Illumina Annual Report 2005

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ANNUAL REPORT 2005

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Illumina helps researchers understand the genetic basis of disease. Shown on the

cover are Sentrix® HumanHap BeadChips, each of which can genotype hundreds

of thousands of SNPs per sample. Powered by Illumina’s revolutionary Infinium™

3404124

assay, HumanHap BeadChips deliver unprecedented performance for large-scale

disease association studies.

18 QUARTERS OF SEQUENTIAL REVENUE GROWTH ($ millions)

Illumina
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Illumina recorded a breakthrough year in 2005.

New product launches, enterprise-wide execution,

and strong market acceptance validated our

commercial strategy and positioned Illumina

for sustainable growth. We launched Infinium

genotyping to the life science community, enabling

scientists to search accurately and economically

for genetic correlations to disease. Capping the

year, we achieved profitability in the fourth quarter

of 2005, our eighteenth quarter of sequential

revenue growth.

Oligonucleotides are a key raw material

for Illumina arrays and reagents and

a co-branded offering under our

collaboration agreement with Invitrogen.

Our fourth-generation Oligator® DNA

synthesizers generate unprecedented

oligonucleotide output and quality at

the lowest cost points in our industry—

a source of competitive advantage

for Illumina.

Illumina
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Dear Fellow Shareholders:

John R. Stuelpnagel, D.V.M.,

Senior Vice President and COO, and

Jay T. Flatley, President and CEO

Illumina had an incredible year in 2005, achieving

The resulting content features so-called

significant milestones in all areas of our business.

“tagSNPs” derived from the Human HapMap

These achievements have positioned us well

Project. TagSNPs are proxies for larger groups

to continue our leadership in the development

of SNPs called haplotypes that are inherited

of tools for the large-scale analysis of genetic

together. By taking a tagSNP-centric approach,

variation and function.

investigators can genotype the entire human

genome comprehensively with a much smaller

We reported record financial results, launched

population of SNPs than the 10 million or so

several market transforming products, and scaled

total SNP variants in each of our genomes. For

our infrastructure to support the significant

example, our Sentrix HumanHap300 BeadChip

opportunities we see for growth in the years

contains over 317,000 SNP markers with broad

ahead. In particular, we attained 45 percent

genomic coverage—an important performance

revenue growth to $73.5 million and achieved

metric for large-scale disease association studies.

profitability in the fourth quarter. Our revenue

growth was driven by the launch of several new

The HumanHap300 has fundamentally changed

products, most notably our whole-genome geno-

the way customers think about performance

typing Human-1 BeadChip. In short succession,

and quality, setting a new standard for this

we introduced our groundbreaking HumanHap300

emerging market.

and the recently launched HumanHap550.

Performance of our whole-genome genotyping

The development of these products was enabled

products has created incredible demand, requiring

by our revolutionary Infinium assay featuring

rapid scale-up of our manufacturing capacity.

“intelligent SNP selection.” This capability allows

The modular nature of our manufacturing process

our products to analize virtually any location of

enabled us to triple our BeadChip manufacturing

variation in the genome and provides tremendous

capacity in less than nine months with only a mod-

flexibility in product development. To maximize

est capital investment. As we look further into 2006,

this benefit, we created a Scientific Advisory

we see BeadChip demand continuing to increase

Committee comprised of HapMap participants

and we are committed to doubling our capacity

and statistical geneticists from leading research

from current levels over the course of the year

institutions to help us select the most relevant

through a combination of capital additions and

SNPs to include on our chips.

process improvements.

Illumina
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Significant market demand has been demonstrat-

the core of our expression products with the

ed by the announcement of multiple genotyping

launch of a whole-genome RNA analysis product

deals in excess of 1,000 BeadChips each. These

for rat, a key organism in the toxicology market.

customers include commercial organizations such

as Genizon (16,000 samples) and academic centers

Our ability to manufacture BeadChips begins

such as CIDR (Center for Inherited Disease

with the synthesis of short pieces of DNA called

Research - 2,500 samples), as well as organizations

oligos that, once attached to beads, act as the

like Cancer Research-UK, with which we have

detectors on our chips. In 2005, we brought our

signed two significant multi-phase service agree-

fourth-generation oligo synthesis technology

ments, each to genotype at least 4,000 samples.

online. These fully automated systems are each

capable of producing more than 13,000 oligos

In 2005, our genotyping services business saw

simultaneously, compared to our previous ability

significant growth. Revenue from our genotyping

to produce approximately 3,000 oligos in a run.

services business increased by over 70% to more

This significant increase in throughput enables

than $13.8 million. Interestingly, the studies we

us to rapidly develop new BeadChip products,

completed were quite varied in nature—from

providing an important competitive advantage.

human disease and genetic linkage work to a

number of significant studies focused on selective

breeding of poultry, livestock and agricultural

crops. We believe that the services business will

continue to grow in 2006 as researchers continue

to see the quality of data and the rapid turn-

around provided by our services group.

In our gene expression business, we launched

Our current and successor

products will provide researchers

with capabilities only dreamed

of five years ago.

the industry’s first multi-sample chips for genome-

Additionally, the significantly increased scale in

wide RNA analysis of human and mouse. These

oligo manufacturing capability enabled us to

products demonstrate the flexibility and value of

commence manufacturing of oligos under our

the BeadChip by enabling researchers to profile

collaboration with Invitrogen Corporation, which

six whole-genome RNA samples on each chip.
In addition, we introduced our DASL™ assay,

was announced in December of 2004. Under this

collaboration, we manufacture co-branded oligos

giving researchers the means to perform gene

which are then sold by Invitrogen’s 350-person

expression experiments on samples with degraded

sales force. The profit resulting from the sale

RNAs such as tumor samples embedded in

of these collaborative products is split evenly

paraffin blocks. In 2006, we expect to complete

between the companies.

In just nine months, Illumina tripled

manufacturing capacity to meet fast-

growing market demand for whole-

genome genotyping arrays. Shown

above is our new decoding facility

for Sentrix® HumanHap BeadChips.

BILL RASTETTER DISCUSSES

Corporate Governance

“In order to be effective, the Board

of Directors must look objectively at

In early 2005, we announced the completion of

our acquisition of CyVera Corporation. We have

been focused on developing CyVera’s digital
microbead technology called VeraCode™, which

is highly complementary to our existing BeadArray

governance, compensation and related

platform. VeraCode technology is optimized for

issues to ensure management is not only

delivering low- to mid-multiplex applications,

performing, but performing in a manner

which we will deploy into both the research mar-

that is fully transparent and fully

compliant with best-in-class practices,”

explains William H. Rastetter, Ph.D.,

kets and the emerging field of molecular diagnos-

tics. We have rapidly integrated CyVera into our
operations and plan to launch the BeadXpress™

who was named Illumina’s non-executive

instrument system and the first products using

Board Chairman in January 2005.

VeraCode technology before the end of 2006.

“Illumina’s corporate governance policies

tribute measurably to our revenue growth in 2007.

We expect that this product line will begin to con-

are both formal and rigorous. We believe

that our commitment to strong corporate

Our human resources increased by 35% in 2005,

governance creates shareholder value

with 30 of those employees joining Illumina from

through enabling us to do our jobs even

CyVera. Among key appointments to our senior

more effectively and by ensuring that our

management team, we named Christian Henry

shareholders maintain confidence in our

as Chief Financial Officer. Earlier this year, we

management and governance practices,”

appointed Matt Posard as Vice President of

added Rastetter.

Marketing. Most recently, we announced the

appointment of Arthur Holden as Senior Vice

President of Corporate and Market Development.

We look forward to leveraging Arthur’s deep

experience in the healthcare industry.

At Illumina, we are committed to strong corporate

governance to ensure transparency and consisten-

cy in our performance as a company. Our non-

executive Chairman of the Board, Bill Rastetter,

is helping us deliver on this commitment. Bill has

also expanded his involvement to provide strategic

guidance to our management team.

Illumina
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Our Path Forward

Whole-genome expression was the first large-scale

Much of the credit goes to our growing library

application for microarrays, enabling the study of

of assay methods and our ability to deploy these

gene regulation to characterize specific diseases.

methods for array-based research.

Whole-genome genotyping is the next break-

through array application, allowing the association

Our products will give researchers the tools

of our genetic code with our tendency to inherit

to unravel the mysteries of the genome with

or contract disease. Over the next few years, we

the ultimate aim of improving diagnostics and

expect this market to experience rapid growth as

therapies, while laying the groundwork for a

genotyping becomes widely adopted in clinical

more personalized approach to healthcare that

trials and molecular diagnostics.

recognizes differential response to drugs and

enables more successful clinical outcomes.

Our current and successor products will provide

researchers with capabilities only dreamed of five

We believe that Illumina will be a major

years ago: the ability to explore the genetic cause

contributor to this process. It’s an opportunity

of disease in a comprehensive manner across the

that is both exciting and humbling.

entire human genome. We are on the brink of

what we believe will be one of the most exciting

Thank you for joining us in this endeavor.

periods of discovery in the history of medicine.

The launch of our whole-genome genotyping

products has positioned us to become a leader

in this rapidly growing market. In addition, our

progress in scaling our infrastructure in 2005

JAY T. FLATLEY

enables us to accelerate the delivery of exciting

new products to market.

PRESIDENT AND CHIEF EXECUTIVE OFFICER

In research, we are working on key technologies

such as DNA methylation analysis that could ulti-

JOHN R. STUELPNAGEL, D.V.M.

SENIOR VICE PRESIDENT AND CHIEF OPERATING OFFICER

mately provide critical information for understand-

ing the origin and progression of cancer. Cancer is

just one of several common, yet complex diseases

that could benefit from our technology. Illumina

is delivering similar value to scientists studying

diabetes, autoimmune diseases, and diseases

related to the central nervous system (CNS).

2005 RESULTS: form 10-K >

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2006

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

Commission file number: 000-30361

Illumina, Inc.

(Exact name of Registrant as Specified in Its Charter)

Delaware
(State or other Jurisdiction of
Incorporation or Organization)
9885 Towne Centre Drive,
San Diego, California
(Address of Principal Executive Offices)

33-0804655
(I.R.S. Employer
Identification No.)

92121
(zip code)

Registrant’s telephone number, including area code:
(858) 202-4500

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the

Securities Act Yes n

No ¥

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of

the Act. Yes n

No ¥

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

No n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¥

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

Large accelerated filer n

Accelerated filer ¥

Non-accelerated filer n

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

Act). Yes n

No ¥

As of January 31, 2006, there were 41,269,312 shares of the Registrant’s Common Stock outstanding. The
aggregate market value of the Common Stock held by non-affiliates of the Registrant as of July 1, 2005 (the last
business day of the Registrant’s most recently completed second fiscal quarter), based on the closing price for the
Common Stock on the Nasdaq National Market on that date, was $463,243,240. This amount excludes an
aggregate of 2,892,533 shares of Common Stock held by officers and directors and each person known by the
Registrant to own 10% or more of the outstanding Common Stock. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, directly or indirectly, to direct or cause the
direction of the management or policies of the Registrant, or that the Registrant is controlled by or under common
control with such person.

Portions of the Registrant’s definitive proxy statement for the annual meeting of stockholders expected to be

held on June 8, 2006 are incorporated by reference into Items 10 through 14 of Part III of this Report.

DOCUMENTS INCORPORATED BY REFERENCE

ILLUMINA, INC.

FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 1, 2006

TABLE OF CONTENTS

PART I

Business********************************************************************
Item 1
Item 1A Risk Factors*****************************************************************
Item 1B Unresolved Staff Comments **************************************************
Properties ******************************************************************
Item 2
Legal Proceedings***********************************************************
Item 3
Submission of Matters to a Vote of Security Holders ****************************
Item 4

PART II

Item 5

Item 6
Item 7

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ************************************************
Selected Financial Data ******************************************************
Management’s Discussion and Analysis of Financial Condition and Results of
Operation ******************************************************************
Item 7A Quantitative and Qualitative Disclosures about Market Risk **********************
Financial Statements and Supplementary Data *********************************
Item 8
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9
Disclosure ******************************************************************
Item 9A Controls and Procedures *****************************************************
Item 9B Other Information ***********************************************************

PART III

Item 10 Directors and Executive Officers of the Registrant ******************************
Executive Compensation *****************************************************
Item 11
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12
Stockholder Matters *********************************************************
Certain Relationships and Related Transactions *********************************
Principal Accounting Fees and Services ****************************************

Item 13
Item 14

Page

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Exhibits and Financial Statement Schedule *************************************
Item 15
Signatures****************************************************************************
Financial Statements ******************************************************************

53
57
F-1

PART IV

ITEM 1. Business.

PART I

This Annual Report on Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.
These statements relate to future events or our future financial performance. We have attempted to
identify forward-looking statements by terminology including ‘‘anticipates,’’ ‘‘believes,’’ ‘‘can,’’ ‘‘con-
tinue,’’ ‘‘could,’’ ‘‘estimates,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘may,’’ ‘‘plans,’’ ‘‘potential,’’ ‘‘predicts,’’ ‘‘should’’
or ‘‘will’’ or the negative of these terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties and other factors, including the risks
outlined under ‘‘Item 1A. Risk Factors’’ in this Annual Report, that may cause our actual results, levels
of activity, performance or achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable,
we cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you
should not unduly rely on these forward-looking statements, which speak only as of the date of this
Annual Report. We are not under any duty to update any of the forward-looking statements after the
date we file this Annual Report on Form 10-K or to conform these statements to actual results, unless
required by law. You should, however, review the factors and risks we describe in the reports we file
from time to time with the Securities and Exchange Commission.

Illumina˛, Array of ArraysTM, BeadArrayTM, DASL˛, GoldenGate˛, InfiniumTM, Sentrix˛ and Oligator˛
are our trademarks. This report also contains brand names, trademarks or service marks of companies
other than Illumina, and these brand names, trademarks and service marks are the property of their
respective holders.

Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and all amendments to those reports are available free of charge on our website, www.illumina.com.
The information on our website is not incorporated by reference into this report. Such reports are made
available as soon as reasonably practicable after filing with, or furnishing to, the Securities and
Exchange Commission. The SEC also maintains an Internet site at www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that electronically file with
the SEC.

Overview

We were incorporated in April 1998. We develop and market next-generation tools for the large-
scale analysis of genetic variation and function. Understanding genetic variation and function is critical
to the development of personalized medicine, a key goal of genomics. Using our technologies, we
have developed a comprehensive line of products that are designed to provide the performance,
throughput, cost effectiveness and flexibility necessary to enable researchers in the life sciences and
pharmaceutical industries to perform the billions of tests necessary to extract medically valuable
information from advances in genomics. This information is expected to correlate genetic variation and
gene function with particular disease states, enhancing drug discovery, allowing diseases to be
detected earlier and more specifically, and permitting better choices of drugs for individual patients.

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

In 2001, we commercialized the first implementation of our BeadArray technology, the Sentrix
Array Matrix. This is a disposable matrix with 96 fiber optic bundles arranged in a pattern that matches
the standard 96-well microtiter plate. Each fiber optic bundle performs more than 1,500 unique assays,
which enables researchers to perform focused genotyping experiments in a high-throughput format.
This format was also used to initiate our single nucleotide polymorphism (‘‘SNP’’) genotyping services
product line. As a result of the increasing market acceptance of our high throughput, low cost
BeadArray technology, we have entered into genotyping services contracts with many leading
genotyping centers, and were awarded $9.1 million from the National Institutes of Health to play a
major role in the first phase of the International HapMap Project.

Our production-scale BeadLab is a turnkey platform that includes all hardware and software
necessary to enable researchers to perform genetic analysis research on what we believe is an
unprecedented scale. This system is being marketed to a small number of high-throughput genotyping
users. As of January 1, 2006, we have installed and recorded revenue for 11 BeadLabs.

In 2003, we announced the launch of several new products, including 1) a new array format, the
Sentrix BeadChip, which significantly expands market opportunities for our BeadArray technology and
provides increased experimental flexibility for life science researchers; 2) a gene expression product
line on both the Sentrix Array Matrix and the Sentrix BeadChip that allows researchers to analyze a
focused set of genes across eight to 96 samples on a single array; and 3) a benchtop SNP genotyping
and gene expression system, the BeadStation, for performing moderate-scale genotyping and gene
expression using our technology. The BeadStation includes our BeadArray Reader, analysis software
and assay reagents and is designed to match the throughput requirements and variable automation
needs of individual research groups and core labs. Sales of these products began in the first quarter of
2004 and, as of January 1, 2006, we have shipped 115 BeadStations.

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

In 2005, we began shipments of Sentrix BeadChips for whole-genome gene expression and
whole-genome genotyping. The whole-genome gene expression BeadChips are designed to enable
high-performance, cost-effective, whole-genome expression profiling of multiple samples on a single
chip, resulting in a dramatic reduction in cost of whole-genome expression analysis. Our whole-
genome expression product line includes multi-sample products for both the Human and Mouse
Genomes. The whole-genome genotyping BeadChip is designed to scale to high levels of multiplex-
ing without compromising data quality and to provide scientists the ability to query hundreds of
thousands of SNPs in parallel. In the second quarter of 2005, we commenced shipment of our first
whole-genome genotyping BeadChip, the HumanHap1, which interrogates more than 100,000 SNPs
in parallel.

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

In January 2006, we began shipment of the new Sentrix HumanHap300 Genotyping BeadChip to
customers around the world. Using the Infinium assay, which enables us to select virtually any SNP in
the genome, the HumanHap300 BeadChip offers genomic coverage for more than 317,000 SNPs. We
selected the SNP assays in collaboration with a consortium of scientists that are leaders in the
genotyping field. We believe this product has quality and performance features that support our
expectation that it will become an important discovery tool for researchers seeking to understand the
genetic basis of common, yet complex diseases.

We are seeking to continue to expand our customer base for our BeadArray technology; however,

we can give no assurance that our sales efforts will continue to be successful.

We were incorporated in California in April 1998. We reincorporated in Delaware in July 2000. Our
principal executive offices are located at 9885 Towne Centre Drive, San Diego, California 92121. Our
telephone number is (858) 202-4500.

Industry Background

Genetic Variation and Function

Every person inherits two copies of each gene, one from each parent. The two copies of each
gene may be identical, or they may be different. These differences are referred to as genetic variation.
Examples of the physical consequences of genetic variation include differences in eye and hair color.
Genetic variation can also have important medical consequences, including predisposition to disease
and differential response to drugs. Genetic variation affects disease susceptibility, including predisposi-
tion to cancer, diabetes, cardiovascular disease and Alzheimer’s disease. In addition, genetic variation
may cause people to respond differently to the same drug treatment. Some people may respond well,
others may not respond at all, and still others may experience adverse side effects. A common form of
genetic variation is a SNP. A SNP is a variation in a single position in a DNA sequence. It is estimated
that the human genome contains over nine million SNPs.

While in some cases a single SNP will be responsible for medically important effects, it is now
believed that combinations of SNPs may contribute to the development of most major diseases. Since
there are millions of SNPs, it is important to investigate many representative, well-chosen SNPs
simultaneously in order to discover medically valuable information.

Another contributor to disease and dysfunction is the over- or under-expression of genes within an
organism’s cells. A very complex network of genes interacts to produce healthy individuals. The
challenge for scientists is to delineate the associated genes’ expression patterns and their relationship
to disease. Until recently, this problem was addressed by investigating effects on a gene-by-gene
basis. This is time consuming, and difficulties exist when several pathways can not be observed or
‘‘controlled’’ at the same time. With the advent of microarray technology, thousands of genes can now
be tested at the same time.

SNP Genotyping

SNP genotyping is the process of determining which base (A, C, G or T) is present at a particular
site in the genome within an individual or other organism. The use of SNP genotyping to obtain
meaningful statistics on the effect of an individual SNP or a collection of SNPs, and to apply that
information to clinical trials and diagnostic testing, requires the analysis of millions of SNP genotypes
and the testing of large populations for each disease. For example, a single large clinical trial could
involve genotyping 300,000 SNPs per patient in 1,000 patients, thus requiring 300 million assays.
Using previously available technologies, this scale of SNP genotyping was both impractical and
prohibitively expensive.

Large-scale SNP genotyping can be used in a variety of ways, including studies designed to
understand the genetic contributions to disease (disease association studies), genomics-based drug
development, clinical trial analysis, disease predisposition testing, and disease diagnosis. SNP ge-
notyping can also be used outside of healthcare, for example in the development of plants and animals
with desirable commercial characteristics. These markets will require billions of SNP genotyping assays
annually.

Gene Expression Profiling

Gene expression profiling is the process of determining which genes are active in a specific cell or
group of cells and is accomplished by measuring mRNA, the intermediary messenger between genes
(DNA) and proteins. Variation in gene expression can cause disease, or act as an important indicator of
disease or predisposition to disease. By comparing gene expression patterns between cells from
different environments, such as normal tissue compared to diseased tissue or in the presence or
absence of a drug, specific genes or groups of genes that play a role in these processes can be
identified. Studies of this type, often used in drug discovery, require monitoring thousands, and
preferably tens of thousands, of mRNAs in large numbers of samples. Once a smaller set of genes of
interest has been identified, researchers can then examine how these genes are expressed or
suppressed across numerous samples, for example, within a clinical trial.

As gene expression patterns are correlated to specific diseases, gene expression profiling is
becoming an increasingly important diagnostic tool. Diagnostic use of expression profiling tools is
anticipated to grow rapidly with the combination of the sequencing of various genomes and the
availability of more cost-effective technologies.

