Bio-Rad Laboratories Annual Report 2006

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FY2006 Annual Report · Bio-Rad Laboratories

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Path to

Health

Bio-Rad LaboratoriesAnnual Report 2006If the journey is indeed the reward, we are fortunate

to be traveling during an auspicious time in the field

of healthcare. On this path, each point along the way

represents a step of hope, each advancement a higher

quality of life for patients. Today, with the promise

of genetic discov-

ery and improved

diagnostic tech-

Health

niques, this path-

way is offering

new routes to suc-

cessful outcomes. At Bio-Rad, we are an integral part

of this journey, helping researchers and diagnosticians

continually reach innovative and important milestones

for improving the way diseases are understood,

managed, and, in some cases, completely eradicated.

Bio-Rad Laboratories | Annual Report 2006

Letter to Shareholders

2006 was another year of growth and progress on many fronts for Bio-Rad.

From a financial perspective, in spite of
slowed life sciences markets in both the
US and Japan, diagnostics cost containment
measures, and reduced BSE (mad cow)
revenue, we posted an 8% sales growth
for the year and increased our net income
over 26%.

A few key events throughout the year
helped to enhance these results, including a
large equipment order in Russia as well as
gains from the settlement of a long-stand-
ing royalty dispute. Our improved financial
performance is due in large part, however,
to the delivery of new and exciting prod-
ucts and our continued focus on the needs
of our customers.

We had a number of projects on our
list in 2006. Key among them was the
realignment of our selling and distribu-
tion functions throughout Europe. This
was undertaken with 2 goals in mind: first,
to improve customer service, and second,
to increase the effectiveness and efficiency
of our organization across this region. To
date, much of what we set out to do has

been completed, leaving us well-positioned
to realize the benefits of this project in the
coming years.

The year also saw several new organi-
zations become part of Bio-Rad. After
many years of discussion, Blackhawk
BioSystems joined us, bringing expertise
and products in the area of quality con-
trol. The company’s offering of infectious
disease controls is complementary to our
current product line, enhancing our lead-
ership position in an important segment
of the diagnostic market.

We also broadened our diabetes focus
with the addition of Provalis point-of-care
products for this market and the osteoporo-
sis area. Point-of-care diagnostics is an area
of increasing interest to healthcare provid-
ers as they seek to streamline patient care.
In the fourth quarter, we were able to
make an important addition to our life sci-
ence product group with the purchase of
Ciphergen’s SELDI technology for protein
analysis. This is, again, complementary to
our current suite of products. The under-

Bio-Rad Laboratories | Annual Report 2006

standing of proteins and their function will
take center stage for many years to come as
scientists seek to discover the basis of dis-
ease and, ultimately, its cures. Another mile-
stone in the pro-
tein arena was the
introduction of the
ProteOn™ system
for understanding
protein
interac-
tions, an increas-
ingly important fo-
cus of research. We
also entered into a
collaboration with
Integrated DNA
Technologies
to
develop validated
RNA
interference
(RNAi) reagents
for the growing area of gene silencing.

After many years in development, we be-
gan placing BioPlex® 2200 systems in diag-
nostic labs. Reception to this new technol-
ogy has been pleasing and we are working

to expand the range of tests available on
this system to broaden its market.

The year ended on a sad note as Philip
Padou, a longtime member of our Board,
died suddenly in
December. Phil was
a dedicated and
valuable member
of our board for
almost 30 years. We
will miss him and are
grateful for his many
years of service.

Throughout the
year, we strength-
ened our offer-
ings in a variety of
product areas in the
healthcare market
that enhanced our
positions along the “path to health”— our
theme for this year’s annual report.

While 2006 was a productive year, we now
have our sights set on 2007 and look forward
to a new year.

David Schwartz
Chairman of the Board

Norman Schwartz
President

research

discover

diagnose

treat

monitor

Bio-Rad Laboratories | Annual Report 2006

The continuum of healthcare is marked by

a long and deliberate journey, with critical

work being done at every step along the way.

Bio-Rad Laboratories is proud to partner

with scientists,

clinicians, and

physicians to

Health

make this path

as productive

as possible for

these practitioners — professionals whose

job it is to see that the ultimate beneficiaries

of this process, the patients themselves,

truly remain on the road to good health.

Bio-Rad Laboratories | Annual Report 2006

It is, in short, the discipline we use to understand how the human body
works … and how it sometimes doesn’t. Life science research allows us
to literally look inside ourselves, discovering the systems, processes, and
structure of living organisms and their component systems.

When we look inside, we find that the interactions
among the body’s thousands of proteins — highly
complex compounds found in all living cells
— play a significant and central role in determin-
ing the progression of
disease. The discovery
and characterizations
of proteins, however,
is only the first step
in learning how these
compounds participate
in a biological process.
How they function and
interact with each other
is the key to under-
standing disease.

Until recently, scientists
could look only at the
narrowest of these in-
teractions, unable to ask
the more complex ques-
tions essential to understanding the intricate pro-
tein combinations that define all cellular processes.
Today, this situation is changing rapidly, thanks
to advances in technology that allow researchers
to observe more than one protein interaction at a
time. Bio-Rad’s dedicated efforts in this area offer
researchers the ability to measure up to 36 simulta-

neous protein interactions. As a result, more exper-
iments can be run in a shorter period of time and
produce richer results in characterizing the role of
proteins in biological processes.

Going beyond the ex-
amination of interactions
among multiple proteins,
examining the relation-
ships among molecules
within a single protein
takes on increased im-
portance. This allows re-
searchers to work on dif-
ferent parts of a single life
cycle. With “interferons,”
for example (a family of
immune proteins that is
produced in response to
viruses, bacteria, parasites,
and tumor cells), work
may be done simultane-
ously to understand both the natural production of
different types of interferons in response to foreign
agents and the therapeutic use of these proteins to
treat diseases such as cancer, hepatitis C, and multiple
sclerosis. By seeing the big picture, instead of isolated
little ones, researchers are coming ever closer to un-
derstanding the interactions that can lead to cures.

The ProteOn™ XPR36 Protein Interaction Array System

fig. 1:

Based on surface plasmon resonance technology, the ProteOn™ XPR36
Protein Interaction Array System is an optical biosensor that uses im-
age analysis to simultaneously track optical changes at many
different sites in an image (array) enabling the measurement
of up to 36 interactions at a time.

fig. 1research

David Myszka, an expert in the field of optical biosensors, is

the Director of the Center for Biomolecular Interaction Analysis

at the University of Utah, in Salt Lake City, where he studies

protein interactions in collaboration with researchers on campus

and for biotech and pharmaceutical companies across the

country. David uses the Bio-Rad ProteOn XPR36 system for its

speed and accuracy, its ease-of-use, and its complete package

of instruments, kits, reagents, software, support, and training.

discover

Brian Gardner, a Research Assistant at the UCLA School

of Medicine’s Division of Pulmonary Critical Care, in Los

Angeles, California, looks at plasma and serum obtained

from patients with lung cancer and compares them to at-risk

individuals and those considered not at risk for contracting

the disease. Brian uses the ProteinChip® SELDI System for

the greater flexibility advantages its surface enhancement

technology gives him over other technologies.

Bio-Rad Laboratories | Annual Report 2006

Before we attempt to find the needle, we’ve got to know which haystack
to look in. Biomarker discovery is the science of screening for, and
identifying, the warning signs of a wide range of disease states.

Today, advances in biomarker discovery are

their structures and functions), SELDI enables

accelerating new hope in the early detection of often

researchers to detect and precisely calculate the mass

debilitating diseases such as Alzheimer’s disease and

of proteins and peptides from complex biological

cancer. A former smoker, for example, is typically

samples through a unique process that identifies

diagnosed with lung

cancer only after the

first symptoms — such

as a persistent cough

— have appeared. But

by then it may be too

late. If it were possible

to determine, early on,

a patient’s risk factors

for developing lung can-

cer, preventive measures

might be taken, with the

odds high for a drasti-

cally different outcome.

An exciting technology

The ProteinChip® SELDI System

different protein subsets

on the surface of a chip.

Comparing the results

of such protein mea-

surements among vari-

ous populations — for

example, diseased-state

lung cancer patients

compared to those con-

sidered at high risk —

leads to informed judg-

ment about the degree

to which a patient might

be likely to contract

cancer in the future.

identifying this kind of early warning sign

Technologies such as these are helpful because they

is called Surface-Enhanced Laser Desorption/

allow researchers to see the widest concentration

Ionization (SELDI), which is accelerating bio-

of proteins in the blood, increasing the possibility

marker discovery. Used for clinical and research

of detecting all types of disease agents that may

proteomics (the study of proteins, in particular

eventually lead to the development of cancer.

fig. 2:

The ProteinChip® SELDI System employs patented Surface-
Enhanced Laser Desorption/Ionization that enables differential
protein expression. Proteomics research provides a direct approach to
understanding the role of proteins in the biology of disease, monitoring
disease progression and increasing the therapeutic effects of drugs.

fig. 2Bio-Rad Laboratories | Annual Report 2006

Once the markers are found, it remains to measure them, to identify their partic-
ular brand of biological malfeasance. With this information, we are able to give
the disease a name — and thus guide the clinician on the path to treatment.

In-vitro diagnostics are designed to quantify
biological markers of interest in order to determine
whether or not a particular therapeutic inter-
vention is appropriate. These markers include
autoimmune diseases
such as
lupus and
rheumatoid arthritis,
genetic disorders like
sickle cell anemia, and
infectious diseases such
as AIDS and Epstein-
Barr Virus.

Recent advances
in
the area of multiplex
analysis have given di-
agnostic labs the abil-
ity to generate multiple
results from a single
patient sample and are
transforming diagnostic
testing for autoimmune disorders and allergies,
infectious diseases, genetically inherited diseases,
and toxicology. This means that labs are able
to perform more tests in less time and with less
labor, thus dramatically improving productivity.

As a result, clinicians are able to provide test results
more quickly to physicians, who in turn can make
critical treatment decisions earlier in a disease state.
With a diagnostic test for Antinuclear Antibodies
(ANA), for example,
knowing whether or
not auto-antibodies are
positive gives a physician
a significant head start
on treating his or her
patient, thus enhancing
the ultimate quality of
the patient’s life.

Multiplexing also allows
for the simultaneous
interpretation of data.
In the world of auto-
immune screening, for
example, clinicians are
able to test up to 11
different auto-antibodies at the same time, gener-
ating results that can be analyzed more quickly to
produce an antibody “profile,” offering additional
information to a physician about other possible
diseases to consider.

The BioPlex® 2200 System

fig. 3:

The BioPlex® 2200 system is the first and only fully automated,
random access multiplex testing platform to generate multiple
results from a single patient sample. Used with accompanying
interpretive software, the system represents a breakthrough in
clinical diagnostic technology.

p10

fig. 3diagnose

Denise Facaros is a Laboratory Manager at Healthcare

Clinical Laboratories

in Stockton, California, where

her responsibilities include the diagnostic testing of a

wide variety of markers, including ANA, for autoimmune

disease. Denise depends on the BioPlex 2200 system for its

fully automated, quick, and accurate results.

treat

Dr. Secily Bason-Mitchell is an OB/GYN at the Pacific Women’s

Obstetrics and Gynecology Medical Group in San Francisco,

California. She spends a lot of time with teens, talking

about pressing health issues such as birth control, sexually

transmitted diseases, cervical cancer, and the importance of

getting regular good health checkups.

Bio-Rad Laboratories | Annual Report 2006

We know the problem; we can now apply the solution. Today,
biomedical treatment allows us to improve the existing condition,
or — even better — prevent it from ever occurring in the first place.

Over the course of the past quarter century,
the paradigm for disease treatment in modern
biology has changed drastically. Past treat-
ments were limited to very general regimens,
but
today’s more
detailed biomarker iden-
tification processes are
leading to highly specific
and focused treatment
applications.

