Management's Discussion of Continuing Operations

The purpose of the following management's discussion and analysis is to provide an overview of the business of Applied Biosystems Inc. to help facilitate an understanding of significant factors influencing our historical operating results, financial condition, and cash flows and also to convey our expectations of the potential impact of known trends, events, or uncertainties that may impact our future results. You should read this discussion in conjunction with our consolidated financial statements and related notes included in this report and in our 2008 Annual Report to Stockholders. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. When used in this management discussion, the terms "Company," "we," "us," or "our" mean Applied Biosystems Inc.

We have reclassified some prior year amounts for comparative purposes.

Overview

We are a global leader in the development and marketing of instrument-based systems, consumables, software, and services for academic research, the life science industry, and commercial markets. We commercialize innovative technology solutions for DNA, RNA, protein, and small molecule analysis. Customers across the disciplines of academic and clinical research, pharmaceutical research, and manufacturing, forensic DNA analysis, and agricultural biotechnology use our products and services to accelerate scientific discovery, improve processes related to drug discovery and development, detect potentially pathogenic microorganisms, and identify individuals based on DNA sources. We have a comprehensive service and field applications support team for a global installed base of high-performance genetic and protein analysis solutions. Our fiscal year ends on June 30.

Pending Merger with Invitrogen

On June 12, 2008, we and Invitrogen Corporation announced that our respective boards of directors had approved a definitive merger agreement under which Invitrogen will acquire all of the outstanding shares of Applied Biosystems Group Common Stock, which we refer to as "Applied Biosystems stock." The merger was approved by the stockholders of each company on October 28, 2008. The closing of the merger is conditioned on the receipt of antitrust clearance under the European Council Merger Regulation and other customary closing conditions. We currently expect the merger to be completed in mid November 2008.

Celera Separation

On July 1, 2008, we completed the separation of all of the business, assets, and liabilities of the Celera group, one of our business units, from our remaining business. The separation was completed by means of a redemption of each outstanding share of Celera Group Common Stock in exchange for one share of common stock of Celera Corporation, a Delaware corporation, which now holds all of the business, assets, and liabilities previously attributed to the Celera group. On July 1, 2008, following the Celera group separation, Celera Corporation became an independent, publicly-traded company whose shares are listed on the NASDAQ stock market under the symbol "CRA." Applied Biosystems became our only business and Applied Biosystems stock became our only class of outstanding common stock. In connection with the Celera separation, we changed our corporate name to Applied Biosystems Inc. to reflect the remaining business of the Company following the separation.

Amounts previously reported for the Celera group have been reclassified and stated as discontinued operations. See Note 15 to our interim condensed consolidated financial statements for more information on our discontinued operations.

Business Developments

Listed below are significant business developments since the filing of our Annual Report on Form 10-K for fiscal 2008.

• In October 2008, we launched the TaqMan® OpenArray™ Genotyping System designed to enable customers to leverage the speed and accuracy of gold-standard Taqman technology for screening and validation applications in fast-growing markets such as disease association studies and understanding drug treatment response as a function of individual genotype in clinical studies.

• Earlier in October, we introduced two new mass spectrometry systems - the AB SCIEX Triple Quad™ 5500 and the AB SCIEX QTRAP® 5500 - based on a completely new, next-generation platform that is expected to set elevated standards for sensitivity, scan speed and functionality. These systems are ideally suited for fast-growing application areas like drug metabolite identification, protein biomarker validation, and food and water analysis.

• Also in October, we announced the SOLiD™ 3 system, which is expected to further extend the industry-leading accuracy and throughput capabilities of this next-generation sequencing platform while providing new automation options and streamlined workflows. SOLiD 3 is expected to lower the cost of sequencing an entire human genome to less than $10,000, a level that may catalyze new research to understand the cause, diagnosis and potential treatment of complex diseases. We also announced two SOLiD-optimized kits for the analysis of small RNAs and transcriptome-wide expression profiles.

• At the end of September 2008, we received 510(k) clearance from the U.S. Food and Drug Administration ("FDA") for our new 7500 Fast Dx Real-Time PCR Instrument for use with the new Centers for Disease Control and Prevention ("CDC") rtPCR flu panel. Together with the 7500 Fast Dx Real-Time PCR Instrument, the new CDC diagnostic assay can accurately detect and identify commonly circulating human influenza viruses as well as avian influenza A (H5N1, Asian lineage) viruses within four hours and in multiple samples at one time, aiding public health officials in making rapid and accurate diagnoses.

• In related news, our Singapore facility received ISO 13485:2003 quality certification during the first quarter of fiscal 2009 for in-vitro diagnostic medical devices, enhancing our ability to serve our customers in applied and validated markets. This stringent, globally recognized management system standard enables CE marking of products for sale within the European Community.

• During the first quarter of fiscal 2009, we made several announcements about how our systems were advancing quality and safety testing. In September 2008, the FDA purchased seven of our 4000 Q TRAP® Systems for the analysis of potentially harmful pesticides in the U.S. food supply. And early in October 2008, we introduced a rapid, rtPCR-based molecular test to detect mycoplasma contamination in biopharmaceutical manufacturing operations. Rapid molecular methods are gaining increasing use in pharmaceutical manufacturing for the analysis of contaminants such as bacteria and fungi.