Our Technologies

BeadArray Technology

We have developed a proprietary array technology that enables the large-scale analysis of genetic
variation and function. Our BeadArray technology combines microscopic beads and a substrate in a
simple proprietary manufacturing process to produce arrays that can perform many assays simultane-
ously. Our BeadArray technology provides a unique combination of high throughput, cost effective-
ness, and flexibility. We achieve high throughput with a high density of test sites per array and we are
able to format arrays either in a pattern arranged to match the wells of standard microtiter plates or in
various configurations in the format of standard microscope slides. We seek to maximize cost
effectiveness by reducing consumption of expensive reagents and valuable samples, and through the
low manufacturing costs associated with our technologies. Our ability to vary the size, shape and
format of the well patterns and to create specific bead pools, or sensors, for different applications
provides the flexibility to address multiple markets and market segments. We believe that these
features have enabled our BeadArray technology to become a leading platform for the emerging high-
growth market of SNP genotyping and expect they will enable us to become a key player in the gene
expression market.

Our proprietary BeadArray technology combines microwells etched into a substrate and specially
prepared beads that self-assemble into an array. We have deployed our BeadArray technology in two
different Sentrix array formats, the Array Matrix and the BeadChip. Our first bead-based product was
the Array Matrix which incorporates fiber optic bundles. The fiber optic bundles, which we cut into
lengths of less than one inch, are manufactured to our specifications. Each bundle is comprised of
approximately 50,000 individual fibers and 96 of these bundles are placed into an aluminum plate,
which forms an Array Matrix. BeadChips are fabricated in microscope slide-shaped sizes with varying
numbers of sample sites per slide. Both formats are chemically etched to create tens to hundreds of
thousands of wells for each sample site.

In a separate process, we create sensors by affixing a specific type of molecule to each of the
billions of microscopic beads in a batch. We make different batches of beads, with the beads in a given
batch coated with one particular type of molecule. The particular molecules on a bead define that
bead’s function as a sensor. For example, we create a batch of SNP sensors by attaching a particular
DNA sequence, or oligo, to each bead in the batch. We combine batches of coated beads to form a
pool specific to the type of array we intend to create. A bead pool one milliliter in volume contains
sufficient beads to produce thousands of arrays. One of the advantages of this technology is that it
allows us to create universal arrays for SNP genotyping, and by varying the reagent kit, we are able to
use the array to test for any combination of SNPs.

To form an array, a pool of coated beads is brought into contact with the array surface where they
are randomly drawn into the wells, one bead per well. The tens of thousands of beads in the wells
comprise our individual arrays. Because the beads assemble randomly into the wells, we perform a
final procedure called ’decoding’ in order to determine which bead type occupies which well in the
array. We employ several proprietary methods for decoding, a process that requires only a few steps to
identify all the beads in the array. One beneficial by-product of the decoding process is a validation of
each bead in the array. This quality control test characterizes the performance of each bead and can
identify and eliminate use of any empty wells. We ensure that each bead type on the array is sufficiently
represented by including multiple copies of each bead type. Multiple bead type copies improve the
reliability and accuracy of the resulting data by allowing statistical processing of the results of identical
beads. We believe we are the only microarray company to provide this level of quality control in the
industry.

An experiment is performed by preparing a sample, such as DNA from a patient, and introducing
it to the array. The design features of our Array Matrix allow it to be simply dipped into a solution
containing the sample, whereas our BeadChip allows processing of samples on a slide-sized platform.
The molecules in the sample bind to their matching molecules on the coated bead. The BeadArray
Reader detects the matched molecules by shining a laser on the fiber optic bundle or on the
BeadChip. Since the molecules in the sample have a structure that causes them to emit light in
response to a laser, detection of a binding event is possible. This allows the measurement of the
number of molecules bound to each coated bead, resulting in a quantitative analysis of the sample.

Oligator Technology

Genomic applications require many different short pieces of DNA that can be made synthetically,
called oligos. For example, SNP genotyping may require three to four different oligos per assay. A SNP
genotyping experiment analyzing 10,000 SNPs may therefore require 30,000 to 40,000 different oligos,
contributing significantly to the expense of the experiment.

We have developed our proprietary Oligator technology for the parallel synthesis of many
different oligos to meet the requirements of large-scale genomics applications. We believe that our
Oligator technology is substantially more cost effective and provides significantly higher throughput
than available commercial alternatives. Our synthesis machines are computer controlled and utilize
many robotic processes to minimize the amount of labor used in the manufacturing process. In 2005,
we implemented our fourth-generation Oligator technology, which is capable of manufacturing up to
13,000 different oligos per run. This is an improvement over prior generations of technology where we
could only manufacture approximately 3,000 oligos per run. This increase in scale was necessary to
enable us to support the manufacture of oligos under our collaboration with Invitrogen as well as to
support our increased need for oligos, a critical component of our BeadArray technology.

Key Advantages of Our BeadArray and Oligator Technologies

We believe that our BeadArray and Oligator technologies provide distinct advantages, in a variety
of applications, over competing technologies, by creating cost-effective, highly miniaturized arrays
with the following advantages:

High Throughput. The miniaturization of our BeadArray technology provides very high informa-
tion content per unit area. To increase sample throughput, we have formatted our array matrix in a
pattern arranged to match the wells of standard microtiter plates, allowing throughput levels of up to
nearly 150,000 unique assays per microtiter plate, and we use laboratory robotics to speed process
time. Similarly, we have patterned our whole-genome expression BeadChips to support up to 48,000
gene expression assays for six samples with each BeadChip. The Oligator’s parallel synthesis capability
allows us to manufacture the diversity of oligos necessary to support large-scale genomic applications.

Cost Effectiveness. Our array products substantially reduce the cost of experiments as a result of
our proprietary manufacturing process and our ability to capitalize on cost reductions generated by
advances in fiber optics, plasma etching processes, digital imaging and bead chemistry. In addition,
these products require smaller reagent volumes than other array technologies, and therefore reduce
reagent costs. Our cost-effective Oligator technology further reduces reagent costs, as well as the cost
of coating beads.

Flexibility. A wide variety of conventional chemistries are available for attaching different
molecules, such as DNA, RNA, proteins, and other chemicals to beads. By using beads, we are able to
take advantage of these chemistries to create a wide variety of sensors, which we assemble into arrays
using the same proprietary manufacturing process. In addition, we can have fiber optic bundles and
BeadChips manufactured in multiple shapes and sizes with wells organized in various arrangements to
optimize them for different markets and market segments. In combination, the use of beads and
etched wells provides the flexibility and scalability for our BeadArray technology to be tailored to
perform many applications in many different market segments, from drug discovery to diagnostics. Our
Oligator technology allows us to manufacture a wide diversity of lengths and quantities of oligos.

Quality. The quality of our products is dependent upon each element in the system, the array,
the assay used to perform the experiment and the instrumentation and software used to capture the
results.

Each array is manufactured with a high density of beads which enables us to have multiple copies
of each individual bead type. We measure the copies simultaneously and combine them into one data
point. This allows us to make a comparison of each bead against its own population of identical beads,
which permits the statistical calculation of a more reliable and accurate value for each data point.
Finally, the manufacture of the array includes a proprietary decoding step that also functions as a
quality control test of every bead on every array, improving the overall quality of the data.

When we develop the assays used with our products we focus on the performance, cost and ease
of use. By developing assays that are easy to use, we can minimize the potential for the introduction of
experimental error into the experiment. We believe that this enables the researcher to obtain high
quality data from their experiments. Additionally, we manufacture substantially all of the reagents used
in our assays which allows us to control the quality of the product delivered to the customer.

Our Strategy

Our goal is to make our BeadArray platforms the industry standard for products and services

utilizing array technologies. We plan to achieve this by:
) focusing on emerging high-growth markets;
) rapidly commercializing our BeadLab, BeadStation, Sentrix Array Matrix and BeadChip

products;

) expanding our technologies into multiple product lines and market segments; and

) strengthening our technological leadership.

Products and Services

The first implementation of our BeadArray technology, the Sentrix Array Matrix, is a disposable
matrix with 96 fiber optic bundles arranged in a pattern that matches the standard 96-well microtiter
plate. Each fiber optic bundle performs more than 1,500 unique assays. The BeadChip, introduced in
2003, is fabricated in multiple configurations to support multiple applications and scanning
technologies.

We have provided genotyping services using our proprietary BeadArray technology since 2001. In
addition, we have developed our first genotyping and gene expression products based on this
technology. These products include disposable Sentrix Array Matrices and BeadChips, GoldenGate
and Infinium reagent kits for SNP genotyping, BeadArray Reader scanning instruments and an evolving
portfolio of custom and standard gene expression products.

SNP Genotyping

In 2001, we introduced the first commercial application of our BeadArray technology by launching
our SNP genotyping services product line. Since this launch, we have had peak days in which we
operated at over two million genotypes per day based on individual samples. To our knowledge, no
other genotyping platform can achieve comparable levels of throughput while delivering such high
accuracy and low cost.

We designed our first consumable BeadArray product, the Sentrix Array Matrix, for SNP genotyp-
ing. The Sentrix Array Matrix uses a universal format that allows it to analyze any set of SNPs. We have
also developed reagent kits based on GoldenGate assay protocols and the BeadArray Reader, a laser
scanner, which is used to read our array products.

Depending on throughput and automation requirements, our customers can select the system
configuration to best meet their needs. For production-scale throughput, our BeadLab would be
appropriate, and for moderate-scale throughput, our BeadStation would be selected. Our BeadLab
includes our BeadArray Reader, combined with LIMS, standard operating procedures and analytical
software and fluid handling robotics. This production-scale system was commercialized in late 2002
and when installed, this system can routinely produce millions of genotypes per day.

The BeadStation, a system for performing moderate-scale genotyping designed to match the
throughput requirements of individual research groups and core labs, was commercialized in late 2003.
The BeadStation includes our BeadArray Reader and genotyping and/or gene expression analysis
software. Our BeadStations are fully upgradeable to a full BeadLab through various steps that add
automation, sample preparation equipment and LIMS capability. For use in custom SNP genotyping,
both the BeadLab and BeadStation utilize GoldenGate assay reagents and our Array Matrix.

In 2003, we announced the availability of an assay set for genetic linkage analysis. This standard
product has been deployed in our genotyping services operation and is also sold to customers who
use our SNP genotyping systems. Genetic linkage analysis can help identify chromosomal regions with
potential disease associations across a related set of samples.

In 2004, we announced a new Sentrix Human-1 Genotyping BeadChip for whole-genome
genotyping. This BeadChip provides to scientists the ability to interrogate over 100,000 SNPs located
in high-value genetic regions of the human genome. In 2006, we announced the Sentrix
HumanHap300 Genotyping BeadChip for larger-scale SNPs studies, which can assay more than
317,000 SNPs displayed across the entire human genome.

In 2005, we announced the MHC Panel Set, which allows the interrogation of a difficult-to-assay
area of the genome, often associated with autoimmune diseases. In addition, we announced the
Mouse-6 and MouseRef-8 Gene Expression BeadChip allowing the study of the levels of gene
expression in mouse model.

Gene Expression Profiling

With the addition of application specific accessory kits, our production-scale BeadLabs and
BeadStations are capable of performing a growing number of applications, including gene expression
profiling.

In 2003, we introduced our focused set gene expression products on both the Sentrix Array Matrix
and Sentrix BeadChip platforms. Our system includes a BeadArray Reader for imaging Sentrix Array
Matrices and BeadChips, a hybridization chamber and software for data extraction. In addition, we
have developed standard gene expression products for each of the human, mouse and arabidopsis
genomes with an additional panel that focuses on human toxicology.

In 2005, we began shipment of the Sentrix Human-6 and HumanRef-8 Expression BeadChip
products. Both products allow large-scale expression profiling of multiple samples on a single chip and
are imaged using our BeadArray Reader. The Human-6 BeadChip is designed to analyze six discrete
whole-human-genome samples on one chip, interrogating in each sample approximately 48,000
transcripts from the estimated 30,000 genes in the human genome. The HumanRef-8 BeadChip
product analyzes eight samples in parallel against 24,000 transcripts from the roughly 22,000 genes
represented in the consensus RefSeq database, a well-characterized whole-genome subset used
broadly in genetic analysis. We expect that these gene expression BeadChips will dramatically reduce
the cost of whole-genome expression analysis, allowing researchers to expand the scale and reproduc-
ibility of large-scale biological experimentation.

Scanning Instrumentation

The BeadArray Reader, an instrument we developed, is a key component of both our production-
scale BeadLab and our benchtop BeadStation. This scanning equipment uses a laser to read the results
of experiments that are captured on our arrays and was designed to be used in all areas of genetic
analysis that use our Sentrix Array Matrices and Sentrix BeadChips.

High-Throughput Oligo Synthesis

We have put in place a state of the art oligo manufacturing facility. This facility serves both the
commercial needs under our collaboration with Invitrogen and our internal needs. In addition to their
use to coat beads, these oligos are components of the reagent kits for our BeadArray products and are
used for assay development. We manufacture oligos in a wide range of lengths and in several scales,
with the ability to add many types of modifications. We offer a range of quality control options and
have implemented a laboratory information management system to control much of the manufacturing
process. In 2003, we introduced the first standard product offerings in our Oligator product line, a
whole-genome oligo reference set designed and optimized for spotted gene expression microarrays,
and in 2004, we introduced a mouse genome oligo set, also for use on spotted gene expression arrays.
In 2005, we stopped selling oligos directly into the market and began shipping oligos under our
collaboration with Invitrogen.

Collaboration with Invitrogen Corporation

In December 2004, we entered into a strategic collaboration with Invitrogen. The goal of the
collaboration is to combine our expertise in oligo manufacturing with the sales, marketing and
distribution capabilities of Invitrogen. In connection with the collaboration, we have developed the
next generation Oligator˛ DNA synthesis technology. This technology includes both plate- and tube-
based capabilities. Under the terms of the agreement, Invitrogen paid us an upfront non-refundable
collaboration payment of $2.3 million in the first quarter of 2005. Additionally, upon the achievement
of a certain milestone, Invitrogen was obligated to make a milestone payment of $1.1 million to us. As
of January 1, 2006, this milestone has been achieved and the milestone payment was received. We
have used these funds to invest in our San Diego facility to enable the development and implementa-
tion of fourth-generation Oligator technology and to extend the technology into tube-based oligo
products. We began manufacturing and shipping the plate-based and certain tube-based oligo
products under the collaboration in the third quarter of 2005. In addition, the agreement provides for
the transfer of our Oligator technology into two Invitrogen facilities outside North America. Collabora-
tion profit from the sale of collaboration products will be divided equally between the two companies.

Research and Development

We have made substantial investments in research and development since our inception. We have
assembled a team of skilled engineers and scientists who are specialists in biology, chemistry,
informatics, instrumentation, optical systems, software, manufacturing and other related areas required
to complete the development of our products. Our research and development efforts have focused
primarily on the tasks required to optimize our BeadArray and Oligator technologies and to support
commercialization of the products and services derived from these technologies. These efforts include
the following, among others:

) We enhanced the quality and manufacturing yield of our Sentrix Array Matrices and BeadChips.
We are exploring ways to continue to increase the level of automation in the manufacturing
process to further reduce the time and cost of producing arrays. We intend to add capacity to
manufacture Sentrix Array Matrices and BeadChips throughout 2006. We believe this additional
capacity will allow us to manufacture our products in sufficient quantity to meet our business
plan for 2006.

) We introduced a number of initiatives in 2002 and 2003 to improve the yield and quality of our
oligos while reducing cost substantially. By refining our understanding of the design and
operation of our Oligator technology, we have been able to make numerous changes in our
process, which we believe provides us a more cost effective system than competing technolo-
gies. In 2005, we expanded our Oligator technology under the collaboration agreement with
Invitrogen discussed above. In addition, we expanded our oligo manufacturing facility to
support high volume shipments.

) We have developed the BeadArray Reader, a laser scanning instrument that scans our Sentrix
array platforms. Laser scanners provide the high sensitivity and resolution required to address
the extremely dense geometries of our bead-based arrays. We made the first commercial
shipments of our scanners in the first quarter of 2003 as part of our BeadLab.

) We completed development of and launched our Direct Hyb and DASL gene expression assays
on both array formats. We believe the combination of our gene expression products flexibility
and low-per-sample cost will enable larger and more meaningful gene expression studies.

) We completed the CyVera acquisition, which we believe provides us with a comprehensive
approach to bead-based assays for biomarker research and development and in-vitro and
molecular diagnostic opportunities, including those that require low complexity as well as high-
complexity testing. We believe the CyVera technology will be highly complementary to our own
portfolio of products and services. We believe it will enhance our capabilities to service our
existing customers and accelerate the development of additional technologies, products and
services.

) We completed the development and launch of our Infinium whole-genome genotyping solu-
tion. This family of products offers a flexible BeadChip design and high density architecture.
Infinium Whole-Genome Genotyping products are based on our BeadArray technology and
provide the industry’s only 100% quality control, with an average 30-fold feature redundancy.
The revolutionary Infinium assays and corresponding Sentrix BeadChips allow large-scale
interrogation of variation in the human genome.

) We have been exploring the underlying molecular biology and chemistry issues related to
developing assays and performing experiments on our BeadArray platforms. By improving our
processes and protocols, we have substantially increased the number of assays we can process
simultaneously in a single sample on our arrays.

Our research and development expenses for 2005, 2004 and 2003 (inclusive of charges relating to
stock-based compensation of $0.1 million, $0.3 million, and $1.3 million, respectively) were $27.7 mil-
lion, $21.1 million and $22.5 million, respectively. As compared to 2005, we expect research and
development expense to increase in absolute dollars during 2006, as we continue to expand our
research and product development efforts, but decrease as a percentage of overall revenue in 2006.

Government Grants

Government grants allow us to fund internal scientific programs and exploratory research. We
retain ownership of all intellectual property and commercial rights generated during these projects,
subject to a non-exclusive, non-transferable, paid-up license to practice, for or on behalf of the United
States, inventions made with federal funds. This license is retained by the U.S. government as provided
by applicable statutes and regulations. We do not believe that the retained license will have any impact
on our ability to market our products, and we do not need government approval with respect to this
license in order to enter into collaborations or other relationships with third parties. We were the
recipient of a grant from the National Institutes of Health covering our participation in the first phase of
the International HapMap Project, which is a $100 million, internationally funded successor project to
the Human Genome Project that will help identify a map of genetic variations that may be used to
perform disease-related research. We received $9.1 million of funding for this project which covered
basic research activities, the development of SNP assays and the genotyping to be performed on those
assays, all of which was earned in prior years, except for approximately $0.8 million, which was
recognized as revenue during the first quarter of fiscal 2005.

Intellectual Property

We have an extensive patent portfolio, including, as of February 1, 2006, ownership of, or
exclusive licenses to, 38 issued U.S. patents and 102 pending U.S. patent applications, including six
allowed applications that have not yet issued as patents, some of which derive from a common parent
application. Our issued patents, which cover various aspects of our array, assay, oligo synthesis,
instrument and chemical detection technologies, expire between 2011 and 2022. We are seeking to
extend this patent protection on our BeadArray, DASL, GoldenGate, Infinium, CyVera, Oligator,
Sentrix, Array of Arrays and related technologies. We have received or filed counterparts for many of
these patents and applications in one or more foreign countries.

We also rely upon trade secrets, know-how, copyright and trademark protection, as well as
continuing technological innovation and licensing opportunities to develop and maintain our competi-
tive position. Our success will depend in part on our ability to obtain patent protection for our products
and processes, to preserve our copyrights and trade secrets, to operate without infringing the
proprietary rights of third parties and to acquire licenses related to enabling technology or products
used with our BeadArray, DASL, GoldenGate, Infinium, Sentrix, Array of Arrays, CyVera and Oligator
technologies.

We are party to various exclusive and non-exclusive license agreements with third parties, which
grant us rights to use key aspects of our array technology, assay methods, chemical detection
methods, reagent kits and scanning equipment. We have exclusive licenses from Tufts University to
patents that cover our use of BeadArray technology. These patents were filed by Dr. David Walt, a
member of our board of directors, the Chairman of our Scientific Advisory Board and one of our
founders. Our exclusive licenses expire with the termination of the underlying patents, which will occur
between 2010 and 2019. In 2001, we entered into a non-exclusive license agreement with Amersham
Biosciences that covers certain technology contained in our BeadArray Reader. In 2002, we obtained a
non-exclusive license from Dade Behring Marburg GmbH that relates to certain components of our
GoldenGate assay. We also have additional nonexclusive licenses from various third parties for other
components of our products. In all cases, the agreements remain in effect over the term of the
underlying patents, may be terminated at our request without further obligation and require that we
pay customary royalties while the agreement is in effect.

Marketing and Distribution

Our current products address the genetic analysis portion of the life sciences market, in particular,
experiments involving SNP genotyping and gene expression profiling. These experiments may be
involved in many areas of biologic research, including basic human disease research, pharmaceutical
drug discovery and development, pharmacogenomics, toxicogenomics and agricultural research. Our
potential customers include pharmaceutical, biotechnology, agrichemical, diagnostics and consumer
products companies, as well as academic or private research centers. The genetic analysis market is
relatively new and emerging and its size and speed of development will be ultimately driven by,
among other items:

) the ability of the research community to extract medically valuable information from genomics
and to apply that knowledge to multiple areas of disease-related research and treatment;

) the availability of sufficiently low cost, high-throughput research tools to enable the large

amount of experimentation required to study genetic variation and function; and

) the availability of government and private industry funding to perform the research required to

extract medically relevant information from genomic analysis.

We market and distribute our products directly to customers in North America, major European
markets, Japan and Singapore. In each of these areas, we have dedicated sales, service and
application support personnel responsible for expanding and managing their respective customer
bases. In markets outside of these areas, primarily the Pacific Rim countries and Europe, we sell our
products and provide services to customers through distributors that specialize in life science products.
We expect to significantly increase our sales and distribution resources during 2006 and beyond as we
launch a number of new products and expand the number of customers that can use our products.