These technologies are
based on advances in
modern biology. The
beneficial effect allows
physicians to help their
patients become more
proactive, by enabling
those patients to lit-
erally take charge of
critical areas of their
healthcare futures. Bio-Rad offers a variety of solu-
tions for the production of biotherapeutics. One
product offering in the area of process chromatog-
raphy is now a critical component of an innovative
treatment for inoperable colorectal liver cancer.

This minimally invasive form of therapy has been
successful at extending the lives of more than 3,40
liver cancer patients in the United States alone since
the introduction of the treatment in 2002.

Similar technologies and
products provide more
effective treatment — and
in some cases, even the
prevention of — common
ailments including dia-
betes, genetic disor-
ders, hemophilia, men-
ingitis, and cancer. In
diabetes treatments, a
Bio-Rad purification
product has become a
key component in the
manufacture of an
innovative new inhal-
able insulin product that
offers great promise for the management of blood
sugar levels. In the future, with increasingly detailed
and insightful information into human biomarkers,
we can expect to see ever more focused therapies,
and ever more targeted treatments.

CHT™ Ceramic Hydroxyapatite

fig. 4:

CHT™ Ceramic Hydroxyapatite is just one example of Bio-Rad
purification products. It is used in the purification stages in the
manufacture of a variety of therapies and vaccines for diabetes,
cancer, meningitis, genetic disorders, and other diseases.

p13

fig. 4Bio-Rad Laboratories | Annual Report 2006

Like a status check in virtually any field of
endeavor, the accuracy of a monitoring process
often depends on an array of highly specific, sensi-
tive, and precise tests. In the biomedical field, such
tests quantify levels or
percentages of a prede-
termined marker in a
patient sample. These
results are then com-
pared with established
ranges to determine if
the patient needs ad-
justment to his or her
treatment, in the form
of changes in medica-
tion, diet, or exercise.

tions of diabetes, including blindness, kidney
failure, and lower limb amputation. In addition,
a variety of high performance liquid chroma-
tography (HPLC) products are used to monitor
therapeutic drugs such
as benzodiazepines and
tricyclics, which are
prescribed for depres-
sion. Monitoring the
levels of these prescrip-
tion drugs aids a phy-
sician in increasing the
efficacy of the drugs
and avoiding cardio
and central nervous
system toxicity.

VARIANT™ II TURBO Hemoglobin Testing System

Instruments such as
in Bio-Rad’s
those
broad range of moni-
toring products help
physicians in many ways. By using a Bio-Rad
A1c diabetes monitoring assay, for example,
physicians have a trusted resource for monitor-
ing a patient’s blood glucose levels over time.
By maintaining hemoglobin A1c levels as rec-
ommended, a patient can reduce the complica-

In the future, the im-
portance of monitor-
ing will increase as our
knowledge of disease
management and its associated markers ex-
pands. From monitoring multiple markers for
the same disease to associating a specific mark-
er to multiple conditions or even multiple uses,
tomorrow’s disease states will have ever more
vigilant eyes upon them.

fig. 5:

The VARIANT™ II TURBO Hemoglobin Testing System offers a great
combination of throughput, efficiency and quality of results — all in
one package. Walk-away automation minimizes
cost and streamlines workflow.

p14

Is it working? Is the regimen that the doctor prescribed effective? And how can one be sure? By monitoring a patient’s specific markers — with sensitivity, specificity, and precision — caregivers can adjust treatment to continually improve the quality of life.fig. 5monitor

In her capacity as Laboratory Administrator at the Advanced

Medical Analysis Laboratory in Monrovia, California, Mina Ison

is responsible for the activities concerned with establishing,

validating, and verifying that testing services meet customer

needs and regulatory requirements. The VARIANT II TURBO

Hemoglobin Testing System meets Mina’s demand for an A1c

test system that combines ease of operation, speed of testing,

quality, and accuracy of results.

Bio-Rad Laboratories | Annual Report 2006

The Business of Bio-Rad

Bio-Rad Laboratories has played a leading role in the advance-
ment of scientific discovery for over 0 years by providing a broad
range of innovative tools and services to the life science research
and clinical diagnostics markets.

Founded in 12 and incorporated in 17, Bio-Rad has a global team of more than
,000 employees and serves more than 8,000 research and industry customers worldwide
through its global network of operations. Throughout its existence, Bio-Rad has built
strong customer relationships that advance scientific research and development efforts
and support the introduction of new technology used in the growing fields of genomics,
proteomics, drug discovery, food safety, medical diagnostics, and more.

LIFE SCI ENCES
Bio-Rad’s Life Science Group develops, manu-
factures, and markets a wide range of labora-
tory instruments, apparatus, and consumables
used for research in functional genomics, pro-
teomics, and food safety. The group ranks
among the top life science companies world-
wide, and maintains a solid reputation for
quality, innovation, and commitment to its
customers. Bio-Rad’s life science products are
based on technologies used to identify, separate,
purify, and analyze biological materials such
as proteins and nucleic acids. Some of these
technologies include electrophoresis, imaging,
multiplex immunoassay, chromatography,
microbiology, bioinformatics, protein function
analysis, transfection, amplification, and real-
time PCR. Bio-Rad products support researchers
in laboratories throughout the world.

CLINICAL DIAGNOSTIC S
Clinical Diagnostics develops, manufactures,
sells, and supports a large portfolio of products
for medical screening and diagnostics. Bio-Rad
is the number one specialty diagnostic company
in the world and its products are recognized as
the gold standard for diabetes monitoring and
broad-spectrum screening. The company is also
well known for its quality control (QC) systems,
blood virus testing and detection, toxicology,
genetic disorders testing, specialty chemistry,
molecular pathology, and internet-based soft-
ware products. Bio-Rad’s clinical diagnostics
products incorporate a broad range of technolo-
gies used to detect, identify, and quantify sub-
stances in bodily fluids and tissues. The results
are used as aids for medical diagnosis, detection,
evaluation, and the monitoring and treatment of
diseases and other medical conditions.

p16

Bio-Rad Laboratories | Annual Report 2006

D-10™ Hemoglobin Testing System

Crime Scene Investigator PCR Basics™ Kit

Unity Desktop™ software

Lyphochek® Immunoassay Plus Control

Profina™ Purification System

ANA Screening Test

HIV-1/HIV-2 PLUS O EIA

Mini-PROTEAN® Tetra Cell

RAPID’E.coli 2™ Chromogenic Media

With a portfolio consisting of over 8,000 products, Bio-Rad provides products for discovery and

diagnostic tests for biological exploration and clinical diagnostics. The company is renowned

worldwide among hospitals, universities, and major research institutions, as well as biotechnology

and pharmaceutical companies for its commitment to quality and customer service.

p17

Bio-Rad Laboratories | Annual Report 2006

On the path to health. With much promising work

being done in the fields of life science and clinical

diagnostics, the outlook — in the face of today’s diseases

— for continued improvement in our basic quality of

life remains encouraging. From helping researchers

gain a better understanding of the nature of illness to

supporting clinicians who determine effective treat-

ment, Bio-Rad is proud to be an active participant in

these efforts, opening up new avenues in innovation

at every step along the way. This journey, more than

half a century in the making, has accelerated the

pace of scientific discovery, resulting in numerous

advancements in medicine through the years, as well

as in the greatest reward of all: a pathway to health.

p18

Bio-Rad Laboratories | Annual Report 2006

Financial Highlights

Five-Year Record

2002

2003

2004

2005

2006

(in millions, except per share data)

Net Sales

Gross Profit

$ 86.0

$ 7.6

$ 1,00.0 $ 1,181.0 $ 1,273.

$ 4.6

$ 6.2

$ 610.1 $ 646. $ 712.

Research Expenditures(1)

$ 7.8

$ 1.3

$ 108.3 $ 11.1 $ 123.4

Net Income

Return On Sales

$ 67.

$ 76.2

68.2 $

81.6 $ 103.3

7.8%

6.3%

6.%

8.1%

Book Value Per Share

$ 1.17

$ 1.41

$ 23.10 $ 2.0 $ 30.2

Basic Earnings Per Share

$ 2.70

$ 3.00

2.6 $

3.13 $

3.2

Cash Flow from Operations

$ 10.8

$ 127.6

$ 123.1 $ 108.3 $ 118.2

(1) Excludes $14.6 and $4.1 of purchased R&D in 2004 and 2006, respectively.

2006 Sales by Region

Net Sales
(in millions)

Cash Flow From
Operations
(in millions)

Basic Earnings
Per Share

9
.
3
7
2
,
1
$

0
.
1
8
1
,
1
$

6
.
7
2
1
$

1
.
3
2
1
$

2
.
8
1
1
$

3
.
8
0
1
$

8
.
5
0
1
$

2
9
.
3
$

3
1
.
3
$

0
0
.
3
$

0
7
.
2
$

5
6
.
2
$

0
.
0
9
0
,
1
$

6
.
9
7
9
$

0
.
5
6
8
$

40%
Americas

16%
Pacific
Rim

44%
Europe

Bio-Rad Laboratories | Annual Report 2006

Sales History

p20

Bio-Rad Laboratories | Annual Report 2006

Summary of Operations and Selected Financial Data

(in thousands, except per share data)

Year Ended December 31,

2006

2005

2004

2003

2002

Net sales

Cost of goods sold

Gross profit

$ 1,273,930 $ 1,180,985 $ 1,090,012 $ 979,631 $ 865,006

561,394

534,499

479,939

423,401

365,451

712,536

646,486

610,073

556,230

499,555

Selling, general and administrative expense

438,949

416,084

378,264

317,524

281,579

Product research and development expense

123,376

115,104

108,344

91,273

79,788

Purchased in-process research and development expense

4,100

—

14,620

Impairment losses on long-lived assets

—

19,770

—

Interest expense

Foreign exchange (gains) losses

Other (income) expense, net (1)

32,022

32,643

20,219

31,006

28,207

1,053

(1,528)

2,394

4,080

5,441

(28,991)

(28,958)

(11,095)

(3,012)

(678)

Income from continuing operations before taxes

142,027

93,371

97,327

115,359

105,218

Provision for income taxes

(38,764)

(15,792)

(31,035)

(38,055)

(36,692)

Income from continuing operations

103,263

77,579

66,292

77,304

68,526

Discontinued operations

Gain (loss) from discontinued operations

(net of tax)

Gain on divestiture (net of tax)

Total income (loss) from discontinued operations

Net income

Basic earnings per share:

Continuing operations

Discontinued operations

Basic earnings per share

Diluted earnings per share:

Continuing operations

Discontinued operations

Diluted earnings per share

—

(1,487)

(1,133)

3,974

3,437

—

1,950

(1,133)

(663)

—

(663)

$ 103,263 $ 81,553 $ 68,242 $ 76,171

$ 67,863

3.92 $

2.98 $

2.58 $

3.04

2.73

—

0.15

0.07

(0.04)

(0.03)

3.92 $

3.13 $

2.65 $

3.00

2.70

3.83 $

2.91 $

2.51 $

2.94

2.63

—

0.15

0.07

(0.04)

(0.02)

3.83 $

3.06 $

2.58 $

2.90

2.61

Cash dividends paid per common share

—

Total assets

$ 1,596,168 $ 1,426,582 $ 1,371,618

$ 992,596 $ 720,703

Long-term debt, net of current maturities

$ 425,625 $ 425,687 $ 425,979

$ 225,835 $ 105,768

(1) See Note 11 to the consolidated financial statements for components of Other (income) expense, net. Included in 2004 is interest and investment income of
$6.6 million, income from equity investee of $3.1 million and a litigation settlement of $1.9 million offset by a $2.4 million write-down of an investment.
Included in 2005 is interest and investment income of $16.7 million, gains on sales of investments of $11.2 million, and litigation expense of $1.2 million.
Included in 2006 is interest and investment income of $22.3 million and gains on sales of investments of $4.7 million.

