desirous of creating and issuing convertible debentures to be issued in the manner set forth herein;

WHEREAS the Corporation is authorized to create and issue the Debentures (as defined hereinafter) as provided hereunder;

WHEREAS all things necessary have been done and performed to make the Debentures, once certified by the Trustee and issued in accordance with the terms of the present Indenture, legal, valid and binding obligations of the Corporation with the benefits and subject to the terms of this Indenture;

NOW THEREFORE the parties hereto, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby covenant and agree as follows.

ARTICLE 1
INTERPRETATION

1.1 Definitions

     In this Indenture, unless something in the subject matter or context is inconsistent therewith, the following words and expressions shall have the following meanings:

(a) “Affiliate” has the meaning attributed to such term in the Canada Business Corporations Act as the same may be amended from time to time and any successor legislation thereto;

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(b)	“Agreement” or “Indenture” means this agreement and all schedules attached to this agreement, in each case as they may be amended or supplemented from time to time, and the expressions “hereof”, “herein”, “hereto”, “hereunder”, “hereby” and similar expressions refer to this agreement, and unless otherwise indicated, references to Articles and sections are to Articles and sections in this agreement;
(c)	“Business” means the discovery of genes associated with common diseases and drug response, as well as research activities downstream of these discoveries and other genetic research;
(d)	“Business Day” means any day, other than Saturday, Sunday or any statutory holiday in the Province of Québec;
(e)	“Canadian Resident Holder” means a person that is a resident in Canada who is an individual, partnership, trust or corporation which is not (i) a public company (as such term is defined in the Income Tax Act (Canada)) or (ii) a company controlled by non-residents of Canada or public companies (as such term is defined in the Income Tax Act (Canada));
(f)	“Class G Preferred Shares” means the class “G” convertible voting preferred shares created pursuant to the amendment of the articles of the Corporation immediately prior to the First Closing;
(g)	“Class H Preferred Shares” means the class “H” convertible subordinate voting preferred             shares created pursuant to the amendment of the articles of the Corporation immediately prior to the First Closing;
(h)	“Closing” means, as applicable, the First Closing Date, the Second Closing Date or the Third Closing Date;
(i)	“Conversion Discount” has the meaning ascribed to it in Section 5.1 hereof;
(j)	“Corporation” means Genizon BioSciences Inc., a corporation incorporated under the laws of Canada;
(k)	“Counsel to the Corporation” means Stikeman Elliott LLP;
(l)	“Debenture” means any Debenture of the Corporation created, issued and certified hereunder and from time to time being outstanding;
(m)	“Debentureholder Instrument” means a direction addressed to the Trustee and signed by the Debentureholders holding a minimum of 662/3% of the aggregate principal amount of outstanding Debentures;
(n)	“Debentureholders”, “Holder of a Debenture” or “Holder” means, at any given time, the registered holder(s) of Debentures at such time;

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(o)	“Documents” means this Indenture, the Debentures, the Subscription Agreement and the Security Documents;
(p)	“Event of Default” has the meaning ascribed to it in Section 10.1 hereof;
(q)	“First Closing Date” means March 27, 2006;
(r)	“Illumina” means Illumina, Inc., a company organized and existing under the laws of the State of Delaware, United States;
(s)	“Illumina Debenture” has the meaning ascribed to it in Section 9.1 hereof;
(t)	“Illumina Warrants” has the meaning ascribed thereto in Section 9.2 hereof;
(u)	“Indebtedness” includes, for any Person:

(i)	obligations for borrowed money;
(ii)	obligations under letters of credit or letters of guarantee or obligations to financial institutions who issued such letters of credit or letters of guarantee for the account of such Person;
(iii)	obligations under banker’s acceptances; and
(iv)	obligations under derivative instruments.

(v)	“Intellectual Property” means any trade mark, copyright, industrial design, patent, goodwill, invention, trade name, trade secret, trade process, license, permit, franchise, know how and any other intellectual property right of the Corporation, including any application or registration relating thereto, if any, and any improvements and modifications thereto as well as rights in any claim against third parties in connection with the protection of any such intellectual property rights or infringement thereto, in Canada or abroad;
(w)	“Interest Payment Date” means the two semi-annual interest payment dates set forth on the first page of each Debenture, which shall be the date that is 6 months following the issuance of such Debenture and the date of the issuance of such Debenture, respectively;
(x)	“Lien” means any security interest, lien, charge, pledge, encumbrance, prior claim, hypothec, mortgage, adverse claim or any other arrangement or condition that in substance secures payment or performance of an obligation and includes a title retention agreement of any nature or kind;
(y)	“Liquidity Event” means any of the following: (i) the completion of a public offering of shares of the Corporation; (ii) the sale or disposition of all or substantially all of the issued and outstanding shares in the share capital of the Corporation for cash proceeds or, if the acquirer is a public company, for consideration consisting, in whole or in part, of shares of the acquirer listed on a nationally recognized stock exchange or quoted on a quotation system; (iii) the sale or disposition of all or substantially all of the assets of the Corporation for cash proceeds or, if the acquirer is a public company, for consideration consisting, in whole or in part, of shares of the acquirer listed on a

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	nationally recognized stock exchange or quoted on a quotation system; or (iv) the consolidation, merger or reorganization or the acquisition of the Corporation by another entity following which the shareholders of the Corporation own less than 50% of the voting securities of the surviving corporation or its parent corporation (i.e., a change of control) listed on a nationally recognized stock exchange or quoted on a quotation system;
(z)	“Major Event of Default” means any Event of Default under either of Section 10.1(a), 10.1(b), 10.1(c) or 10.1(d);
(aa)	“Maturity Date” means the earlier of the following dates: (i) (A) with respect to Debentures issued on the First Closing Date, the date that is 24 months after the First Closing Date, (B) with respect to Debentures issued on the Second Closing Date, the date that is 24 months after the Second Closing Date, or (C) with respect to Debentures issued on the Third Closing Date, the date that is 24 months after the Third Closing Date; and (ii) the date on which an Event of Default occurs;
(bb)	“Non-Canadian Resident Holder” means a person that is not a Canadian Resident Holder;
(cc)	“Offering” means the issue of the Debentures in accordance with the terms and conditions of this Indenture;
(dd)	“Ordinary Debentureholder Instrument” means a direction addressed to the Trustee and signed by the Debentureholders holding a minimum of 50% of the aggregate principal amount of outstanding Debentures;
(ee)	“Part XIII Tax” has the meaning ascribed to it in Article 3 hereof;
(ff)	“Permitted Encumbrances” means the following Liens:

(i)	the Security Documents to be granted in accordance with the provisions hereof;
(ii)	Liens existing under the Senior Indebtedness;
(iii)	the reservation in the original grant of an immovable from the Crown;
(iv)	Liens which are customary, inchoate or minor property Liens incurred in the ordinary course of business for debts which are not overdue and which, in the aggregate, do not significantly reduce the value of the property or significantly impair the use for which it was intended;

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(v)	title defects or irregularities which are of a minor nature and in the aggregate will not substantially impair the use of the property affected by any such title defect or irregularity for the purposes for which it is held by the Corporation, nor substantially diminish the Liens created under the Security Documents;
(vi)	the pledges or deposits made pursuant to laws relating to workmen’s compensation or similar laws, or deposits made in good faith in connection with offers, tenders, leases or contracts (excluding, however, the borrowing of money or the repayment of money borrowed), deposits of cash or securities in order to secure appeal bonds or bonds required in respect of judicial proceedings;
(vii)	Liens for taxes or assessments not yet due or for which payment is not yet delinquent;
(viii)	Liens for taxes or assessments, due or past due and payable, the validity of which is being contested in good faith by the Corporation by appropriate proceedings timely instituted; provided, however, that where taxes must be paid or deposited in whole or in part subject to resolution of such contest in order to stay enforcement of such Lien, such taxes or required part thereof shall have been so paid or deposited;
(ix)	Liens for services performed for or materials delivered to the Corporation for which payment is not yet delinquent, and attachments, judgments and other similar Liens arising in connection with services performed or materials delivered; provided, however, that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being contested in good faith by appropriate proceedings and for which the Corporation has deposited with the Trustee a letter of credit or a suretyship satisfactory to the Trustee in an amount sufficient to pay in principal, interest and costs whatever may be owing should such contestation be unsuccessful;
(x)	Liens resulting from security given under any securitization or monetization of assets program in accordance with standard market practice;
(xi)	Liens securing Purchase Money Obligations provided such Liens charge only the asset subject to the Purchase Money Obligations; and
(xii)	Liens existing as at the date hereof.