In 2004, we entered into a strategic collaboration with Invitrogen with a goal of leveraging our
strength in oligo synthesis with Invitrogen’s extensive sales, marketing and distribution channels. We
transitioned all responsibility for oligo sales, marketing and technical support to Invitrogen in the
beginning of the third quarter of 2005.

Manufacturing

We manufacture our array platforms, reagent kits, scanning equipment and oligos in-house and
believe that we currently have the ability to manufacture these in sufficient quantity to meet our
business plan for 2006. We currently depend upon outside suppliers for materials used in the
manufacture of our products. We intend to continue, and may extend, the outsourcing of portions of
our manufacturing process to subcontractors where we determine it is in our best commercial interests.

During 2001, we moved into a new facility which allowed us to design the manufacturing areas to
fit our specific processes, and optimize material flow and personnel movement. In addition, we have
implemented information management systems for many of our manufacturing and services operations
to manage all aspects of material and sample use. We adhere to access and safety standards required
by federal, state and local health ordinances, such as standards for the use, handling and disposal of
hazardous substances.

Competition

Although we expect that our BeadArray products and services will provide significant advantages
over currently available products and services, we expect to encounter intense competition from other
companies that offer products and services for the SNP genotyping and gene expression markets.
These include companies such as Aclara Biosciences (acquired by ViroLogic), Affymetrix, Agilent,
Amersham Biosciences (acquired by GE Corp. and now named GE Healthcare), Applied Biosystems,
Beckman Coulter, Caliper Technologies, Luminex, ParAllele Bioscience (acquired by Affymetrix),
Perlegen Sciences, NimbleGen, Sequenom and Third Wave Technologies. Some of these companies
have or will have substantially greater financial, technical, research, and other resources and larger,
more established marketing, sales, distribution and service organizations than we do. In addition, they
may have greater name recognition than we do in the markets we need to address and in some cases a
large installed base of systems. Each of these markets is very competitive and we expect new
competitors to emerge and the intensity of competition to increase in the future. In order to effectively
compete with these companies, we will need to demonstrate that our products have superior
throughput, cost and accuracy advantages over the existing products. Rapid technological develop-
ment may result in our products or technologies becoming obsolete. Products offered by us could be
made obsolete either by less expensive or more effective products based on similar or other
technologies. Although we believe that our technology and products will offer advantages that will
enable us to compete effectively with these companies, we cannot assure you that we will be
successful.

Segment and Geographic Information

We operate in one business segment, for the development, manufacture and commercialization of
tools for genetic analysis. Our operations are treated as one segment as we only report operating
results on an aggregate basis to chief operating decision makers of Illumina.

During 2005, $28.0 million, or 38%, of our total revenue came from customers outside the United
States, as compared to $26.4 million, or 52%, in 2004. Sales to territories outside of the United States
are generally denominated in U.S. dollars. We expect that sales to international customers will be an
important and growing source of revenue. We have sales support resources in Western Europe and
direct sales offices in Japan, Singapore and China. In addition, we have distributor relationships in
various countries in the Pacific Rim region and Europe.

Information about the geographies in which we operate can be found in the notes to the
consolidated financial statements at Note 11, ‘‘Segment Information, Geographic Data and Significant
Customers.’’

Seasonality

Historically, customer purchasing patterns have not shown significant seasonal variation, although
demand for our products is usually lowest in the first quarter of the calendar year and highest in the
fourth quarter of the calendar year as academic customers spend unused budget allocations before
the end of the government’s fiscal year.

Environmental Matters

We are dedicated to the protection of our employees and the environment. Our operations
require the use of hazardous materials which subject us to a variety of federal, state and local
environmental and safety laws and regulations. We believe we are in material compliance with current
applicable laws and regulations; however, we could be held liable for damages and fines should
contamination of the environment or individual exposures to hazardous substances occur. In addition,
we cannot predict how changes in these laws and regulations, or the development of new laws and
regulations, will affect our business operations or the cost of compliance.

Employees

As of January 1, 2006, we had a total of 375 employees, 73 of whom hold Ph.D. degrees. 44 of our
employees with Ph.D. degrees are engaged in full-time research and development activities. None of
our employees are represented by a labor union. We consider our employee relations to be positive.

Executive Officers

Our executive officers as of February 1, 2006, are as follows:
Name
Jay T. Flatley *******************
Christian O. Henry **************
Tristan B. Orpin*****************
John R. Stuelpnagel, DVM *******

53
37
39
48

Age

President, Chief Executive Officer and Director
Vice President, Chief Financial Officer
Vice President of Worldwide Sales
Co-Founder, Senior Vice President,
Chief Operating Officer and Director

Position

Jay T. Flatley has served as our President, Chief Executive Officer and a Director since October
1999. Prior to joining Illumina, Mr. Flatley was co-founder, President, Chief Executive Officer and a
Director of Molecular Dynamics, a life sciences company, from May 1994 to September 1999. He
served in various other positions with that company from 1987 to 1994. From 1985 to 1987, Mr. Flatley
was Vice President of Engineering and Vice President of Strategic Planning at Plexus Computers, a
UNIX computer company. Mr. Flatley also serves as a director at GenVault. Mr. Flatley holds a B.A. in
Economics from Claremont McKenna College and a B.S. and M.S. in Industrial Engineering from
Stanford University.

Christian O. Henry joined Illumina in June 2005 as Vice President and Chief Financial Officer. He is
responsible for worldwide financial operations, controllership functions and facilities management.
Mr. Henry served previously as the Chief Financial Officer for Tickets.com, a publicly traded, online
ticket provider that was recently acquired by Major League Baseball Advanced Media, LP. Prior to that,
Mr. Henry was Vice President, Finance and Corporate Controller of Affymetrix, Inc., a publicly traded
life sciences company. He previously held a similar position at Nektar Therapeutics (formerly Inhale
Therapeutic Systems, Inc.). Mr. Henry received a BA in biochemistry and cell biology from the
University of California, San Diego, and an M.B.A. from the University of California, Irvine. Mr. Henry is
a certified public accountant.

Tristan B. Orpin has served as our Vice President of Worldwide Sales since December 2002. Prior
to joining us, Mr. Orpin was the Vice President of Sales and Marketing at Sequenom, a genomics
company, from August 2001 to November 2002, and was Director of Sales and Marketing at
Sequenom from September 1999 to August 2001. From December 1988 to September 1999,
Mr. Orpin served in several senior sales and marketing positions at Bio-Rad Laboratories, a life sciences
company. Mr. Orpin received his BSc. in Biochemistry from the University of Melbourne.

John R. Stuelpnagel, D.V.M., one of our founders, is our Senior Vice President and Chief
Operating Officer and has been a director since April 1998. From October 1999 to April 2002, he
served as our Vice President of Business Development. From April 1998 to October 1999, he served as
our acting President and Chief Executive Officer and was acting Chief Financial Officer through April
2000. While founding Illumina, Dr. Stuelpnagel was an associate with CW Group, a venture capital firm,
from June 1997 to September 1998 and with Catalyst Partners, a venture capital firm, from August
1996 to June 1997. Dr. Stuelpnagel received his B.S. in Biochemistry and his Doctorate in Veterinary
Medicine from the University of California, Davis and his M.B.A. from the University of California, Los
Angeles.

ITEM 1A. Risk Factors.

Our business is subject to various risks, including those described below. In addition to the other
information included in this Form 10-K, the following issues could adversely affect our operating results
or our stock price.

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

Our commercial success depends in part on our non-infringement of the patents or proprietary
rights of third parties and the ability to protect our own intellectual property. Affymetrix, Inc. filed a
complaint against us in July 2004, alleging infringement of six of its patents, and other third parties
have asserted or may assert that we are employing their proprietary technology without authorization.
As we enter new markets, we expect that competitors will likely assert that our products infringe their
intellectual property rights as part of a business strategy to impede our successful entry into those
markets. In addition, third parties may have obtained and may in the future obtain patents and claim
that use of our technologies infringes these patents. We could incur substantial costs and divert the
attention of our management and technical personnel in defending ourselves against any of these
claims. We may incur the same costs and diversions in enforcing our patents and other proprietary
rights against others. Furthermore, parties making claims against us may be able to obtain injunctive or
other relief, which effectively could block our ability to further develop, commercialize and sell
products, and could result in the award of substantial damages against us. In the event of a successful
claim of infringement against us, we may be required to pay damages and obtain one or more licenses
from third parties, or be prohibited from selling certain products. We may not be able to obtain these
licenses at a reasonable cost, or at all. In that event, we could encounter delays in product
introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or
failure to obtain any of these licenses on favorable terms could prevent us from commercializing
products, and the prohibition of sale of any of our products could materially affect our ability to grow
and to attain profitability.

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

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

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

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

We have only recently achieved profitability and may not be able to remain profitable.

We have incurred net losses each year since our inception. As of January 1, 2006, our accumulated
deficit was $144.6 million and we incurred a net loss of $20.9 million for the year ended January 1,
2006. We recorded a modest profit in the fourth quarter of 2005 and we may not be profitable in 2006,
due in part to the impact of Statement of Financial Accounting Standard (‘‘SFAS’’) No. 123R, which is
expected to add additional expense of $9.0 million to $12.0 million in 2006. Our ability to maintain or
increase profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level
of our expenses. We expect to continue incurring significant expenses for research and development,
for developing our manufacturing capabilities and for sales and marketing efforts to commercialize our
products. In addition, we expect that our selling and marketing expenses will increase at a higher rate
in the future as a result of the launch of new products. As a result, we expect that our operating
expenses will increase significantly as we grow and, consequently, we will need to generate significant
additional revenue to maintain profitability. Even if we maintain profitability, we may not be able to
increase profitability on a quarterly basis.

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

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

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

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

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

Market acceptance will depend on many factors, including:

) our ability to demonstrate to potential customers the benefits and cost effectiveness of our

products and services relative to others available in the market;

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

) our ability to manufacture products in sufficient quantities with acceptable quality and reliability

and at an acceptable cost;

) the willingness and ability of customers to adopt new technologies requiring capital

investments; and

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

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

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

The patent positions of companies developing tools for the life sciences and pharmaceutical
industries, including our patent position, generally are uncertain and involve complex legal and factual
questions. We will be able to protect our proprietary rights from unauthorized use by third parties only
to the extent that our proprietary technologies are covered by valid and enforceable patents or are
effectively maintained as trade secrets. We intend to apply for patents covering our technologies and
products, as we deem appropriate. However, our patent applications may be challenged and may not
result in issued patents or may be invalidated or narrowed in scope after they are issued. Questions as
to inventorship may also arise. For example, a former employee recently filed a complaint against us,
claiming he is entitled to be named as joint inventor of certain of our U.S. patents and pending U.S.
and foreign patents and seeking a judgment that the related patents and applications are unenforce-
able. See ‘‘Item 3. Legal Proceedings’’ for a description of this complaint. Any finding that our patents
and applications are unenforceable could harm our ability to prevent others from practicing the related
technology, and a finding that others have inventorship rights to our patents and applications could
require us to obtain licenses to practice the technology, which may not be available on favorable
terms, if at all.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We currently have no credit facility or committed sources of capital available as of January 1, 2006.
To the extent operating and capital resources are insufficient to meet future requirements, we will have
to raise additional funds to continue the development and commercialization of our technologies.
These funds may not be available on favorable terms, or at all. If adequate funds are not available on
attractive terms, we may be required to curtail operations significantly or to obtain funds by entering
into financing, supply or collaboration agreements on unattractive terms.

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

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

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

A significant portion of our sales are to international customers.

Approximately 38% of our revenue for the year ended January 1, 2006 was derived from
customers outside the United States. We intend to continue to expand our international presence and
export sales to international customers and we expect the total amount of non-U.S. sales to continue
to grow. Export sales entail a variety of risks, including:

) currency exchange fluctuations;
) unexpected changes in legislative or regulatory requirements of foreign countries into which we

import our products;

) difficulties in obtaining export licenses or other trade barriers and restrictions resulting in

delivery delays; and

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our principal research and development, manufacturing and administrative facilities occupy
approximately 116,000 square feet of three buildings located in San Diego, California, which we
purchased, along with eight acres of adjacent land, in January 2002. In connection with this purchase
we assumed a $26.0 million, 10-year mortgage on the property at a fixed interest rate of 8.36%. In
June 2004, we entered into a conditional agreement to sell our land and buildings for $42.0 million
and to lease back such property for an initial term of ten years. The sale was completed in August
2004, at which time the lease was signed. Under the terms of the lease, we made a $1.9 million security
deposit and are obligated to pay monthly rent of approximately $318,643 for the first year with an
annual increase of 3% in each subsequent year. The current monthly rent under this lease is $328,202.
The lease contains an option to review for three additional periods of five years each. In January 2006,
we began leasing approximately 4,500 square feet of industrial space in San Diego, California to be
used for distribution and storage of our products. The initial term of this lease is three years. In
conjunction with our acquisition of CyVera in April 2005, we also lease office space for a facility located
in Connecticut that occupies 14,884 square feet of office space. This lease is non-cancelable and
expires as of April 2008. This facility is used primarily for research and development purposes. We
expect that these facilities will be sufficient for our U.S.-based operations through at least 2006.

In February 2003, we began leasing approximately 3,300 square feet of office space in Tokyo and,
in January 2004, we began leasing approximately 1,600 square feet of office space in Singapore. In
November 2005, we began leasing approximately 200 square feet of office space in China. These
facilities are used by local sales, marketing and field service personnel.

Item 3. Legal Proceedings.

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

Affymetrix Litigation

On July 26, 2004, Affymetrix, Inc. (‘‘Affymetrix’’) filed a complaint in the U.S. District Court for the
District of Delaware alleging that the use, manufacture and sale of our BeadArray products and
services, including the Array Matrix and BeadChip products, infringe six Affymetrix patents. Affymetrix
seeks an injunction against the sale of products, if any, that are determined to be infringing these
patents, unspecified monetary damages, interest and attorneys’ fees. On September 15, 2004, we filed
our answer and counterclaims to Affymetrix’ complaint, seeking declaratory judgments from the court
that we do not infringe the Affymetrix patents, and that such patents are invalid, and filed counter-
claims against Affymetrix for unfair competition and interference with actual and prospective economic
advantage. On January 7, 2006, we sought leave to file our first amended answer and counterclaims,
adding allegations of inequitable conduct with respect to all six asserted Affymetrix patents, violation
of Section 2 of the Sherman Act, and unclean hands. Trial is scheduled for October 16, 2006. We
believe we have meritorious defenses against each of the infringement claims alleged by Affymetrix
and intend to vigorously defend ourselves against this suit. However, we cannot be sure that we will
prevail in this matter. Any unfavorable determination, and in particular, any significant cash amounts
required to be paid by us or prohibition of the sale of our products and services, could result in a
material adverse effect on our business, financial condition and results of operations.

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

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

Termination-of-Employment Lawsuit

In March 2001, a complaint seeking damages of an unspecified amount was filed against us by
Dr. Czarnik in the Superior Court of the State of California in connection with the employee’s
termination of employment with Illumina. In June 2002, a California Superior Court judgment was
rendered against us and we recorded a $7.7 million charge in our financial results for the second
quarter of 2002 to cover total damages and remaining expenses. We appealed the decision, and in
December 2004, the Fourth Appellate District Court of Appeal, in San Diego, California, reduced the
amount of the award. We recorded interest expense on the $7.7 million during the appeal based on
the statutory rate. As a result of the revised judgment, we reduced the $9.2 million liability on our
balance sheet to $5.9 million and recorded a gain of $3.3 million as a litigation judgment in the fourth
quarter of 2004. In January 2005, we paid the $5.9 million and removed the liability from our balance
sheet.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2005.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities.

Our common stock has been quoted on the Nasdaq National Market under the symbol ‘‘ILMN’’
since July 28, 2000. Prior to that time, there was no public market for our common stock. The following
table sets forth, for the periods indicated, the quarterly high and low sales prices per share of our
common stock as reported on the Nasdaq National Market. Our present policy is to retain earnings, if
any, to finance future growth. We have never paid cash dividends and have no present intention to pay
cash dividends in the foreseeable future.

2005

High

Low

First Quarter ****************************************************** $11.35
Second Quarter ***************************************************
12.95
Third Quarter *****************************************************
14.83
Fourth Quarter ****************************************************
16.80

$ 6.72
7.90
10.82
12.76

2004

High

Low

First Quarter ****************************************************** $10.24
Second Quarter ***************************************************
8.88
Third Quarter *****************************************************
7.22
Fourth Quarter ****************************************************
9.65

$ 6.50
6.07
4.23
6.16

At January 31, 2006, there were approximately 229 stockholders of record, and the closing price
per share of our common stock, as reported on the Nasdaq National Market on such date, was $21.44.

Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

We did not repurchase any of our securities during 2005.

Use of Proceeds

We completed our initial public offering of common stock in July 2000, resulting in net proceeds
of $101.3 million. We will continue to use proceeds from our initial public offering to fund operations.
Through January 1, 2006, we have used approximately $30.9 million to purchase property, plant and
equipment, approximately $2.4 million for the acquisition of CyVera, and approximately $46.8 million
to fund general operating expenses. The remaining balance is invested in a variety of interest-bearing
instruments including U.S. Treasury securities, and money market accounts.

Item 6. Selected Financial Data.

The following selected historical consolidated financial data has been derived from our audited
consolidated financial statements. The balance sheet data as of January 1, 2006 and January 2, 2005
and statement of operations data for each of the three years in the period ended January 1, 2006 are
derived from audited consolidated financial statements included in this Annual Report on Form 10-K.
The balance sheet data as of December 28, 2003, December 29, 2002, and December 30, 2001 and
statement of operations data for each of the two years in the period ended December 29, 2002 are
derived from our audited consolidated financial statements that are not included in this Annual Report
on Form 10-K. The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to Decem-
ber 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and
September 30. The years ended January 1, 2006 and January 2, 2005 were 52 and 53 weeks,
respectively. You should read this table in conjunction with Item 7, ‘‘Management’s Discussion and
Analysis of Financial Condition and Results of Operations,’’ and Item 8, ‘‘Financial Statements and
Supplementary Data.’’

Statement of Operations Data

Year Ended Year Ended
January 2,
January 1,
2005
2006

Year Ended

Year Ended
December 28, December 29, December 30,
2002

Year Ended

2003

2001

Revenue:

Product revenue*************
Service and other revenue****
Research revenue ***********
Total revenue *************

$ 57,752
13,935
1,814

$40,497
8,075
2,011

73,501

50,583

$ 18,378
6,496
3,161

28,035

$ 4,103
3,305
2,632

10,040

897
99
1,490

2,486

(In thousands, except per share data)

Costs and expenses:

Cost of product revenue *******
Cost of service and other

revenue ********************
Research and development*****
Selling, general and

administrative ***************

Acquired in-process research

and development ***********

Amortization of deferred

compensation and other
stock-based compensation
charges ********************
Litigation judgment

(settlement), net***********
Total costs and expenses ***
Loss from operations ************
Interest income *****************
Interest and other expense *******
Net loss ************************

Net loss per share, basic and

diluted ***********************

Shares used in calculating net loss
per share, basic and diluted ****

19,920

11,572

7,437

1,815

489

3,261
27,725

1,687
21,114

2,600
22,511

1,721
26,848

68
20,735

27,972

25,080

18,899

9,099

5,663

15,800

—

270

844

2,454

4,360

5,850

—

(4,201)

94,948

56,096

(21,447)
1,404
(831)

(5,513)
941
(1,653)

756

54,657

(26,622)
1,821
(2,262)

8,052

51,895

(41,855)
3,805
(2,281)

—

32,805

(30,319)
6,198
(702)

$(20,874)

$ (6,225)

$(27,063)

$(40,331)

$(24,823)

(0.52)

$ (0.17)

(0.85)

(1.31)

(0.83)

40,147

35,845

31,925

30,890

29,748

See Note 1 to the consolidated financial statements for an explanation of the determination of the

number of shares used to compute basic and diluted net loss per share.

Balance Sheet Data

January 1,
2006

January 2,
2005

December 28,
2003

December 29,
2002

December 30,
2001

(In thousands)

Cash, cash equivalents and

current restricted cash and
investments ************** $ 50,822
57,992
100,610
54
(144,586)
72,497

Working capital *************
Total assets*****************
Long-term debt obligations **
Accumulated deficit *********
Total stockholders’ equity ****

$ 66,994
64,643
94,907
—
(123,712)
72,262

$ 32,882
32,229
99,234
24,999
(117,487)
47,388

$ 66,294
58,522
121,906
25,620
(90,424)
71,744

$ 93,786
91,452
122,465
590
(50,093)
106,791

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operation.

The following discussion and analysis should be read with ‘‘Item 6. Selected Financial Data’’ and
our consolidated financial statements and notes thereto included elsewhere in this Annual Report on
Form 10-K. The discussion and analysis in this Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties, such as statements of our plans, objectives, expecta-
tions and intentions. Words such as ‘‘anticipate’’, ‘‘believe,’’ ‘‘continue,’’ ‘‘estimate,’’ ‘‘expect,’’
‘‘intend,’’ ‘‘may,’’ ‘‘plan,’’ ‘‘potential,’’ ‘‘predict,’’ ‘‘project’’ or similar words or phrases, or the negatives
of these words, may identify forward-looking statements, but the absence of these words does not
necessarily mean that a statement is not forward looking. Examples of forward-looking statements
include, among others, statements regarding the integration of CyVera’s technology with our existing
technology, the commercial launch of new products, including products based on CyVera’s technol-
ogy, and the duration which our existing cash and other resources is expected to fund our operating
activities. Forward-looking statements are subject to known and unknown risks and uncertainties and
are based on potentially inaccurate assumptions that could cause actual results to differ materially from
those expected or implied by the forward looking statements. Factors that could cause or contribute to
these differences include those discussed in ‘‘Item 1A. Risk Factors’’ as well as those discussed
elsewhere. The risk factors and other cautionary statements made in this Annual Report on Form 10-K
should be read as applying to all related forward-looking statements wherever they appear in this
Annual Report on Form 10-K.