p21

Bio-Rad Laboratories | Annual Report 2006

Consolidated Balance Sheets

(in thousands)

ASSETS

Current assets:

Cash and cash equivalents

Restricted cash

Short-term investments

Accounts receivable less allowance of

$15,265 in 2006 and $13,301 in 2005

Inventories, net:

Raw materials

Work in process

Finished goods

Total inventories

Deferred tax assets

Prepaid expenses and other current assets

Total current assets

Property, plant and equipment:

Land and improvements

Buildings and leasehold improvements

Equipment

Total property, plant and equipment

Accumulated depreciation

Property, plant and equipment, net

Goodwill

Purchased intangibles, net

Long-term deferred tax assets

Other assets

December 31,

2006

2005

$ 223,607

$ 296,716

—

36,138

264,473

116,343

292,970

247,192

59,356

57,682

48,271

51,601

136,007

112,470

253,045

212,342

35,862

59,820

30,984

68,496

1,129,777

1,008,211

9,577

9,837

121,977

120,015

357,600

322,354

489,154

452,206

(299,527)

(271,948)

189,627

180,258

119,492

113,276

44,605

9,100

103,567

28,449

14,003

82,385

TOTAL ASSETS

$ 1,596,168

$ 1,426,582

The accompanying notes are an integral part of these consolidated financial statements.

p22

Bio-Rad Laboratories | Annual Report 2006

(in thousands, except share data)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Accrued payroll and employee benefits

Notes payable

Current maturities of long-term debt

Sales, income and other taxes payable

Litigation accrual

Accrued royalties

Current deferred taxes

Other current liabilities

Total current liabilities

Long-term debt, net of current maturities

Deferred tax liabilities

Other long-term liabilities

Total liabilities

December 31,

2006

2005

83,411

72,950

92,101

81,076

2,539

503

19,949

8,810

31,826

2,445

77,949

2,950

391

15,841

55,701

34,386

126

55,822

319,533

319,243

425,625

425,687

7,512

23,960

2,281

21,397

776,630

768,608

Commitments and contingent liabilities

—

Stockholders’ equity:

Preferred stock, $0.0001 par value, 7,500,000

shares authorized; none outstanding

Class A common stock, $0.0001 par value, 80,000,000 shares

authorized; outstanding — 21,594,311 at 2006 and 21,316,556 at 2005

Class B common stock, $0.0001 par value,

20,000,000 shares authorized; outstanding — 4,909,908 at 2006 and 2005

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income:

Currency translation and other

Total stockholders’ equity

—

78,230

60,112

674,070

570,807

67,235

27,052

819,538

657,974

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$ 1,596,168

$ 1,426,582

The accompanying notes are an integral part of these consolidated financial statements.

p23

Bio-Rad Laboratories | Annual Report 2006

Consolidated Statements of Income

(in thousands, except per share data)

Net sales

Cost of goods sold

Gross profit

Selling, general and administrative expense

Product research and development expense

Purchased in-process research and development expense

Impairment losses on long-lived assets

Interest expense

Foreign exchange (gains) losses

Other income, net

Income from continuing operations before taxes

Provision for income taxes

Income from continuing operations

Discontinued operations

Loss from discontinued operations net of tax benefits of $532

Gain on divestiture net of tax expense of $0 in 2005

and $2,295 in 2004

Total income from discontinued operations

Net income

Basic earnings per share:

Continuing operations

Discontinued operations

Net income

Weighted average common shares

Diluted earnings per share:

Continuing operations

Discontinued operations

Net income

Weighted average common shares

The accompanying notes are an integral part of these consolidated financial statements.

Year Ended December 31,

2006

2005

2004

$ 1,273,930

$ 1,180,985

$ 1,090,012

561,394

534,499

479,939

712,536

646,486

610,073

438,949

416,084

378,264

123,376

115,104

108,344

4,100

—

32,022

1,053

(28,991)

142,027

(38,764)

103,263

—

14,620

19,770

32,643

(1,528)

(28,958)

93,371

(15,792)

77,579

—

20,219

2,394

(11,095)

97,327

(31,035)

66,292

—

(1,487)

3,974

3,437

1,950

$ 103,263

81,553

68,242

3.92

2.98

—

0.15

3.92

3.13

2.58

0.07

2.65

26,376

26,063

25,724

3.83

2.91

—

0.15

3.83

3.06

2.51

0.07

2.58

26,949

26,662

26,489

p24

Bio-Rad Laboratories | Annual Report 2006

Consolidated Statements of Cash Flows

(in thousands)

Cash flows from operating activities:

Cash received from customers

Cash paid to suppliers and employees

Litigation settlement related to MJ acquisition

Interest paid

Income tax payments

Miscellaneous receipts

Excess tax benefits from stock-based compensation

Year Ended December 31,

2006

2005

2004

$ 1,247,779

$ 1,166,711

$ 1,087,946

(1,058,977)

(1,003,264)

(920,606)

(46,981)

(31,049)

(16,072)

24,914

(1,385)

—

(31,334)

(39,597)

15,768

—

(19,543)

(33,637)

8,933

—

Net cash provided by operating activities

118,229

108,284

123,093

Cash flows from investing activities:

Capital expenditures, net

Payments for acquisitions and long-term investments

Proceeds from divestiture

Payments for purchase of intangible assets

(52,987)

(46,071)

12,772

(36,055)

(4,344)

—

(5,000)

(60,493)

(58,983)

19,775

(10,000)

Purchases of marketable securities and investments

(334,047)

(873,822)

(2,257,694)

Sales of marketable securities and investments

178,643

942,790

2,174,538

Foreign currency economic hedges, net

Receipt (payment) of restricted cash

Net cash used in investing activities

Cash flows from financing activities:

Net payments on notes payable

Long-term borrowings

Payments on long-term debt

Debt issuance costs on 6.125% bonds

Proceeds from issuance of common stock

Excess tax benefits from stock-based compensation

Net cash provided by financing activities

(2,196)

36,138

6,397

(36,138)

6,539

—

(207,748)

(6,172)

(186,318)

(659)

—

(487)

—

9,923

1,385

10,162

(6,847)

(9,580)

—

200,000

(447)

(331)

8,915

—

(1,781)

(2,876)

7,464

—

1,290

193,227

Effect of exchange rate changes on cash

6,248

(2,420)

337

Net (decrease) increase in cash and cash equivalents

(73,109)

100,982

130,339

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

296,716

195,734

65,395

$ 223,607

$ 296,716

$ 195,734

Non-cash investing activities:

Tender of Accent stock

Receipt of Nanometrics stock

(3,200)

5,354

—

The accompanying notes are an integral part of these consolidated financial statements.

p25

Bio-Rad Laboratories | Annual Report 2006

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

Common stock, $0.0001 par value:

Balance at beginning of year

Issuance of common stock

Balance at end of year

Additional paid-in capital:

Balance at beginning of year

Issuance of common stock

Stock compensation expense

Tax benefit from exercise of stock options

Balance at end of year

Retained earnings:

Balance at beginning of year

Net income

Balance at end of year

Accumulated other comprehensive income (loss):

Balance at beginning of year

Other comprehensive income (loss)

Balance at end of year

Year Ended December 31,

2006

2005

2004

—

60,112

9,923

5,363

2,832

78,230

49,628

8,916

—

1,568

60,112

—

42,164

6,250

—

1,214

49,628

570,807

489,254

421,012

103,263

81,553

68,242

674,070

570,807

489,254

27,052

40,183

67,235

58,003

(30,951)

27,052

32,628

25,375

58,003

Total stockholders’ equity

$ 819,538

$ 657,974

$ 596,888

Comprehensive income, net of tax:

Net income

Currency translation adjustments

Net unrealized holding gains net of tax of $5,767

$ 103,263

81,553

68,242

30,059

(30,535)

18,573

in 2006, $2,735 in 2005 and $3,870 in 2004

10,175

2,960

8,096

Reclassification adjustments for gains included in net income

net of tax of $30 in 2006, $2,007 in 2005 and $623 in 2004

(51)

(3,376)

(1,294)

Total comprehensive income

$ 143,446

50,602

93,617

The accompanying notes are an integral part of these consolidated financial statements.

p26

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of Bio-Rad Laboratories, Inc. and all subsidiaries

(referred to in this report as “Bio-Rad,” “we,” “us” and “our”) after elimination of intercompany balances and

transactions. The preparation of financial statements in conformity with accounting principles generally accepted

in the United States of America requires management to make estimates and assumptions that affect the amounts

reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less

which are readily convertible into cash. Cash equivalents are stated at cost, which approximates fair market value.

Restricted Cash

Restricted cash of $36.1 million at December 31, 2005 represented deposits in a money market account that was

used as collateral to protect a surety company in connection with its execution of a surety bond in the amount of

$37.2 million to stay the enforcement of a judgment in a legal matter. This matter has since been settled and the surety

bond is no longer needed. The cash is no longer restricted and has been returned to Cash and cash equivalents.

Short-Term Investments

Short-term investments consist of corporate, state and municipal securities with readily determinable fair market

values and original maturities in excess of three months. Investments with maturities beyond one year may be

classified as short-term based on their highly liquid nature and because such marketable securities represent the

investment of cash that is available for current operations. Our investments are classified as “Available-for-sale”

and accordingly are reported at fair value, with unrealized gains and losses, if material, reported as a component

of stockholders’ equity, net of any related tax effect. Unrealized losses are charged against income when a decline

in the fair market value of an individual security is determined to be other than temporary. Realized gains and

losses on investments are included in investment income.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash

equivalents, short-term investments and trade accounts receivable. Cash and cash equivalents and short-term invest-

ments are placed with highly rated major financial institutions. We perform credit evaluation procedures related to

our trade receivables and with the exception of certain developing countries, generally do not require collateral. As

a result of increased risk in these developing countries, some Bio-Rad sales are subject to collateral letters of credit.

Credit risk is generally limited due to the large number of customers and their dispersion across many geographic

areas. However, a significant amount of trade receivables are with national healthcare systems in countries within

the European Economic Community. We do not currently anticipate a credit risk associated with these receivables.

p27

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

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. The amount of the allowance is determined by analyzing known uncollectible accounts,

aged receivables, economic conditions in the customers’ country or industry, historical losses and our customers’

credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged or written off

against this reserve. This valuation allowance is reviewed quarterly to determine whether a change is warranted.

Inventory Valuation

Inventories are valued at the lower of actual cost or market and include material, labor and overhead costs.

Management reviews the need for an inventory obsolescence reserve on a quarterly basis or, if warranted by

circumstances, more frequently. In evaluating this reserve, technology changes, competition, customer demand

and manufacturing quality are considered.

Property, Plant and Equipment

Property, plant and equipment are carried at historical cost. Included in property, plant and equipment is reagent

rental equipment. We provide these instruments to our customers for use with our reagents. Property, plant and

equipment are assessed for impairment annually or whenever events or changes in circumstances indicate that the

carrying amount may not be recoverable.

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Buildings and leasehold

improvements are amortized over 15-30 years or the lives of the leases or improvements, whichever is shorter.

With the exception of reagent rental equipment, which is amortized over a 1-5 year period, equipment is depreciated

over 3-12 years.

Net capital expenditures include proceeds from the sale of property, plant and equipment of $0.3 million, $3.2

million and $0.8 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Goodwill

Goodwill, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired

businesses, is stated at cost. Goodwill is assessed for impairment by applying a fair-value based test annually or

whenever events or changes in circumstances indicate that the carrying amount may not be recoverable (see Note 6).

Income Taxes

We account for income taxes under the asset and liability method which recognizes deferred tax assets and liabilities

for the expected future tax consequences of temporary differences between carrying amounts and tax basis of assets

and liabilities (see Note 8).