Critical Accounting Estimates

There were no material changes to our critical accounting estimates during the first three months of fiscal 2009. For further information on our critical accounting estimates, refer to the discussion contained in the management's discussion and analysis section of our 2008 Annual Report to Stockholders (which discussion is incorporated in this quarterly report by reference).

Events Impacting Comparability

We are providing the following information on some actions taken by us or events that occurred in the periods indicated. We describe the effect of these items on our reported earnings for the purpose of providing you with a better understanding of our on-going operations. You should consider these items when making comparisons to past performance and assessing prospects for future results.

Income/(charge)                                          Three months ended
                                                            September 30,
(Dollar amounts in millions)                                  2008       2007

Employee-related charges, asset impairments and other       $(4.7)       $  -

Other events impacting comparability:
Asset dispositions and legal settlements                    $   -        $7.6
Investment loss, net                                         (2.9)
Tax items                                                                (1.8 )

Employee-Related Charges, Asset Impairments and Other

The following items have been recorded in the interim condensed consolidated statements of operations in employee-related charges, asset impairments and other, except as noted.

Fiscal 2009

During the first quarter of fiscal 2009, we recorded a pre-tax charge of $4.7 million for professional fees and other costs associated with the pending merger with Invitrogen. This charge was in addition to a $7.8 million charge recorded in fiscal 2008.

Fiscal 2008

During the fourth quarter of fiscal 2008, we recorded pre-tax charges of $4.7 million for severance costs for 32 employees, some of whom were involved in the LC/MS product line, which is included in the Applied Biosystems/MDS Analytical Technologies Instruments business, a 50/50 joint venture between us and MDS Inc. Included in the $4.7 million charge was a charge of $0.7 million for severance costs related to the Applied Biosystems/MDS Analytical Technologies Instruments business. The charges resulted from our realignment to support our strategic growth priorities and the decision at MDS to resize and refocus its development process. All of our affected employees were notified by May 31, 2008, and are expected to be terminated by December 31, 2008. To date, we have made cash payments of $2.2 million, of which $1.6 million was made in the first quarter of fiscal 2009, related to these charges. Cash expenditures were funded by cash provided by operating activities. Additionally, in the first quarter of fiscal 2009, we recorded a pre-tax benefit of $0.1 million for a reduction in anticipated employee-related costs associated with this charge. The remaining cash expenditures of $2.4 million are expected to be paid by December 31, 2008.

Also during the fourth quarter of fiscal 2008, we recorded pre-tax charges of $1.3 million, comprised of a $0.8 million charge in connection with the disposal of an aircraft and a $0.5 million related charge for severance costs for 5 employees. We completed the sale of the aircraft in the fourth quarter of fiscal 2008. All of the affected employees were notified in the fourth quarter of fiscal 2008, and were terminated by the end of the first quarter of fiscal 2009. During the first quarter of fiscal 2009, we made cash payments of $0.5 million related to severance costs, which represented the remaining payments related to these charges. Cash expenditures were funded by cash provided by operating activities.

During the second quarter of fiscal 2008, we recorded a pre-tax charge of $2.9 million for severance costs for 41 employees. The charge resulted from the realignment of our organization to support market dynamics and we plan on redirecting the savings into other strategic initiatives. All of the affected employees were notified as of December 31, 2007, and were terminated by June 30, 2008. To date, we have made cash payments of $2.7 million, of which $0.1 million was made in the first quarter of fiscal 2009, which represented the remaining payments related to this charge. Cash expenditures were funded by cash provided by operating activities. Additionally, in fiscal 2008, we recorded a pre-tax benefit of $0.2 million for a reduction in anticipated employee-related costs associated with this charge.

Charges prior to fiscal 2008

During the first three months of fiscal 2009, we made cash payments of approximately $0.2 million related to excess facility lease space charges recorded in fiscal 2005. The remaining cash payments of $0.9 million as of September 30, 2008, are expected to be disbursed by fiscal 2011.

Other Events Impacting Comparability

Asset dispositions and legal settlements

In the first quarter of fiscal 2008, we recorded a $7.6 million pre-tax gain in asset dispositions and legal settlements primarily related to a settlement and licensing agreement entered into with Stratagene Corporation and Agilent Technologies, Inc. (which acquired Stratagene), which resolved outstanding legal disputes with Stratagene.

Investments

In the first quarter of fiscal 2009, we recorded an other-than-temporary impairment charge of $2.9 million due to a decline in market value of an investment in the Reserve Primary Fund, a money market fund in the U.S. that is currently in liquidation as a result of having unsecured commercial paper from Lehman Brothers in its portfolio. The charge was based on our assessment that it is unlikely that the fair value of the investment will fully recover in the foreseeable future, given that Lehman Brothers has filed a petition under Chapter 11 of the U.S. Bankruptcy Code. We may recognize additional losses in future quarters as the issues with this investment are resolved. See Discussion of Condensed Consolidated Financial Resources and Liquidity for further information about this fund.

Tax items

In the first quarter of fiscal 2008, we recorded tax charges of $1.8 million primarily related to the recalculation of deferred tax assets as a result of a decrease in the statutory tax rate in Germany.