Overview

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

We have incurred substantial operating losses since our inception. As of January 1, 2006, our
accumulated deficit was $144.6 million, and total stockholders’ equity was $72.5 million. These losses
have principally occurred as a result of the substantial resources required for the research, develop-
ment and manufacturing scale up effort required to commercialize our products and services, an
acquired in-process research and development charge of $15.8 million related to our acquisition of
CyVera and a charge of $5.9 million related to a termination-of-employment lawsuit. We expect to
continue to incur substantial costs for research, development and manufacturing scale up activities
over the next several years. We will also need to significantly increase our selling, general and
administrative costs as we build up our sales and marketing infrastructure to expand and support the
sale of systems, other products and services. As a result of the expected increase in expenses, we will
need to increase revenue significantly to achieve sustained profitability.

Critical Accounting Policies and Estimates

General

Our discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of financial statements requires that management
make estimates, assumptions and judgments with respect to the application of accounting policies that
affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of
contingent assets and liabilities. Actual results could differ from those estimates.

Our significant accounting policies are described in Note 1 to our consolidated financial state-
ments. Certain accounting policies are deemed critical if 1) they require an accounting estimate to be
made based on assumptions that were highly uncertain at the time the estimate was made, and
2) changes in the estimate that are reasonably likely to occur, or different estimates that we reasonably
could have used would have a material effect on our consolidated financial statements.

Management has discussed the development and selection of these critical accounting policies
with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the
disclosure. In addition, there are other items within our financial statements that require estimation, but
are not deemed critical as defined above.

We believe the following critical accounting policies reflect our more significant estimates and

assumptions used in the preparation of the consolidated financial statements.

Revenue Recognition

Our revenue is generated primarily from the sale of products and services. Product revenue
consists of sales of arrays, reagents, instrumentation, and oligos. Service and other revenue consists of
revenue received for performing genotyping services, extended warranty sales and revenue earned
from milestone payments. As described below, significant judgments and estimates must be made and
used in connection with the revenue recognized in any accounting period.

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

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

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

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

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

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

A third source of revenue, research revenue, consists of amounts earned under research agree-
ments with government grants, which is recognized in the period during which the related costs are
incurred. All revenue is recorded net of any applicable allowances for returns or discounts.

Allowance for Doubtful Accounts

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

Inventory Valuation

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

Contingencies

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

Goodwill and Intangible Asset Valuation

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

During 2001, we adopted SFAS No. 142. SFAS No. 142 requires that goodwill and certain
intangible assets be assessed for impairment using fair value measurement techniques. If the carrying
amount of a reporting unit exceeds its fair value, then a goodwill impairment test is performed to
measure the amount of the impairment loss, if any. The goodwill impairment test compares the implied
fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair
value of goodwill is determined in the same manner as in a business combination. Determining the fair
value of the implied goodwill is judgmental in nature and often involves the use of significant estimates
and assumptions. These estimates and assumptions could have a significant impact on whether or not
an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value
are primarily determined using discounted cash flows and market comparisons. These approaches use
significant estimates and assumptions, including projection and timing of future cash flows, discount
rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of
appropriate market comparables, and determination of whether a premium or discount should be
applied to comparables. It is reasonably possible that the plans and estimates used to value these
assets may be incorrect. If our actual results, or the plans and estimates used in future impairment
analyses, are lower than the original estimates used to assess the recoverability of these assets, we
could incur additional impairment charges. As of January 1, 2006, we had $2.1 million of goodwill. This
goodwill is reported as a separate line item in the balance sheet for fiscal 2005.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 123
(revised 2004), Share Based Payment (‘‘SFAS 123R’’), which is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation. This statement supercedes Accounting Principles Bulletin (‘‘APB’’)
Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in
SFAS No. 123; however, SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.

SFAS No. 123R permits companies to adopt its requirements using either a ‘‘modified prospec-
tive’’ method or a ‘‘modified retrospective’’ method. Under the ‘‘modified prospective’’ method,
compensation cost is recognized in the financial statements beginning with the effective date, based
on the requirements of SFAS No. 123R for all share-based payments granted after that date, and based
on the requirements for SFAS No. 123 for all unvested awards granted prior to the effective date of
SFAS No. 123R. Under the ‘‘modified retrospective’’ method, the requirements are the same as under
the ‘‘modified prospective’’ method, but companies may restate financial statements of previous
periods based on pro forma disclosures made in accordance with SFAS No. 123. We currently utilize
the Black-Scholes model to measure the fair value of stock options granted to employees under the
pro forma disclosure requirements of SFAS No. 123. While SFAS No. 123R permits companies to
continue to use such model, it also permits the use of a ‘‘lattice’’ model. We have deterimined we will
use the Black-Scholes model to measure the fair value of employee stock options under
SFAS No. 123R. The new standard is effective for companies that are not small business issuers, like us,
beginning with the first reporting period during the first fiscal year beginning on or after June 15, 2005,
and we adopted SFAS No. 123R at the beginning of our new reporting period on January 2, 2006.

We currently account for share-based payments to employees using APB No. 25’s intrinsic value
method and, as such, recognize no compensation cost for employee stock options granted with
exercise prices equal to or greater than the fair value of our common stock on the date of the grant.
Accordingly, the adoption of SFAS No. 123R’s fair value method is expected to result in significant
non-cash charges which will increase our reported operating expenses. However, it will have no impact
on our cash flows. The precise impact of adoption of SFAS No. 123R cannot be predicted at this time
because it will depend on the level of share-based payments granted in the future. However, had we
adopted SFAS No. 123R in prior periods, we believe the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss in the
notes to our consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs. We are required to adopt
the provisions of SFAS No. 151, on a prospective basis, as of January 2, 2006. SFAS No. 151 clarifies
the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material. SFAS No. 151 requires that those items — if abnormal — be recognized as expenses in the
period incurred. In addition, SFAS No. 151 requires the allocation of fixed production overheads to the
costs of conversions based upon the normal capacity of the production facilities. We do not believe
that the adoption of SFAS No. 151 will have a material impact on our financial position or results of
operations.

Results of Operations

To enhance comparability, the following table sets forth audited consolidated statement of
operations data for the years ended January 1, 2006, January 2, 2005, and December 28, 2003 stated
as a percentage of total revenue.

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Revenue***************************************
Product revenue *****************************
Service and other revenue ********************
Research revenue ****************************
Total revenue ******************************

Costs and expenses:

Cost of product revenue **********************
Cost of service and other revenue *************
Research and development********************
Selling, general and administrative *************
Acquired in-process research and development**
Amortization of deferred compensation and

other stock-based compensation charges *****
Litigation judgment (settlement), net ***********
Total costs and expenses********************
Loss from operations ***************************
Interest income ********************************
Interest and other expense **********************
Net loss ***************************************

79%
19
2

80%
16
4

100

27
4
38
38
22

—
—

129

(29)
2
(1)

23
3
41
50
—

2
(8)

111

(11)
2
(3)

66%
23
11

100

27
9
80
67
—

9
3

195

(95)
6
(8)

(28%)

(12%)

(97%)

Comparison of Years Ended January 1, 2006 and January 2, 2005

Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or
14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended
January 1, 2006 and January 2, 2005 were 52 and 53 weeks, respectively.

Revenue

Product revenue **********************************
Service and other revenue *************************
Research revenue *********************************
Total revenue ***********************************

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(in thousands)

$57,752
13,935
1,814

$40,497
8,075
2,011

$73,501

$50,583

Percentage
Change

43%
73
(10)

45%

Total revenue for the years ended January 1, 2006 and January 2, 2005 was $73.5 million and
$50.6 million, respectively. This represents an increase of $22.9 million for 2005, or 45%, as compared
to 2004.

Product revenue increased to $57.8 million for the year ended January 1, 2006 from $40.5 million
for the year ended January 2, 2005. The increase in 2005 was primarily due to higher BeadStation,
consumable and, to a lesser extent, oligo sales. Growth in consumable sales was due to the launch of
several new products, as well as the growth in our installed base of BeadStations. As of January 1,
2006, we have shipped a total of 115 BeadStations and 11 BeadLabs.

Service and other revenue increased to $13.9 million in 2005 from $8.1 million in 2004. The
increase in service and other revenue is primarily due to higher demand for third-party SNP genotyping
service contracts during the 2005 period. In addition, due to the achievement of a milestone
associated with our collaboration agreement with Invitrogen, we recognized revenue of $1.1 million in
the fourth quarter of 2005. These increases were partially offset by decreased revenue related to the
International HapMap Project. We completed all revenue-generating genotyping services for the
International HapMap project early in the first quarter of 2005. We expect sales from third-party SNP
genotyping services contracts to fluctuate on a yearly and quarterly basis, depending on the mix and
number of contracts that are completed. The timing of completion of a SNP genotyping services
contract is highly dependent on the customer’s schedule for delivering the SNPs and samples to us.

Government grants and other research funding decreased to $1.8 million for the year ended
January 1, 2006 from $2.0 million for the year ended January 2, 2005, due primarily to a decrease in
internal research spending for our grants from the National Institutes of Health. We expect revenue
from government grants to decline in the future as we continue to expand our focus on commercial
operations.

Cost of Product and Service and Other Revenue

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(In thousands)

Percentage
Change

Cost of product revenue **************************
Cost of service and other revenue******************

$19,920
3,261

$11,572
1,687

Total cost of product and service and other revenue

$23,181

$13,259

72%
93

75%

Cost of product and service and other revenue represents manufacturing costs incurred in the
production process, including component materials, assembly labor and overhead, installation, war-
ranty, packaging and delivery costs, as well as costs associated with performing genotyping services
on behalf of our customers. Costs related to research revenue are included in research and develop-
ment expense. Cost of product and service and other revenue increased to $23.2 million for the year
ended January 1, 2006, as compared to $13.3 million for the year ended January 2, 2005 due primarily
to the significant increase in product revenue. Gross margin on product and service and other revenue
was 68% for 2005, as compared to 73% for 2004.

Cost of product revenue increased to $19.9 million for the year ended January 1, 2006, as
compared to $11.6 million for the year ended January 2, 2005, due to the significant increase in
product revenue. Gross margin on product revenue decreased to 66% for the year ended January 1,
2006, as compared to 71% for the year ended January 2, 2005. The decrease in gross margin
percentage is primarily due to the impact of product mix. A higher percentage of our revenue in 2005
was generated from the sale of instrumentation, which generally has a lower gross margin than other
products. Other factors contributing to the decrease include decreased gross margins related to our
consumable and oligo sales. Lower consumable margins can be primarily attributed to lower average
selling prices on consumable sales in 2005, as compared to 2004, which were partially offset by
decreased manufacturing costs. In addition, the gross margin associated with oligo products sold as a
part of the Invitrogen collaboration was lower when compared to the prior year. The change in oligo
gross margin is due to the fact that, under the Invitrogen collaboration, we no longer sell oligos
directly. As a result, the gross margin related to this product line decreased; however, the net margin
has increased due to the fact that most of the sales and marketing expenses surrounding the oligo
business have shifted to our collaboration partner, Invitrogen.

Cost of service and other revenue increased to $3.3 million for the year ended January 1, 2006, as
compared to $1.7 million for the year ended January 2, 2005. Gross margin on service and other
revenue decreased to 77% for the year ended January 1, 2006 from 79% in the year ended January 2,
2005. The decrease is due primarily to a change in the mix of projects and decreased average selling
prices.

We expect product mix to continue to affect our future gross margins. However, we expect our

market to become increasingly price competitive and our margins may fluctuate.

Research and Development Expenses

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(In thousands)

Percentage
Change

Research and development ************************

$27,725

$21,114

31%

Research and development expenses increased to $27.7 million for the year ended January 1,
2006, as compared to $21.1 million for the year ended January 2, 2005. The increase in research and
development expenses is primarily due to the development expenses incurred to develop our newly-
acquired Microbead technology purchased in conjunction with our acquisition of CyVera in April 2005.
Research and development expenses related to the Microbead technology totaled approximately
$3.2 million in 2005. Additional factors contributing to the increased research and development
expenses during 2005 relate to increased costs of $2.1 million associated with the cost of BeadArray
research activities and $1.3 million related to research costs to support our Oligator technology
platform. We believe a substantial investment in research and development is essential to remaining
competitive and expanding into additional markets. Accordingly, we expect our research and develop-
ment expenses to increase as we expand our product base.

Stock based compensation related to research and development employees and consultants was
approximately $0.1 million for the year ended January 1, 2006, as compared to $0.3 million for the year
ended January 2, 2005.

Selling, General and Administrative Expenses

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(In thousands)

Percentage
Change

Selling, general and administrative******************

$27,972

$25,080

12%

Our selling, general and administrative expenses consist primarily of personnel costs for sales and
marketing, finance, human resources, business development, legal and general management, as well
as professional fees, such as expenses for legal and accounting services.

Selling, general and administrative expenses increased to $28.0 million for the year ended
January 1, 2006, as compared to $25.1 million for the year ended January 2, 2005. Our sales and
marketing expenses increased $3.6 million, of which $2.7 million was attributable to personnel related
expenses for the build-out of our sales force and customer support staff, and $0.9 million is attributable
to other non-personnel-related costs, including sales and marketing activities for our existing and new
products. General and administrative expenses decreased by $0.7 million in 2005, as compared to
2004, due primarily to a $2.5 million decrease in litigation expenses, partially offset by a $1.5 million
increase in personnel-related expenses.

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

Stock based compensation for selling, general and administrative employees, directors and
consultants was $0.2 million for the year ended January 1, 2006, as compared to $0.5 million for the
year ended January 2, 2005. During 2005, we recorded non-cash compensation expense for acceler-
ated vesting of options for certain employees totaling approximately $0.1 million. This compensation
was provided as incentive to continue to work as key members of the sales team associated with the
Invitrogen collaboration.

Acquired In-Process Research and Development

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(In thousands)

Percentage
Change

Acquired in-process research and development ******

$15,800

$ —

N/A

During the year ended January 1, 2006, we recorded $15.8 million of acquired IPR&D resulting
from the CyVera acquisition. These amounts were expensed on the acquisition dates because the
acquired technology had not yet reached technological feasibility and had no alternative future uses.
At the acquisition date, CyVera’s ongoing research and development initiatives were primarily the
development of its microbead technology platform and optical instrumentation/reader concepts. The
IPR&D charge related to the CyVera acquisition was made up of two projects that were approximately
50% and 25% complete at the date of acquisition. The discount rate applied to calculate the IPR&D
charge was 30%. Acquisitions of businesses, products or technologies by us in the future may result in
substantial charges for acquired IPR&D that may cause fluctuations in our interim or annual operating
results. There were no charges resulting from any acquisitions during the same period in 2004.

Amortization of Deferred Compensation and Other Stock-Based Compensation Charges

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(In thousands)

Percentage
Change

Amortization of deferred compensation and other

stock-based compensation charges ***************

$270

$844

(68%)

Since our inception, in connection with the grant of certain stock options and sales of restricted
stock to employees, founders and directors through July 25, 2000, we have recorded deferred stock
compensation totaling approximately $17.6 million, representing the difference between the exercise
or purchase price and the fair value of our common stock as estimated by our management for
financial reporting purposes on the date such stock options were granted or restricted common stock
was sold. Deferred compensation is included as a reduction of stockholders’ equity and is being
amortized over the vesting period of the options and restricted stock. In 2005, we recorded
$0.2 million as deferred compensation related to unvested options associated with our acquisition of
CyVera. In addition, in 2005, we granted a restricted stock award to an employee and recorded
deferred stock compensation totaling $0.2 million. During the years ended January 1, 2006 and
January 2, 2005, we recorded amortization of deferred stock compensation of approximately $0.3 mil-
lion and $0.8 million, respectively.

We recognize compensation expense over the vesting period for employees, founders and
directors, using an accelerated amortization methodology in accordance with FASB Interpretation
No. 28. For consultants, deferred compensation is recorded at the fair value for the options granted or
stock sold in accordance with SFAS No. 123 and is periodically re-measured and expensed in
accordance with EITF No. 96-18.

In 2005, we recorded approximately $48,000 as deferred compensation expense related to our
acquisition of CyVera. We also recorded non-cash compensation expense related to accelerated
vesting of options for certain employees totaling approximately $0.1 million. This compensation was
provided to these employees as incentive to continue to work as key members of the sales team
associated with the Invitrogen collaboration. In addition, in 2005 we granted a restricted stock award
to an employee and recorded a non-cash compensation charge of $21,000. We expect expenses
related to stock-based compensation to increase significantly beginning in 2006 as we implement the
requirements of SFAS No. 123R. Although the adoption of SFAS No. 123R’s fair value method is
expected to result in a significant increase in our reported operating expenses, it will have no impact
on our cash flows. SFAS No. 123R is discussed further in ‘‘Recently Issued Accounting Standards’’ in
Item 7 and in Note 1 to our consolidated financial statements.

Litigation Judgment (Settlement), net

Litigation judgment (settlement), net ***************

$ —

$(4,201)

(100%)

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Percentage
Change

(In thousands)

We recorded a $7.7 million charge in June 2002 to cover total damages and estimated expenses
related to a jury verdict in a termination-of-employment lawsuit. We appealed the decision, and in
December 2004, the Fourth Appellate District Court of Appeal, in San Diego, California, reduced the
amount of the award. During the appeal process, the court required us to incur interest charges on the
judgment amount at statutory rates until the case was resolved. During the years ended January 2,
2005 and December 28, 2003, we recorded $0.6 million and $0.8 million, respectively, of such interest
charges as litigation expense. As a result of the revised judgment, we reduced the $9.2 million liability
on our balance sheet to $5.9 million and recorded a gain of $3.3 million as a litigation judgment in the
fourth quarter of 2004. In addition, in August 2004, we recorded a $1.5 million gain as a result of a
settlement with Applera.

Interest Income

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(In thousands)

Percentage
Change

Interest income ***********************************

$1,404

$941

49%

Interest income on our cash and cash equivalents and investments was $1.4 million and
$0.9 million for the years ended January 1, 2006 and January 2, 2005, respectively. The increase was
due to higher average cash balances and higher effective interest rates compared to the prior year.

Interest and Other Expense

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(In thousands)

Percentage
Change

Interest and other expense*************************

$831

$1,653

(50%)

Interest and other expense consists of interest expense, expenses related to foreign exchange
transaction costs, foreign income taxes and gains and losses on disposals of assets. Interest and other
expense decreased to $0.8 million for the year ended January 1, 2006, as compared to $1.7 million for
the year ended January 2, 2005.

Interest expense was $7,000 for the year ended January 1, 2006, as compared to $1.4 million for
the year ended January 2, 2005. Interest expense in the 2004 period relates primarily to a $26.0 million
fixed rate loan that was paid off in August 2004 in connection with the sale of our San Diego facilities.

In the year ended January 1, 2006, we recorded approximately $0.4 million in losses due to
foreign currency transactions compared to $0.2 million in foreign currency transaction losses for the
year ended January 2, 2005. Estimated foreign income taxes were approximately $0.2 million and
$0.1 million for the years ended January 1, 2006 and January 2, 2005, respectively. In addition in 2005,
we recorded $0.3 million related to losses on disposal of assets. There were no gains or losses on
disposals in 2004.

Provision for Income Taxes

We incurred net operating losses for the years ended January 1, 2006 and January 2, 2005 and,
accordingly, we did not pay any U.S. federal or state income taxes. We have recorded a valuation
allowance for the full amount of the resulting net deferred tax asset, as the future realization of the tax
benefit is uncertain. As of January 1, 2006, we had net operating loss carryforwards for federal and
California tax purposes of approximately $103.7 million and $40.1 million, respectively, which begin to
expire in 2018 and 2006, respectively, unless previously utilized.

As of January 1, 2006, we also had U.S. federal and California research and development tax credit
carryforwards of approximately $4.1 million and $3.8 million, respectively. The federal tax credit
carryforwards will begin to expire in 2018 and the California carryforwards have no expiration.

Our utilization of the net operating losses and credits may be subject to substantial annual
limitations pursuant to Section 382 and 383 of the Internal Revenue Code, and similar state provisions,
as a result of changes in our ownership structure. CyVera Corporation had an ownership change upon
our acquisition during 2005 and, accordingly, its net operating loss and tax credit carryforwards are
subject to annual limitation. These annual limitations may result in the expiration of net operating
losses and credits prior to utilization. We are in the final stages of completing our formal Section 382
and 383 analysis and it is anticipated that approximately $0.2 million of our net operating loss
carryforwards may be limited.

Comparison of Years Ended January 2, 2005 and December 28, 2003

Our fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or
14 weeks ending the Sunday closest to March 31, June 30, and September 30. The years ended
January 2, 2005 and December 28, 2003 were 53 and 52 weeks, respectively.

Revenue

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Percentage
Change

(In thousands)

Product revenue ********************************
Service revenue*********************************
Research revenue *******************************
Total revenue *********************************

$40,497
8,075
2,011

$50,583

$18,378
6,496
3,161

$28,035

120%
24
(36)

80%

Revenue for the years ended January 2, 2005 and December 28, 2003 was $50.6 million and
$28.0 million, respectively. Product revenue increased to $40.5 million in 2004 from $18.4 million in
2003. The increase resulted almost entirely from sales of consumables used on our BeadLabs and
BeadStations and sales of our benchtop BeadStations, offset by fewer sales of our production-scale
BeadLabs. In 2003, we had no sales of BeadStations and we only began selling consumable products
in May 2003.