Revenue Recognition

Revenue is recognized when pervasive evidence of an arrangement exists, the price to the buyer is fixed and

determinable, collectibility is reasonably assured and title has passed to the customer or product has been delivered

absent specific contractual specifications. Equipment that requires factory installation is not recorded until installa-

tion is complete and customer acceptance, if required contractually, has occurred. At the time the related revenue is

p28

Bio-Rad Laboratories | Annual Report 2006

recognized, a provision is recognized for estimated product returns. Reagent agreements are a diagnostic industry

sales method that provides use of an instrument if the customer exclusively purchases the company’s reagents to use

on that instrument. We have evaluated the reagent agreements and account for the contracts under the terms of the

guidance set forth in EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. All revenues

that we earn under our reagent agreements are recognized when the reagent has been delivered to the customer.

Service revenues on extended warranty contracts are recognized ratably over the life of the service agreement or

as services are performed, if not under contract.

Shipping and Handling

We classify all freight billed to customers as net sales. Related freight costs are included in cost of goods sold.

Warranty

We warrant certain equipment against defects in design, materials and workmanship, generally for a period of one

year. Upon shipment of that equipment, we establish, as part of cost of goods sold, a provision for the expected

costs of such warranty based on historical experience, specific warranty terms and customer feedback. A review is

performed on a quarterly basis to assess the adequacy of our warranty reserve.

Components of the warranty accrual, included in Other current liabilities and Other long-term liabilities, were as

follows (in millions):

January 1

Provision for warranty

Actual warranty costs

December 31

Research and Development

2006

2005

$ 12.0

$ 10.1

14.9

(14.0)

13.3

(11.4)

$ 12.9

$ 12.0

Internal research and development costs are expensed as incurred. Third-party research and development costs are

expensed when the contracted work has been performed. Purchased in-process research and development costs are

expensed at the time of purchase.

Foreign Currency

Balance sheet accounts of international subsidiaries are translated at the current exchange rate as of the end of

the accounting period. Income statement items are translated at average exchange rates. The resulting translation

adjustment is recorded as a separate component of stockholders’ equity.

Foreign currency transaction gains and losses are included in Foreign exchange (gains) losses in the Consolidated

Statements of Income. Transaction gains and losses result primarily from fluctuations in exchange rates when

intercompany receivables and payables are denominated in currencies other than the functional currency of our

subsidiary that recorded the transaction.

p29

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

Forward Exchange Contracts

As part of distributing our products, we regularly enter into intercompany transactions. We enter into forward

foreign currency exchange contracts to manage foreign exchange risk of future movements in foreign exchange rates

that affect foreign currency denominated intercompany receivables and payables. We do not use derivative financial

instruments for speculative or trading purposes. In accordance with Statement of Financial Accounting Standards

(SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, we do not seek hedge accounting

treatment for these contracts. As a result, these contracts, generally with maturity dates of 90 days or less and

related primarily to currencies of industrial countries, are recorded at their fair value at each balance sheet date.

The resulting gains or losses offset exchange gains or losses on the related receivables and payables, both of which

are recorded as Foreign exchange (gains) losses in the Consolidated Statements of Income. The cash flows related to

these contracts are classified as cash flows from investing activities in the Consolidated Statements of Cash Flows.

Employee Stock Compensation Plans

We maintain incentive and non-qualified stock option plans for officers and certain other key employees. We also

have an employee stock purchase plan that provides that eligible employees may contribute toward the purchase of

our Class A common stock. These plans are described more fully in Note 10.

Prior to January 1, 2006, we applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to

Employees (APB No. 25), and related interpretations, in accounting for our share-based compensation plans. All

employee stock options were granted at or above the grant date market price. Accordingly, no compensation cost

was recognized in the financial statements but was included as a pro forma disclosure in the consolidated financial

statements. We also recorded no compensation expense in connection with our Employee Stock Purchase Plan

(ESPP) as the purchase price of the stock was not less than 85% of the lower of the fair market value of our com-

mon stock at the beginning of each offering period or at the end of each purchase period.

As of January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), Share-Based Payment using

the modified prospective method. Under this transition method we are required to record compensation expense for

all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain

outstanding at the date of adoption. In accordance with the modified prospective transition method, our results for prior

periods have not been restated. See Note 10 for information on the impact of our adoption of SFAS 123(R).

Earnings per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares

outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as stock

options, and uses the average share price for the period using the treasury stock method. Under the treasury stock

method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for

future service that Bio-Rad has not yet recognized, and the amount of tax benefits that would be recorded in addi-

tional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. Common

stock equivalents are excluded from the diluted earnings per share calculation if the effect would be anti-dilutive.

Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options

to purchase 573,000, 599,000 and 765,000 shares for the years ended December 31, 2006, 2005 and 2004,

respectively. Options to purchase 253,000, 281,000 and 10,000 shares of common stock were outstanding for the

p30

Bio-Rad Laboratories | Annual Report 2006

years ended December 31, 2006, 2005 and 2004, respectively, but were excluded from the computation of diluted

earnings per share because the price of the options was greater than the average market price of the common shares.

Fair Value of Financial Instruments

The estimated fair value of financial instruments has been determined using available market information or other

appropriate valuation methodologies. Estimates are not necessarily indicative of the amounts that could be realized

in a current market exchange as considerable judgment is required in interpreting market data used to develop esti-

mates of fair value. The use of different market assumptions or estimation techniques could have a material effect

on the estimated fair value.

The estimated fair value of our financial instruments is as follows (in millions):

Year Ended December 31,

2006

2005

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Notes receivable and other assets

Total long-term debt

103.6

426.1

190.5

436.4

82.4

426.1

113.4

430.6

Financial instruments (e.g., notes receivable) that have fair values based on discounted cash flows, market quotations,

and other appropriate valuation techniques are included in Other assets. Long-term debt has an estimated fair value

based on quoted market prices for the same or similar issues.

For certain financial instruments, including cash and cash equivalents, short-term investments, accounts receivable,

marketable securities, notes payable, and accounts payable, the carrying amounts approximate fair value.

New Financial Accounting Standards

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 158, Employers’ Accounting for

Defined Benefit Pension and Other Postretirement Plans. This new standard requires an employer to: (a) recognize

in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded

status; (b) measure a plan’s assets and obligations that determine its funded status as of the end of the employer’s

fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in

which the changes occur. These changes are to be reported in comprehensive income of a business entity. The

employer is required to recognize the funded status of a benefit plan and meet the disclosure requirements effective

as of the end of fiscal years ending after December 15, 2006. The requirement to measure plan assets and benefit

obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years

ending after December 15, 2008. The adoption of SFAS 158 will not have a material effect on our consolidated

results of operations and financial position.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, Fair Value Measurements

to eliminate the diversity in practice that exists due to different definitions of fair value and the limited guidance for

applying those definitions in GAAP. SFAS 157 is effective for financial statements issued for fiscal years beginning

after November 15, 2007. We are in the process of evaluating the impact of the adoption of SFAS 157 on the results

of our operations and financial condition.

p31

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an interpreta-

tion of SFAS No. 109, Accounting For Income Taxes (FIN 48). FIN 48 prescribes a comprehensive model for how

companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken

or expected to be taken on a tax return. Under FIN 48, tax positions must initially be recognized in the financial

statements when it is more likely than not the position will be sustained upon examination by the tax authorities.

Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that is greater

than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the

position and relevant facts. FIN 48 is effective for fiscal years beginning after December 15, 2006. Bio-Rad will be

required to apply the provisions of FIN 48 to all tax positions upon initial adoption on January 1, 2007, with any

cumulative effect adjustment to be recognized as an adjustment to retained earnings. Additional FASB guidance

on FIN 48 is pending. As a result, we are currently unable to finalize our estimate of the impact that adopting this

Interpretation will have on our financial statements. Based on our analysis to date, however, we believe that the

adoption of FIN 48 may result in recording an additional liability.

2. ACQUISITIONS

In November 2006, we acquired Ciphergen Biosystems, Inc.’s ProteinChip® Systems business and worldwide

rights to its Surface Enhanced Laser Desorption/Ionization (SELDI) technology for approximately $18 million in

cash. The acquisition includes certain product lines, manufacturing capability, and intellectual property as well as

access to Ciphergen’s life science customer base. Under the terms of the agreement, Ciphergen will retain rights to

the diagnostics market. Through a separate supply agreement, Bio-Rad will supply instruments and reagents to

Ciphergen to support their diagnostics business. The total purchase of $18.0 million included $5.4 million of net

tangible assets, $1.0 million of goodwill and $11.6 million of intangible assets. The SELDI patent is presently under

review by the U.S. Patent and Trademark Office. If the patent is granted, we will pay an additional $2.0 million

to Ciphergen. All goodwill will be deductible for tax purposes. Purchased in-process research and development of

$3.8 million was charged to expense in the fourth quarter of 2006. The allocation of the total purchase price to

net tangible assets, goodwill and other intangible assets has been recorded at their fair market value based upon

management estimates and third party valuations. The results of this acquisition are included in our consolidated

financial statements from the acquisition date, in our Life Science segment. We also made a $3.0 million equity

investment in Ciphergen as part of the transaction.

In October 2006, we completed the acquisition of Blackhawk BioSystems, Inc. for approximately $16.7 million

in cash. With the acquisition of the Blackhawk infectious disease controls, we will be able to offer a broader line

of quality control products for the clinical laboratory. Bio-Rad acquired $2.2 million of net tangible liabilities,

$5.3 million of goodwill and $13.6 million of intangible assets. All goodwill will not be deductible for tax purposes.

Purchased in-process research and development of $0.3 million was charged to expense in the fourth quarter of

2006. The allocation of the total purchase price to net tangible liabilities, goodwill and other intangible assets

has been recorded at their fair market value based upon management estimates and third party valuations. The

results of Blackhawk are included in our consolidated financial statements from the acquisition date, in our

Clinical Diagnostics segment.

Pro forma results of operations for our business acquisitions have not been presented because the effects were not

material to the consolidated financial statements on either an individual or aggregate basis.

p32

Bio-Rad Laboratories | Annual Report 2006

3. SHORT-TERM INVESTMENTS

Short-term investments consist of the following (in millions):

Available-for-sale securities:

Corporate obligations

Asset backed securities

U.S. Agencies

Mortgage backed securities

Marketable equity securities

Variable rate notes

Auction rate securities

Certificates of deposit

Total short-term investments

December 31,

2006

2005

$ 143.7

$ 31.4

43.5

32.5

15.4

14.4

10.0

—

5.0

36.6

25.5

10.2

—

8.7

3.9

—

$ 264.5

$ 116.3

Management classifies investments in marketable securities at the time of purchase and reevaluates such classifica-

tion at each balance sheet date. Securities classified as Available-for-sale are stated at fair value which approximates

cost. As of December 31, 2006, the short-term investments will mature within one year.

4. INVESTMENTS

We own shares of ordinary voting stock of Sartorius AG, of Goettingen, Germany, a process technology supplier to

the biotechnology, pharmaceutical, chemical and food and beverage industries. We purchased shares in 2006 and

2005 for approximately $6 and $4 million, respectively, bringing our total investment to approximately 27% of

the outstanding voting shares of Sartorius at December 31, 2006. The Sartorius family trust and Sartorius family

members hold a controlling interest of the outstanding voting shares. We do not have any representative or designee

on Sartorius’ board of directors, nor do we have any other influence over the operating and financial policies of

Sartorius. Therefore, we account for this investment using the cost method. This investment is reported in Other assets.

In December 1997, we began investing in Instrumentation Laboratory, S.p.A. (IL), an Italian based clinical diag-

nostics company. A privately held company based in Spain controls the majority of the outstanding stock of IL. As

of December 31, 2004, we valued our investment in IL at $4.0 million which reflects a $2.4 million write-down

recorded in Other income, net. In October 2005, Bio-Rad entered into an agreement to sell all its shares back to IL.