(gg) “Permitted Indebtedness” means:

(i)	the outstanding obligations under the Debentures; and
(ii)	the Senior Indebtedness;

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(hh)	“Person” means any individual, partnership, limited partnership, joint venture, syndicate, sole proprietorship, company or corporation, with or without share capital, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, regulatory body or agency, government or governmental agency, authority or entity however designated or constituted;
(ii)	“Purchase Money Obligations” means the outstanding balance of the purchase price of equipment incurred to finance the acquisition thereof;
(jj)	“Second Closing Date” means the date on which the Corporation issues Debentures pursuant to this Indenture for the second time;
(kk)	“Security Documents” means the deed of hypothec dated March 24, 2006 between the Corporation and the Trustee, as further described in Article 6 hereof;
(ll)	“Senior Indebtedness” means (i) the $7 million loan by La Financière du Québec (Investissement Québec) to the Corporation pursuant to an Offre de Prêt accepted by the Corporation on January 9, 2004; (ii) the $2.625 million loan by La Financière du Québec (Investissement Québec) pursuant to an Offre de Prêt accepted by the Corporation on July 18, 2002; (iii) the credit facilities in the aggregate amount of $4.5 million granted by Royal Bank of Canada to the Corporation pursuant to a letter agreement dated December 7, 2005 consisting of two demand facilities for research and development (R&D) tax credit financing; and (iv) a future capital lease or term loan with a financial institution for an amount not exceeding $3 million, consisting of R&D equipment credit facilities; including any renewal or refinancing of any of items (i) to (iv) above;
(mm)	“Shares” means the Class G Preferred Shares and the Class H Preferred Shares;
(nn)	“Subscription Agreement” means the Subscription Agreement to be entered into as of each Closing Date between the Corporation and each Holder;
(oo)	“Third Closing Date” means the date on which the Corporation issues Debentures pursuant to this Indenture for the third time which shall be no later than 120 days following the First Closing Date or such later date as may be agreed upon by the Corporation and the investors subscribing for Debentures to be issued on the Third Closing Date;
(pp)	“Trustee” means Computershare Trust Company of Canada, or any successor trustee pursuant to Section 13.2;

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1.2 Meaning of “outstanding”

     Any Debenture certified and delivered by the Trustee hereunder shall be deemed to be outstanding until it is cancelled or delivered to the Trustee for cancellation, or a new Debenture is issued in substitution therefor under the provisions hereof, or monies for the payment thereof have been set aside according to the provisions of Section 15.2 hereof, provided that:

(a)	Where a new Debenture has been issued in substitution for a Debenture which has been mutilated, lost, stolen or destroyed, only the new Debenture shall be counted for the purpose of determining the aggregate principal amount of Debentures outstanding;
(b)	Debentures that have been partially redeemed, repaid or converted shall be deemed to be outstanding only to the extent of the unredeemed, unrepaid or unconverted portion of the principal amount thereof; and
(c)	For the purpose of any provision of this Indenture entitling Debentureholders to vote, sign consents, requisitions or other instruments or take any action under this Indenture or to constitute a quorum at any meeting of Debentureholders, Debentures owned directly or indirectly by the Corporation or any Affiliate thereof, shall be disregarded.

1.3 Schedules

     The following are the schedules attached to this Indenture which shall, for all purposes of this Indenture, form an integral part hereof:

     Schedule 2.3 — Form of Debentures.

1.4 Headings

     The division of this Indenture into Articles and Sections and the inclusion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Indenture.

1.5 Gender and Number

     In this Indenture, unless the context otherwise requires, any reference to gender includes all genders and words importing the singular number only include the plural and vice versa.

1.6 Currency

     Except where otherwise expressly provided, all amounts in this Indenture are stated and shall be paid in lawful money of Canada.

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1.7 Generally Accepted Accounting Principles

     In this Indenture, except to the extent otherwise expressly provided, references to “generally accepted accounting principles” or “GAAP” mean, at any time, all accounting principles recommended in the Handbook of the Canadian Institute of Chartered Accountants at the relevant time applied on a consistent basis.

1.8 Invalidity of Provisions

     Each of the provisions contained in this Indenture is distinct and severable from the others and a declaration of invalidity or unenforceability of any such provision or part thereof by a court of competent jurisdiction shall not affect the validity or enforceability of any other provision hereof.

1.9 Entire Agreement

     This Indenture supersedes all prior agreements between the parties with respect to the subject matter dealt with herein and constitutes the entire agreement between the parties pertaining to the subject matter hereof.

1.10 Waiver, Amendment

     Except as expressly provided in this Indenture, no amendment or waiver of this Indenture shall be binding unless executed in writing by the party to be bound thereby. No waiver of any provision of this Indenture shall constitute a waiver of any other provision nor shall any waiver of any provision of this Indenture constitute a continuing waiver unless otherwise expressly provided.

1.11 Non-Business Days

     Whenever any payment to be made hereunder shall be stated to be due or any other actions to be taken hereunder shall be stated to be required to be taken on a day other than a Business Day, such payment shall be made and such other action shall be taken on the next succeeding Business Day.

1.12 Formal Date of Agreement

     For reference purposes only, this Agreement can be referred to as bearing the formal date of March 24, 2006 notwithstanding its actual date of execution.

1.13 Governing Law

     This Indenture shall be governed by and construed in accordance with the laws of the Province of Québec and the federal laws of Canada applicable therein.

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ARTICLE 2
ISSUE OF DEBENTURES

2.1 Creation and Limit of Issue of Debentures

     The Debentures created and issued hereunder are limited to an aggregate principal amount of $25,000,000. The Debentures may be issued on the First Closing Date, the Second Closing Date or the Third Closing Date, subject to compliance with the provisions and restrictions hereinafter set forth.

2.2 Designation and Terms of Debentures

(a)	The Debentures shall be designated “Secured Convertible Debentures”.
(b)	The Debentures shall be issued as fully registered debentures and shall be dated the date of their issue and shall mature at the Maturity Date. Provided no Liquidity Event has occurred prior to the Maturity Date, the Corporation will return, at the Maturity Date, 112.5% of the principal amount of the outstanding Debentures, directly to the registered Holders of Debentures, in lawful money of Canada, together with accrued and unpaid interest thereon (for a total two year cash-on-cash return of 30%). No notice of repayment shall be required to be given by the Corporation.
(c)	The outstanding principal amount of each Debenture issued hereunder shall bear interest, for the first calendar year after the Closing Date on which such Debenture was issued, at the annual rate of 5% and, for the second calendar year after the Closing Date on which such Debenture was issued, at the annual rate of 12.5%, and will be paid semi-annually at each Interest Payment Date. Any unpaid interest shall bear interest at the same rate per annum commencing on the date it becomes due to the date it is fully paid, calculated daily and payable on demand. Interest on the Debentures and on overdue interest shall be paid directly by the Corporation to the registered Holders of Debentures. Interest unpaid when due shall bear interest at the same rate, calculated daily, after as well as before default and before and after demand and judgment.
(d)	The Debentures are secured by the Lien described in Article 6 hereof.
(e)	The Debentures shall be convertible as to any or all outstanding principal amount and interest thereon in accordance with Article 5 hereof.
(f)	The principal of the outstanding Debentures shall be repayable, and interest thereon shall be paid, at the address of the Debentureholders as indicated on the register of the Trustee.
(g)	The Debentures shall have the other attributes and be subject to the provisions set out in this Indenture.