Service revenue increased to $8.1 million for the year ended January 2, 2005 from $6.5 million in
for the year ended December 28, 2003. Substantially all of this increase relates to SNP genotyping
services performed for the International HapMap Project. We are the recipient of a grant from the
National Institutes of Health covering our participation in the first phase of the International HapMap
Project, which is a $100 million internationally funded successor project to the Human Genome Project
that will help identify a map of genetic variations that may be used to perform disease-related
research. We received $9.1 million of funding for this project which covered basic research activities,
the development of SNP assays and the genotyping to be performed on those assays. We had
recognized revenue from this grant of $8.3 million through the end of 2004. The remaining $0.8 million
of funding remaining related to this project was received and recognized as revenue in early 2005.

Government grants and other research funding decreased to $2.0 million for the year ended
January 2, 2005 from $3.2 million for the year ended December 28, 2003, primarily due to a decrease
in internal research spending for our grant from the National Institutes of Health covering our
participation in the International HapMap Project.

Cost of Product and Service Revenue

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Percentage
Change

(In thousands)

Cost of product revenue *************************
Cost of service revenue**************************
Total cost of product and service revenue *********

$11,572
1,687

$13,259

$ 7,437
2,600

$10,037

56%
(35%)

32%

Cost of product and service revenue represents manufacturing costs incurred in the production
process, including component materials, assembly labor and overhead, installation, warranty, packag-
ing and delivery costs, as well as costs associated with performing genotyping services on behalf of our
customers. Costs related to research revenue are included in research and development expense.

Cost of product revenue increased to $11.6 million for the year ended January 2, 2005 from
$7.4 million for the year ended December 28, 2003. Substantially all of this increase was driven by the
sales of our BeadStations and consumables. Gross margin on product revenue increased to 71% in the
year ended January 2, 2005, from 60% for the year ended December 28, 2003, due primarily to
increased sales of higher margin consumable products, as well as efficiencies gained in oligo
manufacturing.

Cost of service revenue decreased to $1.7 million for the year ended January 2, 2005 from
$2.6 million for the year ended December 28, 2003. Gross margin on service revenue increased to 79%
in the year ended January 2, 2005, from 60% for the year ended December 28, 2003. This decrease in
cost and increase in gross margin is due primarily to efficiencies gained in SNP genotyping services, as
well as lower costs of oligos used in the genotyping services process.

Research and Development Expenses

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Percentage
Change

(In thousands)

Research and development **********************

$21,114

$22,511

(6%)

Our research and development expenses consist primarily of salaries and other personnel-related
expenses, laboratory supplies and other expenses related to the design, development, testing and
enhancement of our products. We expense our research and development expenses as they are
incurred. Research and development expenses decreased $1.4 million to $21.1 million for the year
ended January 2, 2005 from $22.5 million for the year ended December 28, 2003. Approximately
$0.9 million of the decrease is attributable to personnel-related expenses and related lab supplies and
the majority of the remaining $0.5 million is attributable to lower manufacturing-related resources
needed to support research efforts and a decrease in depreciation expense.

During the year ended January 2, 2005, the cost of BeadArray technology research activities
decreased $0.4 million, as compared to the year ended December 28, 2003. The decrease is primarily
the result of completing the development of several products that were commercially launched in late
2003 and 2004 such as our BeadStation and focused gene set array products.

Research to support our Oligator technology platform decreased $1.0 million in the year ended
January 2, 2005, as compared to the year ended December 28, 2003. In the second quarter of 2003,
we implemented additional Oligator manufacturing and software enhancements to expand capacity,
increase throughput, and further reduce operating costs. In addition, as we increase our product sales,
a smaller portion of our manufacturing resources are now used to support research efforts as compared
to the same periods in 2003.

Stock based compensation related to research and development employees and consultants was
$0.3 million for the year ended January 2, 2005, as compared to $1.3 million for the year ended
December 28, 2003.

Selling, General and Administrative Expenses

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Percentage
Change

(In thousands)

Selling, general and administrative****************

$25,080

$18,899

33%

Our selling, general and administrative expenses consist primarily of personnel costs for sales and
marketing, finance, human resources, business development and general management, as well as
professional fees, such as expenses for legal and accounting services. Selling, general and administra-
tive expenses increased $6.2 million to $25.1 million for the year ended January 2, 2005 from
$18.9 million for the year ended December 28, 2003. Approximately $5.2 million of the increase is due
to higher sales and marketing costs, of which $4.1 million is attributable to personnel-related expenses
and $0.7 million is attributable to an increase in facility-related expenses. Approximately $1.0 million of
the increase in selling, general and administrative expenses is related to general and administrative
costs, of which $0.4 million is related to personnel-related expenses, and the majority of the remaining
$0.6 million is attributable to expenses associated with Sarbanes-Oxley compliance and our interna-
tional expansion.

Stock based compensation related to selling, general and administrative employees, directors and
consultants was $0.5 million for the year ended January 2, 2005, as compared to $1.2 million for the
year ended December 28, 2003.

Amortization of Deferred Compensation and Other Stock-Based Compensation Charges

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Percentage
Change

(In thousands)

Amortization of deferred compensation and other

stock-based compensation charges *************

$844

$2,454

(66%)

From our inception through July 27, 2000, in connection with the grant of certain stock options
and sales of restricted stock to employees, founders and directors, we have recorded deferred stock
compensation totaling $17.6 million, representing the difference between the exercise or purchase
price and the fair value of our common stock as estimated for financial reporting purposes on the date
such stock options were granted or such restricted stock was sold. We recorded this amount as a
component of stockholders’ equity and amortize the amount as a charge to operations over the
vesting period of the restricted stock and options.

We recorded amortization of deferred compensation of $0.8 million and $2.5 million for the years
ended January 2, 2005 and December 28, 2003, respectively. We recognize compensation expense
over the vesting period for employees, founders and directors, using an accelerated amortization
methodology in accordance with the FIN No. 28. For consultants, deferred compensation is recorded
at the fair value for the options granted or stock sold in accordance with SFAS No. 123 and is
periodically re-measured and expensed in accordance with EITF No. 96-18.

Litigation Judgment (Settlement), net

Litigation judgment (settlement), net **************

$(4,201)

$756

(656%)

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Percentage
Change

(In thousands)

We recorded a $7.7 million charge in June 2002 to cover total damages and estimated expenses
related to a jury verdict in a termination-of-employment lawsuit. We appealed the decision, and in
December 2004, the Fourth Appellate District Court of Appeal, in San Diego, California, reduced the
amount of the award. During the appeal process, the court required us to incur interest charges on the
judgment amount at statutory rates until the case was resolved. For the years ended January 2, 2005
and December 28, 2003 we recorded $0.6 million and $0.8 million, respectively, of such interest
charges as litigation expense. As a result of the revised judgment, we reduced the $9.2 million liability
on our balance sheet to $5.9 million and recorded a gain of $3.3 million as a litigation judgment in the
fourth quarter of 2004.

In 1999, we entered into a joint development agreement with Applied Biosystems Group, an
operating group of Applera Corporation, under which the companies agreed to jointly develop a SNP
genotyping system that would combine our BeadArray technology with Applied Biosystems’ assay
chemistry and scanner technology. In conjunction with the agreement, Applied Biosystems agreed to
provide us with non-refundable research and development support of $10.0 million, all of which was
paid by December 2001 and recorded as a liability on our balance sheet as of December 28, 2003. In
December 2002, Applied Biosystems initiated a patent infringement suit and sought to compel
arbitration of an alleged breach of the joint development agreement. We initiated a suit in state court
seeking to enjoin the arbitration and alleged that Applied Biosystems had breached the joint
development agreement. In August 2004, we entered into a settlement and cross-license agreement
with Applera. As a result of the settlement, we removed the $10.0 million liability from our balance
sheet, made a payment of $8.5 million to Applera and recorded a gain of $1.5 million as a litigation
settlement.

Interest Income

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Percentage
Change

(In thousands)

Interest income ********************************

$941

$1,821

(48%)

Interest income on our cash and cash equivalents and investments was $0.9 million and
$1.8 million for the years ended January 2, 2005 and December 28, 2003, respectively. The decrease is
due to lower effective interest rates, partially offset by higher average cash balances.

Interest and Other Expense

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Percentage
Change

(In thousands)

Interest and other expense **********************

$1,653

$2,262

(27%)

Interest and other expense primarily consisted of interest expense, which was $1.4 million and
$2.2 million for the years ended January 2, 2005 and December 28, 2003, respectively. Interest
expense relates primarily to a $26.0 million fixed rate loan, which was paid off in August 2004 in
connection with the sale of our San Diego facilities.

In the year ended January 2, 2005, we recorded approximately $150,000 in losses due to foreign
currency transactions as compared to approximately $5,000 in gains for the year ended December 28,
2003. Estimated foreign income taxes were approximately $135,000 and $45,000 for the years ended
January 2, 2005 and December 28, 2003, respectively.

Provision for Income Taxes

We incurred net operating losses for the years ended January 2, 2005 and December 28, 2003,
and accordingly, we did not pay any U.S. federal or state income taxes. We have recorded a valuation
allowance for the full amount of the resulting net deferred tax asset, as the future realization of the tax
benefit is uncertain. As of January 2, 2005, we had net operating loss carryforwards for federal and
state tax purposes of approximately $86.5 million and $39.1 million, respectively, which begin to
expire in 2018, unless previously utilized.

As of January 2, 2005, we also had U.S. federal and state research and development tax credit
carryforwards of approximately $3.1 million and $3.0 million, respectively, which begin to expire in
2018, unless previously utilized.

Liquidity and Capital Resources

Cashflow

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Net cash used in operating activities *************
Net cash provided by (used in) investing activities
Net cash provided by financing activities *********
Effect of foreign currency translation *************

$(9,008)
(1,535)
5,963
613

(In thousands)

$(19,574)
57,022
4,875
1

$(18,256)
28,468
216
—

Net increase (decrease) in cash and cash

equivalents **********************************

$(3,967)

$ 42,324

$ 10,428

As of January 1, 2006, we had cash and cash equivalents of approximately $50.8 million. We
currently invest our excess cash balances in U.S. dollar-based, short-term money market mutual funds.

Our operating activities used cash of $9.0 million in the year ended January 1, 2006, as compared
to $19.6 million in the year ended January 2, 2005. Net cash used in operating activities in the year
ended January 1, 2006 was primarily the result of a net loss from operations of $20.9 million, a
$6.0 million payment for a litigation judgment, a $7.0 million increase in accounts receivable and a
$6.5 million increase in inventory, reduced by a $7.4 million increase in accounts payable and accrued
liabilities, a $3.2 million increase in long-term liabilities primarily related to payments received from
Invitrogen recorded as deferred revenue, non-cash charges of $4.1 million for depreciation and
amortization and a non-cash acquired IPR&D charge of $15.8 million related to the CyVera acquisition.
The accounts receivable and inventory increases over the prior year are primarily due to our significant
year-over-year sales growth of 45%, which resulted from increased customer demand and our
introduction of new products and services into the market. The increase in accounts payable and
accrued liability balances was driven primarily by increases in general business activity associated with
such sales growth, as well as expenses associated with the expansion of our corporate infrastructure to
accommodate this growth. Net cash used in operating activities in the year ended January 2, 2005 was
primarily the result of a net loss from operations of $6.2 million, the payment of an $8.5 million legal
settlement, as described under ‘‘Litigation Judgment (Settlement), net,’’ a $7.2 million increase in
accounts receivable due to increased sales and a $2.0 million increase in other assets primarily for the
security deposit for the building lease, reduced by non-cash charges of $4.0 million for depreciation
and amortization.

Our investing activities used cash of $1.5 million in the year ended January 1, 2006, as compared
to providing cash of $57.0 million in the year ended January 2, 2005. Cash used in investing activities
in the year ended January 1, 2006 was due to $11.4 million used for the purchase of property and
equipment and $2.4 million paid for the acquisition of CyVera, reduced by $12.2 million from the sale
or maturity of investment securities used to provide operating funds for our business. Cash provided
by investing activities in the year ended January 2, 2005 was due to $40.7 million in proceeds from the
sale of our land and buildings, net of fees, and $19.7 million from the sale or maturity of investment
securities, net of purchases of investment securities used to provide operating funds for our business,
reduced by $3.4 million for the purchase of property and equipment.

Our financing activities provided $6.0 million in the year ended January 1, 2006, as compared to
$4.9 million for the year ended January 2, 2005. Cash provided from financing activities in the year
ended January 1, 2006 was due primarily to proceeds from the issuance of common stock from option
exercises. Cash provided from financing activities in the year ended January 2, 2005 was due primarily
to proceeds from the issuance of common stock, including $28.7 million of net proceeds from the sale
of approximately 4.6 million shares of our common stock in May 2004, offset by the $25.4 million in
long-term debt we paid off in connection with the sale of our land and buildings.

In June 2002, we recorded a $7.7 million charge to cover total damages and estimated expenses
related to a termination-of-employment lawsuit. As a result of our decision to appeal the ruling, we
filed a surety bond with the court in October 2002 of 1.5 times the judgment amount, or approximately
$11.3 million. Under the terms of the bond, we were required to maintain a letter of credit for 90% of
the bond amount to secure the bond. Further, we were required to deposit approximately $12.5 mil-
lion of marketable securities as collateral for the letter of credit and accordingly, these funds were
restricted from use for corporate purposes. A judgment was rendered in December 2004 and a
$5.9 million payment was made in early 2005, at which time the restricted funds were released.

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

In December 2003, we filed a shelf registration statement that would allow us to raise up to
$65 million of funding through the sale of common stock in one or more transactions. In May 2004, we
raised approximately $28.7 million, net of offering expenses, through the sale of our common stock
under this shelf registration statement.

Off-Balance Sheet Arrangements and Contractual Obligations

We do not participate in any transactions that generate relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special purpose
entities (‘‘SPEs’’), which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As of January 1, 2006, we were not
involved in any SPE transactions.

In January 2002, we purchased two newly constructed buildings and assumed a $26.0 million,
10-year mortgage on the property at a fixed interest rate of 8.36%. In June 2004, we entered into a
conditional agreement to sell our land and buildings for $42.0 million and to lease back such property
for an initial term of ten years. The sale was completed in August 2004 at which time the lease was
signed. After the repayment of the remaining $25.2 million debt and other related transaction
expenses, we received $15.5 million in net cash proceeds. We removed the land and net book value of
the buildings of $36.9 million from our balance sheet and are recording the resulting $3.7 million gain
on the sale of the property over the ten-year lease term in accordance with SFAS No. 13, Accounting
for Leases. Under the terms of the lease, we made a $1.9 million security deposit, with monthly rental
payments of $318,643 for the first year with an annual increase of 3% in each subsequent year through
August 2014. The current monthly rent under this lease is $328,202. The lease contains an option to
renew for three additional periods of five years each.

We also lease office space for a facility in Connecticut, an additional manufacturing storage facility
in San Diego and for three foreign facilities located in Japan, Singapore and China under non-
cancelable operating leases that expire at various times through December 2008. These leases contain
renewal options ranging from one to three years.

As of January 1, 2006, our contractual obligations are (in thousands):

Contractual Obligation
Operating leases ************* $39,513
Total************************* $39,513

Total

Payments Due by Period

Less Than
1 Year

$4,557

1 – 3 Years

3 – 5 Years

$8,708

$8,833

More Than
5 Years

$17,415

The above table does not include orders for goods and services entered into in the normal course

of business that are not enforceable or legally binding.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Sensitivity

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

Foreign Currency Exchange Risk

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

Exchange gains and losses arising from transactions denominated in foreign currencies are
recorded in operations. In July 2004, we began hedging significant foreign currency firm sales
commitments and accounts receivable with forward contracts. We only use derivative financial
instruments to reduce foreign currency exchange rate risks; we do not hold any derivative financial
instruments for trading or speculative purposes. Our forward exchange contracts have been desig-
nated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on
these foreign currency forward contracts are reported in other comprehensive income. Realized gains
and losses for the effective portion are recognized with the underlying hedge transaction. The notional
settlement amount of the foreign currency forward contracts outstanding at January 1, 2006 and
January 2, 2005 were $0.1 million and $4.0 million, respectively. As of January 1, 2006, we had one
foreign currency forward contract outstanding. This contract had a fair value of $882, representing an
unrealized gain, and was included in other current assets at January 1, 2006. This contract is set to
expire in March 2006 and is with a reputable bank institution. As of January 2, 2005, the outstanding
contracts had a fair value of $0.2 million, representing an unrealized loss, and were included in other
current liabilities at January 2, 2005. We settled foreign exchange contracts of $5.2 million and
$0.3 million for the years ended January 1, 2006 and January 2, 2005, respectively. Our hedging
program reduces, but does not entirely eliminate the impact of currency exchange rate movements.
We believe we have hedged all significant firm commitments denominated in foreign currencies, and
as a result, any increase or decrease in the exchange rates of these commitments would have no
material net effect to our balance sheet or our results of operations. The Company did not hold any
derivative financial instruments prior to fiscal 2004.

Item 8. Financial Statements and Supplementary Data.

The Report of Independent Registered Public Accounting Firm, Financial Statements and Notes to
Financial Statements begin on page F-1 immediately following the signature page and are incorpo-
rated herein by reference.

Our fiscal year is 52 or 53 weeks ending on the Sunday closest to December 31, with quarters of
13 or 14 weeks ending on the Sunday closest to March 31, June 30 and September 30. The years
ended January 1, 2006 and January 2, 2005 were 52 and 53 weeks, respectively.

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial

Disclosure.

None.

Item 9A. Controls and Procedures.

We have established and maintain disclosure controls and procedures that are designed to ensure
that we record, process, summarize, and report information we are required to disclose in our periodic
reports filed with the Securities and Exchange Commission in the manner and within the time periods
specified in the SEC’s rules and forms. We also design our disclosure controls to ensure that the
information is accumulated and communicated to our management, including the chief executive
officer and the chief financial officer, as appropriate to allow timely decisions regarding required
disclosure. We also maintain internal controls and procedures that are designed to ensure that we
comply with applicable laws and our established financial policies. We design our internal controls to
provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and
reported in conformity with U.S. generally accepted accounting principles.

We have evaluated the design and operation of our disclosure controls and procedures to
determine whether they are effective in ensuring that the disclosure of required information is timely
made in accordance with the Exchange Act and the rules and regulations of the Securities and
Exchange Commission. This evaluation was made under the supervision and with the participation of
management, including our chief executive officer and chief financial officer as of January 1, 2006. Our
management does not expect that our disclosure controls or our internal controls will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances
of fraud, if any, have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be
detected.

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

The chief executive officer and chief financial officer have concluded, based on their review, that
as of January 1, 2006, our disclosure controls and procedures, as defined by Exchange Act
Rules 13a-15(e) and 15d-15(e), are effective to ensure that information required to be disclosed by us in
reports that we file under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition,
no change in our internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting has occurred during the fourth
quarter of 2005.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of
its inherent limitations, internal control over financial reporting may not prevent or detect all
misstatements. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.

We conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework
in Internal Control — Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of January 1, 2006.

Our management’s assessment of the effectiveness of our internal control over financial reporting
as of January 1, 2006 has been audited by Ernst & Young LLP, Independent Registered Public
Accounting Firm. This report from Ernst & Young LLP, which expressed an unqualified opinion on
management’s assessment and the effectiveness of our internal controls over financial reporting as of
January 1, 2006, is included herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders
Illumina, Inc.

We have audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Illumina, Inc. maintained effective internal
control over financial reporting as of January 1, 2006, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Illumina Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the company’s internal control over financial
reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Illumina, Inc. maintained effective internal control
over financial reporting as of January 1, 2006, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, Illumina, Inc. maintained, in all material respects, effective internal
control over financial reporting as of January 1, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Illumina, Inc. as of January 1, 2006
and January 2, 2005, and the related consolidated statements of operations, stockholders’ equity, and
cash flows for the years ended January 1, 2006, January 2, 2005 and December 28, 2003 of Illumina,
Inc. and our report dated February 15, 2006 expressed an unqualified opinion thereon.

San Diego, California
February 15, 2006

/s/ ERNST & YOUNG LLP

Item 9B. Other Information.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

(a) Identification of Directors. Information concerning our directors is incorporated by reference
from the section entitled ‘‘Proposal 1 — Election of Directors’’ contained in our definitive Proxy
Statement with respect to our 2006 Annual Meeting of Stockholders to be filed with the SEC no later
than May 1, 2006.

(b) Identification of Executive Officers. Information concerning our executive officers is set forth
under ‘‘Executive Officers’’ in Part I of this Annual Report on Form 10-K and is incorporated herein by
reference.

(c) Compliance with Section 16(a) of the Exchange Act. Information concerning compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the section
entitled ‘‘Compliance with Section 16(a) of the Securities Exchange Act’’ contained in our definitive
Proxy Statement with respect to our 2006 Annual Meeting of Stockholders to be filed with the SEC no
later than May 1, 2006.

(d) Information concerning the audit committee financial expert as defined by the SEC rules
adopted pursuant to the Sarbanes-Oxley Act of 2002 is incorporated by reference from our definitive
Proxy Statement with respect to our 2006 Annual Meeting of Stockholders to be filed with the SEC no
later than May 1, 2006.

Code of Ethics

We have adopted a code of ethics for our directors, officers and employees, which is available on
our website at www.illumina.com in the Corporate Governance section under ‘‘Investors.’’ The
information on our website is not incorporated by reference into this report.

Item 11. Executive Compensation.

Information concerning executive compensation is incorporated by reference from the sections
entitled ‘‘Executive Compensation and Other Information’’ contained in our definitive Proxy Statement
with respect to our 2006 Annual Meeting of Stockholders to be filed with the SEC no later than May 1,
2006.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters.

Information concerning the security ownership of certain beneficial owners and management is
incorporated by reference from the section entitled ‘‘Ownership of Securities’’ contained in our
definitive Proxy Statement with respect to our 2006 Annual Meeting of Stockholders to be filed with
the SEC no later than May 1, 2006.

Equity Compensation Plan Information

The following table presents information about our common stock that may be issued upon the
exercise of options, warrants and rights under all our existing equity compensation plans as of
January 1, 2006. We currently have two active equity compensation plans, the 2000 employee stock
purchase plan and the 2005 stock incentive plan, which replaced the 2000 stock plan. Prior to our initial
public offering, we granted options under our 1998 stock incentive plan. All of these plans have been
approved by our stockholders. Options outstanding include options granted under the 1998 stock
incentive plan, the 2000 stock plan and the 2005 stock incentive plan.

Plan Category

Equity compensation plans

approved by security holders
Equity compensation plans not
approved by security holders
Total**************************

(a) Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options

7,326,431

—

7,326,431

(b)Weighted-
Average
Exercise Price
of Outstanding
Options

$7.96

—

$7.96

(c) Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities
Reflected in
Column (a))

5,660,884(1)(2)

—

5,660,884

Please refer to Note 6 to the consolidated financial statements included in this Annual Report on

Form 10-K for a description of our equity compensation plans.

(1) Includes 3,870,374 shares available for grant under our 2005 stock incentive plan. The 2005 stock
incentive plan provides for an automatic annual increase in the shares reserved for issuance by the
lesser of (1) five percent of outstanding shares of our common stock on the last day of the
immediately preceding fiscal year, (2) 1,200,000 shares or (3) a lesser amount as determined by our
Board of Directors.

(2) Includes 1,790,510 shares available for grant under our 2000 employee stock purchase plan. The
2000 employee stock purchase plan provides for an automatic annual increase in the shares
reserved for issuance by the lesser of (1) three percent of outstanding shares of our common stock
on the last day of the immediately preceding fiscal year or (2) 1,500,000 shares.

Item 13. Certain Relationships and Related Transactions.

Information concerning certain relationships and related transactions is incorporated by reference
from the sections entitled ‘‘Proposal One: Election of Directors,’’ ‘‘Executive Compensation and Other
Information’’ and ‘‘Certain Transactions’’ contained in our Definitive Proxy Statement with respect to
our 2006 Annual Meeting of Stockholders to be filed with the SEC no later than May 1, 2006.

Item 14. Principal Accounting Fees and Services.

Information concerning principal accounting fees and services is incorporated by reference from
the sections entitled ‘‘Proposal Two: Ratification of Independent Auditors’’ contained in our Definitive
Proxy Statement with respect to our 2006 Annual Meeting of Stockholders to be filed with the SEC no
later than May 1, 2006.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as a part of this report:

(1) Consolidated Financial Statements:

Page
Index to Consolidated Financial Statements ************************************* F-1
Report of Independent Registered Public Accounting Firm ************************ F-2
Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005 *********** F-3
Consolidated Statements of Operations for the years ended January 1, 2006,

January 2, 2005, and December 28, 2003 ************************************* F-4

Consolidated Statements of Stockholders’ Equity for the period from December 29,

2002 to January 1, 2006***************************************************** F-5

Consolidated Statements of Cash Flows for the years ended January 1, 2006,

January 2, 2005 and December 28, 2003************************************** F-6
Notes to Consolidated Financial Statements ************************************* F-7

(2) Financial Statement Schedule:
Valuation and Qualifying Account and Reserves for the three years ended January 1,

2006 ********************************************************************** F-31

(3) Exhibits:
Exhibit
Number

Description of Document

2.1(16)

3.1(2)
3.2(1)
3.3(5)

4.1(1)
4.2(1)

4.3(5)

+10.1(1)

+10.2(1)
+10.3(1)
10.4(1)

10.5(1)

10.6(1)

+10.7(1)
10.8(1)

Agreement and Plan of Merger by and among Illumina, Inc., Semaphore Acquisition
Sub, Inc., and Cyvera Corporation, dated February 22, 2005.
Amended and Restated Certificate of Incorporation.
Bylaws.
Certificate of Designation for Series A Junior Participating Preferred Stock (included as
an exhibit to exhibit 4.3).
Specimen Common Stock Certificate.
Amended and Restated Investors Rights Agreement, dated November 5, 1999, by and
among the Registrant and certain stockholders of the Registrant.
Rights Agreement, dated as of May 3, 2001, between the Company and Equiserve Trust
Company, N.A.
Form of Indemnification Agreement between the Registrant and each of its directors
and officers.
1998 Incentive Stock Plan.
2000 Employee Stock Purchase Plan.
Sublease Agreement dated August 1998 between Registrant and Gensia Sicor Inc. for
Illumina’s principal offices.
License Agreement dated May 1998 between Tufts and Registrant (with certain
confidential portions omitted).
Master Loan and Security Agreement, dated March 6, 2000, by and between Registrant
and FINOVA Capital Corporation.
2000 Stock Plan.
Eastgate Pointe Lease, dated July 6, 2000, between Diversified Eastgate Venture and
Registrant.

Exhibit
Number

10.9(1)

10.10(4)

10.11(6)

Description of Document

Option Agreement and Joint Escrow Instructions, dated July 6, 2000, between Diversi-
fied Eastgate Venture and Registrant.
First Amendment to Joint Development Agreement dated March 27, 2001 between
Registrant and PE Corporation, now known as Applied Biosystems Group (with certain
confidential portions omitted).
First Amendment to Option Agreement and Escrow Instructions dated May 25, 2001
between Diversified Eastgate Venture and Registrant.

10.12(13) Second Amendment to Option Agreement and Escrow Instructions dated July 18, 2001

between Diversified Eastgate Venture and Registrant.

10.13(14) Third Amendment to Option Agreement and Escrow Instructions dated September 27,

2001 between Diversified Eastgate Venture and Registrant.

10.14(15) First Amendment to Eastgate Pointe Lease dated September 27, 2001 between

10.15(8)

Diversified Eastgate Venture and Registrant.
Replacement Reserve Agreement, dated as of January 10, 2002, between the Company
and BNY Western Trust Company as Trustee for Washington Capital Joint Master Trust
Mortgage Income Fund.

10.16(17) Loan Assumption and Modification Agreement, dated as of January 10, 2002, between
the Company, Diversified Eastgate Venture and BNY Western Trust Company as Trustee
for Washington Capital Joint Master Trust Mortgage Income Fund.

10.17(18) Tenant Improvement and Leasing Commission Reserve Agreement, dated as of Janu-
ary 10, 2002, between the Company and BNY Western Trust Company as Trustee for
Washington Capital Joint Master Trust Mortgage Income Fund.

+10.18(19) 2000 Employee Stock Purchase Plan as amended and restated through March 21, 2002.
+10.19(20) 2000 Stock Plan as amended and restated through March 21, 2002.

10.20(21) Non-exclusive License Agreement dated January 2002 between Amersham Biosciences

Corp. and Registrant (with certain confidential portions omitted).

10.21(22) License Agreement dated June 2002 between Dade Behring Marburg GmbH and

Registrant (with certain confidential portions omitted).

10.22(23) Purchase and Sale Agreement and Escrow Instructions dated June 18, 2004 between

Bernardo Property Advisors, Inc. and Registrant.

10.23(24) Single Tenant Lease dated August 18, 2004 between BioMed Realty Trust Inc. and

Registrant.

10.24(25) Settlement and Cross License Agreement dated August 18, 2004 between Applera

Corporation and Registrant (with certain confidential portions omitted).

10.28(26) Collaboration Agreement dated December 17, 2004 between Invitrogen Incorporated
and Registrant (confidential treatment has been requested with respect to certain
portions of this exhibit).

10.29(27) Offer letter for Christian O. Henry dated April 26, 2005.
10.30(28) Forms of Stock Option Agreement under 2000 Stock Plan.
14(10)
21.1
23.1
24.1
31.1

Code of Ethics.
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (included on the signature page).
Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

31.2

Exhibit
Number

32.1

32.2

Description of Document

Certification of Jay T. Flatley pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Christian O. Henry pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Management contract or corporate plan or arrangement

(1) Incorporated by reference to the same numbered exhibit filed with our Registration Statement on

Form S-1 (333-33922) filed April 3, 2000, as amended.

(2) Incorporated by reference to the same numbered exhibit filed with our Annual Report on
Form 10-K (File No. 000-30361) for the year ended December 31, 2000 filed March 29, 2001.

(3) [reserved]

(4) Incorporated by reference to Exhibit 10.13 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended March 31, 2001 filed May 8, 2001.

(5) Incorporated by reference to the same numbered exhibit filed with our Registration Statement on

Form 8-A (File No. 000-30361) filed May 14, 2001.

(6) Incorporated by reference exhibit 10.15 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended June 30, 2001 filed August 13, 2001.

(7) Incorporated by reference to the same numbered exhibit filed with our Form 10-Q (File
No. 000-30361) for the quarterly period ended September 30, 2001 filed November 14, 2001.

(8) Incorporated by reference to the exhibit 10.18 filed with our Form 10-Q (File No. 000-30361) for

the quarterly period ended March 31, 2002 filed May 13, 2002.

(9) Incorporated by reference to the same numbered exhibit filed with Amendment No. 1 to our

Registration Statement on Form S-3 (File No. 333-111496) filed March 2, 2004.

(10) Incorporated by reference to the same numbered exhibit filed with our Annual Report on

Form 10-K (File No. 000-30361) for the year ended December 28, 2003 filed March 12, 2004.

(11) Incorporated by reference to the same numbered exhibit filed with our Form 10-Q (File No. 000-

30361) for the quarterly period ended June 27, 2004 filed August 6, 2004.

(12) Incorporated by reference to the same numbered exhibit filed with our Form 10-Q (File No. 000-

30361) for the quarterly period ended October 3, 2004 filed November 12, 2004.

(13) Incorporated by reference to exhibit 10.16 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended September 30, 2001 filed November 14, 2001.

(14) Incorporated by reference to exhibit 10.17 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended September 30, 2001 filed November 14, 2001.

(15) Incorporated by reference to exhibit 10.18 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended September 30, 2001 filed November 14, 2001.

(16) Incorporated by reference to exhibit 2.01 filed with our Form 8-K (File No. 000-30361) filed

April 14, 2005.

(17) Incorporated by reference to the exhibit 10.19 filed with our Form 10-Q (File No. 000-30361) for

the quarterly period ended March 31, 2002 filed May 13, 2002.

(18) Incorporated by reference to the exhibit 10.20 filed with our Form 10-Q (File No. 000-30361) for

the quarterly period ended March 31, 2002 filed May 13, 2002.

(19) Incorporated by reference to the exhibit 10.21 filed with our Form 10-Q (File No. 000-30361) for

the quarterly period ended March 31, 2002 filed May 13, 2002.

(20) Incorporated by reference to the exhibit 10.22 filed with our Form 10-Q (File No. 000-30361) for

the quarterly period ended March 31, 2002 filed May 13, 2002.

(21) Incorporated by reference to exhibit 10.24 filed with Amendment No. 1 to our Registration

Statement on Form S-3 (File No. 333-111496) filed March 2, 2004.

(22) Incorporated by reference to exhibit 10.23 filed with our Amendment No. 1 to our Registration

Statement on Form S-3 (File No. 333-111496) filed March 2, 2004.

(23) Incorporated by reference to exhibit 10.25 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended June 27, 2004 filed August 6, 2004.

(24) Incorporated by reference to exhibit 10.26 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended October 3, 2004 filed November 12, 2004.

(25) Incorporated by reference to exhibit 10.27 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended October 3, 2004 filed November 12, 2004.

(26) Incorporated by reference to exhibit 10.28 filed with our Form 10-K (File No. 000-30361) for the

year ended January 2, 2005 filed March 8, 2005.

(27) Incorporated by reference to exhibit 10.33 filed with our Form 10-Q (File No. 000-30361) for the

quarterly period ended July 3, 2005 filed August 8, 2005.

(28) Incorporated by reference to exhibit 10.29 filed with our Form 10-K (File No. 000-30361) for the

year ended January 2, 2005 filed March 8, 2005.

Supplemental Information

No Annual Report to stockholders or proxy materials has been sent to stockholders as of the date
of this report. The Annual Report to stockholders and proxy material will be furnished to our
stockholders subsequent to the filing of this Annual Report on Form 10-K and we will furnish such
material to the SEC at that time.

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on March 6, 2006.

ILLUMINA, INC.

By:

/s/

JAY T. FLATLEY

Jay T. Flatley
President and Chief Executive Officer

March 6, 2006

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Jay T. Flatley and Christian O. Henry, and each or any one of them, his true
and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on
Form 10-K has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

/s/

JAY T. FLATLEY
Jay T. Flatley

/s/ CHRISTIAN O. HENRY
Christian O. Henry

/s/

JOHN R. STUELPNAGEL
John R. Stuelpnagel

/s/ WILLIAM H. RASTETTER
William H. Rastetter

/s/ DANIEL M. BRADBURY
Daniel M. Bradbury

President, Chief Executive Officer
and Director (Principal
Executive Officer)

Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)

March 6, 2006

Senior Vice President, Chief
Operating Officer and Director

March 6, 2006

Chairman of the Board of Directors

March 6, 2006

Director

March 6, 2006

/s/ KARIN EASTHAM
Karin Eastham

/s / PAUL GRINT
Paul Grint

/s/ DAVID R. WALT
David R. Walt

Director

March 6, 2006

Director

March 6, 2006

Director

March 6, 2006

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ********************************* F-2
Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005 ******************** F-3
Consolidated Statements of Operations for the years ended January 1, 2006, January 2, 2005,

and December 28, 2003 ************************************************************** F-4

Consolidated Statements of Stockholders’ Equity for the period from December 29, 2002 to

January 1, 2006 ********************************************************************* F-5

Consolidated Statements of Cash Flows for the years ended January 1, 2006, January 2, 2005,

and December 28, 2003 ************************************************************** F-6
Notes to Consolidated Financial Statements ********************************************** F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Illumina, Inc.

We have audited the accompanying consolidated balance sheets of Illumina, Inc. as of January 1,
2006 and January 2, 2005, and the related consolidated statements of operations, stockholders’
equity, and cash flows for the years ended January 1, 2006, January 2, 2005, and December 28, 2003.
Our audits also include the financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the Company’s management. Our responsi-
bility is to express an opinion on these financial statements and schedule 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, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Illumina, Inc. as of January 1, 2006 and January 2, 2005, and the
results of its operations and its cash flows for the years ended January 1, 2006, January 2, 2005, and
December 28, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic consoli-
dated financial statements taken as a whole, presents fairly in all material respects the information set
forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Illumina, Inc.’s internal control over financial
reporting as of January 1, 2006, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated February 15, 2006 expressed an unqualified opinion thereon.

San Diego, California
February 15, 2006

/s/ ERNST & YOUNG LLP

F-2

ILLUMINA, INC.

CONSOLIDATED BALANCE SHEETS

January 2,
January 1,
2006
2005
(In thousands, except
share amounts)

ASSETS

Current assets:

Cash and cash equivalents ************************************** $ 50,822
Restricted cash and investments *********************************
—
Accounts receivable, net ****************************************
17,620
Inventory, net **************************************************
10,309
Prepaid expenses and other current assets ************************
959
Total current assets *****************************************
Property and equipment, net ****************************************
Goodwill **********************************************************
Intangible and other assets, net *************************************

79,710
16,131
2,125
2,644
Total assets ************************************************ $ 100,610

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable ********************************************** $
Accrued liabilities **********************************************
Litigation judgment*********************************************
Current portion of long-term debt *******************************
Total current liabilities **************************************
Long-term debt, less current portion *********************************
Deferred gain on sale of land and building ***************************
Other long term liabilities *******************************************
Commitments and contingencies
Stockholders’ equity:

7,390
14,210
—
118

21,718
54
2,843
3,498

$ 54,789
12,205
11,891
3,807
999

83,691
8,574
—
2,642

$ 94,907

2,684
10,407
5,957
—

19,048
—
3,218
379

Common stock, $0.01 par value, 120,000,000 shares authorized,
41,294,003 shares issued and outstanding at January 1, 2006,
38,120,685 shares issued and outstanding at January 2, 2005*****
Additional paid-in capital ***************************************
Deferred compensation *****************************************
Accumulated other comprehensive income ***********************
Accumulated deficit ********************************************
Total stockholders’ equity ***********************************
72,497
Total liabilities and stockholders’ equity*********************** $ 100,610

413
216,766
(354)
258
(144,586)

381
195,653
(156)
96
(123,712)

72,262

$ 94,907

See accompanying notes to the consolidated financial statements

F-3

ILLUMINA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended
January 1,
2006
(In thousands, except per share amounts)

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Revenue

$ 57,752
13,935
1,814

$ 40,497
8,075
2,011

73,501

50,583

$ 18,378
6,496
3,161

28,035

Costs and expenses:

Cost of product revenue***************************
Cost of service and other revenue ******************
Research and development ************************
Selling, general and administrative *****************
Acquired in-process research and development ******
Amortization of deferred compensation and other

stock-based compensation charges ***************
Litigation judgment (settlement), net****************
Total costs and expenses **********************
Loss from operations **********************************
Interest income ***************************************
Interest and other expense ****************************
Net loss *********************************************
Net loss per share, basic and diluted *******************

19,920
3,261
27,725
27,972
15,800

270
—

94,948

(21,447)
1,404
(831)

11,572
1,687
21,114
25,080
—

844
(4,201)

56,096

(5,513)
941
(1,653)

7,437
2,600
22,511
18,899
—

2,454
756

54,657

(26,622)
1,821
(2,262)

$(20,874)

$ (6,225)

$(27,063)

(0.52)

(0.17)

(0.85)

Shares used in calculating net loss per share, basic and

diluted ********************************************

40,147

35,845

31,925

The composition of stock-based compensation is as

follows:
Research and development **************************
Selling, general and administrative *******************

84
186

270

348
496

844

$ 1,289
1,165

$ 2,454

See accompanying notes to the consolidated financial statements

F-4

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S

ILLUMINA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flows from operating activities:

Net loss **********************************************
Adjustments to reconcile net loss to net cash used in

operating activities:

Acquired in-process research and development *********
Depreciation and amortization*************************
Loss on disposal of property and equipment************
Amortization of premium on investments ***************
Amortization of deferred compensation and other stock-

based compensation charges ***********************
Amortization of gain on sale of land and building *******
Changes in operating assets and liabilities:

Accounts receivable ********************************
Inventory******************************************
Prepaid expenses and other current assets ***********
Other assets***************************************
Accounts payable **********************************
Accrued liabilities **********************************
Litigation judgment ********************************
Other long-term liabilities***************************
Advance payment from former collaborator***********
Net cash used in operating activities ***************

Cash flows from investing activities:

Cash paid for acquisition, net of cash acquired************
Purchases of available-for-sale securities ******************
Sales and maturities of available-for-sale securities ********
Proceeds from sale of land and building, net of fees*******
Purchase of property and equipment*********************
Acquisition of intangible assets **************************
Net cash (used in) provided by investing activities ***

Cash flows from financing activities:

Payments on long-term debt ****************************
Payments on equipment financing ***********************
Proceeds from issuance of common stock ****************
Repurchase of common stock ***************************
Net cash provided by financing activities ***********

Effect of foreign currency translation on cash and cash

equivalents ******************************************
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year *********
Cash and cash equivalents at end of the year ***************

Supplemental disclosures of cash flow information:

Cash paid during the year for interest ********************

Year Ended
January 1,
2006

Year Ended
January 2,
2005

(In thousands)

Year Ended
December 28,
2003

$(20,874)

$ (6,225)

$(27,063)

15,800
4,116
293
(14)

270
(375)

(7,039)
(6,502)
290
395
3,193
4,214
(5,957)
3,182
—
(9,008)

(2,388)
—
12,248
—
(11,395)
—
(1,535)

(83)
—
6,046
—
5,963

—
3,956
—
354

844
(156)

(7,202)
(1,785)
(29)
(2,041)
697
1,958
567
(512)
(10,000)
(19,574)

—
(6,603)
26,348
40,667
(3,355)
(35)
57,022

(25,387)
(232)
30,507
(13)
4,875

—
4,545
175
432

2,454
—

(1,296)
277
8
(151)
260
1,742
606
(245)
—
(18,256)

—
(1,940)
32,456
—
(2,032)
(16)
28,468

(342)
(337)
903
(8)
216

613
(3,967)
54,789
$ 50,822

1
42,324
12,465
$ 54,789

—
10,428
2,037
$ 12,465

$ 1,368

$ 2,222

See accompanying notes to the consolidated financial statements

F-6

ILLUMINA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization and Business

Illumina, Inc. (the ‘‘Company’’) was incorporated on April 28, 1998. The Company develops and
markets next-generation tools for the large-scale analysis of genetic variation and function. Using the
Company’s technologies, it has developed a comprehensive line of products that are designed to
provide the performance, throughput, cost effectiveness and flexibility necessary to enable researchers
in the life sciences and pharmaceutical industries to perform the billions of tests necessary to extract
medically valuable information from advances in genomics. This information is expected to correlate
genetic variation and gene function with particular disease states, enhancing drug discovery, allowing
diseases to be detected earlier and more specifically, and permitting better choices of drugs for
individual patients.

Basis of Presentation

The consolidated financial statements of the Company have been prepared in conformity with
U.S. generally accepted accounting principles and include the accounts of the Company and its wholly-
owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Fiscal Year

The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with
quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The
years ended January 1, 2006 and January 2, 2005 were 52 and 53 weeks, respectively.

Reclassifications

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

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents are comprised of short-term, highly liquid investments primarily in

money market-type funds.

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Investments

The Company applies Statement of Financial Accounting Standards (‘‘SFAS’’) No. 115, Accounting
for Certain Investments in Debt and Equity Securities, to its investments. Under SFAS No. 115, the
Company classifies its investments as ‘‘Available-for-Sale’’ and records such assets at estimated fair
value in the balance sheet, with unrealized gains and losses, if any, reported in stockholders’ equity.
The Company invests in marketable debt securities, primarily government securities and corporate
bonds and notes, with strong credit ratings or short maturity mutual funds providing similar financial
returns. As of January 1, 2006, the Company’s excess cash balances were invested mainly in short-
term, highly liquid money market mutual funds. The Company limits the amount of investment
exposure as to institutions, maturity and investment type. The cost of securities sold is determined
based on the specific identification method. Gross realized gains totaled $0, $453,750 and $342,693
for the years ended January 1, 2006, January 2, 2005 and December 28, 2003, respectively. Gross
realized losses were not material for all periods presented.

Restricted Cash and Investments

As of January 2, 2005, restricted cash and investments consisted of corporate debt securities that
are used as collateral against a letter of credit and a $100,000 bond deposit with the San Diego
Superior Court related to the Applied Biosystems litigation as described more fully in Note 7. The
letter of credit and bond deposit were released in January of 2005.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash
equivalents, accounts and notes receivable, accounts payable and accrued liabilities, approximate fair
value.

Accounts and Notes Receivable

Trade accounts receivable are recorded at net invoice value and notes receivable are recorded at
contractual value plus earned interest. Interest income on notes receivable is recognized according to
the terms of each related agreement. The Company considers receivables past due based on the
contractual payment terms. The Company reviews its exposure to amounts receivable and reserves
specific amounts if collectibility is no longer reasonably assured. The Company also reserves a
percentage of the net trade receivable balance based on collection history. The Company re-evaluates
such reserves on a regular basis and adjusts its reserves as needed.

Concentrations of Risk

Cash equivalents, investments and accounts receivable are financial instruments that potentially
subject the Company to concentrations of credit risk. Most of the Company’s cash and cash
equivalents as of January 1, 2006 were deposited with financial institutions in the United States and
Company policy restricts the amount of credit exposure to any one issuer and to any one type of
investment, other than securities issued by the U.S. Government. The Company has historically not
experienced significant credit losses from accounts receivable. The Company performs a regular review
of customer activity and associated credit risks and generally does not require collateral. The Company
maintains an allowance for doubtful accounts based upon a percentage of the net trade receivable
balance based on collection history and re-evaluates such reserves on a regular basis.

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

The Company’s products require customized components that currently are available from a
limited number of sources. The Company obtains certain key components included in its products from
single vendors. No assurance can be given that these or other product components will be available in
sufficient quantities at acceptable costs in the future.

Approximately 38%, 52% and 51% of the Company’s revenue for the year ended January 1, 2006,
January 2, 2005 and December 28, 2003 was derived from customers outside the United States.
Approximately 48% and 70% of the Company’s net accounts receivable balance as of January 1, 2006
and January 2, 2005, respectively, was related to customers outside the United States. Sales to
territories outside of the United States are generally denominated in U.S. dollars. International sales
entail a variety of risks, including currency exchange fluctuations, longer payment cycles and greater
difficulty in accounts receivable collection. The Company is also subject to general geopolitical risks,
such as political, social and economic instability and changes in diplomatic and trade relations. The
risks of international sales are mitigated in part by the extent to which sales are geographically
distributed.

Inventories

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

Property and Equipment

Property and equipment are stated at cost, subject to review of impairment, and depreciated over
the estimated useful lives of the assets (generally three to seven years) using the straight-line method.
Amortization of leasehold improvements is computed over the shorter of the lease term or the
estimated useful life of the related assets.

Intangible Assets

Intangible assets consist of license agreements and acquired technology. The cost of the
Company’s license agreements was $844,450 and the Company has amortized $785,366 through
January 1, 2006. Amortization expense related to license agreements for the years ending January 1,
2006, January 2, 2005 and December 28, 2003 was $292,033, $300,000 and $185,000, respectively.
The licenses will be fully amortized by 2008.

Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, if indicators of impairment exist, the Company assesses the recoverability of the affected long-
lived assets by determining whether the carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is indicated, the Company measures the future
discounted cash flows associated with the use of the asset and adjusts the value of the asset
accordingly. While the Company’s current and historical operating and cash flow losses are indicators
of impairment, the Company believes the future cash flows to be received from the long-lived assets
recorded at January 1, 2006 will exceed the assets’ carrying value, and accordingly the Company has
not recognized any impairment losses through January 1, 2006.

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Reserve for Product Warranties

The Company generally provides a one-year warranty on instrumentation. At the time revenue is
recognized, the Company establishes an accrual for estimated warranty expenses associated with
system sales. This expense is recorded as a component of cost of revenue.

Revenue Recognition

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

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

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

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

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

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

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

Shipping and Handling Expenses

Shipping and handling expenses are included in cost of product revenue and totaled $1,287,802,
$493,052 and $224,210 for the years ended January 1, 2006, January 2, 2005 and December 28, 2003,
respectively.

Research and Development

Expenditures relating to research and development are expensed in the period incurred.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs were $1,208,263,
$792,508 and $439,710 for the years ended January 1, 2006, January 2, 2005 and December 28, 2003,
respectively.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Income Taxes

A deferred income tax asset or liability is computed for the expected future impact of differences
between the financial reporting and tax bases of assets and liabilities, as well as the expected future tax
benefit to be derived from tax loss and credit carryforwards. Deferred income tax expense is generally
the net change during the year in the deferred income tax asset or liability. Valuation allowances are
established when realizability of deferred tax assets is uncertain. The effect of tax rate changes is
reflected in tax expense during the period in which such changes are enacted.

Foreign Currency Translation

The functional currencies of the Company’s wholly-owned subsidiaries are their respective local
currencies. Accordingly, all balance sheet accounts of these operations are translated to U.S. dollars
using the exchange rates in effect at the balance sheet date, and revenues and expenses are translated
using the average exchange rates in effect during the period. The gains and losses from foreign
currency translation of these subsidiaries’ financial statements are recorded as a separate component
of stockholders’ equity under the caption ‘‘accumulated other comprehensive income.’’

Stock-Based Compensation

As of January 1, 2006, the Company has two stock-based employee and non-employee director
compensation plans, which are described in Note 6. As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company accounts for common stock options granted, and restricted
stock sold, to employees, founders and directors using the intrinsic value method and, thus, recognizes
no compensation expense for options granted, or restricted stock sold, with exercise prices equal to or
greater than the fair value of the Company’s common stock on the date of the grant. The Company has
recorded deferred stock compensation related to certain stock options, and restricted stock, which
were granted prior to the Company’s initial public offering, with exercise prices below estimated fair
value, which are being amortized on an accelerated amortization methodology in accordance with
Financial Accounting Standards Board Interpretation Number (‘‘FIN’’) No. 28. In the year ending
January 1, 2006, the Company recorded deferred stock compensation as part of a business acquisition
as well as deferred stock compensation related to a restricted stock grant awarded to an employee,
which are being amortized over the vesting period on a straight-line basis.

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

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Pro forma information regarding net loss is required by SFAS No. 123 and has been determined as
if the Company had accounted for its employee stock options and employee stock purchases under
the fair value method of that statement. The fair value for these options was estimated at the dates of
grant using the fair value option pricing model (Black-Scholes) with the following weighted-average
assumptions for 2005, 2004 and 2003:

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Weighted average risk-free interest rate ***********
Expected dividend yield *************************
Weighted average volatility **********************
Estimated life (in years) **************************
Weighted average fair value of options granted****

4.08%
0%
90%
5
$7.38

3.25%
0%
97%
5
$5.25

3.03%
0%
103%
5
$3.31

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the vesting period. The Company’s pro forma information is as follows (in thousands,
except per share amounts):

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Net loss, as reported****************************
Add: Stock-based compensation expense recorded
Less: Assumed stock compensation expense*******
Pro forma net loss ******************************

$(20,874)
270
(8,393)

$ (6,225)
844
(10,302)

$(27,063)
2,454
(9,517)

$(28,997)

$(15,683)

$(34,126)

Basic and diluted net loss per share:
As reported ************************************
Pro forma basic and diluted net loss per share *****

(0.52)

(0.72)

(0.17)

(0.44)

(0.85)

(1.07)

In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 123
(revised 2004), Share Based Payment (‘‘SFAS No. 123R’’), which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation. This statement supercedes Accounting Principles Bulletin
(‘‘APB’’) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach
described in SFAS No. 123; however, SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

SFAS No. 123R permits companies to adopt its requirements using either a ‘‘modified prospec-
tive’’ method or a ‘‘modified retrospective’’ method. Under the ‘‘modified prospective’’ method,
compensation cost is recognized in the financial statements beginning with the effective date, based
on the requirements of SFAS No. 123R for all share-based payments granted after that date, and based
on the requirements for SFAS No. 123 for all unvested awards granted prior to the effective date of
SFAS No. 123R. Under the ‘‘modified retrospective’’ method, the requirements are the same as under
the ‘‘modified prospective’’ method, but companies may restate financial statements of previous
periods based on pro forma disclosures made in accordance with SFAS No. 123. The Company
currently utilizes the Black-Scholes model to measure the fair value of stock options granted to
employees under the pro forma disclosure requirements of SFAS No. 123. While SFAS No. 123R
permits companies to continue to use such model, it also permits the use of a ‘‘lattice’’ model. The
Company has determined it will use the Black-Scholes model to measure the fair value of employee
stock options under SFAS No. 123R. The new standard is effective for companies that are not small
business issuers, like the Company, beginning with the first reporting period during the first fiscal year
beginning on or after June 15, 2005, and the Company adopted SFAS No. 123R at the beginning of its
new reporting period on January 2, 2006.

The Company currently accounts for share-based payments to employees using APB No. 25’s
intrinsic value method and, as such, recognizes no compensation cost for employee stock options
granted with exercise prices equal to or greater than the fair value of the Company’s common stock on
the date of the grant. Accordingly, the adoption of SFAS No. 123R’s fair value method is expected to
result in significant non-cash charges which will increase the Company’s reported operating expenses.
However, it will have no impact on its cash flows. The precise impact of adoption of SFAS No. 123R
cannot be predicted at this time because it will depend on the level of share-based payments granted
in the future. However, had the Company adopted SFAS No. 123R in prior periods, it believes the
impact of that standard would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net loss in this note.

Deferred compensation for options granted, and restricted stock sold, to consultants has been
determined in accordance with SFAS No. 123 and EITF 96-18 as the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more reliably measured.
Deferred charges for options granted and restricted stock sold, to consultants are periodically
remeasured as the underlying options vest.

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Net Loss per Share

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

Weighted-average shares outstanding ************
Less: Weighted-average shares of common stock

subject to repurchase *************************

Weighted-average shares used in computing net

loss per share, basic and diluted ***************

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Year Ended
December 28,
2003

(In thousands)

40,199

36,165

32,733

(52)

(320)

(808)

40,147

35,845

31,925

The total number of shares excluded from the calculation of diluted net loss per share, prior to
application of the treasury stock method for options and shares of restricted stock, was 7,368,181,
6,360,023 and 5,809,649 for the years ended January 1, 2006, January 2, 2005, and December 28,
2003, respectively.

Comprehensive Income (Loss)

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

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

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Foreign currency translation adjustments **********
Unrealized gain (loss) on available-for-sale securities
Unrealized gain (loss) on cash flow hedges ********
Accumulated other comprehensive income ********

$248
—
10

$258

$171
(29)
(46)

$ 96

$ 60
275
—

$335

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Acquisition of CyVera Corporation

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

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

Pursuant to the Merger Agreement, Illumina issued 1.6 million shares (the ‘‘Shares’’) of Illumina
common stock, paid $2.3 million in cash and assumed the net liabilities of CyVera. In addition, Illumina
assumed the outstanding stock options of CyVera. Approximately 250,000 of the Shares were
deposited into an escrow account with a bank. For a period of one year from the closing date, these
shares will be held by the bank to satisfy any claims for indemnification made by the Company or
CyVera pursuant to the Merger Agreement. To the extent that some, or all, of these shares are not
required to satisfy indemnification claims, then such shares will be distributed pro rata among the
CyVera stockholders.

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

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

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

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

The final purchase price allocation is shown below:

Cash ******************************************************************
Prepaid expenses ******************************************************
Fixed assets ***********************************************************
Deferred compensation on unvested stock options assumed ****************
Accounts payable and accrued liabilities **********************************
Debt assumed *********************************************************
Net book value of net liabilities assumed *********************************
In-process research and development ************************************
Goodwill **************************************************************

As of April 8,
2005
(In thousands)

4
12
349
196
(432)
(255)

(126)
15,800
2,125

$17,799

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the goodwill is not
amortized, but will be subject to a periodic assessment for impairment by applying a fair-value-based
test. None of this goodwill is expected to be deductible for tax purposes. The Company expects to
perform its annual test for impairment of goodwill in May of each year. The Company is required to
perform a periodic assessment between annual tests in certain circumstances. As of January 1, 2006,
the Company has determined there has been no impairment of goodwill.

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

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

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

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

The following unaudited pro forma information shows the results of the Company’s operations for
the years ended January 1, 2006, January 2, 2005 and December 28, 2003 as though the acquisition
had occurred as of the beginning of the periods presented:

Year Ended
Year Ended
December 28,
January 1,
2003
2006
(In thousands, except per share data)

Year Ended
January 2,
2005

Revenue ***************************************
Net loss ***************************************
Net loss per share, basic and diluted *************

$73,501
(6,234)
(0.15)

$50,583
(9,965)
(0.27)

$ 28,035
(27,616)
(0.82)

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

Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The Company is required to
adopt the provisions of SFAS No. 151, on a prospective basis, as of January 2, 2006. SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material. SFAS No. 151 requires that those items — if abnormal — be recognized as expenses
in the period incurred. In addition, SFAS No. 151 requires the allocation of fixed production overheads
to the costs of conversions based upon the normal capacity of the production facilities. The Company
does not believe that the adoption of SFAS No. 151 will have a material impact on its financial position
or results of operations.

2. Balance Sheet Account Details

Investments, including restricted investments, consist of the following, (in thousands):

Amortized
Cost

Gross
Unrealized Gain

Gross
Unrealized Loss

Market Value

January 2, 2005

Restricted corporate debt

securities ********************

$12,134

$ —

$(29)

$12,105

The Company had no investments as of January 1, 2006.

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Accounts receivable consist of the following (in thousands):

Accounts receivable from product and service sales****************
Notes receivable from product sales *****************************
Accounts receivable from government grants *********************
Other receivables **********************************************

$17,055
441
180
257

$11,182
464
108
283

January 1,
2006

January 2,
2005

Allowance for doubtful accounts *********************************
Total ******************************************************

Inventory consists of the following (in thousands):

17,933
(313)

12,037
(146)

$17,620

$11,891

January 1,
2006

January 2,
2005

Raw materials **************************************************
Work in process************************************************
Finished goods ************************************************
Total ******************************************************

$ 4,575
4,546
1,188

$1,487
1,714
606

$10,309

$3,807

Property and equipment consist of the following (in thousands):

January 1,
2006

January 2,
2005

Leasehold improvements**************************************** $
Manufacturing and laboratory equipment *************************
Computer equipment and software ******************************
Furniture and fixtures *******************************************

819
19,430
8,121
2,139

Accumulated depreciation and amortization***********************

30,509
(14,378)
Total ****************************************************** $ 16,131

347
11,067
6,116
2,095

19,625
(11,051)

$ 8,574

Depreciation expense was $3.8 million, $3.7 million and $4.4 million for the years ended

January 1, 2006, January 2, 2005 and December 28, 2003, respectively.

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Accrued liabilities consist of the following (in thousands):

Compensation *************************************************
Legal and other professional fees ********************************
Taxes *********************************************************
Reserve for product warranties***********************************
Customer deposits *********************************************
Short-term deferred revenue ************************************
Short-term deferred gain on sale of building **********************
Other *********************************************************
Total ******************************************************

January 1,
2006

January 2,
2005

$ 4,922
2,311
939
751
1,361
1,937
375
1,614

$ 3,798
1,488
928
387
1,671
915
375
845

$14,210

$10,407

3. Derivative Financial Instruments

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires that all
derivatives be recognized on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive income, depending
on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company assesses, both at its inception and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash
flows of hedged items. The Company also assesses hedge ineffectiveness on a quarterly basis and
records the gain or loss related to the ineffective portion to current earnings to the extent significant.

The Company has a foreign exchange hedging program principally designed to mitigate the
potential impact due to changes in foreign currency exchange rates. The Company does not hold any
derivative financial instruments for trading or speculative purposes. The Company primarily uses
forward exchange contracts to hedge foreign currency exposures and they generally have terms of one
year or less. These contracts have been designated as cash flow hedges and accordingly, to the extent
effective, any unrealized gains or losses on these foreign currency forward contracts are reported in
other comprehensive income. Realized gains and losses for the effective portion are recognized with
the underlying hedge transaction. The notional settlement amount of the foreign currency forward
contracts outstanding at January 1, 2006 and January 2, 2005 were $0.1 million and $4.0 million,
respectively. As of January 1, 2006, the Company had one foreign currency forward contract
outstanding. This contract had a fair value of $882, representing an unrealized gain, and was included
in other current assets at January 1, 2006. This contract is set to expire in March 2006 and is with a
reputable bank institution. As of January 2, 2005, the outstanding contracts had a fair value of
$0.2 million, representing an unrealized loss, and were included in other current liabilities at January 2,
2005. The Company settled foreign exchange contracts of $5.2 million and $0.3 million for the years
ended January 1, 2006 and January 2, 2005, respectively. The Company’s hedging program reduces,
but does not entirely eliminate the impact of currency exchange rate movements. The Company
believes it has hedged all significant firm commitments denominated in foreign currencies, and as a
result, any increase or decrease in the exchange rates of these commitments would have no material
net effect to the Company’s balance sheet or its results of operations. The Company did not hold any
derivative financial instruments prior to fiscal 2004.

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

4. Warranties and Maintenance Contracts

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

Changes in the Company’s warranty liability during the three years ended January 1, 2006 are as

follows (in thousands):

Balance as of December 29, 2002 *******************************************
Additions charged to cost of revenue ****************************************
Balance as of December 28, 2003 *******************************************
Additions charged to cost of revenue ****************************************
Repairs and replacements **************************************************
Balance as of January 2, 2005 **********************************************
Additions charged to cost of revenue ****************************************
Repairs and replacements **************************************************
Balance as of January 1, 2006 **********************************************

$ —
230

230
603
(446)

387
1,094
(730)

$ 751

5. Commitments and Long-term Debt

Building Loan

In July 2000, the Company entered into a 10-year lease to rent space in two newly constructed
buildings in San Diego that are now occupied by the Company. That lease contained an option to
purchase the buildings together with certain adjacent land that has been approved for construction of
an additional building. The Company exercised that option and purchased the properties in January
2002 and assumed a $26.0 million, 10-year mortgage on the property at a fixed interest rate of 8.36%.
The Company made monthly payments of $208,974, representing interest and principal, through
August 2004. Interest expense was $0, $1.4 million and $2.2 million for the years ended January 1,
2006, January 2, 2005 and December 28, 2003, respectively.

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

The Company leased a portion of the space to a tenant under a lease which expired in June 2004.
Rental income was recorded as an offset to the Company’s facility costs. Rental income was $0,
$409,517, and $695,282 for the years ended January 1, 2006, January 2, 2005, and December 28,
2003, respectively.

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Capital Leases

In April 2000, the Company entered into a $3,000,000 loan arrangement to be used at its
discretion to finance purchases of capital equipment. The loan was secured by the capital equipment
financed. As of January 1, 2005, all loan payments were made, the underlying equipment was
purchased and the loan arrangement was closed. Cost and accumulated depreciation of equipment
under capital leases at January 1, 2006 and January 2, 2005 was $0 and $1,287,789, respectively.
Depreciation of equipment under capital leases was included in depreciation expense. Interest
expense related to capital leases was $0, $10,500 and $56,661 for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 respectively.

Operating Leases

In August 2004, the Company entered into a ten-year lease for its San Diego facility after the land
and building were sold (as discussed above). Under the terms of the lease, the Company paid a
$1.9 million security deposit and is paying monthly rent of $318,643 for the first year with an annual
increase of 3% in each subsequent year through August 2014. The current monthly rent under this
lease is $328,202. The lease contains an option to renew for three additional periods of five years each.
In accordance with SFAS No. 13, the Company records rent expense on a straight-line basis and the
resulting deferred rent is included in other long-term liabilities in the accompanying consolidated
balance sheet. The Company also leases office space for a facility in Connecticut, an additional
distribution and storage facility in San Diego and for three foreign facilities located in Japan, Singapore
and China under non-cancelable operating leases that expire at various times through December 2008.
These leases contain renewal options ranging from one to three years.

As of January 1, 2006, annual future minimum payments under these operating leases are as

follows (in thousands):

2006 ********************************************************************
2007 ********************************************************************
2008 ********************************************************************
2009 ********************************************************************
2010 ********************************************************************
2011 and thereafter*******************************************************
Total ****************************************************************

4,557
4,365
4,343
4,351
4,482
17,415

$39,513

Rent expense, net of amortization of the deferred gain on sale of property, was $4,737,218,
$1,794,234, and $238,065 for the years ended January 1, 2006, January 2, 2005 and December 28,
2003, respectively.

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

6. Stockholders’ Equity

Common stock

As of January 1, 2006, the Company had 41,294,003 shares of common stock outstanding, of
which 4,802,319 shares were sold to employees and consultants subject to restricted stock agree-
ments. The restricted common shares vest in accordance with the provisions of the agreements,
generally over five years. All unvested shares are subject to repurchase by the Company at the original
purchase price. As of January 1, 2006, 41,750 shares of common stock were subject to repurchase. In
addition, the Company also issued 12,000 shares for a restricted stock award to an employee under
the Company’s new 2005 Stock and Incentive Plan based on service performance. These shares vest
monthly over a three-year period.

Stock Options

2005 Stock and Incentive Plan

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

The Company’s stock option activity under all stock option plans from December 29, 2002

through January 1, 2006 is as follows:

Outstanding at December 29, 2002**************************
Granted **************************************************
Exercised *************************************************
Cancelled *************************************************
Outstanding at December 28, 2003**************************
Granted **************************************************
Exercised *************************************************
Cancelled *************************************************
Outstanding at January 2, 2005 *****************************
Granted **************************************************
Exercised *************************************************
Cancelled *************************************************
Outstanding at January 1, 2006 *****************************

Options

4,422,781
1,241,175
(102,590)
(331,492)

5,229,874
1,453,400
(139,768)
(337,486)

6,206,020
2,992,300
(869,925)
(1,001,964)

7,326,431

Weighted-
Average
Exercise Price

$ 7.94
$ 3.31
$ 1.25
$ 8.36

$ 6.95
$ 7.08
$ 1.98
$ 8.80

$ 6.99
$10.02
$ 4.66
$11.00

$ 7.96

At January 1, 2006, options to purchase approximately 2,763,225 shares were exercisable and

3,870,374 shares remain available for future grant.

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Following is a further breakdown of the options outstanding as of January 1, 2006:

Range of
Exercise Prices

Options
Outstanding

$0.03 - 4.44
$4.64 - 6.53
$6.55 - 8.52
$8.60 - 10.26
$10.30 - 16.00
$16.03 - 45.00

1,401,109
1,298,379
1,943,164
1,290,701
1,235,978
157,100

$0.03 - 45.00

7,326,431

Weighted
Average
Remaining Life
in Years

Weighted
Average
Exercise Price

Options
Exercisable

Weighted
Average
Exercise Price
of Options
Exercisable

6.80
6.89
8.17
7.63
8.85
6.33

7.66

$ 3.14
$ 5.77
$ 8.10
$ 9.11
$12.67
$20.75

$ 7.96

789,881
472,989
604,053
557,114
227,042
112,146

2,763,225

$ 2.91
$ 5.63
$ 7.92
$ 9.30
$12.73
$22.59

$ 7.37

2000 Employee Stock Purchase Plan

In February 2000, the board of directors and stockholders adopted the 2000 Employee Stock
Purchase Plan (the ‘‘Purchase Plan’’). A total of 3,589,168 shares of the Company’s common stock have
been reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to
purchase common stock at a discount, but only through payroll deductions, during defined offering
periods.

The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair market
value of the common stock on the first or last day of the offering period, whichever is lower. The initial
offering period commenced in July 2000. In addition, the Purchase Plan provides for annual increases
of shares available for issuance under the Purchase Plan beginning with fiscal 2001. 717,164, 585,855
and 304,714 shares were issued under the 2000 Employee Stock Purchase Plan during fiscal 2005,
2004 and 2003, respectively. As of January 1, 2006, there were 1,790,510 shares available for issuance
under the Purchase Plan.

Deferred Stock Compensation

Since the inception of the Company, in connection with the grant of certain stock options and
sales of restricted stock to employees, founders and directors through July 25, 2000, the Company has
recorded deferred stock compensation totaling approximately $17.6 million, representing the differ-
ence between the exercise or purchase price and the fair value of the Company’s common stock as
estimated by the Company’s management for financial reporting purposes on the date such stock
options were granted or restricted common stock was sold. Deferred compensation is included as a
reduction of stockholders’ equity and is being amortized to expense over the vesting period of the
options and restricted stock. In 2005, the Company recorded $0.2 million as deferred compensation
related to unvested options associated with our acquisition of CyVera. In addition, in 2005, the
Company granted a restricted stock award to an employee and recorded deferred stock compensation
totaling $0.2 million. During the years ended January 1, 2006, January 2, 2005 and December 28,
2003, the Company recorded amortization of deferred stock compensation of approximately $0.3 mil-
lion, $0.8 million and $2.5 million, respectively.

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Stockholder Rights Plan

On May 3, 2001, the Board of Directors of the Company declared a dividend of one preferred
share purchase right (a ‘‘Right’’) for each outstanding share of common stock of the Company. The
dividend was payable on May 14, 2001 (the ‘‘Record Date’’) to the stockholders of record on that date.
Each Right entitles the registered holder to purchase from the Company one unit consisting of one-
thousandth of a share of its Series A Junior Participating Preferred Stock at a price of $100 per unit. The
Rights will be exercisable if a person or group hereafter acquires beneficial ownership of 15% or more
of the outstanding common stock of the Company or announces an offer for 15% or more of the
outstanding common stock. If a person or group acquires 15% or more of the outstanding common
stock of the Company, each Right will entitle its holder to purchase, at the exercise price of the right, a
number of shares of common stock having a market value of two times the exercise price of the right. If
the Company is acquired in a merger or other business combination transaction after a person acquires
15% or more of the Company’s common stock, each Right will entitle its holder to purchase, at the
Right’s then-current exercise price, a number of common shares of the acquiring company which at the
time of such transaction have a market value of two times the exercise price of the right. The Board of
Directors will be entitled to redeem the Rights at a price of $0.01 per Right at any time before any such
person acquires beneficial ownership of 15% or more of the outstanding common stock. The rights
expire on May 14, 2011 unless such date is extended or the rights are earlier redeemed or exchanged
by the Company.

7. Legal Proceedings

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

Affymetrix Litigation

On July 26, 2004, Affymetrix, Inc. (‘‘Affymetrix’’) filed a complaint in the U.S. District Court for the
District of Delaware alleging that the use, manufacture and sale of the Company’s BeadArray products
and services, including the Array Matrix and BeadChip products, infringe six Affymetrix patents.
Affymetrix seeks an injunction against the sale of products, if any, that are determined to be infringing
these patents, unspecified monetary damages, interest and attorneys’ fees. On September 15, 2004,
the Company filed its answer and counterclaims to Affymetrix’ complaint, seeking declaratory
judgments from the court that the Company does not infringe the Affymetrix patents, and that such
patents are invalid, and filed counterclaims against Affymetrix for unfair competition and interference
with actual and prospective economic advantage. On January 7, 2006, the Company sought leave to
file the first amended answer and counterclaims, adding allegations of inequitable conduct with
respect to all six asserted Affymetrix patents, violation of Section 2 of the Sherman Act, and unclean
hands. Trial is scheduled for October 16, 2006. The Company believes it has meritorious defenses
against each of the infringement claims alleged by Affymetrix and intends to vigorously defend against
this suit. However, the Company cannot be sure that it will prevail in this matter. Any unfavorable
determination, and in particular, any significant cash amounts required to be paid by the Company or
prohibition of the sale of products and services, could result in a material adverse effect on its business,
financial condition and results of operations.

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

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

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

Termination-of-Employment Lawsuit

In March 2001, a complaint seeking damages of an unspecified amount was filed against the
Company by Dr. Anthony W. Czarnik, a former employee, in the Superior Court of the State of
California in connection with the employee’s termination of employment with the Company. In June
2002, a California Superior Court judgment was rendered against the Company and the Company
recorded a $7.7 million charge in its financial results for the second quarter of 2002 to cover total
damages and remaining expenses. The Company appealed the decision, and in December 2004, the
Fourth Appellate District Court of Appeal, in San Diego, California, reduced the amount of the award.
The Company recorded interest expense on the $7.7 million during the appeal based on the statutory
rate. As a result of the revised judgment, the Company reduced the $9.2 million liability on its balance
sheet to $5.9 million and recorded a gain of $3.3 million as a litigation judgment in the fourth quarter
of 2004. In January 2005, the Company paid the $5.9 million and removed the liability from its balance
sheet.

Litigation with Applera Corporation’s Applied Biosystems Group

In 1999, the Company entered into a joint development agreement with Applied Biosystems
Group, an operating group of Applera Corporation, under which the companies agreed to jointly
develop a SNP genotyping system that would combine the Company’s BeadArray technology with
Applied Biosystems’ assay chemistry and scanner technology. In conjunction with the agreement,
Applied Biosystems agreed to provide the Company with non-refundable research and development
support of $10.0 million, all of which was paid by December 2001 and recorded as a liability on the
Company’s balance sheet as of December 28, 2003. In December 2002, Applied Biosystems initiated a
patent infringement suit and sought to compel arbitration of an alleged breach of the joint develop-
ment agreement. The Company initiated a suit in state court seeking to enjoin the arbitration and
alleged that Applied Biosystems had breached the joint development agreement. In August 2004, the
Company entered into a settlement and cross-license agreement with Applera. As a result of the
settlement, the Company removed the $10.0 million liability from its balance sheet, made a payment
of $8.5 million to Applera and recorded a gain of $1.5 million as a litigation settlement.

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

8. Collaborative Agreements

Invitrogen Corporation

In December 2004, the Company entered into a strategic collaboration with Invitrogen Corpora-
tion (‘‘Invitrogen’’). The goal of the collaboration is to combine the Company’s expertise in oligonucle-
otide manufacturing with the sales, marketing and distribution capabilities of Invitrogen. In connection
with the collaboration, the Company is developing the next generation Oligator˛ DNA synthesis
technology. This technology is expected to include both plate- and tube-based capabilities. Under the
terms of the agreement, Invitrogen paid the Company an upfront non-refundable collaboration
payment of $2.3 million during the first quarter of 2005. Additionally, upon the achievement of a
certain milestone, Invitrogen was obligated to make a milestone payment of $1.1 million to the
Company. The milestone was achieved in November of 2005 and payment of $1.1 million was made
by Invitrogen.

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

International HapMap Project

The Company was the recipient of a grant from the National Institutes of Health covering its
participation in the first phase of the International HapMap Project, which is a $100 million,
internationally funded successor project to the Human Genome Project that will help identify a map of
genetic variations that may be used to perform disease-related research. The Company was awarded a
$9.1 million grant from the National Institutes of Health in September 2002 to perform genotyping
services in connection with the first phase of the International HapMap Project that covered basic
research activities, the development of SNP assays and the genotyping performed on those assays. For
the year ending January 1, 2006, January 2, 2005, and December 28, 2003, the Company recorded
revenue related to this project totaling $0.8 million, $4.6 million and $3.7 million, respectively.

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

Income Taxes

As of January 1, 2006, the Company had federal and California tax net operating loss carryfor-
wards of approximately $103.7 million and $40.1 million, respectively. The federal and state tax loss
carryforwards will begin expiring in fiscal year 2018 and 2006, respectively, unless previously utilized.
The Company also has federal and California research and development tax credit carryforwards of
approximately $4.1 million and $3.8 million, respectively. The federal tax credit carryforwards will begin
to expire in 2018 and the California carryforwards have no expiration.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net
operating loss and credit carryforwards may be limited in the event of a cumulative ownership change
of more than 50 percentage points within a three-year period. CyVera Corporation had an ownership
change upon acquisition by the Company during 2005, and accordingly, its federal and Connecticut
net operating loss carryforwards and its federal research and development tax credit carryforwards are
subject to annual limitation. The Company is in the final stages of completing its formal Section 382
and 383 analysis and it is anticipated that approximately $0.2 million of its net operating loss
carryforwards may be limited. CyVera Corporation’s federal net operating loss carryforwards and
research and development tax credit carryforwards as of the date of acquisition were approximately
$6.5 million and $0.2 million, respectively. To the extent these assets are recognized, the adjustment
will be offset as a credit to goodwill.

Significant components of the Company’s deferred tax assets as of January 1, 2006 and January 2,
2005 are shown below (in thousands). A valuation allowance has been established as of January 1,
2006 and January 2, 2005 to offset the net deferred tax assets, as realization of such assets has not met
the ‘‘more likely than not’’ threshold required under SFAS No. 109.

January 1,
2006

January 2,
2005

Deferred tax assets:

Net operating losses ***************************************** $ 37,801
Tax credits***************************************************
6,634
Deferred revenue ********************************************
1,037
Capitalized research and development costs ********************
1,523
Property and equipment **************************************
(1,134)
Other *******************************************************
3,681
Net deferred tax assets *************************************
Valuation allowance on deferred tax assets************************
Net deferred taxes ********************************************* $

49,542
(49,542)

$ 32,161
5,076
—
1,857
(299)
6,732

45,527
(45,527)

— $

—

Deferred tax assets of approximately $2.5 million and $0.4 million as of January 1, 2006 and
January 2, 2005, respectively, resulted from the exercise of employee stock options. When recognized,
the tax benefit of these assets will be accounted for as a credit to goodwill (with respect to vested stock
options issued to employees of CyVera Corporation upon acquisition), or as a credit to additional paid-
in capital, rather than a reduction of the income tax provision.

The Company’s provision for income taxes for the years ended January 1, 2006 and January 2,
2005 consisted of $163,000 and $135,000, respectively, for income tax expense related to its foreign
operations. This expense is included with interest and other expense in the consolidated statements of
operations.

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

The following is a reconciliation of the statutory federal income tax to the Company’s effective tax

(in thousands):

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Year Ended
December 28,
2003

Tax at federal statutory rate **********************
State, net of federal benefit**********************
Research and other credits***********************
Acquired in-process research & development ******
Adjustments to deferred tax balances *************
Change in valuation allowance *******************
Permanent differences***************************
Other *****************************************
Income tax expense*****************************

$(7,043)
633
(1,239)
5,372
2,952
(1,138)
(226)
852

$(2,179)
(336)
34
—
—
2,330
(264)
550

$ (9,472)
(1,434)
(1,374)
—
—
12,130
738
(588)

$ 163

$ 135

—

10. Retirement Plan

The Company has a 401(k) savings plan covering substantially all of its employees. Company
contributions to the plan are discretionary and no such contributions were made during the years
ended January 1, 2006, January 2, 2005 and December 28, 2003.

11. Segment Information, Geographic Data and Significant Customers

The Company has determined that, in accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, it operates in one segment as it only reports
operating results on an aggregate basis to chief operating decision makers of the Company. The
Company had revenue in the following regions for the years ended January 1, 2006, January 2, 2005
and December 28, 2003 (in thousands):

Year Ended
January 1,
2006

Year Ended
January 2,
2005

Year Ended
December 28,
2003

United States***********************************
Europe ****************************************
Asia *******************************************
Other *****************************************
Total **************************************

$45,480
17,551
6,850
3,620

$24,166
12,528
9,703
4,186

$73,501

$50,583

$13,666
5,909
5,557
2,903

$28,035

The Company had no customer that provided more than 10% of total revenue in the year ended
January 1, 2006; one customer that provided approximately 14% of total revenue in the year ended
January 2, 2005 (exclusive of revenue recorded from the National Institutes of Health) and approxi-
mately 18% of total revenue in the year ended December 28, 2003. Revenue from the National
Institutes of Health accounted for approximately 1%, 13% and 21% of total revenue for the years
ended January 1, 2006, January 2, 2005 and December 28, 2003, respectively.

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ILLUMINA, INC.

12. Quarterly Financial Information (unaudited)

The following financial information reflects all normal recurring adjustments, except as noted
below, which are, in the opinion of management, necessary for a fair statement of the results of interim
periods. Summarized quarterly data for fiscal 2005 and 2004 are as follows (in thousands except per
share data):

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

2005:

Total revenue **************
Total cost of revenue *******
Net income (loss) **********
Historical net income (loss)

per share, basic **********

Historical net income (loss)

per share, diluted ********

2004:

Total revenue **************
Total cost of revenue *******
Net income (loss) **********
Historical net income (loss)

per share, basic **********

Historical net income (loss)

per share, diluted ********

$15,148
4,599
(1,235)

(0.03)

$10,803
2,802
(3,931)

(0.12)

$ 15,824
4,734
(18,539)(1)

$19,516
6,599
(1,426)

(0.46)

(0.03)

$23,013
7,249
326

0.01

$ 11,486
3,067
(3,516)

$13,512
3,517
(2,026)(2)

$14,782
3,873
3,248(2)

(0.10)

(0.05)

0.09

0.08

The four quarters for net income (loss) per share for each fiscal year presented may not add for the

year because of the different numbers of shares outstanding during the years presented.

(1) During the second quarter of 2005, the Company recorded a $15.8 million charge related to

acquired in-process research and development from the CyVera acquisition.

(2) During the third quarter of 2004, the Company recorded a $1.5 million reduction in expense for a
legal settlement and, in the fourth quarter of 2004, the Company recorded a $3.3 million reduction
in expense related to the reduction of a legal judgement (see Note 7).

F-30

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED JANUARY 1, 2006

Balance as of December 29, 2002 *********************************
Charged to expense *******************************************
Utilizations ****************************************************
Balance as of December 28, 2003 *********************************
Charged to expense *******************************************
Utilizations ****************************************************
Balance as of January 2, 2005*************************************
Charged to expense *******************************************
Utilizations ****************************************************
Balance as of January 1, 2006*************************************

Allowance
for Doubtful
Accounts

Reserve for
Inventory

(In thousands)

$145
118
(85)

178
49
(81)

146
167
—

$ 273
710
(353)

630
946
(538)

1,038
304
(247)

$313

$1,095

F-31

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Corporate Directory

Corporate Information

BOARD OF DIRECTORS
Jay T. Flatley
President and Chief Executive Officer

ILLUMINA, INC.

Daniel M. Bradbury
Chief Operating Officer

AMYLIN PHARMACEUTICALS

Karin Eastham
Executive Vice President and
Chief Operating Officer

THE BURNHAM INSTITUTE

FOR MEDICAL RESEARCH

Paul Grint, M.D.
Chief Medical Officer and
Head of Development

KALYPSYS, INC.

William H. Rastetter, Ph.D.
Non-Executive Chairman

ILLUMINA, INC.

John R. Stuelpnagel, D.V.M.
Senior Vice President and
Chief Operating Officer

ILLUMINA, INC.

David R. Walt, Ph.D.
Robinson Professor of Chemistry

TUFTS UNIVERSITY

EXECUTIVE OFFICERS
Jay T. Flatley
President and Chief Executive Officer

John R. Stuelpnagel, D.V.M.
Senior Vice President and
Chief Operating Officer

Christian O. Henry
Vice President and
Chief Financial Officer

Tristan B. Orpin
Vice President of Worldwide Sales

CORPORATE
HEADQUARTERS
9885 Towne Centre Drive
San Diego, CA 92121
+1 858.202.4500

TRANSFER AGENT
Computershare
250 Royall Street
Canton, MA 02121
+1 781.575.3400
www.computershare.com

INDEPENDENT
ACCOUNTANTS
Ernst & Young LLP
San Diego, CA 92101

LEGAL COUNSEL
Dewey Ballantine LLP
New York, NY 10019

FORM 10-K
Included with this report is a copy of the Company’s Form 10-K filed
with the Securities and Exchange Commission. Additional copies are
available by contacting Illumina’s Investor Relations Department:

www.illumina.com
investor@illumina.com
+1 858.202.4750.

ANNUAL MEETING
The Company’s Annual Meeting of Stockholders will be held at the
Company’s corporate headquarters at 10:00 a.m. on June 8, 2006.

SELECTED COMMON STOCK DATA
The Company’s common stock, par value $0.01, has been traded under
the symbol ILMN since July 28, 2000 on the NASDAQ National Market.

As of April 20, 2006, there were approximately 212 record holders of
the Company’s common stock. The Company has not paid any cash
dividends since its inception and does not anticipate paying any cash
dividends in the foreseeable future.

“Safe Harbor” Statement under the Private Securities Litigation Reform
Act of 1995: this release may contain forward-looking statements that
involve risks and uncertainties. Among the important factors that could
cause actual results to differ materially from those in any forward-looking
statements are the costs and outcome of Illumina’s litigation with
Affymetrix, Illumina’s ability to scale and integrate CyVera technology,
the ability to further scale oligo synthesis output and technology to
satisfy market demand deriving from Illumina’s collaboration with
Invitrogen, Illumina’s ability to further develop and commercialize
its BeadArray technologies and to deploy new gene expression and
genotyping products and applications for its platform technology,
to manufacture robust Sentrix® arrays, including HumanHap BeadChips,
and Oligator® oligonucleotides, and other factors detailed in the
Company’s filings with the Securities and Exchange Commission includ-
ing its recent filings on Forms 10-K and 10-Q or in information disclosed
in public conference calls, the date and time of which are released
beforehand. Illumina disclaims any intent or obligation to update
these forward-looking statements beyond the date they are made.

© 2006, Illumina, Inc. All rights reserved. Illumina, BeadArray, Array of Arrays, Sentrix, GoldenGate, DASL, Infinium, Making Sense Out of Life and Oligator
are registered trademarks or trademarks of Illumina, Inc. Printed in the U.S.A. 070-2006-002.

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Illumina, Inc.
9885 Towne Centre Drive
San Diego, CA 92121
www.illumina.com