We received cash of $12.0 million and recorded in Other income, net, a pre-tax gain of $7.9 million (see Note 11).

During July 2006, Accent Semiconductor Technology Inc. (Accent), a private company, was acquired by Nanometrics Inc.

(Nanometrics), a publicly held company. In preparation for the merger, Accent repaid the $11.8 million note receivable

and accrued interest owed to Bio-Rad as part of Accent’s 2000 purchase of the assets and certain liabilities of our

former semiconductor and optoelectronic metrology business. As part of the merger agreement, we tendered our

ownership interest in Accent in exchange for approximately 600,000 shares of Nanometrics stock valued at $5.4

million on conversion. We also received a $2.5 million facilitation fee for aiding in the merger. These transactions

p33

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

resulted in a gain of $4.7 million included in Other (income) expense, net (see Note 11). Our current ownership

interest in Nanometrics is less than 5%, is marked to market and is included in Other assets. There are certain

restrictions on selling our Nanometrics shares within the first year of ownership.

On July 26, 2005, BioSource International, Inc. (BioSource) announced in a press release that it had entered into a

definitive merger agreement under which Invitrogen Corporation would acquire BioSource for $12.50 per share in

cash. In October 2005, we tendered our shares of BioSource to Invitrogen Corporation for $12.50 per share in cash

and received cash of $8.3 million. We recorded in Other income, net, a pre-tax gain of $3.3 million (see Note 11).

5. DISCONTINUED OPERATIONS

On May 31, 2004, we sold a group of assets and transferred certain liabilities that comprise a substantial portion of

our confocal microscopy product line to Carl Zeiss Jena GmbH. Proceeds of $19.8 million were offset by net assets

of $5.7 million, lease settlements of $6.7 million and severance, legal and other costs of $1.7 million resulting in a

pre-tax gain of $5.7 million. As required by SFAS 144, Accounting for the Impairment or Disposal of Long-Lived

Assets, with the disposition of this asset group, the sales and expenses related to this product line for current and

prior periods have been reclassified as a separate line on the income statement titled “Discontinued Operations.”

During 2005, Bio-Rad reached an agreement to settle the $6.7 million lease commitment and revised our lease

settlement estimate to $2.7 million to exit the facility in 2005. Consequently, we recognized a $4.0 million gain on

the revised disposition. There were no sales or pre-tax operating losses attributable to the discontinued operations

for the years ended December 31, 2006 and 2005. The discontinued operations generated net sales of $6.3 million

and a pre-tax operating loss of $2.0 million for the year ended December 31, 2004.

6. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS

As part of the acquisition of Ciphergen Biosystems, Inc. in December 2006 (see Note 2), we added $1.0 million of

goodwill and $7.8 million of intangible assets: $7.2 million of developed technology and $0.6 million in customer

lists. The intangibles are recorded in our Life Science segment.

As part of the acquisition of Blackhawk BioSystems, Inc. in October 2006 (see Note 2), we added $5.3 million of

goodwill and $13.3 million of intangible assets: $11.5 million of developed technology, $0.4 million of covenants

not to compete, $0.2 million of customer lists, and $1.2 million of other intangibles. These intangibles are part of

our Clinical Diagnostics segment.

In March 2005, we purchased the rights to certain patents for $1.0 million. In June 2004, we purchased $14.0 mil-

lion of intangible assets related to licensing agreements. We paid $6.0 million upon acquisition and $4.0 million in

the third quarter of 2004. The remaining $4.0 million was paid in 2005. These intangibles are part of our Clinical

Diagnostics segment.

p34

Bio-Rad Laboratories | Annual Report 2006

During the fourth quarter of 2005, $19.8 million of impairment losses related to intangible and long-lived assets

were recorded in the Life Science segment. Of these losses, $15.8 million related to intangible and tangible assets

acquired from MJ GeneWorks (MJ). The circumstance leading to the impairment was the November 10, 2005

recommended ruling of the Connecticut Federal District Court that it would not enforce the August 30, 2005

settlement between Bio-Rad, Applera and Roche (see Note 14). As a result of this decision Bio-Rad continued to

be barred from selling, servicing or marketing MJ thermal cyclers and real time polymerase chain reaction (PCR)

equipment in the United States. The asset group impaired included fixed assets at the Massachusetts manufactur-

ing location making the MJ cyclers along with intangible assets related to developed technology, U.S. customer

mailing lists, trade names and non-compete agreements. The determination of fair value was calculated converting

estimated future cash flows to their present value, using the rate of return expected by an investor for an investment

with similar perceived risk. Additionally, $4.0 million of intangible and tangible assets related to our microarray

product line manufactured in Waterloo, Canada were impaired. In the fourth quarter, we decided to close the plant

and no longer manufacture the products that related to the specific patents purchased from Virtek in 2002. We

have developed new microarray products that do not use the technology covered in the patents. The discontinued

products covered by the patents will have negligible sales and cash flow in 2007 and beyond.

Goodwill balances have been included in corporate for segment reporting purposes in Note 15.

Other than goodwill, we have no intangible assets with indefinite lives. Information regarding our identifiable

purchased intangible assets is as follows (in millions):

December 31, 2006

Average
Useful Life
(years)

Carrying
Amount

Accumulated
Amortization

Net

Developed Product Technology

2-15

$ 27.9

Licenses

Know How

Covenants Not to Compete

Patents

Customer Lists

Other

1-4

2-5

2-15

5-15

14.0

9.8

2.4

1.0

1.4

1.3

3.6

2.2

5.7

1.1

0.1

0.4

0.1

$ 24.3

11.8

4.1

1.3

0.9

1.0

1.2

$ 57.8

$ 13.2

$ 44.6

p35

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

December 31, 2005

Average
Useful Life
(years)

Carrying
Amount

Accumulated
Amortization

Net

Developed Product Technology

Licenses

Know How

Covenants Not to Compete

Patents

Customer Lists

Other

3-6

1-5

1-6

9.2

14.0

8.7

2.0

1.0

0.6

2.2

$ 37.7

1.4

1.3

3.7

0.7

0.2

2.0

9.3

—

7.8

12.7

5.0

1.3

1.0

0.4

0.2

$ 28.4

Recorded purchased intangible asset amortization expense for the years ended December 31, 2006, 2005, and 2004

was $5.3 million, $11.0 million and $6.9 million, respectively. Estimated purchased intangible asset amortization

expense (based on existing intangible assets) for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 is

$6.9 million, $6.3 million, $4.8 million, $3.6 million and $2.9 million, respectively.

7. NOTES PAYABLE AND LONG-TERM DEBT

Notes payable include local credit lines maintained by our subsidiaries aggregating approximately $33.5 million,

of which $30.1 million was unused at December 31, 2006. At December 31, 2005, these lines aggregated approxi-

mately $34.1 million, of which $30.8 million was unused. The weighted average interest rate on these lines was

4.5% and 8.3% at December 31, 2006 and 2005, respectively. Bio-Rad Laboratories, Inc. guarantees most of these

credit lines.

In June 2005, Bio-Rad entered into a new Credit Agreement, which amends and restates the Credit Agreement

dated September 9, 2003, as amended December 8, 2004. Borrowings are permitted up to a maximum of $150.0

million on a revolving basis and can be used to make acquisitions, for working capital and for other general

corporate purposes. Borrowings under this line of credit carry a floating rate of interest based on a reference rate

dictated by the type of borrowing plus the applicable margin. Under certain conditions, the Credit Agreement may

be increased up to an additional $50 million. The credit agreement will mature on June 21, 2010.

The Credit Agreement is secured by substantially all of our personal property assets, the assets of our domestic subsidiar-

ies and 65% of the capital stock of certain foreign subsidiaries. It is guaranteed by all of our existing and future domestic

subsidiaries (other than immaterial domestic subsidiaries as defined for purposes of the Credit Agreement).

p36

Bio-Rad Laboratories | Annual Report 2006

The principal components of Long-term debt are as follows (in millions):

7.5% Senior Subordinated Notes

6.125% Senior Subordinated Notes

Capitalized leases

Less current maturities

Long-term debt

December 31,

2006

2005

$ 225 .0

$ 225.0

200.0

1.1

426.1

(0.5)

200.0

1.1

426.1

(0.4)

$ 425.6

$ 425.7

In December 2004, Bio-Rad sold $200.0 million principal amount of Senior Subordinated Notes due 2014 (6.125%

Notes). The notes pay a fixed rate of interest of 6.125% per year. Upon any sale of our common stock, we have the

right to repurchase up to 35% of the 6.125% Notes any time prior to December 15, 2007 at a specified redemption

price plus accrued and unpaid interest and certain other charges. Furthermore, we have the option to redeem any or

all of the 6.125% Notes at various declining redemption prices or at 100% of the principal amount plus the “appli-

cable premium” (as defined by the indenture) along with accrued and unpaid interest and certain other charges

depending on the date redeemed. Bio-Rad’s obligations under the 6.125% Notes are not secured, rank equal to

other senior subordinated notes and rank junior to all Bio-Rad’s existing and future senior debt.

In August 2003, Bio-Rad sold $225.0 million principal amount of Senior Subordinated Notes due 2013 (7.5%

Notes). The notes pay a fixed rate of interest of 7.5% per year. We have the option to redeem any or all of the

7.5% Notes at various declining redemption prices or at 100% of the principal amount plus the “applicable pre-

mium” (as defined by the indenture) along with accrued and unpaid interest and certain other charges depending

on the date redeemed. Bio-Rad’s obligations under the 7.5% Notes are not secured, rank equal to other senior

subordinated notes and rank junior to all Bio-Rad’s existing and future senior debt.

The Credit Agreement, the 6.125% Notes, and the 7.5% Notes require Bio-Rad to comply with certain financial

ratios and covenants, among other things. The covenants include a leverage ratio test, an interest coverage test and

a consolidated net worth test. There are also restrictions on our ability to declare or pay dividends, incur debt,

guarantee debt, enter into transactions with affiliates, merge or consolidate, sell assets, make investments, create

liens and prepay subordinated debt. We were in compliance with all financial ratios as of December 31, 2006 and 2005.

Maturities of long-term debt at December 31, 2006 are as follows: 2007 – $0.5 million; 2008 – $0.4 million;

2009 – $0.1 million; 2010 – $0.1 million; 2011 – $0.0 million; thereafter – $425.0 million.

p37

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

8. INCOME TAXES

The U.S. and international components of income before taxes are as follows (in millions):

U.S.

International

Income from continuing operations before taxes

The provision (benefit) for income taxes consists of (in millions):

Current:

U.S.

International

Deferred:

U.S.