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2.3 Form of Debentures

     The Debentures and the certificate of the Trustee shall be substantially in the form set out in the Schedule 2.3 hereto with such appropriate additions, deletions, substitutions and variations as may be required or permitted by the terms of this Indenture or as may be required to comply with any law or the rules of any securities commission as may be determined by the officer of the Corporation executing any Debenture, such determination to be conclusively evidenced by his or her execution thereof.

2.4 Rank of Debentures

     Subject to the provisions hereof, the Debentures certified and issued hereunder shall rank pari passu with one another without discrimination, preference or priority, whatever may be their respective actual date of issue provided however, that, in the case of Debentures issued at different times, principal and interest, if any, may, prior to any accelerated payment thereof pursuant to Section 10.2, be payable at different times. The Debentures will rank senior to all common and preferred equity of the Corporation and junior to the Senior Indebtedness.

2.5 Issue and execution of Debentures

(a)

The Debentures hereby created shall forthwith upon issuance be executed by the Corporation and delivered to the Trustee and shall be certified by or on behalf of the Trustee to or upon the written order of the Corporation without the Trustee receiving any consideration therefor.

(b)

The Debentures shall be signed by at least one officer of the Corporation holding office at the time of signing. Such signatures on Debentures may be printed or otherwise mechanically reproduced thereon and Debentures so signed are as valid as if they had been signed manually. If a Debenture contains a printed or mechanically reproduced signature of a Person, then the Corporation may issue the Debenture even though the Person has ceased to be an officer of the Corporation and such Debenture is as valid as if the Person were an officer at the date of its issue.

2.6 Certification

(a)

No Debenture shall be issued or, if issued, shall be obligatory or entitle the Debentureholder thereof to the benefit hereof, until it has been certified by or on behalf of the Trustee substantially in the form of the certificate set out in the Schedule 2.3 hereto or in some other form approved by the Trustee. Such certification by the Trustee on any Debenture shall be conclusive evidence that such Debenture has been duly issued hereunder and is a valid obligation of the Corporation and that the Debentureholder is entitled to the benefits hereof.

(b)

The certificate of the Trustee on the Debentures shall not be construed as a representation or warranty by the Trustee as to the validity of this Indenture or

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of the Debentures or as to the performance of the Corporation of its obligations hereunder (except the due certification thereof and any other warranties implied by law) and the Trustee shall in no respect be liable or answerable for the use made of any Debenture or proceeds thereof.

2.7 Registration and Transfer

(a)	The Corporation shall cause to be kept by and at the principal office of the Trustee in the City of Montreal, a central register and at such other places, if any, as may be designated by the Corporation and approved by the Trustee, in which shall be entered the names and addresses of the Debentureholders and particulars of the Debentures held by them respectively. Such registration shall be noted on the Debentures by the Trustee. No transfer of a Debenture shall be effective against the Corporation unless made on one of the registers and made by the Debentureholders or its liquidators of succession or administrators or other legal representatives or its or their attorney duly appointed by an instrument in form and execution satisfactory to the Trustee and upon compliance with such requirements prescribed in Section 16.1 hereof and such other requirements as the Trustee may prescribe, and unless such transfer shall have been duly noted on such Debenture by the Trustee.
(b)	The registered Holder of a Debenture, on whatever register the same may be registered, shall be entitled to have such Debenture transferred at any of the places at which a register is kept pursuant to the provision of this Section 2.7. A Debenture may only be transferred on one of such registers by the registered Debentureholder or its duly appointed mandatary for such purpose and upon compliance with such other reasonable requirements as the Trustee or other registrar may prescribe, and upon due notation of such transfer on such Debenture by the Trustee.
(c)	A transferee of a Debenture shall, after the appropriate form of transfer is lodged with the Trustee and upon compliance with any requirements prescribed under this Indenture, be entitled to be entered on a register as the owner of such Debenture.
(d)	Neither the Corporation nor the Trustee shall be bound to take notice of or see to the execution of any trust, whether express, implied or constructive, in respect of any Debenture, and any Debenture may be transferred on the direction of the registered Debentureholder thereof, whether named as trustee or otherwise, as though that person were also the beneficial owner thereof.
(e)	Except in the case of the register required to be kept at the City of Montreal, the Corporation shall have the power, at any time, to close any register and, in that event, it shall transfer the records thereof to another existing register or to a new register and thereafter the Debentures registered on the closed register shall be deemed to be registered on such existing or new register, as the case may be. In the event that the register in any place is closed and the records transferred to a register in another place, notice of such change shall be given to each

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	Debentureholder registered in the register so closed and the particulars of such change shall be recorded in the central register required to be kept in the City of Montreal.
(f)	The Holder of any Debenture shall be entitled to inspect the registers of Debentureholders at any time during normal business hours of the Trustee and to make extracts therefrom.

2.8 Ownership

     Subject to any applicable law, the person in whose name any Debenture is registered shall, for all the purposes of this Indenture, be and be deemed to be the owner thereof and payment of or on account of the principal and interest thereon, shall be made only to or upon the order in writing of such Person and such payment shall be a good and sufficient discharge of the Corporation, for the amount paid.

2.9 Mutilation, Loss or Destruction of Debentures

     If any Debenture shall become mutilated or be lost, destroyed or stolen, and in the absence of notice that such Debentures have been acquired by a “bona fide purchaser” within the meaning of the Canada Business Corporations Act, the Corporation, in its discretion, may issue, and thereupon the Trustee shall certify and deliver or cause to be delivered, a new Debenture of like date and tenor upon surrender and cancellation of the mutilated Debenture or, in the case of a lost, destroyed or stolen Debenture, in lieu of and in substitution for the same, and the new or substituted Debenture shall be in a form approved by the Trustee and shall be entitled to the benefits of this Indenture equally with all other Debentures issued or to be issued hereunder. In the case of loss, destruction or theft, the applicant for a substituted Debenture shall furnish to the Corporation and to the Trustee such evidence of such loss, destruction or theft as shall be satisfactory to the Corporation and to the Trustee in their discretion and shall also furnish such indemnity as is reasonably satisfactory to them. The applicant for a new or substituted Debenture shall pay all expenses incidental to the issuance of such new or substituted Debenture.

2.10 Payment Agreements for Debentures

     Notwithstanding anything contained in this Indenture to the contrary, the Corporation may enter into an agreement with a Debentureholder or with the Person for whom such Debentureholder is acting as nominee providing for the particulars of payment, without presentation or surrender of the Debenture or notation of payment thereon, to such Debentureholder of the principal amount and interest on such Debenture and all other money payable hereunder at a place, and by wire transfer of funds or in such other manner, other than the places or the manner specified in this Indenture. Any payment of the principal and interest on any such Debenture and other monies payable hereunder at such other place or in such other manner pursuant to such agreement shall, notwithstanding any other provision of this Indenture or the Debentures, be valid and binding on the Corporation, the Trustee and all Debentureholders.

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2.11 Computation of Interest

     Interest on the Debentures shall be computed on the basis of a 365 day calendar year. For the purpose of the Interest Act (Canada), in the case of a leap year, the yearly rate of interest shall be such rate multiplied by 366 and divided by 365.

ARTICLE 3
PROVISIONS RELATING TO WITTHOLDING TAXES

     All payments to be made by the Corporation under or in connection with the Debentures shall be made without deduction or withholding for or on account of any tax under Part XIII of the Income Tax Act (Canada) (“Part XIII Tax”). If any such tax is required to be deducted or withheld from any such payment, the amount of such payment shall be increased to such amount as is necessary to yield and remit to the Holder, after provision for payment of such tax, the original amount of such payment provided, however, that no additional amount shall be payable to the extent that either: (i) the Holder’s country of residence provides for a reduction or credit against income tax payable in such country to account for Part XIII Tax; or (ii) the Holder could have reduced or eliminated Part XIII Tax by taking reasonable measures to structure its investment through another jurisdiction. Furthermore, the Corporation undertakes to inform the Non-Canadian Resident Holders of any amendment to Part XIII Tax.

     The Corporation shall also indemnify the Holder in respect of the delay or failure by the Corporation to make any such payment, including penalties relating thereto or interest thereon. These gross-up provisions shall not apply to any amounts payable as dividends, deemed dividends or other distributions on Shares of the share capital of the Corporation or the disposition of such Shares.

ARTICLE 4
TERMINATION OF OFFERING OR
TAKING UP OF THE REMAINDER OF THE OFFERING

4.1 Termination of the Offering

     Provided that the Corporation has received a written offer, otherwise satisfactory to the investors investing in Debentures on the First Closing Date (collectively, the “Early Investors”), to the effect that the Corporation can benefit from an equity offering that is, in the opinion of the Early Investors, substantially higher than the last price paid for preferred shares of the Corporation in December 2004 (being $1.54375 per preferred share) and upon agreement by the Holders representing not less than 66²/₃% of the then aggregate outstanding principal amount of Debentures, the Corporation may truncate the Offering at any time prior to the date which is 120 days following the First Closing Date.

4.2 Right of Early Investors to Invest in the Remainder of the Offering

     Each of the Early Investors shall have the right, in preference and priority to any other interested purchasers of Debentures who were not Early Investors, to invest in the

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remainder of the Offering at any time during the 120 days following the First Closing Date (the “Early Investors’ Option”). In such a case, the Early Investors’ participation in the remainder of the Offering shall be calculated proportionally to each Early Investors’ existing investment and the other provisions of this Indenture, including, without limitation, those of Article 2 and Article 5, shall apply to the Debentures to be issued pursuant to the exercise of the Early Investors’ Option, with the necessary adaptations.

ARTICLE 5
CONVERSION OF DEBENTURES

5.1 Conversion Privilege of Debentures

     Subject to and upon compliance with the provisions of Article 5 of the Debentures, upon the occurrence of a Liquidity Event, the Debentures held by Canadian Resident Holders will be automatically convertible into fully paid and non-assessable Class G Preferred Shares and the Debentures held by Non-Canadian Resident Holders will be automatically convertible into fully paid and non-assessable Class H Preferred Shares, in each case at the conversion ratio and upon compliance with the procedures set forth in Article 5 of the Debentures.

5.2 Cancellation of Debentures

     Upon delivery to the Corporation of a Debenture surrendered to the Corporation for conversion and cancellation in accordance with Article 5 of the Debenture, the Corporation shall forthwith notify the Trustee of such cancellation and the Trustee shall forthwith register such cancellation in its register of Debentureholders.

ARTICLE 6
SECURITY

     As a general and continuing collateral security for the performance by the Corporation of all its obligations under this Indenture, the Debentures outstanding from time to time and under the Security Documents, the Corporation shall grant, in favour of the Trustee, as fondé de pouvoir (person holding the power of attorney of the Holders), a hypothec on the universality of its present and future movable assets. The Trustee hereby acknowledges and confirms that said hypothec shall rank immediately after the Senior Indebtedness.

ARTICLE 7
REPRESENTATIONS AND WARRANTIES

7.1 By the Corporation

     The Corporation represents and warrants as follows:

(a) Incorporation and Status. The Corporation is duly incorporated and organized, and is validly existing and up-to-date in the filing of all corporate and similar returns under the laws of Canada. The Corporation is duly registered, licensed or

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	qualified in those jurisdictions where the Corporation currently carries on business, and is up-to-date in the filing of all corporate and similar returns;
(b)	Corporate Power. The Corporation has the corporate power and capacity to own or lease its assets and to carry on its business as the same is presently conducted and to enter into and carry out its obligations with respect to the transactions contemplated by this Indenture;
(c)	Enforceability. This Indenture, the issue of the Debentures and the Security Documents have been duly authorized, executed and delivered by the Corporation and each such document constitutes a legal, valid and binding obligation of the Corporation enforceable in accordance with their respective terms, subject to the usual exceptions as to bankruptcy and the availability of equitable remedies;
(d)	No Contravention. Neither the entering into of this Indenture and of the Security Documents, the issue of Debentures nor the performance by the Corporation of any of its obligations under, or contemplated by, this Indenture and the Security Documents will contravene, breach or result in any default under its articles, by-laws, constating documents or other organizational documents or under any mortgage, lease, agreement, other legally binding instrument, license, permit, statute, regulation, order, judgment, decree or law to which the Corporation is a party or by which it may be bound;
(e)	Approvals and Consents. Except as provided for in the Subscription Agreement and except for the registration of the Security Documents at all relevant registry offices where applicable laws require such registration, no authorization, consent or approval of, or filing with or notice to, any governmental agency, regulatory body, court or other Person is required by the Corporation in connection with the execution, delivery or performance of this Indenture by the Corporation or of any of the Security Documents by the Corporation or the issue of any of the Debentures. Without limiting the generality of the foregoing or of any other provision of this Indenture, all authorizations and exemptions required under applicable law, including from any securities commission or other regulatory body, have been obtained by the Corporation, or the requirements to benefit from an exemption have been complied with, in order to allow the Corporation to issue the Debentures and the underlying Shares upon conversion thereof, provided certain private placement filings are made together with payment of the requisite fees to the relevant securities regulatory authorities;
(f)	Title to Assets. The Corporation has good and valid title to its assets charged under the Security Documents, free and clear of all Liens other than Permitted Encumbrances and except to the extent the failure to have such title could not reasonably be expected to result in a material adverse effect on the Corporation.
(g)	Shares. The issuance and delivery of the underlying Shares to be issued on conversion of the Debentures in accordance with the provisions of Article 5 hereof have been validly authorized and reserved by all necessary corporate

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action of the Corporation and shall, upon the conversion in accordance with the provisions of this Indenture, be validly issued as fully paid-up and non-assessable Shares in the capital of the Corporation;

7.2 By Trustee

     The Trustee represents and warrants to the Corporation as follows and acknowledges that the Corporation is relying upon the following representations and warranties in connection with execution of this Indenture:

(a)

Incorporation and Status of the Trustee. The Trustee is duly incorporated and validly existing under the laws of its jurisdiction of incorporation;

(b)

Corporate Power of the Trustee and Due Authorization. The Trustee has the corporate power and capacity to enter into, and to perform its obligations under this Indenture. This Indenture and the agreements, contracts and instruments required by this Indenture to be delivered by the Trustee on the date hereof have been duly authorized by the Trustee and have been duly executed and delivered by the Trustee, and shall be a valid and binding obligation of the Trustee enforceable in accordance with their respective terms, subject to the usual exceptions relating to bankruptcy and the availability of equitable remedies.

7.3 Survival of Covenants, Representations and Warranties

     The covenants, representations and warranties contained in this Indenture and in all certificates and documents delivered pursuant to or contemplated by this Indenture shall survive the execution of this Indenture and shall continue for so long as any Debenture remains outstanding, provided, however, that no claim for breach of representation or warranty shall be valid unless the party against whom such claim is made has been given notice thereof before the date on which the applicable representation or warranty shall have terminated in accordance with the foregoing.

ARTICLE 8
COVENANTS OF THE CORPORATION

8.1 General Covenants

     The Corporation hereby covenants and agrees that:

(a)	It will duly and punctually pay or cause to be paid, directly to each Debentureholder, the principal and interest, if any, on the Debentures, on the dates, at the places and in the manner set forth in this Indenture and the Debentures;
(b)	It will maintain at all times its corporate existence and will carry on and conduct its business in a proper and efficient manner;

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(c) It will pay to the Trustee reasonable remuneration for its services hereunder and under the Security Documents and shall repay to the Trustee on demand all reasonable expenditures or advances incurred by the Trustee in accordance with the present Indenture (including reasonable fees and expenses of legal counsel) with interest thereon at the same rate of interest per annum that is applicable to the principal of the Debentures for the first calendar year after the issuance thereof, and such monies shall be payable out of any funds in the possession of the Trustee in priority to any Debenture.

8.2 Securities Qualification Requirements

     If any prospectus or other instrument is required to be filed with or any permission is required to be obtained from any securities regulatory authority or any other step is required under any federal or provincial law of Canada in respect of any securities which a Debentureholder is entitled to receive upon conversion of the Debentures, before such conversion may properly and legally be delivered upon the due exercise thereof, the Corporation covenants that it will take all such action, at its expense, as is required or appropriate in the circumstances.

8.3 Financial Information

(a) The Corporation shall deliver to any Holder of Debentures holding at least $1,500,000 principal amount of Debentures:

(i)	As soon as practicable, but in any event within thirty (30) days after the meeting of the Corporation’s board of directors, the report of the chief financial officer of the Corporation deposited at each said meeting; and
(ii)	As soon as practicable, but in any event within forty-five (45) days after the end of each fiscal quarter, consolidated financial statements of the Corporation including, the balance sheet, the statement of operations and the statement of cash flows.

     Furthermore, the Corporation will provide each Debentureholder with all such financial reports provided to its shareholders, irrespective of the classes of shares, on the same schedule as such information is provided to said shareholders;

8.4 Other Covenants of the Subscription Agreement

     The Corporation shall comply with any other covenants contained in the Subscription Agreement, as though the same had been recited herein at length, the Corporation herein acknowledging that all representations, terms and covenants of the Subscription Agreement are essentials to the execution of this Indenture and the purchase by any Debentureholder of the Debentures.

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8.5 Restriction on Financings

     The Corporation shall not obtain any bank financing or credit facility or issue any bonds, debentures or similar debt instruments that is not a Permitted Indebtedness without the prior written consent of each Holder of Debentures holding at least $1,500,000 principal amount of Debentures, which consent shall not unreasonably be withheld.

ARTICLE 9
PROVISIONS APPLICABLE TO ILLUMINA

9.1 Sale of the Illumina Debenture

     Immediately after the entering into of the Corporation’s first commercial contract, the Corporation will use its best efforts to find a purchaser for the Debenture issued to Illumina (the “Illumina Debenture”), with a view to completing the sale of the Illumina Debenture prior to December 31, 2006, the whole subject to Section 9.2. Upon the transfer to a third party of the Illumina Debenture, Illumina will forfeit all of its rights under the Illumina Debenture and the warrants to purchase Class H Preferred Shares (the “Illumina Warrants”) issued to Illumina concurrently with the issuance of the Illumina Debenture.

9.2 Right of First Refusal

     If at any time following the date hereof, Illumina receives a bona fide offer (the “Third Party Offer”) by a person (the “Third Party”) dealing at arm’s length with Illumina to purchase or otherwise acquire all or any part of the Illumina Debenture for a consideration payable in full on closing, in cash, by certified cheque or wire transfer which Illumina proposes to accept, Illumina shall deliver a notice in writing (the “Offer”) to the Early Investors (and only to the Early Investors), offering to sell to the Early Investors the Illumina Debenture, or the portion thereof that is covered by the Third Party Offer and that Illumina desires to sell (the “Purchased Illumina Debenture”). The Offer shall specify the aggregate principal amount of Purchased Illumina Debenture and the price per $1,000 principal amount of Purchased Illumina Debenture, which shall be payable in cash only, and shall also disclose the name of the Third Party making the Third Party Offer (or the person who ultimately controls the Third Party, as the case may be), and shall otherwise contain the same terms and conditions as contained in the Third Party Offer together with a copy thereof. The Offer shall be irrevocable and shall be open for acceptance in writing by the Early Investors for a period of ten (10) Business Days (the “Acceptance Delay”) from the date upon which the Offer was given by Illumina to the Early Investors. If no response is received by Illumina from any Early Investor within the Acceptance Delay, such Early Investors will be deemed to have refused the Offer.

     If the Offer is accepted by the Early Investors, such that one or more of the Early Investors have accepted to purchase all of the Purchased Illumina Debenture, then Illumina shall be bound to sell, and the Early Investors who have accepted the Offer shall purchase, the Purchased Illumina Debenture from Illumina upon the terms and

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conditions set out in the Offer. Each Early Investor may, in its acceptance, set forth the aggregate principal amount of Purchased Illumina Debenture which such Early Investor is willing to purchase pursuant to the Offer, up to the total aggregate principal amount of Purchase Illumina Debenture being offered to all of the Early Investors.

     In the event that all of the Early Investors accept the Offer, then the Purchased Illumina Debenture shall be allocated among the Early Investors in accordance with their respective proportion (the “Designated Portion”) of aggregate principal amount of Debentures held out of the aggregate principal amount of all Debentures issued to Early Investors at the First Closing Date.

     In the event that one or more of the Early Investors does not accept the Offer within the Acceptance Delay or rejects the Offer, and those Early Investors who have accepted the Offer (in this Section 9.2, the “Purchasers”) have indicated in their notices of acceptance that the total aggregate principal amount of Purchased Illumina Debenture that they are willing to acquire, in the aggregate, is equal to or exceeds the total aggregate principal amount of the Purchased Illumina Debenture available for sale pursuant to the Offer, such Purchased Illumina Debenture shall be allocated among the Purchasers as follows:

(i)	each Purchaser shall be entitled, as an initial allocation, to acquire its Designated Proportion of the Purchased Illumina Debenture as if all Early Investors had accepted the Offer; and
(ii)	any principal amount of Purchased Illumina Debenture that remains unallocated shall be allocated among the Purchasers as nearly as possible in proportion to their Designated Portion, but so that no such Purchaser shall be bound to take a greater principal amount of Purchased Illumina Debenture than the maximum number set out in its acceptance of the Offer.

     In the event that the Early Investors have accepted to purchase less than all of the Purchased Illumina Debenture pursuant to the foregoing, or if the Early Investors do not elect to accept the Offer within the Acceptance Delay, then Illumina shall be entitled to sell the Purchased Illumina Debenture to the Third Party pursuant to the Third Party Offer.

     If the provisions of this Section 9.2 are applicable, the Board of Directors of the Corporation, before consenting to the transfer of the Purchased Illumina Debenture to the Third Party, shall be entitled to require reasonable proof (to be limited to copies of all documents delivered in connection with such transfer or otherwise contemplated by this Section 9.2) that the sale took place in accordance with the foregoing and the Board of Directors of the Corporation shall refuse to consent to the transfer of the Purchased Illumina Debenture which may have been sold otherwise than in accordance with the provisions of this Section 9.2.

     Upon any transfer of the Purchased Illumina Debenture or a portion thereof pursuant to this Section 9.2 (including pursuant to the Third Party Offer or pursuant to the Offer), the transferee of the Purchased Illumina Debenture shall be entitled to receive

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from Illumina the number of Illumina Warrants to which such transferee would otherwise have been entitled pursuant to the Subscription Agreement if such transferee had initially subscribed at the First Closing Date for the aggregate principal amount of Purchased Illumina Debenture transferred to such transferee, with no fractional Illumina Warrant being transferable.

9.3 Repurchase of the Illumina Debenture by the Corporation

     In the event that no purchaser has been found for the Illumina Debenture by December 15, 2006 or that purchasers have not offered to purchase the full amount of the Illumina Debenture, and that the Corporation’s cash flow then permits it to do so, the Corporation may, at its option (which option shall not be unreasonably declined), repurchase the Illumina Debenture at face value or repurchase the portion not purchased by the purchasers, together with accrued interest thereon, in which case the Illumina Warrants will automatically and immediately be cancelled. However, such option may only be exercised by the Corporation once the Early Investors have been given the opportunity to exercise their right of first refusal pursuant to Section 9.2 above and that they have declined to exercise such right.

9.4 Rights of Illumina

     In any event contemplated by Sections 9.1 to 9.3 above, Illumina shall have the right to either (i) accept the transfer or repurchase of the Illumina Debenture, as the case may be; or (ii) refuse the same and remain the holder of the Illumina Debenture and the Illumina Warrants.

ARTICLE 10
DEFAULT AND ENFORCEMENT

10.1 Events of Default

     There shall be a default hereunder upon the occurrence of any of the following events (herein called an “Event of Default”):

(a)	if the Corporation fails to repay the principal of any Debenture when the same becomes due;
(b)	if the Corporation fails to pay interest as required pursuant to any Debenture on the principal of such Debenture;
(c)	if the Corporation contracts any Indebtedness that is or purports to be senior to the Permitted Indebtedness, without the prior consent of the Debentureholders expressed by Ordinary Debentureholder Instrument;
(d)	if the Corporation assigns or grants any security or Lien, other than a Permitted Encumbrance, in respect of its Intellectual Property or any of its other assets in favour of any third party (other than in the ordinary course of its business), without the prior consent of the Debentureholders expressed by Ordinary

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	Debentureholder Instrument, which consent shall not be unreasonably withheld in connection with the licensing of its Intellectual Property rights to a third party for valuable consideration;
(e)	if any proceedings are instituted by or against the Corporation seeking its liquidation, dissolution or winding-up;
(f)	if the Corporation files a proposal or makes a general assignment of its property for the benefit of its creditors or otherwise acknowledges its insolvency;
(g)	if a petition in bankruptcy is filed against the Corporation and such petition is not stayed or dismissed within thirty (30) days or a trustee or receiver is appointed for the Corporation pursuant to applicable legislation relating to insolvent persons or an application is filed by or against the Corporation pursuant to the Companies’ Creditors Arrangement Act (Canada);
(h)	if a seizure (unless such seizure is validly contested) is made or a judgment is executed against all or a substantial part of the Corporation’s property;
(i)	if the Corporation ceases to be in legal existence or ceases to operate in the ordinary course of its business; or
(j)	if the Corporation fails to fulfill or comply with the conditions and undertakings set forth in the Subscription Agreement or any other material undertaking or condition set forth in this Indenture or the Debentures and such failure to comply continues for a period of fifteen (15) days following the Corporation’s receipt of a notice to that effect from the Trustee.

10.2 Acceleration of Maturity upon Default

     Upon the occurrence of an Event of Default which is continuing, the Trustee may, in addition to all of its other rights and recourses, and shall, in the event of a Major Event of Default, upon the request of Holders which hold, individually or in the aggregate, Debentures representing an aggregate principal amount of at least $3,500,000 at the time of the Major Event of Default or, in the event of any Event of Default, pursuant to a Debentureholder Instrument, send a written notice to the Corporation requiring the redemption of the principal amount of the outstanding Debentures and the premium thereon, if any, the payment of unpaid interest accrued on such principal amount and any interest on unpaid interest and the payment of any amount owed pursuant to this Indenture. The Corporation shall forthwith pay these amounts to the Trustee on behalf of the Debentureholders.

10.3 Waiver of Default

     The Holders, pursuant to a Debentureholder Instrument, shall have the right to waive any default or Event of Default, or may cancel any instructions made to the Trustee pursuant to Section 10.2 above.

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10.4 Enforcement of Payment and of Security

     Subject to the waiver referred to in Section 10.3, the Trustee may, in its discretion, and shall, pursuant to a Debentureholder Instrument and upon receiving sufficient funds and being indemnified to its reasonable satisfaction against all costs, expenses and liabilities to be incurred, proceed in its name as fondé de pouvoir to obtain or enforce payment of the Debentures and other monies owing hereunder and realize the rights resulting from the Security Documents or by law.

10.5 Application of Monies

     Except for any prior claim to the extent required by law, any money received by the Trustee from any enforcement of the provisions hereof shall forthwith be paid as follows:

(a)	Firstly, to pay or reimburse to the Trustee for the costs, charges, expenses and advances incurred in the enforcement of the rights hereunder or under the Security Documents;
(b)	Secondly, in payment of accrued and unpaid interest owing on the Debentures and on other sums due hereunder, on a pro rata basis;
(c)	Thirdly, in repayment of the principal amount of the outstanding Debentures, on a pro rata basis;
(d)	Fourthly, the surplus, if any, to the Corporation or as it directs.

10.6 Remedies Cumulative

     All rights and remedies provided for hereunder and at law are cumulative.

ARTICLE 11
ACTIONS BY DEBENTUREHOLDERS AND TRUSTEE

11.1 Trustee not Required to Possess Debentures

     All rights of action under this Indenture and the Security Documents may be enforced by the Trustee without the possession of any of the Debentures or the production thereof at any trial or other proceedings relative thereto.

11.2 Trustee May Institute All Proceedings

     The Trustee shall be entitled and empowered, either in its own name or as agent or mandatary of the Debentureholders, or in any one or more of such capacities, to file such proof of debt, amendment of proof of debt, claim, petition or other document as may be necessary or advisable in order to have the claim of the Trustee and of the Debentureholders allowed in any insolvency, bankruptcy, liquidation or other judicial proceedings relating to the Corporation or its creditors or relating to or affecting its property. The Trustee is hereby irrevocably appointed (and the successive respective

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Holders of a Debenture by taking and holding the same shall be conclusively deemed to have so appointed the Trustee) the true and lawful agent or mandatary of the respective Debentureholders with authority to make and file, in the respective names of the Debentureholders or on behalf of the Debentureholders as a class, subject to deduction from any such claims of the amounts of any claims filed by any of the Debentureholders themselves, any proof of debt, amendment of proof of debt, claim, petition or other document in any such proceedings and to receive payment of any sums becoming distributable on account thereof, and to execute any such other papers and documents and to do and perform any and all such acts and things for and on behalf of such Debentureholders, as may be necessary or advisable in the opinion of the Trustee, in order to have the respective claims of the Trustee and of the Debentureholders against the Corporation or its property allowed in any such proceeding, and to receive payment of or on account of such claims; provided, however, that nothing contained in this Indenture shall be deemed to give to the Trustee, unless so authorized by a Debentureholder Instrument, any right to accept or consent to any plan or reorganization or otherwise by action of any character in such proceeding to waive or change in any way any right of any Debentureholder.

     The Trustee shall also have the power at any time and from time to time to institute and to maintain such suits and proceedings as it may be advised shall be necessary or advisable to preserve and protect its interests and the interests of the Debentureholders.

     Any such suit or proceeding instituted by the Trustee may be brought in the name of the Trustee as agent or mandatary, and any recovery of judgment shall be for the rateable benefit of the Debentureholders subject to the provisions of this Indenture. In any proceeding brought by the Trustee (and any proceeding in which a declaratory judgment of a court may be sought as to the interpretation or construction of any provision of this Indenture, to which the Trustee shall be a party) the Trustee shall have the right to represent all the Debentureholders, and it shall not be necessary to make any Debentureholders parties to any such proceeding.

ARTICLE 12
ADMINISTRATION OF THE MANDATE

12.1 Appointment of Trustee as fondé de pouvoir

     The Corporation hereby irrevocably appoints the Trustee and the Trustee irrevocably accepts, to act as fondé de pouvoir (“person holding the power of attorney”) as contemplated in Article 2692 of the Civil Code of Québec, on behalf of the present and future Debentureholders, to the extent necessary or desirable for the purpose of receiving, creating, holding or enforcing any right, hypothec or security interest created under the Security Documents and hereafter each Debentureholder, by receiving and accepting a Debenture, shall be deemed to accept and confirm such appointment of the Trustee as fondé de pouvoir.

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12.2 Acceptance

     The Debentureholders hereby empower the Trustee to represent them and all future Holders of Debentures in the performance of all juridical acts provided for herein and the Trustee, by its acceptance, binds itself to exercise the powers above-mentioned and agrees to perform the same upon the terms and conditions herein set forth.

12.3 Sufficiency of Execution of Instruments

     Any order, request, direction, certificate or other instrument to be made or given by the Corporation under any of the provisions hereof shall, unless otherwise provided, be deemed sufficiently executed if executed by any officer of the Corporation. The Trustee may receive a certificate signed by the President, the Secretary or a Vice-President of the Corporation as sufficient evidence of the adoption of any resolution of the directors or of the shareholders of the Corporation.

12.4 Trustee May Require Indemnity

     Subject to Section 13.1 hereof, the Trustee shall not be required to take any measure to enforce this Indenture or any covenant herein contained until furnished with funds for such purpose or after having been indemnified to its reasonable satisfaction.

12.5 Trustee May Employ Advisors

     The Trustee may employ or retain such agents, counsel and other advisors as it may reasonably require for the proper discharge of its duties hereunder and may pay reasonable remuneration for all services performed for it.

12.6 Trustee May Act on Opinion or Advice

     The Trustee may, in relation to this Indenture, act on the opinion or advice of, or on information obtained from any counsel, notary, valuator, surveyor, engineer, broker, auctioneer, accountant or other expert, whether retained by the Trustee or by the Corporation or otherwise.

12.7 Trustee May Rely upon Declarations

     In the exercise of its rights and duties, the Trustee may, if it is acting in good faith, rely, as to the truth of the statements and accuracy of the opinions expressed therein, upon a statutory declaration, opinion, report or certificate furnished to the Trustee under a provision hereof or at its request where the Trustee examines the same and determines that it complies with the applicable requirement, if any, of this Indenture.

12.8 Corporation Shall Provide Evidence of Compliance

     The Corporation shall provide forthwith to the Trustee evidence of compliance with the conditions precedent provided for in this Indenture relating to the issue, certification and delivery of Debentures hereunder, the satisfaction and discharge of this

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Indenture or the taking of any other action to be taken by the Trustee at the request of or on the application of the Corporation. Such evidence shall consist of:

(a)	a statutory declaration or a certificate made by any officer of the Corporation stating that such conditions precedent have been complied with in accordance with the terms of this Indenture; and
(b)	in the case of conditions precedent, the compliance with which are by this Indenture subject to review or examination by Counsel to the Corporation, an opinion of Counsel to the Corporation that such conditions precedent have been complied with in accordance with the terms of this Indenture.

     Whenever such evidence relates to a matter other than the certification and delivery of Debentures and the satisfaction and discharge of this Indenture, such evidence may consist of, or otherwise be in accordance with, a report or opinion of any solicitor, auditor, accountant, engineer or appraiser or any other Person whose qualifications give authority to a statement made by him, but if such report or opinion is furnished by a director, officer or employee of the Corporation, it shall be in the form of a statutory declaration or a certificate.

12.9 Trustee May Act on Instruments Believed Genuine

     The Trustee shall not be bound to act in accordance with any direction or request of the Corporation or of its directors until a duly authenticated copy of the instrument or resolution containing such direction or request shall have been delivered to the Trustee, and the Trustee shall be empowered to act upon any such copy purporting to be authenticated and believed by the Trustee to be genuine.

12.10 No Person Dealing with Trustee Need Enquire

     No person dealing with the Trustee shall be concerned to enquire whether the powers that the Trustee is purporting to exercise have become exercisable, or whether any money remains due upon the Debentures or to see to the application of any money paid to the Trustee.

12.11 Investment of Funds

     Any money held by the Trustee or other registrar, which under this Indenture may be invested, shall be invested and reinvested as directed by the Corporation to the Trustee in its name or under its control in any securities in which presumed sound investments are made under the laws of the Province of Québec. Pending such investment, such money shall be placed by the Trustee on deposit at interest at the then current rate in a Canadian bank or trust company.

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ARTICLE 13
CONCERNING THE TRUSTEE

13.1 Duty of Trustee

     In the exercise of the powers, rights, duties and obligations prescribed or conferred by the terms of this Indenture, the Trustee shall act honestly and in good faith with a view to the best interests of the Debentureholders and shall exercise that degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

13.2 Resignation of Trustee and Appointment of New Trustee

     The Trustee may resign and be discharged from all further duties and liabilities hereunder by giving to the Corporation not less than sixty (60) days’ notice in writing or such shorter notice as the Corporation may accept as sufficient. The Debentureholders may at any time, pursuant to a Debentureholder Instrument, remove the Trustee and appoint a new trustee. If at any time a material conflict of interest in the Trustee’s role hereunder arises, the Trustee shall, within ninety (90) days after ascertaining that it has such a conflict, either eliminate such conflict or resign in the manner and with the effect specified in this Section 13.2. In the event of the Trustee resigning or being removed pursuant to a Debentureholder Instrument or being dissolved, becoming bankrupt, going into liquidation or otherwise becoming incapable of acting hereunder, the Corporation shall forthwith appoint a new trustee unless a new trustee has already been appointed by the Debentureholders; failing such appointment by the Corporation, the retiring Trustee (at the Corporation’s expense) or any Debentureholder may petition any court of competent jurisdiction for the appointment of a new trustee, but any new trustee so appointed by the Corporation or by the court shall be subject to removal as aforesaid by the Debentureholders. Any new trustee appointed under this Section shall be a corporation authorized to carry on the business of a trust company in the Province of Québec. On any new appointment, the new trustee shall be vested with the same powers, rights, duties and obligations as if it had been originally named herein as trustee.

     Any corporation into which the Trustee may be merged or with which it may be consolidated or amalgamated or any corporation resulting from any merger, consolidation or amalgamation to which the Trustee shall be a party shall be the successor trustee under this Indenture without the execution of any instrument or any further act.

13.3 Trustee May Deal in Debentures

     Subject to Section 13.6 hereof, the Trustee may buy, lend upon and deal in the Debentures either with the Corporation or otherwise, and generally contract and enter into financial transactions with the Corporation or otherwise, without being liable to account for any profit made thereby.

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13.4 Trustee Not Required to Give Security

     The Trustee shall not be required to give any bond or security with respect of the execution of its duties or conduct or administration hereunder.

13.5 Protection of Trustee

     By way of supplement to the provisions of any law for the time being relating to trustees, it is expressly declared and agreed as follows:

(a)	the Trustee shall not be liable for or by reason of any statements of fact or recitals in this Indenture or in the Debentures (except the representation contained in Section 13.6 hereof and in the certificate of the Trustee on the Debentures) or required to verify the same, but all such statements or recitals are and shall be deemed to be made by the Corporation;
(b)	nothing herein contained shall impose any obligation on the Trustee to see or to require evidence of registration or filing (or renewals thereof) of this Indenture or any instrument ancillary or supplemental hereto or thereto;
(c)	the Trustee shall not be bound to give any notice of the execution hereof;
(d)	the Trustee shall not incur any liability or responsibility whatever or be in any way responsible for the consequence of any breach on the part of the Corporation of any of the covenants contained herein or of any act of the agents or servants of the Corporation; and
(e)	in addition to any right of indemnity given to the Trustee by law, the Corporation shall at all times indemnify and save harmless the Trustee against all liabilities, losses, damages, actions, proceedings, costs, claims, expenses and demands in respect of any matter or thing done or omitted by the Trustee (save only in the event of gross negligence or intentional fault of the Trustee) in any way related to this Indenture.

13.6 Conflict of Interest

     The Trustee represents to the Corporation that, at the time of the execution and delivery hereof, no material conflict of interest exists in the Trustee’s role hereunder and agrees that in the event of a material conflict of interest arising hereafter it will, within ninety (90) days after ascertaining that it has such material conflict of interest, either eliminate the same or resign its duties hereunder. If any such material conflict exists or hereafter shall exist, the validity and enforceability of this Indenture and the Debentures shall not be affected in any manner whatsoever by reason thereof.

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ARTICLE 14
SUPPLEMENTAL INDENTURES

14.1 Supplemental Indentures

     From time to time the Corporation and the Trustee may, without any further approval or consent of the Debentureholders, subject to the provisions of this Indenture, and they shall, when so directed by the provisions of this Indenture, execute, acknowledge and deliver, by their proper officers, deeds or indentures supplemental hereto, which thereafter shall form part hereof, for any one or more of the following purposes:

(a)	adding to the covenants of the Corporation herein contained for the protection of the Debentureholders or providing for events of default in addition to those herein specified;
(b)	making such provisions not inconsistent with this Indenture as may be necessary or desirable with respect to matters or questions arising hereunder, including the making of any modifications hereto or in the form of the Debentures which do not affect the substance thereof and which, in the opinion of the Trustee, may be expedient to make, provided that the Trustee shall be of the opinion that such provisions and modifications will not be prejudicial to the interests of the Debentureholders;
(c)	evidencing the succession, or successive successions of other corporations to the Corporation and the covenants of and obligations assumed by any such successor in accordance with the provisions of this Indenture; and
(d)	for any other purpose not inconsistent with the terms of this Indenture provided that, in the opinion of the Trustee, the rights of the Trustee and of the Debentureholders are not materially prejudiced thereby.

14.2 Typographical Errors

     The Corporation and the Trustee may correct any typographical or other manifest error in this Indenture, provided that in the opinion of the Trustee such corrections will not prejudice the rights of the Trustee or of the Debentureholders hereunder, and may execute all such documents as may be necessary to correct such errors.

ARTICLE 15
SATISFACTION AND DISCHARGE

15.1 Discharge

     The Trustee shall, at the request and at the cost of the Corporation, release and discharge this Indenture and execute and deliver such instruments as it shall be advised by Counsel to the Corporation are requisite for that purpose and to release the

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Corporation from its covenants herein contained (other than the provisions relating to the indemnification of the Trustee), upon proof being given to the reasonable satisfaction of the Trustee that the principal of all Debentures and interest thereon (including interest on amounts in default, if any) and all other monies payable hereunder have been paid or satisfied, or that all the outstanding Debentures having matured, or having been duly called for redemption pursuant to Section 10.2 and payment thereof and of all other monies payable hereunder have been duly and effectually provided for.

15.2 Money May be Set Aside For Holders

     In case the Holder of any Debenture shall fail to surrender his Debenture on or after the date on which the same shall be due and payable, at maturity, or otherwise and the principal or interest then payable hereunder in respect thereof shall have been duly provided for by the Corporation by deposit with the paying agent for the time being or the Trustee or other registrar, interest, if any, accruing in respect thereof shall cease to accrue, from such date, and such money, on the direction of the Corporation, may be set aside in trust for such holder in a Canadian bank, or the Trustee may itself so set aside such money and such setting aside shall for all purposes be deemed a payment to the Debentureholder of the money payable in respect thereof and the Holder shall have no other right except to receive payment of the money so set aside upon surrender of such Debenture.

15.3 Prescription

     Notwithstanding any other provision of this Indenture and subject to applicable law, the Debentures will become void unless presented for payment within three (3) years from the Maturity Date.

ARTICLE 16
GENERAL MATTERS

16.1 Assignment

     The Debentureholders may not assign the Debentures without (i) obtaining the prior written consent of the Corporation (which shall not be unreasonably withheld); and (ii) complying with the right of first refusal set forth in the Third Amended and Restated Shareholders Agreement of the Corporation dated as of March 27, 2006 (the “Shareholders Agreement”) as if the Debentures were “Shares” for the purposes of the provisions of the Shareholders Agreement. Furthermore, the Shares issuable upon conversion under this Indenture shall be subject to the Shareholders Agreement or any other agreement among all the shareholders of the Corporation governing the affairs of the Corporation. Notwithstanding the foregoing, the transfer of the Illumina Debenture shall be governed by the provisions of Article 9 hereof for as long as the provisions of such Article will apply to the Illumina Debenture.

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16.2 Notices

     Any notice or other communication required or permitted to be given hereunder shall be in writing, and shall be given by facsimile or by hand-delivery, as hereinafter provided. Any such notice or other communication, if sent by facsimile shall be deemed to have been received on the Business Day following the sending, or if delivered by hand-delivery, shall be deemed to have been received at the time it is delivered to the applicable address noted below. Notice of a change of address shall also be governed by this Section. Notices and other communications shall be addressed as follows:

(a)	if to the Debentureholders, at their addresses shown on the register kept by the Trustee pursuant to Section 2.7:
(b)	if to the Corporation:
	880 McCaffrey St. Laurent, Québec H4T 2C7
	Attention of: Claude Lambert, Vice President and Chief Financial Officer Facsimile: (514) 270-5291
	with a copy to:
	Stikeman Elliott LLP 1155 René-Lévesque Boulevard West Montreal, Québec H3B 3V2
	Attention of: Franziska Ruf Facsimile: (514) 397-3222
(c)	if to the Trustee:
	Computershare Trust Company of Canada 1500 University Street, Suite 700 Montreal, Québec H3A 3S8
	Attention of: Manager, Corporate Trust Facsimile: (514) 982-7677

16.3 Time of Essence

     Time is of the essence of this Indenture.

16.4 Further Assurances

     Each of the parties shall promptly do, make, execute, deliver, or cause to be done, made, executed or delivered, all such further acts, documents and things as the other party hereto may reasonably require from time to time for the purpose of giving effect to

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this Indenture and shall use reasonable efforts and take all such steps as may reasonably be within its power to implement, to their full extent, the provisions of this Indenture.

16.5 Counterparts

     This Indenture may be executed in several counterparts, including by facsimile, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument.

[SIGNATURE PAGE FOLLOWS]

     IN WITNESS WHEREOF the parties hereto have executed this Indenture.

GENIZON BIOSCIENCES INC.
Per:	(signed)
	Duly Authorized Officer
COMPUTERSHARE TRUST COMPANY OF CANADA
Per:	(signed)
	Duly Authorized Officer
Per:	(signed)
	Duly Authorized Officer

INTERVENTION

The undersigned hereby intervenes to the present Secured Convertible Debenture Indenture to acknowledge that it has taken cognizance of the foregoing and accept all of the terms and provisions thereof applicable to it.

ILLUMINA, INC.
Per:	(signed)
	Duly Authorized Officer

EX-31.1

Exhibit 31.1

CERTIFICATION OF JAY T. FLATLEY PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jay T. Flatley, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Illumina, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 8, 2006

/s/ Jay T. Flatley

Jay T. Flatley
President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHRISTIAN O. HENRY PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christian O. Henry, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Illumina, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 8, 2006

/s/ Christian O. Henry

Christian O. Henry
Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF JAY T. FLATLEY PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Illumina, Inc. (the “Company”) on Form 10-Q for the three months ended April 2, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jay T. Flatley, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 8, 2006

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

This certification accompanying the Report is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities such Section, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHRISTIAN O. HENRY PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002

In connection with the Quarterly Report of Illumina, Inc. (the “Company”) on Form 10-Q for the three months ended April 2, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christian O. Henry, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 8, 2006

By:   /s/ Christian O. Henry

Christian O. Henry
Vice President and Chief Financial Officer

This certification accompanying the Report is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities such Section, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.