International

Provision for income taxes

Year Ended December 31,

2006

2005

2004

$ 66.8

$ 35.0

3.5

75.2

58.4

93.8

$ 142.0

$ 93.4

$ 97.3

Year Ended December 31,

2006

2005

2004

$ 13.2

$ 11.6

(2.4)

24.6

37.8

22.6

34.2

36.4

34.0

0.8

0.2

1.0

$ (13.6)

(5.1)

(4.8)

(18.4)

2.1

(3.0)

$ 38.8

$ 15.8

$ 31.0

Bio-Rad’s income tax provision differs from the amount computed by applying the U.S. federal statutory rate to income

before taxes as follows:

U. S. statutory tax rate

State taxes, net of federal benefit

Foreign income at other than U.S. tax rates

Foreign losses not benefited

Non-taxable dividend income

Export sales benefit

Tax credits

Capital losses not benefited/(benefited)

Increase (decrease) in tax reserves

Other

Provision for income taxes

p38

Year Ended December 31,

2006

2005

2004

(1)

(3)

(2)

—

(3)

—

(7)

(6)

(3)

(2)

(5)

(1)

(2)

(1)

Bio-Rad Laboratories | Annual Report 2006

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and

liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of

deferred tax assets and liabilities are as follows (in millions):

Deferred tax assets

Bad debt reserve

Inventory reserve

Warranty reserve

Vacation pay reserve

Net operating loss

Royalty reserve

Retirement reserve

Depreciation

In-process R&D, goodwill and acquired intangible assets

State tax credit carryforward

Miscellaneous — other items

Valuation allowance

Deferred tax liabilities

Unrealized holding gains

Deferred gain

Development cost of Hercules facility

Foreign exchange gain/loss

Depreciation

Goodwill and acquired intangible assets

Miscellaneous — other items

Year Ended December 31,

2006

2005

4.2

3.2

13.2

6.1

6.3

16.2

—

3.8

6.2

16.5

7.2

15.3

(26.5)

68.5

10.6

5.2

0.8

2.3

1.9

9.4

3.3

12.2

5.5

6.0

10.1

4.4

3.6

5.5

15.3

6.4

12.0

(17.7)

66.5

4.8

5.2

1.2

2.3

5.6

2.0

2.8

$ 33.5

$ 23.9

At December 31, 2006, Bio-Rad’s international subsidiaries had combined net operating loss carryforwards of

$39.4 million. These loss carryforwards have no expiration date. The utilization of these carryforwards is limited to

the separate taxable income of each individual subsidiary.

At December 31, 2006, Bio-Rad had an unutilized domestic net operating loss carryforward of $11.7 million.

The loss carryforward will expire in the year 2018. The utilization of the loss carryforward is limited to Bio-Rad’s

domestic taxable income. At December 31, 2006, Bio-Rad had a California tax credit carryforward of $7.2 million.

The credit carryforward has no expiration date. The utilization of the tax credit carryforward is limited to the

extent Bio-Rad has California taxable income.

p39

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

A valuation allowance is needed to reduce the deferred tax assets to an amount that is more likely than not to be

realized. The net change in the valuation allowance in 2006 was an increase of $8.8 million, primarily relating to

net operating losses acquired or incurred and credit carryforwards in jurisdictions with no future projected earnings.

Bio-Rad does not provide taxes which would be payable if the cumulative undistributed earnings of its international

subsidiaries, approximately $314 million at December 31, 2006, were remitted to the U.S. parent company. Unless

it becomes advantageous to remit earnings for tax reasons, foreign exchange reasons, or to fulfill working capital

or investment requirements, such earnings are indefinitely reinvested in its operations. If these earnings were repatriated

to the United States, they would generate foreign tax credits that would reduce the U.S. federal tax liability associated

with the distribution. The potential deferred tax liability for these earnings would be approximately $50 million.

9. STOCKHOLDERS’ EQUITY

Bio-Rad’s outstanding stock consists of Class A Common Stock (Class A) and Class B Common Stock (Class B).

Each share of Class A and Class B participates equally in the earnings of Bio-Rad, and is identical in most respects

except that Class A has limited voting rights. Each share of Class A is entitled to one-tenth of a vote on most mat-

ters, and each share of Class B is entitled to one vote. Additionally, Class A stockholders are entitled to elect 25%

of the Board of Directors and Class B stockholders are entitled to elect the balance of the directors. Cash dividends

may be paid on Class A shares without paying a cash dividend on Class B shares but no cash dividend may be paid

on Class B shares unless at least an equal cash dividend is paid on Class A shares. Class B shares are convertible at

any time into Class A shares on a one-for-one basis at the option of the stockholder.

10. STOCK OPTION AND PURCHASE PLANS

Description of Share-Based Compensation Plans

Stock Option Plans

We have two stock option plans for officers and certain other employees: the Amended 1994 Stock Option Plan (the

“1994 Plan”) and the 2003 Stock Option Plan (the “2003 Plan”). Both plans authorize the grant to employees of

incentive stock options and non-qualified stock options. The maximum number of shares issuable under the 2003

Plan is 1,675,000 shares and may be of either Class A or Class B Common Stock. Of these shares, 823,090 remain

available to be granted as of December 31, 2006. We no longer make stock option grants under the 1994 Plan.

Under both of these plans, Class A and Class B options are granted at prices not less than fair market value on the

date of grant. Generally, options granted have a term of 10 years and vest in increments of 20% per year over a

five-year period on the yearly anniversary date of the grant. For options granted before January 1, 2001, options

vest in increments of 25% over a four-year period on the yearly anniversary date of the grant.

p40

Bio-Rad Laboratories | Annual Report 2006

Employee Stock Purchase Plan (ESPP)

Bio-Rad has an employee stock purchase plan that provides that eligible employees may contribute up to 10%

of their compensation up to $25,000 annually toward the quarterly purchase of our Class A common stock. The

employees purchase price is 85% of the lesser of the fair market value of the stock on the first business day or the

last business day of each calendar quarter. Bio-Rad has authorized the sale of 2,390,000 shares of common stock

under the ESPP.

Stock Options

The following table summarizes stock option activity (amounts reported in the Price columns represent the weighted

average exercise price):

Year Ended December 31,

2006

2005

2004

Price
Price
Price

Shares
Shares
Shares

Price
Price
Price

Shares
Shares
Shares
Shares
Shares

Price
Price
Price
Price
Price
Price
Price

Outstanding at beginning of year

1,589,206

$ 34.43 1,630,717

$ 27.14 1,582,915

$ 20.04

Granted

Exercised

313,233

62.68

307,822

57.25

306,990

(177,867)

25.81

(299,485)

16.26

(221,759)

Forfeited/Expired

(56,803)

51.79

(49,848)

46.05

(37,429)

53.82

14.02

23.58

Outstanding at end of year

1,667,769

$ 40.06 1,589,206

$ 34.43 1, 630,717

$ 27.14

Options exercisable at year-end

815,318

$ 25.65

746,765

$ 20.50

849,633

$ 15.22

Weighted average fair value of

options granted during the year

$ 29.85

$ 20.76

$ 18.74

p41

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

The following summarizes information about stock options outstanding at December 31, 2006:

Options Outstanding

Options Exercisable

Number
Outstanding
at 12/31/06

Weighted
Average Remaining
Contractual Life
(in years)

Weighted
Average
Exercise Price

Number
Exercisable
at 12/31/06

Weighted
Average
Exercise Price

282,977

269,614

283,585

253,407

269,954

308,232

3.42

2.87

5.51

6.94

8.10

9.00

$ 11.34

$ 21.38

$ 34.06

$ 53.09

$ 57.13

$ 62.62

282,977

224,005

169,710

89,629

48,865

132

$ 11.34

$ 19.91

$ 33.52

$ 53.03

$ 57.09

$ 58.85

Range of Exercise Prices

$10.75-$11.94

$11.97-$28.61

$28.88-$36.00

$36.50-$53.75

$56.05-$57.49

$58.85-$69.30

The weighted average remaining contractual term for stock options outstanding and exercisable was 6.01 years and

4.22 years, respectively, as of December 31, 2006. The aggregate intrinsic value for stock options outstanding and

exercisable was $70.8 million and $46.4 million, respectively, as of December 31, 2006. The total intrinsic value of

stock options exercised during the year ended December 31, 2006 was approximately $8 million. Intrinsic value for

stock options is defined as the difference between the current market value and the grant price.

Cash received from stock options exercised during the year ended December 31, 2006 was $4.6 million. The actual

tax benefit realized for the tax deductions from stock options exercised totaled $1.8 million in 2006.

As of December 31, 2006, there was $9.8 million of total unrecognized compensation cost from stock options. That

cost is expected to be recognized over a weighted-average period of approximately two years.

We currently use the Black-Scholes option-pricing model to calculate the fair value of share-based awards. This

model incorporates various assumptions including volatility, interest rate and expected life. The following table

summarizes the assumptions used to compute the weighted average fair value of stock option grants.

Expected volatility

Risk-free interest rate

Expected life (in years)

Expected dividend

Year Ended December 31,

2006

2005

2004

4.62

7.4

—

3.45

4.7

—

2.73

4.3

—

Volatility was based on the historical volatilities of our common stock for a period equal to the stock option’s

expected life. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant.

In 2005, the expected life was estimated using the historical exercise behavior of employees. In 2006, we estimated

the expected life using the simplified method described in the SEC’s Staff Accounting Bulletin No. 107. We do not

anticipate paying any cash dividends in the future and therefore use an expected dividend yield of zero.

p42

Bio-Rad Laboratories | Annual Report 2006

Employee Stock Purchase Plan

The fair value of the employee’s purchase rights was estimated using the Black-Scholes option-pricing model with

the following weighted average assumptions.

Expected volatility

Risk-free interest rate

Expected life (in years)

Expected dividend

Weighted average fair value

of purchase rights

Year Ended December 31,

2006

2005

2004

4.66

.25

—

2.95

.25

—

1.22

.25

—

$ 13.68

$ 11.38

$ 10.81

The major assumptions are primarily based on historical data. Volatility was based on the historical volatilities of

our common stock for a period equal to the purchase right’s expected life. The risk-free interest rate is based on the

U.S. Treasury yield curve in effect at the time of the grant. We do not anticipate paying any cash dividends in the

future and therefore use an expected dividend yield of zero.

We sold 99,888 shares for $5.3 million, 92,869 shares for $4.0 million and 68,932 shares for $3.1 million under the

ESPP to employees in 2006, 2005 and 2004, respectively. At December 31, 2006, 507,550 shares remain authorized

under the ESPP.

We currently issue new shares to satisfy stock option exercises and ESPP stock purchases, but may use repurchased

stock to fulfill our obligations.

Impact of Adoption of SFAS 123(R)

For the year ended December 31, 2006, we recognized pre-tax share-based compensation expense of $5.4 million

and after-tax share based compensation expense of $4.6 million. After-tax share-based compensation expense reduced

each of our net income per share and diluted net income per share by $0.17, for the year ended December 31, 2006.

Included in our share-based compensation expense is the cost related to prior year option grants that vest after

January 1, 2006 and the cost related to our ESPP stock purchases.

Prior to the adoption of SFAS 123(R), we presented all benefits of tax deductions resulting from the exercise of

share-based compensation as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123(R)

requires the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax

benefits) to be classified as financing cash flows. The recognized tax benefit was $1.4 million for the year ended

December 31, 2006.

For options granted before January 1, 2006, we amortized the fair value on an accelerated basis. For options

granted after January 1, 2006, we amortized the fair value on a straight-line basis. All options are amortized over

the requisite service periods of the awards, which are generally the vesting periods.

p43

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

In accordance with SFAS 123(R), we recognize share-based compensation net of estimated forfeitures. Prior to

January 1, 2006, we recognized forfeitures and the corresponding reduction in pro forma expenses as they occurred.

Pro forma Information Under SFAS 123 for Years Prior to 2006

The following table illustrates the effect on net income and earnings per share if we had applied the fair value

recognition provisions of SFAS 123 in accounting for the compensation cost for our stock option and stock

purchase plans (in millions, except per share data).

Net income, as reported

Deduct: Total stock based employee compensation expense

determined under fair value methods for all awards

net of related tax effects

Pro forma net income

Earnings per share:

Basic — as reported

Basic — pro forma

Diluted — as reported

Diluted — pro forma

11. OTHER INCOME AND EXPENSE

Other income, net includes the following income (expense) components (in millions):

Year Ended December 31,

2005

2004

$ 81.6

$ 68.2

3.4

3.0

$ 78.2

$ 65.2

$ 3.13

$ 3.00

$ 3.06

$ 2.93

$ 2.65

$ 2.54

$ 2.58

$ 2.47

Interest and investment income

Income from equity investee

Write-down of investments (Note 4)

Litigation settlement (Note 14)

Gains on sales of investments (Note 4)

Miscellaneous other items

Other income, net

Year Ended December 31,

2006

2005

2004

$ 22.3

$ 16.7

—

4.7

2.0

0.1

—

(1.2)

11.2

2.2

6.6

3.1

(2.4)

1.9

—

1.9

$ 29.0

$ 11.1

p44

Bio-Rad Laboratories | Annual Report 2006

12. SUPPLEMENTAL CASH FLOW INFORMATION

The reconciliation of net income to net cash provided by operating activities is as follows (in millions):

Net Income

$ 103.3

$ 81.6

$ 68.2

Year Ended December 31,

2006

2005

2004

Adjustments to reconcile income to net cash provided by

operating activities (net of effects of acquisitions):

Depreciation

Amortization

Excess tax benefits from stock compensation

Stock-based compensation

Foreign currency economic hedge transactions, net

Gains on dispositions of securities

Increase in accounts receivable, net

Increase in inventories, net

Decrease (increase) in other current assets

Increase in accounts payable and other current liabilities

Increase (decrease) in income taxes payable

Increase (decrease) in deferred taxes

Write-down of investments

Impairment losses on long-lived assets

Litigation settlement related to MJ acquisition

Other

48.7

6.7

(1.4)

5.4

2.2

(0.1)

(25.5)

(22.8)

16.9

17.3

3.8

1.2

—

(47.0)

9.5

49.1

11.9

—

(6.4)

(13.3)

(7.7)

(18.7)

(12.1)

20.5

1.6

(15.0)

—

19.8

—

(3.0)

46.2

9.3

—

(6.5)

(1.9)

(4.4)

(5.5)

3.5

1.1

(2.8)

2.5

2.4

—

11.0

Net cash provided by operating activities

118.2

108.3

123.1

13. COMMITMENTS AND CONTINGENT LIABILITIES

Rents and Leases

Net rental expense under operating leases was $26.7 million in 2006, $23.7 million in 2005 and $23.0 million in

2004. Leases are principally for facilities and automobiles.

Annual future minimum lease payments at December 31, 2006 under operating leases are as follows:

2007 – $27.7 million; 2008 – $19.3 million; 2009 – $12.1 million; 2010 – $8.8 million; 2011 – $7.1 million;

subsequent to 2011 – $9.9 million.

Deferred Profit Sharing Retirement Plan

We have a profit sharing plan covering substantially all U.S. employees. Contributions are made at the discretion

of the Board of Directors. Bio-Rad has no liability other than for the current year’s contribution. Contributions

charged to income were $7.8 million, $7.5 million and $7.0 million in 2006, 2005 and 2004, respectively.

p45

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

Other Post-Employment Benefits

In several foreign locations we are statutorily required to provide a lump sum severance or termination indemnity

to our employees. Under these plans, the vested benefit obligation at December 31, 2006 and 2005 was $17.4

million and $15.4 million, respectively and has been included in Other long-term liabilities in the consolidated

balance sheets. These plans are not required to be funded, and as such, there is no trust or other device used to

accumulate assets to settle these obligations.

Foreign Exchange Contracts

We enter into forward foreign exchange contracts as an economic hedge against foreign currency denominated

intercompany receivables and payables. At December 31, 2006, we had contracts maturing in January through

March 2007 to sell foreign currency with a nominal value of $48.1 million and an unrealized gain of $0.2 million.

Contracts to purchase foreign currency had a nominal value of $19.2 million with a negligible unrealized loss.

Insurance

We carry a deductible for workers’ compensation and a portion of our group health insurance cost. Accruals for

losses are based on our claims experience and actuarial assumptions followed in the insurance industry. Should a

greater amount of claims occur compared to our estimates or cost of medical care increase beyond what has been

anticipated, reserves recorded may not be sufficient and additional charges to income may be required.

Letters of Credit

In the ordinary course of business, we are at times required to post letters of credit. The letters of credit are issued

by our banks to guarantee our obligations to insurance companies. We were contingently liable for $5.3 million of

standby letters of credit with banks as of December 31, 2006.

Taxes

Settlement of open tax years, as well as tax issues in other countries where we conduct our business, are not

expected to have a material effect on the consolidated financial position or liquidity of Bio-Rad and, in the opinion

of management, adequate provision has been made for income and franchise taxes for all years under examination

or subject to future examination.

14. LEGAL PROCEEDINGS

On February 9, 2006, Bio-Rad completed negotiations with Applera Corporation (Applera) and Roche Molecular

Systems, Inc. to settle the patent infringement litigation against MJ Research, Inc. (MJ Research) which Bio-Rad

acquired in 2004. The total net settlement amount, including amounts related to previously accrued back royalties,

was approximately $62 million. We recognized $1.2 million of additional expense in the fourth quarter of 2005

to adjust our estimated liability as a result of the settlements. In connection with the settlements, we entered into

a royalty-bearing license agreement with Applera relating to our real-time instrument business in the United States

and a term limited license in the rest of the world.

Applera filed an action in the Regional Court of Düsseldorf, Germany in February 2003 against Bio-Rad alleg-

ing infringement of a European patent relating to real-time PCR thermal cycler technology. MJ Research is also a

defendant in this action. The suit seeks actual damages, costs and expenses and injunctive relief. In May 2004, the

Düsseldorf court issued an adverse ruling against MJ Research and us, which included an injunction against

p46

Bio-Rad Laboratories | Annual Report 2006

us and MJ Research from selling any real-time PCR instruments and reagents in Germany. In December 2004, the

European Patent Office revoked the patent for lack of novelty and the injunctions against MJ Research and Bio-Rad

were lifted, allowing MJ Research and us to resume sales of real-time PCR thermal cyclers and reagents. Applera

appealed revocation of the patent, and in July 2006 the European Patent Office reversed its novelty rejection and

reinstated the patent, subject to further review by the Opposition Division of the European Patent Office for other

grounds for revocation. The patent will be returned to the Opposition Division for review of these other issues.

We are party to various claims, legal actions and complaints arising in the ordinary course of business. We do not

believe that any ultimate liability resulting from any of these lawsuits will have a material adverse effect on our

results of operations, financial position or liquidity. However, we cannot give any assurance regarding the ultimate

outcome of these lawsuits and their resolution could be material to our operating results for any particular period,

depending upon the level of income for the period.

15. SEGMENT INFORMATION

Bio-Rad is a multinational manufacturer and worldwide distributor of its own life science research products and

clinical diagnostics products. We have two reportable segments: Life Science and Clinical Diagnostics. These

reportable segments are strategic business lines that offer different products and services and require different

marketing strategies.

The Life Science segment develops, manufactures, sells and services reagents, apparatus and instruments used for

biological research. These products are sold to university and medical school laboratories, pharmaceutical and

biotechnology companies, food testing laboratories and government and industrial research facilities.

The Clinical Diagnostics segment develops, manufactures, sells and services automated test systems, informatics

systems, test kits and specialized quality controls for the healthcare market. These products are sold to reference

laboratories, hospital laboratories, state newborn screening facilities, physicians’ office laboratories, transfusion

laboratories, and insurance and forensic testing laboratories.

The remainder of our former Analytical Instruments segment is included in Other Operations. The material product

lines of this segment were sold in 2001 and 2000.

The accounting policies of the segments are the same as those described in Significant Accounting Policies (see Note 1).

Segment profit or loss used for corporate management purposes includes an allocation of corporate expense based

upon sales and an allocation of interest expense based upon accounts receivable and inventories. Segments are

expected to manage only assets completely under their control. Accordingly, segment assets include primarily

accounts receivable, inventories and gross machinery and equipment. Goodwill balances have been included in

corporate for segment reporting purposes.

p47

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

Information regarding industry segments at December 31, 2006, 2005 and 2004 and for the years then ended is as

Life
Science

Clinical
Diagnostics

Other
Operations

$ 575.6

$ 684.9

$ 13.4

549.9

504.7

618.4

576.4

12.6

$ 13.0

$ 18.8

13.8

8.0

18.7

12.1

$ 18.0

$ 33.8

24.6

18.8

$ 25.7

(0.5)

31.4

33.0

32.6

$89.6

64.4

60.1

8.9

0.2

0.1

0.3

0.1

0.2

$0.6

(0.6)

(0.1)

$ 318.5

$ 458.8

276.3

277.5

392.9

401.2

$ 10.3

$ 34.7

11.9

24.1

25.1

34.6

7.8

5.4

6.0

0.3

0.1

follows (in millions):

Segment net sales

Allocated interest expense

Depreciation and amortization

Segment profit (loss)

Segment assets

Capital expenditures

2006

2005

2004

2006

2005

2004

2006

2005

2004

2006

2005

2004

2006

2005

2004

2006

2005

2004

p48

Bio-Rad Laboratories | Annual Report 2006

The Life Science segment profit (loss) for 2006 includes $3.8 million of in-process research and development

expense purchased in the Ciphergen acquisition and 2005 includes $19.8 million of impairment losses on long-lived

assets (see Note 6). The Life Science segment profit (loss) for 2004 includes $13.7 million of in-process research and

development expense purchased as part of the MJ GeneWorks, Inc. acquisition.

The difference between total segment allocated interest expense, depreciation and amortization, and capital

expenditures and the corresponding consolidated amounts is attributable to our corporate headquarters. The

following reconciles total segment profit to consolidated income before taxes (in millions):

Total segment profit

Other income, net

Foreign exchange gains (losses)

Net corporate operating, interest and other

Year Ended December 31,

2006

2005

2004

115.9

63.3

29.0

(1.1)

29.0

1.5

91.4

11.1

(2.4)

income and expense not allocated to segments

(1.8)

(0.4)

(2.8)

Consolidated income before taxes

from continuing operations

142.0

93.4

97.3

The following reconciles total segment assets to consolidated total assets (in millions):

Total segment assets

Cash and other current assets

Net property, plant and equipment excluding

segment specific gross machinery and equipment

Goodwill

Other long-term assets

Total assets

December 31,

2006

2005

785.1

594.2

(50.8)

119.5

148.2

674.6

563.1

(35.3)

113.3

110.9

$ 1,596.2

$ 1,426.6

p49

Bio-Rad Laboratories | Annual Report 2006

Notes to Consolidated Financial Statements (continued)

The following presents sales to external customers by geographic area based primarily on the location of the use of

the product or service (in millions):

Europe

Pacific Rim

United States

Other (primarily Canada and Latin America)

Total sales

Year Ended December 31,

2006

2005

2004

559.4

508.3

200.7

443.7

70.1

193.6

421.3

57.8

502.2

168.2

370.2

49.4

$ 1,273.9

$ 1,181.0

1,090.0

The following presents long-lived assets by geographic area based upon the location of the asset (in millions):

Europe

Pacific Rim

United States

Other (primarily Canada and Latin America)

Total long-lived assets

Year Ended December 31,

2006

2005

2004

88.1

75.0

9.2

366.0

3.1

8.5

332.1

2.8

57.7

8.0

394.4

3.1

466.4

418.4

463.2

p50

Bio-Rad Laboratories | Annual Report 2006

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 2006 and 2005 are as follows (in millions, except per share data):

2006
Net sales
Gross profit
Net income
Basic earnings per share
Diluted earnings per share

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$ 308.3
175.5
31.2
$ 1.19
$ 1.16

$ 317.7
184.7
32.3
$ 1.22
$ 1.20

$ 304.8
166.8
23.2
$ 0.88
$ 0.86

$ 343.1
185.6
16.6
$ 0.63
$ 0.61

2005
Net sales
Gross profit
Net income
Basic earnings per share
Diluted earnings per share

300

250

$ 299.2
166.4
33.5
$ 1.29
$ 1.26

$ 291.3
160.6
18.4
$ 0.71
$ 0.69

$ 283.2
156.8
16.2
$ 0.62
$ 0.61

$ 307.3
162.7
13.5
$ 0.51
$ 0.50
New Peer Group(1)

Bio-Rad

S
R
A
In the fourth quarter of 2005, Bio-Rad recorded $19.8 million of impairment losses related to intangible and
L
L
O
long-lived assets (see Note 6).
D

150

Former Peer Group(1)

200

100

50
17. STOCK PERFORMANCE GRAPH

AMEX(1)

The following graph compares the cumulative stockholder returns over the past five years for the Company’s Class A

2001

2002

2003

2004

2005

2006

Common Stock, the American Stock Exchange Market Value Index and a selected peer group, assuming $100

invested on December 31, 2001, and reinvestment of dividends if paid:

S
R
A
L
L
O
D

300

250

200

150

100

Bio-Rad

New Peer Group(1)

Former Peer Group(1)

AMEX(2)

2001

2002

2003

2004

2005

2006

(1) The New Peer Group consists of the following public companies: Applera Corp. (the Applied Biosystems group), Beckman Coulter,

Becton Dickinson, Thermo Fisher Scientific, Invitrogen, Meridian Bioscience, Millipore, and PerkinElmer Inc. Companies in our peer
group reflect our participation in two different markets: life science research products and clinical diagnostics. No single public or
private company has a comparable mix of products which serve the same markets. In many cases, only one division of a peer group
company competes in the same markets as we do. Collectively, however, our peer group reflects products and markets similar to those
of Bio-Rad. In the past, we have included Diagnostics Products in our peer group but, as they have been acquired by Siemens in the
past year, we no longer include them. We have added Thermo Fisher Scientific and Applera Corp. to form the New Peer Group as
we believe that this revised peer group is a better representation of our competitors. The Former Peer Group reflects the peer group
companies we used in prior years minus Diagnostics Products.

(2)American Stock Exchange Market Value Index

This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference
into any filing under the Securities Act or the Exchange Act, and shall not otherwise be deemed filed under these Acts.

p51

Bio-Rad Laboratories | Annual Report 2006

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Bio-Rad Laboratories, Inc., Hercules, California

We have audited the accompanying consolidated balance sheets of Bio-Rad Laboratories, Inc. and subsidiaries (the

“Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’

equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial state-

ments are the responsibility of the Company’s management. Our responsibility is to express an opinion on these

financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board

(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,

evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the

accounting principles used and significant estimates made by management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position

of Bio-Rad Laboratories, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their opera-

tions and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with

accounting principles generally accepted in the United States of America.

As discussed in Notes 1 and 10 the Company changed its method of accounting for share-based payment arrangements

in 2006 to conform to Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the effectiveness of the Company’s internal control over financial reporting as of December 31,

2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of

Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an

unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

San Francisco, California

February 28, 2007

p52

Bio-Rad Laboratories | Annual Report 2006

Management’s Discussion and Analysis

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

This discussion should be read in conjunction with the information contained in Bio-Rad’s Consolidated Financial

Statements and the accompanying notes which are an integral part of the statements. References are to the Notes to

Consolidated Financial Statements.

Other than statements of historical fact, statements made in this Annual Report include forward looking state-

ments, such as statements with respect to our future financial performance, operating results, plans and objectives

that involve risk and uncertainties. We have based these forward looking statements on our current expectations

and projections about future events. However, actual results may differ materially from those currently anticipated

depending on a variety of risk factors including among other things: our ability to successfully develop and market

new products; our reliance on and access to necessary intellectual property; our ability to successfully integrate

any acquired business; our substantial leverage and ability to service our debt; competition in and government

regulation of the industries in which we operate; and the monetary policies of various countries. We undertake no

obligation to publicly update or revise any forward looking statements, whether as a result of new information,

future events, or otherwise.

Overview

Bio-Rad is a multinational manufacturer and worldwide distributor of our own life science research and clinical

diagnostics products. Our business is organized into two primary segments, Life Science and Clinical Diagnostics,

with the mission to provide scientists with specialized tools needed for biological research and clinical diagnostics.

We sell more than 8,000 products and services to a diverse client base comprised of scientific research, healthcare,

education and government customers worldwide. We manufacture and supply our customers with a range of

reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze

and purify components. Because our customers require replication of results in manufacturing processes, research

experiments and diagnostic tests, much of our revenues are recurring. Approximately 35% of our 2006 consolidated

net sales are from the United States and 65% are from overseas, largely denominated in local currency with the

majority of these sales in Euros, Yen and British Sterling. As a result, our consolidated net sales expressed in dollars

benefit when the U.S. dollar weakens and suffers when the U.S. dollar strengthens in relation to other currencies.

Currency fluctuations benefited our consolidated net sales expressed in U.S. dollars in 2006 and 2005. The market

for reagents and apparatus remains good while growth rates have slowed due to both public and private grant

funding being more measured. The market for large capital equipment has slowed, as many pharmaceutical and

biotechnology customers delayed or reduced their capital spending. Bio-Rad is generally less impacted by trends in

capital spending as lower priced reagents and apparatus comprise more than 70% of product sales.

p53

Bio-Rad Laboratories | Annual Report 2006

Management’s Discussion and Analysis (continued)

The following shows gross profit and expense items as a percentage of net sales:

Net sales

Cost of goods sold

Gross profit

Selling, general and administrative expense

Product research and development expense,

excluding in-process research and development

Income from continuing operations

Discontinued operations

Net income

Year Ended December 31,

2006

2005

2004

100.0

44.1

55.9

34.5

9.7

8.1

—

8.1

45.3

54.7

35.2

9.7

6.6

0.3

6.9

44.0

56.0

34.7

9.9

6.1

0.2

6.3

We intend that the discussion of our results of operations and financial condition that follow will assist you in

understanding how accounting principles, policies and estimates affect our results, and the significant factors that

caused changes in our operations and financial position for the years ended December 31, 2006 and 2005.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accompanying discussion and analysis of Bio-Rad’s financial condition and results of operations are based

upon the consolidated financial statements, which have been prepared in accordance with generally accepted

accounting principles in the United States (GAAP). The preparation of financial statements in conformity with

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets,

liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and

expenses during the reporting periods. We evaluate our estimates on an on-going basis. Bio-Rad bases its estimates

on historical experience and on other assumptions that are believed to be reasonable under the circumstances,

the results of which form the basis for making judgments about the carrying values of assets and liabilities that

are not readily apparent from other sources. However, future events may cause us to change our assumptions and

estimates requiring routine adjustment. Actual results could differ from these estimates. We have determined that

for the periods reported in our 2006 Annual Report, the following accounting policies and estimates are critical in

understanding the financial condition and results of our operations.

Accounting for Income Taxes

As part of the process of preparing consolidated financial statements, management is required to estimate our income

taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure

together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.

These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet.

Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and

to the extent management believes that recovery is not likely, a valuation allowance must be established. To the extent

management establishes a valuation allowance or increases this allowance in a period, an increase to expense within the

provision for income taxes in the statement of income will result.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and

liabilities and any valuation allowance recorded in connection with the deferred tax assets. We have recorded a valuation

p54

Bio-Rad Laboratories | Annual Report 2006

allowance of $26.5 million and $17.7 million as of December 31, 2006, and 2005, respectively, due to uncertainties

related to our ability to utilize some of the deferred tax assets, primarily consisting of certain foreign net operating

losses carried forward, before they expire. The valuation allowance is based on management’s current estimates of

taxable income for the jurisdictions in which Bio-Rad operates and the period over which the deferred tax assets will be

recoverable. In the event that actual results differ from these estimates, or these estimates are adjusted in future periods, an

additional valuation allowance may need to be established which would increase the tax provision, lowering income and

impacting Bio-Rad’s financial position. Should realization of these deferred assets previously reserved occur, the provision

for income tax would decrease, raising income and positively impacting Bio-Rad’s financial position.

Valuation of Long-lived and Intangible Assets and Goodwill

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise level

goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Projected future operating results and cash flows of the reporting units’ asset or asset group are used to establish

the fair value used in evaluating the carrying value of long-lived, intangible assets and goodwill. Factors that we

consider important which could trigger an impairment review include the following:

• significant under-performance relative to expected, historical or projected future operating results;

• significant changes in the manner of use of the long-lived assets, intangible assets or the strategy for our overall business;

• significant negative industry or economic trends.

When Bio-Rad determines that the carrying value of intangibles, long-lived assets or enterprise level goodwill may

not be recoverable based upon the existence of one or more of the above indicators of impairment, we test for any

impairment based on a projected undiscounted cash flow method.

There were no impairments taken in the years 2006 and 2004. For the year 2005, that review indicated an impair-

ment had taken place in purchased intangible assets related to existing thermal cycler and microarray technology.

Valuation of Inventories

Bio-Rad values inventory at the lower of the actual cost to purchase and/or manufacture the inventory, or the current

estimated market value of the inventory. We review inventory quantities on hand and record a provision for excess

and obsolete inventory based primarily on an estimated forecast of product demand and production requirements

for the next twelve months on a quarterly basis or, if warranted by the circumstances, more frequently. In addition,

our industry is characterized by technological change, frequent new product development and product obsolescence

that could result in an increase in the amount of obsolete inventory quantities on hand. Our estimates of future

product demand may prove to be inaccurate, in which case we may have understated or overstated the valuation

allowance required for excess and obsolete inventory. In the future, if inventory is determined to be overvalued, we

would be required to recognize such costs in our cost of goods sold at the time of such determination by initiating

or increasing the valuation allowance. Likewise, if the inventory valuation allowance is determined to be no longer

required, we may have over-reported cost of goods sold in previous periods and would be required to recognize

such additional operating income at the time of sale until the inventory allowance is depleted. In no case is inven-

tory valued at an amount greater than cost. Therefore, although we make efforts to ensure the accuracy of our

forecasts of future product demand, any significant unanticipated changes in demand, technological developments

or regulations could have a significant impact on the value of our inventory and reported operating results.

p55

Bio-Rad Laboratories | Annual Report 2006

Management’s Discussion and Analysis (continued)

Allowance for Doubtful Accounts

Bio-Rad maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers

to make required payments. The amount of the allowance is determined by analyzing known uncollectible accounts, the

age of our receivables, economic conditions in the customers’ country or industry, historical losses and our customers’

general credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged or written

off against this reserve. This valuation allowance is reviewed on a quarterly basis to determine whether an increase or

decrease is warranted. Should the estimates be higher than the actual uncollectible accounts, we would report lower

profitability when the estimates are made and higher profitability when the receivable is collected.

Warranty Reserves

Bio-Rad warrants certain equipment against defects in design, materials and workmanship, generally for a period of

one year. Upon delivery and on acceptance of that equipment, we establish, as part of cost of goods sold, a provi-

sion for the expected costs of such warranty based on historical experience, specific warranty terms and customer

feedback. A review is performed on a quarterly basis to assess the adequacy of our warranty reserve and it is

adjusted if necessary. The warranty percentage and accrual are based on actual experience and expected future costs

to be incurred. Should realized costs be higher than expected costs, cost of goods sold would be lower in the period

of estimation and higher when realized.

Litigation Reserves

Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the

consolidated balance sheets. The likelihood of a material change in these estimated reserves is dependent on the possible

outcome of settlement negotiations, regulatory or judicial review and the development of facts and circumstances in

extended litigation which could change claims or assessments when both the amount and range of loss on some outstanding

litigation is uncertain. We are obligated to disclose in the footnotes of the financial statements when we are unable

to make a reasonable estimate of the liability that could result from unfavorable outcomes in litigation. As events

occur, we will assess the potential liability related to our pending litigation and revise our estimates. Such revisions

in our estimates of the potential liability could materially impact our results of operations and financial position.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an interpretation

of SFAS No. 109, Accounting For Income Taxes (FIN 48). FIN 48 prescribes a comprehensive model for how com-

panies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken