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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                               TO                               COMMISSION FILE NUMBER 0-28218

AFFYMETRIX, INC.
(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)	77-0319159 (IRS Employer Identification Number)
3420 CENTRAL EXPRESSWAY SANTA CLARA, CALIFORNIA (Address of principal executive offices)	95051 (Zip Code)
(408) 731-5000 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Common Stock, $0.01 par value Preferred Stock Purchase Rights	Name of Each Exchange on Which Registered The Nasdaq Global Market The Nasdaq Global Market

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

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         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 o    No ý

         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 ý    No o

         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. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer ý	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

         The aggregate market value of the registrant's common stock held by non-affiliates of the registrant at June 30, 2008, based on the closing price of such stock on the Nasdaq Global Market on such date, was approximately $716 million. The number of shares of the registrant's Common Stock, $0.01 par value, outstanding on February 20, 2009, was 70,685,572.

DOCUMENTS INCORPORATED BY REFERENCE

         Certain sections of the Proxy Statement to be filed in connection with the 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K where indicated.

AFFYMETRIX, INC.

FORM 10-K
DECEMBER 31, 2008

TABLE OF CONTENTS

Item No.			Page
		PART I	3
	1.	Business	3
	1A.	Risk Factors	18
	1B.	Unresolved Staff Comments	30
	2.	Properties	30
	3.	Legal Proceedings	30
	4.	Submission of Matters to a Vote of Security Holders	30
		PART II	31
	5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities	31
	6.	Selected Financial Data	33
	7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
	7A.	Quantitative and Qualitative Disclosures About Market Risk	49
	8.	Financial Statements and Supplementary Data	51
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	99
	9A.	Controls and Procedures	99
	9B.	Other Information	101
		PART III	101
	10.	Directors, Executive Officers and Corporate Governance	101
	11.	Executive Compensation	101
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	101
	13.	Certain Relationships and Related Transactions, and Director Independence	101
	14.	Principal Accounting Fees and Services	101
		PART IV	102
	15.	Exhibits and Financial Statement Schedules	102
		Signatures	107

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PART I

ITEM 1.    BUSINESS

Forward-Looking Statements

        All statements in this Annual Report on Form 10-K that are not historical are "forward-looking statements" within the meaning of the federal securities laws, including statements regarding our "expectations," "beliefs," "hopes," "intentions," "strategies" or the like. Such statements are based on our current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the risk factors discussed in "Risk Factors" contained in Item 1A of this report and elsewhere in this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based.

Narrative Description of Business

Overview

        We are engaged in the development, manufacture, sale and service of consumables and systems for genetic analysis in the life sciences and clinical healthcare markets and are recognized as a market leader creating tools that are advancing our understanding of the molecular basis of life. The markets for our products currently include all aspects of molecular biology research in the life sciences, including basic human disease research, genetic analysis, pharmaceutical drug discovery and development, pharmacogenomics (research relating to how a person's genes affect the body's response to drug treatments), toxicogenomics (research relating to the measurement of gene expression as a predictor of toxicity) and molecular diagnostics. Our integrated GeneChip® microarray platform includes: disposable DNA probe arrays (chips) consisting of nucleic acid sequences set out in an ordered, high density pattern, certain reagents for use with the probe arrays, a scanner and other instruments used to process the probe arrays, and software to analyze and manage genomic or genetic information obtained from the probe arrays. Related microarray technology also offered by us includes licenses for fabricating, scanning, collecting and analyzing results from complementary technologies.

        Our business strategy is to capitalize on our leadership position in the DNA microarray field by marketing our GeneChip® technologies to customers based on two central applications: gene expression monitoring and DNA variation detection. Due to the novel, massively parallel approach to studying biological systems that GeneChip® technology enables, numerous discoveries across many disciplines have already been made, as evidenced by the over 16,000 peer-reviewed publications that have cited GeneChip® technology. The application of GeneChip® technologies for diagnosing and guiding treatment of disease is an emerging market opportunity that seeks to improve the effectiveness of health care by collecting information about DNA variation and RNA expression in patients at various times from screening and diagnosis through prognosis and throughout therapeutic monitoring. We currently sell our products directly to pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies as well as academic research centers, government research laboratories, private foundation laboratories and clinical reference laboratories in North America and Europe. We also sell our products through life science supply specialists acting as authorized distributors in Latin America, India, the Middle East and Asia Pacific regions, including China.

        In March 1992, Affymetrix, Inc. was incorporated in California as a wholly-owned subsidiary of Affymax N.V. (Affymax) and we have continued our business and operations as Affymetrix. We

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completed our initial public offering in June 1996 and in September 1998 we reincorporated as a Delaware corporation. Our headquarters and principal research and development facilities are located in Santa Clara, California, and we maintain facilities in West Sacramento, California (probe array manufacturing), Sunnyvale, California (administration and array research and development), Emeryville, California (bioinformatics and software development), Fremont, California (array and reagent manufacturing and administration), South San Francisco, California (manufacturing and research and development), Maumee and Cleveland, Ohio (reagent manufacturing and administration), Singapore (probe array manufacturing, administration, and sales), China (representative office), and have sales offices in the United Kingdom, Italy, Germany, Singapore, and Japan.

Scientific Background and Technology

Introduction to the Genome and its Opportunity

        The genetic content of an organism is known as its "genome." All known genomes are composed of either deoxyribonucleic acid (DNA) or ribonucleic acid (RNA). The instructions required for every living cell to develop its characteristic form and function are believed to be represented within discrete regions of the DNA or RNA known as genes. The instructions contained within genes are embodied in the specific sequences of the four nucleotide bases—adenine-A, cytosine-C, guanine-G and thymine-T (uracil-U replaces T in RNA)—that are the chemical building blocks of DNA and RNA. In protein coding genes, the sequence of these building blocks forms a code which instructs the cell to build a protein, comprised of a string of amino acids, ordered in a way which matches the sequence code of the gene. These proteins are an example of a "hard copy" output of the genetic code and contribute to the structure, biochemical functions and communication mechanisms of the cell in which they are formed.

        The DNA molecule possesses a chemical structure which consists of a combination of two DNA strands with hydrogen bonds between nucleotide bases on one strand to complementary nucleotide bases on the other strand. Only certain pairs of the bases can form these complementary bonds: C pairs with G, and A pairs with T. Therefore, a single DNA strand containing bases in the sequence CGTACGGAT can form a bond with a DNA strand containing bases in the sequence GCATGCCTA. Such paired DNA strands are said to be "complementary" and can form a double helix structure in a process called "hybridization." Our GeneChip® technology uses the principle of hybridization to recognize the presence of specific gene sequences and to analyze genetic information.

        Genes are segments of DNA that serve as information packets of the genome. In general, a gene's functional information is made available to a cell through the process of transcription or "gene expression," whereby the sequence is copied into an RNA molecule. Protein coding genes may span thousands to hundreds of thousands, or even millions, of nucleotide bases since the non-coding regions of a gene (called "introns") and the coding regions of a gene (called "exons") are usually distributed within neighboring genomic sequences that are not translated into proteins or used, or to the extent currently understood, as a functional part of the gene. The number of distinct protein coding genes in the human genome is estimated to be between 25,000 to 30,000. The number of functional non-coding sequences is the focus of current research interest. Though currently unknown, the number of functional non-coding sequences is estimated to be significantly larger than the number of protein coding genes in the human genome.

        A primary goal in life sciences research and modern molecular medicine is to unravel the complexities of the genome. This has generated a worldwide effort to identify and sequence the genomes of many organisms. In the human genome, this effort includes more than three billion nucleotide pairs. In recent years, the effort led by the Human Genome Project and related academic, government and industry research projects resulted in a first near complete draft of the human genome sequence. It is anticipated that many years of research will be required to gain a better understanding

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of the complexities of the genome, and its characteristics in normal and diseased conditions. We believe that this will lead to a new healthcare paradigm where disease is understood at the molecular level, allowing patients to be diagnosed according to genetic information and then treated with drugs designed to work on specific molecular targets. Ultimately, in addition to diagnosis and treatment, prevention and cure of disease might also be possible based on genetic information.

        While scientists are learning more and more about the functions of genes and their variability, there is a great deal more to discover. We believe that the efforts of science to understand the complexities of gene expression, the interaction of genes with our environment and the role of genes in disease and health will continue to provide growth opportunities for our existing gene expression and DNA analysis products, and will continue to create new opportunities in clinical medicine. Toward this end we have partnered with the National Cancer Institute to assemble the first complete map of the human transcriptome (a catalog of all of the RNA transcripts made by the genome). This ongoing effort has already led to the discovery of many novel protein coding and non-protein coding sequences that we have started to include in some of our new products. This effort is also prompting continued development of our sample preparation, array, instrumentation and data analysis technologies.

Genetic Variability and Disease

        For the most part, each cell in a complex organism contains a complete copy of the genome. In a population of organisms, individuals vary from one another because of differences in gene sequences which are inherited from each parent and sometimes through the introduction of sequence changes due to environmental damage or biological errors in processes like gene replication. In some cases these variations, or polymorphisms, have little detectable effect on the biology of the organism, while in other cases they may result in an altered biological response to the environment which could thereby lead to disease. By screening for these polymorphisms, researchers seek to identify those that might be implicated in specific diseases. Sometimes it is not a single variation, but the combination of these sequence differences that leads to a diseased state. For this reason, researchers look at the patterns of these polymorphisms in a large number of healthy and affected organisms in order to correlate specific gene polymorphisms with specific diseases.

        Another major mechanism by which the fate and function of cells is regulated is the timing and level of gene expression, which can reflect the interface between genes and the environment. Although most cells contain an organism's full set of genes, each cell expresses only a fraction of this set of genes in different quantities and at different times. The expression patterns of genes can be correlated with many human diseases such as cancer, as well as with the effectiveness of treatment in specific patient populations for which new therapies can be developed. By identifying genes that are differentially expressed in particular diseases or patient populations, novel molecular targets and treatments may be identified and validated. In addition, gene expression signatures may be identified that allow the selection of optimal treatment for a single individual.

        In order to understand the impact of genomics on health, disease and other aspects of the human condition, scientists must compare both the sequence variation and the gene expression patterns of healthy and diseased individuals, tissues and cells. We believe that our GeneChip® platform not only enables scientists to attain ambitious goals, from identifying genetic variations associated with disease to discovering new drug targets, but also simplifies, accelerates and reduces the cost of understanding this genetic information.

GeneChip® Probe Array Technology

        Our GeneChip® technology leverages semiconductor-based photolithographic fabrication techniques, which enables us to synthesize a large variety of predetermined DNA sequences simultaneously in predetermined locations on a small glass chip called a "probe array."

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Photolithography is a technique which uses light to create exposure patterns on the glass chip and direct chemical reactions. The process begins by coating the chip with light-sensitive chemical compounds that prevent chemical coupling. These light-sensitive compounds are called "protecting groups." Lithographic masks, which consist of predetermined transparent patterns etched into a glass plate that block or transmit light, are used to selectively illuminate the glass surface of the chip. Only those areas exposed to light are deprotected, and thus activated for chemical coupling through removal of the light-sensitive protecting groups. The entire surface is then flooded with a solution containing the first in a series of DNA building blocks (A, C, G or T). Coupling only occurs in those regions that have been deprotected through illumination. The new DNA building block also bears a light-sensitive protecting group so that the cycle can be repeated.

        This process of exposure to light and subsequent chemical coupling can be repeated many times on the same chip in order to generate a complex array of DNA sequences of defined length. The intricate illumination patterns allow us to build high-density arrays of many diverse DNA sequences in a small area. Unlike conventional synthesis techniques, which generally use a linear process to create compounds, our synthesis technique is combinatorial, in that the number of different compounds synthesized grows exponentially with the number of cycles in the synthesis. Currently available commercial arrays contain over 6.0 million unique sequences. Each unique sequence is 25 nucleotides in length and is represented millions of times within a specified area of the probe array. Just as in the semiconductor industry, we manufacture probe arrays in a wafer format. Each wafer is approximately five inches square and can contain over 300 million unique probe sequences based on current technology. Whole wafers have been used by a related party of Affymetrix, Perlegen Sciences, Inc., in its work to resequence multiple samples of the human genome. For our commercial array products, we can manufacture a large number of identical or different DNA probe arrays on a glass wafer, which is then diced into individual chips. Given the large amount of unique sequences represented in our probe arrays, our technology enables the efficient analysis of a multitude of DNA probes to analyze DNA or RNA sequences in a test sample.

        In the semiconductor industry, the principle that the number of transistors in a semiconductor chip doubles every 18 months based on feature shrink, or increased resolution, is known as Moore's Law. Because we leverage photolithographic manufacturing processes adapted from the semiconductor industry, we have also been able to continually "shrink" the size of features, or oligonucleotide probes of a given sequence, on our GeneChip® arrays. Our first commercial GeneChip® products, which we shipped in 1994, had a feature size of 100 microns and by 2005, we introduced our Human Exon Array product with a 5 micron feature size. We have thus been able to increase the amount of genetic information packaged onto our GeneChip® arrays by nearly 400 times since the introduction of our first products.

        Because we manufacture our chips in wafer format, we can vary the number of chips manufactured per wafer. We can therefore manufacture thousands of chips per wafer with low information content and lower cost of goods sold or decrease the number of chips per wafer and increase the information content. We expect that we will continue to benefit from this manufacturing leverage as our technology development activities enable further feature shrink.

Products

Overview

        Our products form an integral part of our GeneChip® system that is designed for use by pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies, as well as academic research centers, private and government research foundations and consortia and clinical reference laboratories. The GeneChip® system consists of several integrated components: disposable probe arrays containing genetic information on a chip, reagents for extracting, amplifying and labeling

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target nucleic acids, a fluidics station for introducing the test sample to the probe arrays, a hybridization oven for optimizing the binding of samples to the probe arrays, a scanner to read the fluorescent image from the probe arrays, and software to analyze and manage the resulting genetic information. The function of each single-stranded sequence on the GeneChip® probe array is to bind to its complementary single strand of DNA or RNA from a biological sample. Each unique sequence feature on the GeneChip® probe array contains multiple copies of the same single strand of DNA. The nucleic acid (DNA or RNA) to be tested is isolated from a sample, such as blood or biopsy tissue, amplified and fluorescently labeled by one of several standard biochemical methods. The test sample is then washed over the probe array, where the now labeled individual nucleic acid sequences that represent the genetic content or expressed genes of the sample hybridize to their complementary sequences bound on the array. When scanned by a laser, which is part of the scanner instrument, the test sample generates a fluorescent signal. The locations where a fluorescent signal is detected by an optical detection system on the scanner instrument correspond to sequences complementary to the test sample. Sequence variation, or the quantification of specific sequences of nucleic acids in the sample, can be determined by detecting the relative strength of these signals since the sequence and position of each complementary DNA probe on the probe array is known. The combination of a particular GeneChip® probe array, together with an optimized set of reagents and a user protocol describing how to carry out the procedure, is referred to as an "assay."

        We currently market products for two principal applications: monitoring of gene or exon expression levels and investigation of genetic variation (DNA analysis including single nucleotide polymorphism (SNP) genotype analysis, and resequencing, copy number variation and cytogenics). Our GeneChip® expression monitoring arrays enable our customers to qualitatively and quantitatively measure gene or exon expression levels in a number of frequently studied organisms. Our catalog GeneChip® expression arrays are available for the study of human, rat, mouse and a broad range of other mammalian and model organisms. Human, mouse and rat exon analysis and gene analysis arrays are also available. Additionally, we market MyGeneChip™ and, CustomSeq™ products, which enable our customers to design their own custom GeneChip® expression arrays or sequence arrays for organisms of interest to them. Our GeneChip® DNA analysis arrays and variant detection systems are available to enable researchers to perform high throughput polymorphism analysis, structural and chromosomal characterization and to carry out large scale resequencing (comparing the DNA sequence of multiple samples against a known reference sequence, e.g. the published human genome sequence). An additional application of DNA variant analysis allows researchers to gain an understanding of drug metabolism and related implications. With its unique, parallel analysis capability, GeneChip® technology enables our customers to perform accurate and cost-effective genetic analysis, using minute amounts of sample DNA, in their own laboratories on a scale that was previously only possible in specialist high throughput centers.

        In addition, we believe that analysis and testing of genetic material by the GeneChip products will be a core component in the area of molecular diagnostic development. We are developing our GeneChip® system for diagnostic use for both gene expression and DNA analysis. The GeneChip® System 3000Dx (GCS3000Dx) is the first microarray instrumentation system for molecular diagnostic laboratories. The GCS3000Dx is 510(k) cleared and CE marked for in vitro diagnostic use in conjunction with the Roche Diagnostics AmpliChip CYP450 Test.

        Together with our collaborative partners, we are focusing on the development and commercialization of diagnostic products in cancer, cardiovascular, inflammatory, metabolic, infectious and other diseases, and believe that our GeneChip® assays will facilitate more efficient and effective disease detection, prognosis and treatment selection, leading to overall improved patient management. To further our clinical research and molecular diagnostics strategy, we have established partnerships and customer relationships with leading academic researchers, pharmaceutical and biotechnology companies, including Sysmex, F. Hoffmann-La Roche Ltd. ("Roche"), bioMérieux, Inc. ("bioMérieux"),

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and Veridex, LLC, a Johnson & Johnson company ("Veridex"). Through Sysmex, we have expanded our diagnostics distribution capability into Japan and the Asian Pacific regions. We believe that the rapid growth of the diagnostic markets holds the potential for GeneChip® technology applications ranging from basic research to clinical trials and, ultimately, diagnostic products. As a result we are working with leaders in molecular diagnostics to provide to them custom made GeneChip® probe. Our partners subsequently package the chips into kits, seek regulatory approval for their diagnostic use, and sell them into the diagnostic markets using their sales channels. We are leveraging our partners' strengths in research, development, regulatory practices and distribution while leveraging our strengths in array technology. These products are marketed as being Powered by Affymetrix™.

Gene Expression Monitoring Arrays

        Gene expression monitoring is a valuable tool for identifying correlations between genes, determining their biological functions and identifying patterns that might be useful in classifying diseases. To monitor gene expression, we design and manufacture probe arrays with single-stranded DNA molecules that are complementary to sequences within genes or exons of interest. By synthesizing specific probes for multiple genes or exons on a single probe array, we enable researchers to quickly, quantitatively and simultaneously monitor the expression of a large number of genes or exons of interest. By monitoring the expression of such genes under different conditions and at different times, researchers can use the probe arrays to understand the dynamic relationship between gene expression and biological activity. We believe such information will be an important tool in understanding gene function and for the development of new drugs and diagnostic tools. Increasingly, clinical research is showing that gene expression patterns in tissue samples, particularly those from cancerous tissues, can be used to characterize disease sub-types and hopefully to predict therapeutic responses and likely outcomes.

DNA Analysis Arrays

        As genes and regulatory regions in the human genome are mapped, identified, and sequenced, the value of understanding the variability of sequences among individuals increases. Researchers seek to determine the normal sequence of the gene, which mutations or polymorphisms exist in a population, and whether these variations correlate with a disease or other aspect of the human condition. Studies of the genetics of complex diseases have historically been challenging due to the high costs of sequencing or genotyping of large numbers of affected and unaffected individuals. Genetic variation also impacts how individuals respond to therapeutics. The study of these effects is known as pharmacogenetics. This is part of the broader field of pharmacogenomics, which seeks to understand how the overall composition and expression of the genome affects therapeutic response, drug efficacy and the incidence of adverse side effects to therapy. We believe pharmacogenomics will become increasingly important both in clinical drug trials and patient care. By using our resequencing, copy number and genotyping technologies, we believe that our GeneChip® probe arrays could significantly reduce the cost and time required for high-volume polymorphism analysis, which is currently performed through more labor- intensive techniques.

        We have initiated product research and development efforts on several genetic analysis probe arrays and variant detection analysis systems and formed collaborations to accelerate the development of our genotyping products. For additional information concerning these efforts and collaborations see the sections of this Form 10-K entitled "Research and Development" and "Our Collaborative Partners."

Products Powered by Affymetrix™

        Through our Powered by Affymetrix™ (PbA) Program, we permit commercial entities to license GeneChip® technology to develop microarray products. PathChip, the gene expression array used in the

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Pathwork Tissue of Origin test was custom-designed for Pathwork Diagnostics of Sunnyvale, California through the PbA Program. In July 2008, the U.S. Food and Drug Administration (FDA) cleared for marketing the Pathwork Tissue of Origin test. PathChip is the first custom Affymetrix gene expression array to be cleared for diagnostic use. The Pathwork Tissue of Origin test is the second in vitro diagnostic multivariate index assay (IVDMIA) device to be cleared by the FDA. In July 2007, the FDA issued a draft guidance document to address premarket pathways and postmarket requirements for IVDMIA. These tests combine the values of multiple variables to yield a single, patient-specific result. This test uses our technology to analyze thousands of pieces of genetic material at one time. The Pathwork Tissue of Origin test compares the genetic material of a patient's tumor with genetic information on malignant tumor types stored in a database. It considers 15 common malignant tumor types, including bladder, breast and colorectal tumors. This test can help healthcare professionals determine what types of cancer cells are present in a malignant tumor. For additional information concerning the PbA Program, see the section of this Form 10-K entitled "Our Collaborative Partners."

Reagents for Our GeneChip® Systems

        We offer target labeling, hybridization, stain, wash and control reagents for use with GeneChip® expression analysis and GeneChip® DNA analysis arrays.

Instruments for Our GeneChip® Systems

        Our GeneChip® instruments provide a fully integrated system for conducting research using GeneChip® probe arrays. The instrument system consists of four hardware devices, each providing for robust preparation and analysis of samples using GeneChip® arrays. The first device is a hybridization oven to control the timing and temperature required for hybridization of the test sample to the probe array. The second device is a fluidics station that controls exposure of the probe array to solutions containing prepared sample and labeled detection reagents across the probe array. The fluidics station can process four probe arrays simultaneously. The fluidics station protocols conclude with a reagent wash that leaves the labeled, hybridized test sample bound to the probe array.

        The third device, a laser scanner, is used after completion of protocols on the fluidics and hybridization stations, at which time the cartridge containing the probe array is placed in the scanner and read. The scanner consists of a laser, high-resolution optics, robotics to position and scan the probe array, a fluorescence detector and an interface to a computer workstation. The labeled material that is bound to the hybridized test sample emits fluorescent signals when exposed to the light from the laser. The locations and intensities of the fluorescent signals are recorded by the scanner and stored in the computer for analysis. The fourth device is an autoloader, which is a 48-array carousel that interfaces with the scanner to allow walk-away automation of the scanning steps, while maintaining the loaded arrays at the optimum storage temperature.

        Our GeneTitan™ instrument is a new system that combines all of the individual components discussed above into a single, integrated, highly automated system that enables hands-free processing of high throughput array plates. This platform currently can be used for expression applications and is intended to support genotyping applications in the second half of 2009.

Software for Our GeneChip® Systems and Analysis Tools

        Our GeneChip® Command Console Software (AGCC) provides an intuitive set of tools for instrument control and data organization used in the processing of GeneChip probe arrays. AGCC produces probe cell intensity data (.CEL file generation) enables sample and array registration, data organization, fluidics and scanning instrument control as well as automatic and manual image gridding. Besides these core features, AGCC's flexible platform enables customized, automated, and integrated workflows with a variety of laboratory information management systems.

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        Customers may choose operating or other software products provided by third party vendors that have been developed through our OpenSystems™ program, which includes the provision of a Software Developer's Kit to interested commercial and academic parties. Through this program we intend to stimulate a wide range of independent groups to develop tools for use with our platform, further enhancing our customers' capability to generate unique biological insights from the high quality data provided by the GeneChip® platform.

        Finally, our NetAffx™ Analysis Center (www.affymetrix.com/analysis/) is our exclusive online informatics resource for our customers and provides streamlined, open access to design information and biological annotations associated with our GeneChip® arrays. It was created to assist genomic researchers with the design and analysis of DNA array based experiments. NetAffx™ offers researchers a searchable catalog of Affymetrix GeneChip® probe array content, a range of publicly available and Affymetrix generated databases, and links to important third party resources.

Instruments for Use in Molecular Diagnostics

        In December 2007, we launched a second generation update to the GeneChip® System 3000Dx platform. The GCS3000 Dx version 2 is configured especially for the molecular diagnostic market. The GCS3000Dx will support all Powered by Affymetrix™ molecular diagnostic tests. The system includes the GCS3000Dx Scanner with Autoloader Dx, FS450Dx Fluidics Station, and Workstation with GCOS Dx software. A data transfer server module is also available for use with select research use only assays on the system.

        We believe that our GeneChip® technology can be effectively applied to complex molecular diagnostic testing. We have formed collaborations and intend to further partner with, or license technology to, established diagnostic companies to develop, obtain regulatory approval for, and commercialize arrays and instrumentation. We anticipate broader use of arrays as components of diagnostic products and clinical research applications. We believe that to support large central laboratories, additional instrumentation and automation will need to be developed to allow for handling the large volume testing of the clinical diagnostic setting. To further our molecular diagnostics strategy, we have established a number of collaborations with leading academic researchers, diagnostic companies, pharmaceutical and biotechnology companies, including bioMérieux, Inc., Roche, and Veridex (a Johnson & Johnson company).

USB and Anatrace Products

        Our acquisition of USB Corporation (USB) and its wholly-owned subsidiary Anatrace, Inc. (Anatrace) in January 2008 enables us to provide researchers with a whole product solution which includes a complete line of microarray products and extensive reagent kits. The USB reagent platform is highly complementary to Affymetrix' current portfolio and can be applied to a broad variety of emerging technologies. The USB reagent platform includes the following products:

        ExoSAP-IT® For PCR Product Clean-Up.    USB® ExoSAP-IT® For PCR Product Clean-Up is a reagent for rapid clean-up of polymerase chain reaction (PCR) products used in downstream applications, such as DNA sequencing or Single Nucleotide Polymorphism (SNP) analysis. When PCR amplification is complete, any unused deoxyribonucleotide triphosphates (dNTPs) and primers remaining in the PCR product mixture will interfere with these methods (unless removed by proper cleaning).

        HotStart-IT® line of hot start PCR reagents.    The USB® HotStart-IT® line of products is based on a sequestration technology. In contrast to traditional hot start PCR methods which inhibit DNA polymerases via antibodies or chemical modification, USB HotStart-IT® reagents utilize a recombinant primer binding protein which binds and sequesters primers at lower temperatures making them unavailable for use by Taq DNA Polymerase. This technique effectively blocks DNA synthesis from

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mis-priming events at lower temperatures, eliminating primer-dimers and other non-specific products. The hot start method enhances quantitative and end point PCR reactions by increasing sensitivity, specificity and yield without inhibiting polymerase activity.

        Molecular Biology Enzymes.    USB® molecular biology enzymes provide researchers reliability and high purity for use in techniques such as labeling, cloning, reverse transcription, DNA isolation, DNA sequencing, nucleic acid manipulation, and polymerase chain reaction. These enzymes are utilized in a wide array of molecular biology applications in both primary research and industrial spaces.

        Molecular Biology Products & Kits.    USB® molecular biology kits provide convenience for researchers and are available for a variety molecular biology techniques such as polymerase chain reaction, cloning, mutagenesis, labeling, Western blotting, chromatin immunoprecipitation, DNA sequencing, RNA transcription, nucleic acid and protein purification, and miRNA detection.

        Biochemicals.    USB Ultrapure Biochemicals are specially selected biochemicals and reagents that meet stringent requirements, such as adherence to compendial references where applicable, have ultra-low levels of trace metal contamination, and low levels of DNase, RNase, protease, and endotoxins where applicable. USB® Biochemicals include ultrapures, ACS biochemicals, buffers, acrylamides, agaroses, detergents, stabilizers, antibiotics, amino acids, substrates, albumins, carbohydrates, coenzymes, proteins, sugars, vitamins and nucleotides.

        Anatrace offers a wide variety of detergents for membrane protein and cell biology applications.

Panomics Products

        Our acquisition of Panomics, Inc. (Panomics) in December 2008 enables us to provide customers with a suite of assay products for a wide variety of low- to mid-plex genetic, protein and cellular analysis applications. Panomics is developing a comprehensive line of multiplex (measurement of many different targets from the same sample) assays. Panomics' Parallel Quantitative Biology ("PQB") initiative provides reagents to characterize dynamic cellular pathway function. Panomics' products target unmet market needs in drug discovery and life science research in the gene expression, cell-signaling and RNA interface (RNAi) markets as research shifts from static, semi-quantitative methods to dynamic, multiplex quantitative approaches. Our programs target new and growing fields of investigation with products that overcome limitations of certain existing technologies. In addition, our products address the nascent, rapidly emerging biomarker discovery market, as well as the use of biomarkers in secondary and high throughput screening applications.

        Panomics' products are based on three major foundations: (i) branched chain DNA (bDNA) for highly quantitative and multiplex measurements of gene expression; (ii) multiplex gene and protein analysis, based on bead arrays; and (iii) a significant amount of genetic content that is used to create products. Panomics' products are designed to enable its customers to generate larger amounts of higher quality data than competitive products and drive more efficient and cost effective life science research and drug discovery. These products enable drug target identification through analysis of gene silencing, cell signaling and biomarker validation.

        Branched Chain DNA Technology (bDNA).    bDNA technology measures RNA levels directly from lysed samples without the need for tedious, costly and time-consuming RNA purification or PCR. bDNA uses a novel signal amplification method, rather than relying on PCR-based target amplification and its associated biases and drawbacks. The product is compatible with a wide variety of samples and tissues, including cell lysates, tissue homogenates and archived, rare samples. The assay provides highly sensitive, specific, and quantitative data.

        The increased adoption of biomarkers, microarrays and other gene expression methods has driven a strong need for downstream analysis by multiplexed gene expression. Panomics' multiplexed bDNA

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platform is a robust system to accurately measure the activity of many genes simultaneously. It can provide data on the activity of many genes in a pathway, greatly increasing the efficiency and precision of research. Panomics' multiplex gene expression profiling system is cell-based, harnessing the technical strengths of bDNA. This product is a natural extension of the bDNA technology from QuantiGene, which measures one gene per test, into a system that measures up to 30 genes in parallel. Together, the two products allow Panomics to provide a solution that addresses both low and high throughput market needs.

        Multiplex Gene and Protein Analysis.    Our Procarta product line allows multiplex measurement of cytokines, transcription factors (TF), and protein interaction domains. All these multiplex products are used in elucidating cell signaling pathways, understanding disease states and for discovering and validating biomarkers. These products are currently configured as bead arrays, which permit cost effective, high throughput and accurate measurements.

Our Collaborative Partners

        Our collaboration strategy is to establish the GeneChip® system as the platform of choice for analyzing complex genetic information, to expand the applications of our technology and to acquire access to complementary technologies and resources.

        One of our goals is to provide our life science research customers with complete workflow solutions. To that end we collaborate with a number of reagent and instrumentation companies to develop and supply certain components of the user work flow. These companies include the Caliper Life Sciences, and CapitalBio Corporation, Life Technologies, Pathwork Diagnostics, PreAnalutiX GmbH, and Qiagen GmbH.

        We have developed and implemented our Powered by Affymetrix (PbA) program to address specific diagnostics applications of our technology. Through this program we enable PbA partners to develop custom product solutions based upon our arrays, instrumentation and software. These partners identify, develop, seek regulatory approval for and commercialize these specific tests. Current PbA partners include bioMerieux, Inc., F. Hoffman-La Roche Ltd., Veridex, LLC., and Sysmex Corporation.

        We also collaborate with certain academic, government, and commercial research groups to develop and validate new applications of our technologies. These include the Broad Institute of Harvard and the Massachusetts Institute of Technology and the National Genome Research Institute.

Marketing and Distribution

        The markets for our products include all aspects of molecular biology research in the life sciences, including basic human disease research, clinical research, pharmaceutical drug discovery and development, including pharmacogenomics and toxicogenomics and agricultural research, amongst others. Our customers include pharmaceutical, biotechnology, agrichemical, diagnostics, industrial and consumer products companies, as well as academic research centers, laboratories in government agencies, private research foundations and clinical and industrial reference laboratories. The following factors, among others, influence the size and development of our markets:

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the availability of genomic sequence and sequence variation data for the human population and for other organisms;

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technological innovation that increases throughput and lowers the cost of genomic and genetic analysis;

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the development of new computational techniques to handle and analyze large amounts of genomic data;

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the availability of government funding for basic and disease-related research;

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•

the amount of capital and ongoing expenditures allocated to research and development and outsourced spending by biotechnology, pharmaceutical and diagnostic companies for products and services;

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the application of genomics to new areas including molecular diagnostics, agriculture, human identity and consumer goods; and

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the availability of genetic markers and signatures of diagnostic value.

        In North America and major European markets, our GeneChip® products are marketed principally through our own sales and distribution organizations. We own or lease sales and service offices in the United States, Europe, Japan, Singapore and China. Outside these markets, we sell our GeneChip® products principally through third party distributors, primarily in Mexico, Latin and South America, India, the Middle East, South Africa and Asia Pacific, including China. These distributors are life science supply specialists within their own countries and operate as our sole distributors within a defined country or other geographic area.

        For molecular diagnostic and industrial applications market opportunities, we supply our partners with arrays and instruments, which they incorporate into diagnostic products and for which they take on the primary commercialization responsibilities.

Manufacturing and Raw Materials

        We manufacture our consumables and instruments in-house and with contracts with third-party suppliers. In 2008, we implemented a restructuring plan to optimize our production capacity and cost structure to enable us to increase our future gross margins. This plan included the move of the majority of our probe array manufacturing from our West Sacramento, California facility to our Singapore facility by December 31, 2008 and also encompasses the transition of our instrument manufacturing to third party contract manufacturers. We will maintain a small capability in West Sacramento, California until June 2009. We also maintain a pilot manufacturing and process engineering/development facility in Santa Clara, California. Additionally, through our GeneChip compatible™ application program, a number of third party software suppliers develop, market and sell genomic data analysis software that interfaces with data files generated by our GeneChip® system.

        In 2008, we acquired USB Corporation and Panomics, Inc. and we are working to integrate these businesses into our global manufacturing, business and sales operations. This strategy includes compliance with all of our standards for quality, supplier management and business systems integration.

        Our probe array manufacturing process involves wafer preparation, probe synthesis, dicing of synthesized wafers into chips, assembly of chips and quality control. We have developed software programs that extensively automate the design of photolithographic masks used in probe array manufacturing and that control the probe array manufacturing lines. Glass wafers are prepared for synthesis through the application of chemical coatings. GeneChip® probe arrays are synthesized on the wafers using our proprietary, combinatorial photolithographic process. The completed wafers can then be diced to yield individual probe arrays, which are assembled and packaged for shipment.

        Our reagent manufacturing capabilities are a combination of vertically integrated operations and qualified suppliers of complete products and/or sub-assembly kits. We operate our reagent manufacturing from four sites today — Santa Clara, California, South San Francisco, California, Fremont, California, and Cleveland, Ohio. All of our reagent products are conducted under quality systems that are currently being integrated due to the acquisition of USB and Panomics. With regard to GeneChip reagents we perform quality tests on in-house and third party reagents at our Santa Clara facility to verify performance of reagent components and assembled reagent kits. We have qualified second source vendors for labeling reagents and oligonucleotides. Currently we perform limited

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manufacturing and quality control testing on certain of our reagents at our South San Francisco facility. All of this is intended to be moved to our Cleveland operations in the first half of 2009.

        Our United States commercial instrument and array manufacturing facility complies with Good Manufacturing Practices as a subset of the Quality System Regulation (21 CFR 820). The Singapore facility is fully operational and is independently approved as an ISO 13485 facility. The Singapore facility operates under the strict standards of our corporate quality plan. We intend to certify a portion of the Cleveland, Ohio operations to these standards in 2009. The selected instrument supplier will meet all of our strict quality standards and be ISO 13485 and FDA registered before qualification is complete.

        Key parts of the GeneChip® product line, such as hybridization ovens, are available from single sources. We take such steps as we believe are appropriate to ensure that supplies from these vendors are not materially delayed or interrupted, since any such delays or interruptions could in turn delay our ability to deliver these products to our customers. Likewise, certain raw materials or components used in the synthesis of probe arrays or the assembly of instrumentation are currently available only from a single source or limited sources. We take such steps as we believe are appropriate to ensure that materials and components from these vendors are not materially delayed or interrupted, since any such delays or interruptions could in turn delay our ability to produce probe arrays or other components for our GeneChip® system in a timely fashion, in sufficient quantities or under acceptable terms. Alternative sources of supply may be time consuming and expensive to qualify. In addition, we are dependent on our vendors to provide components of appropriate quality and reliability, and to meet applicable regulatory requirements. Accordingly, we also take what we believe are appropriate measures to prevent the delay or interruption of supplies from these vendors and to ensure the appropriate quality for our customers.

Research and Development

        We believe a substantial investment in research and development is essential to a long-term sustainable competitive advantage and critical to expansion into high-value markets such as toxicogenomics, pharmacogenomics, and molecular diagnostic and applied testing applications. Our research and development effort is divided into the major areas of basic research, product research and development, and manufacturing technology development. Basic research efforts are carried out through our Affymetrix Research Laboratories to further advance our GeneChip® platform, develop new concepts that can be rapidly productized, and create innovations that will influence our business model in the future. Our product research and development efforts are focused primarily on expanding the applications of the GeneChip® technology, including development of new probe array products, improving the overall performance of GeneChip® assays, increasing the information capacity per probe array and simplifying highly complex assays. We are conducting research aimed at enhancing the manufacturing process currently employed in the production of our GeneChip® probe arrays. This process, which leverages semiconductor photolithographic fabrication techniques, is combinatorial in that the number of different compounds synthesized grows exponentially with the number of cycles in the synthesis. The objective of this research is to allow us to produce arrays with higher information density in the same unit area, similar to advances achieved in the semiconductor industry, which has produced silicon chip capacity closely following Moore's Law.

        Our research and development expenses for the years ended December 31, 2008, 2007 and 2006 were $84.5 million, $72.7 million and $86.3 million, respectively.

Intellectual Property

        We rely on a combination of patent, copyright, and trade secret laws, know-how and licensing opportunities to establish and protect our proprietary technologies and products. Our success depends

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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 GeneChip® technology.

        We are pursuing a patent strategy designed to facilitate our research and development program and the commercialization of our current and future products. While no one patent is considered essential to our success, we aggressively seek to protect our patent rights as our patent portfolio as a whole is material to the success of the business.

        There are a significant number of United States and foreign patents and patent applications in our areas of interest, and we believe that there will continue to be significant litigation in the industry regarding patent and other intellectual property rights. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. It may be necessary for us to enter into litigation to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets or know-how owned by us or to determine the scope and validity of the proprietary rights of others. To determine the priority of inventions, it may be necessary for us to participate in interference proceedings declared by the United States Patent and Trademark Office. Litigation or interference proceedings could result in substantial costs to and distraction from our core business and our efforts in respect to such proceedings may not be successful. For further information, see Item 3. Legal Proceedings.

        We also rely upon copyright and trade secrets to protect our confidential and proprietary information. We seek to protect our proprietary technology and processes by confidentiality agreements with our employees and certain consultants and contractors. These agreements may be breached, we may not have adequate remedies for any breach and our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees or our consultants or contractors use intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.

        We are party to various option, supply and license agreements with third parties which grant us rights to use certain aspects of our technologies. We take such measures as we believe are appropriate to maintain rights to such technology under these agreements. In addition, our academic collaborators have certain rights to publish data and information in which we have rights. There is considerable pressure on academic institutions to publish discoveries in the genetics and genomics fields. We take such steps as we believe are appropriate to ensure that such publication will not adversely affect our ability to obtain patent protection for information in which we may have a commercial interest.

Competition

        Competition in gene expression monitoring, DNA analysis and molecular diagnostics is intense and is expected to increase. Further, the technologies for monitoring gene expression, discovering and analyzing polymorphisms associated with significant diseases, and approaches for commercializing those discoveries are new and rapidly evolving. Currently, our principal competition comes from existing technologies and other DNA array technologies that are used to perform many of the same functions for which we market our GeneChip® systems.

        In the gene expression monitoring and DNA analysis fields, existing competitive technologies include gel-based sequencing using instruments provided by companies such as Beckman Coulter, Inc. and Life Technologies. Other companies developing or marketing potentially competitive DNA array technology include: Agilent Technologies, Inc., BD Biosciences, CombiMatrix Corporation, Inc., Illumina, Inc., MDS Analytic Technologies, Nanogen, Inc., Sequenom, Inc., and Visible Genetics, Inc. For example, companies such as Agilent Technologies, Inc., Life Technologies, and Illumina, Inc. have products for DNA analysis which are directly competitive with our GeneChip® Mapping Array

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products. In order to compete against existing and emerging technologies, we will need to be successful in demonstrating to customers that the GeneChip® system provides a competitive advantage.

        The market for molecular diagnostic products derived from gene discovery is currently limited and highly competitive, with several large corporations already having significant market share. Established diagnostic companies could compete with us by developing new products. Companies such as Beckman Coulter, Becton Dickinson, bioMérieux, Johnson & Johnson, and Roche have the strategic commitment to diagnostics, the financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. Established diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which are not compatible with the GeneChip® system and could slow acceptance of our products. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests.

        Future competition in existing and potential markets will likely come from existing competitors as well as other companies seeking to develop new technologies for sequencing and analyzing genetic information, such as Helicos, Illumina, Life Technologies, Pacific Biosystems and a number of smaller private companies. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. We have significantly expanded our network of approved service providers in America, Japan, Europe, and China. While these companies expand the reach of Affymetrix technology and make its analytical power available to a wider base of users they may act as a substitute for outright purchase of instruments and arrays by those end users. In the molecular diagnostic field, competition will likely come from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases, and other companies conducting research on new technologies to ascertain and analyze genetic information. In addition, we have several other third party licensees that could offer products that compete with our product offerings.

Government Regulation

        Regulation by governmental authorities in the United States and other countries will likely be a significant factor in the manufacturing, labeling, distribution and marketing of certain products and services that may be developed by us or our collaborative partners. In particular, diagnostic products we are developing with our collaborative partners may require regulatory approval by governmental agencies when distributed outside of the research environment.

        Commercially available diagnostic tests are regulated as medical devices and are generally subject to rigorous testing and other approval procedures by the United States Food and Drug Administration (FDA). The FDA's Quality System Regulations also apply in connection with our manufacture of arrays and systems as components for use in diagnostic products developed by our partners. Obtaining these clearances or approvals and the compliance with these regulations require the expenditure of substantial resources over a significant period of time, and there can be no assurance that any clearances or approvals will be granted on a timely basis, if at all. Once granted, a clearance or approval may place substantial restrictions on how the device is marketed or labeled or to whom it may be sold. In addition, various federal and state statutes and regulations govern or influence the manufacturing, safety, storage of our products and components of our products and our record keeping.

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        Medical device laws and regulations, including those covering in vitro diagnostic products, are also in effect in the European Union, and many of the countries in which we may do business outside the United States. These range from comprehensive device approval requirements for some or all of our medical device products to requests for product data or self-certifications. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining our non-US regulatory approvals. In addition, the export by us of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA or other export restrictions.

Reimbursement

        The design of our products and the potential market for their use may be directly or indirectly affected by U.S. and other government regulations governing reimbursement for clinical testing services. The availability of third-party reimbursement for our products and services may be limited or uncertain, particularly with respect to genetic tests and other clinical applications products.

        Third-party payers may deny reimbursement if they determine that a prescribed health care product or service has not received appropriate FDA or other governmental regulatory clearances, is not used in accordance with cost-effective treatment methods as determined by the payer, or is deemed by the third-party payer to be experimental, unnecessary or inappropriate. Furthermore, third-party payers are increasingly challenging the prices charged for health care products and services.

        Currently, sales of our products and services are not subject to third-party reimbursement. However, we are currently developing diagnostic and therapeutic products with our collaborative partners which may be subject to reimbursement issues. The ability of our collaborators to commercialize such products may depend, in part, on the extent to which reimbursement for the cost of these products will be available under U.S. and foreign regulations governing reimbursement for clinical testing services by government authorities, private health insurers and other organizations. In addition, we are establishing a diagnostic clinical laboratory which will provide subcontract services to primary clinical laboratories.

        In the United States, third-party payer price resistance, the trend towards managed health care and legislative proposals to reform health care or reduce government insurance programs could reduce prices for health care products and services, adversely affect the profits of our customers and collaborative partners and reduce our future royalties and product sales.

Environmental Matters

        We are dedicated to compliance and protection of the environment and individuals. Our operations require the use of hazardous materials (including biological 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 and applicable laws and regulations. However, some of the regulations under the current regulatory structure allow for "strict liability," holding a party potentially liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others', business operations should contamination of the environment or individual exposure to hazardous substances occur. We cannot predict how changes in these laws or development of new regulations will affect our business operations or the cost of compliance.

Employees

        As of February 20, 2009, we had 1,128 full-time employees. The employee group includes chemists, engineers, computer scientists, mathematicians and molecular biologists with experience in the diagnostic products, medical products, semiconductor, computer software and electronics industries. None of our employees are represented by a collective bargaining agreement, nor have we experienced

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work stoppages. We believe that we maintain good relationships with our employees. Our success depends in large part on our ability to attract and retain skilled and experienced employees.

Seasonality

        Customer demand for probe arrays and instrumentation systems is typically highest in the fourth quarter of the calendar year as customers spend unused budget allocations before the end of the financial year.

Backlog

        Because most customer orders are shipped in the quarter in which they are received, we believe that backlog at quarter end is typically not a material indicator of future sales. In addition, backlog may not result in sales because of cancellation of orders or other factors. On a few occasions we have experienced, and made public announcements about, short-term increases in backlog as a result of factors such as new product introductions or supply constraints.

Financial Information About Industry Segments

        We operate in one business segment, for the development, manufacture, and commercialization of systems for genetic analysis in the life sciences and diagnostic industry. Our operations are treated as one segment as we only report operating information on a total enterprise level to our chief operating decision-maker. Further, resource allocations are also made at the enterprise level by our chief operating decision-maker.

Financial Information About Geographic Areas

        Our total revenue from customers outside of the United States for fiscal years 2008, 2007 and 2006 was $141.1 million, $173.6 million and $169.7 million, or approximately 34%, 47% and 48%, respectively, of our total revenue. A summary of revenues from external customers attributed to each of our geographic areas for the fiscal years ended December 31, 2008, 2007 and 2006, is included in Note 17 of our Consolidated Financial Statements included in this report.

Available Information

        Our internet address is www.affymetrix.com. Information included in our website is not part of this Form 10-K. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, copies of our annual reports are available free of charge upon written request. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

ITEM 1A.    RISK FACTORS

        In evaluating our business, you should carefully consider the following risks, as well as the other information contained in this annual report on Form 10-K. If any of the following risks actually occurs, our business could be harmed.

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Risks Related to the Growth of Our Business

We must continually offer new products and technologies to be successful.

        Our success depends in large part on continuous, timely development and introduction of new products that address evolving market requirements and are attractive to customers. The RNA/DNA probe array field is undergoing rapid technological changes. New technologies, techniques or products could emerge which might allow the packaging and analysis of genomic information at densities similar to or higher than our microarray technology. Other companies may begin to offer products that are directly competitive with, or are technologically superior, to our products. Standardization of tools and systems for genetic research is still ongoing and we cannot assure you that our products will emerge as the standard for genetic research. If we do not appropriately innovate and invest in new technologies, then our technologies will become dated and our customers could move to new technologies offered by our competitors, causing us to lose our competitive position in the market.

        As a result, we are continually looking to develop, license or acquire new technologies and products to further broaden and deepen our already broad product line. Once we have developed or obtained a new technology, to the extent that we fail to introduce new and innovative products that are accepted by our markets, we may not obtain an adequate return on our research and development, licensing and acquisition investments and could lose market share to our competitors, which would be difficult to regain and could seriously damage our business. Some of the factors affecting market acceptance of our products include:

•

availability, quality and price as compared to competitive products;

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the functionality of new and existing products;

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the timing of introduction of our products as compared to competitive products;

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the existence of undetected product defects;

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scientists' and customers' opinions of the product's utility and our ability to incorporate their feedback into future products;

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citation of the products in published research; and

•

general trends in life sciences research and life science informatics software development.

        As we introduce new or enhanced products, we must successfully manage the transition from older products to minimize disruption in customers' ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. Risks relating to product transitions include the inability to accurately forecast demand and difficulties in managing different sales and support requirements due to the type or complexity of the new products.

Failure to integrate acquired businesses into our operations successfully will adversely impact our results of operations.

        As part of our strategy to develop and identify new products and technologies, we have made and continue to make acquisitions. Our integration of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, manufacturing and finance. These efforts result in additional expenses and divert significant amounts of management's time from other projects. Our failure to manage successfully and coordinate the growth of the combined company could also have an adverse impact on our business. In addition, there is no guarantee that some of the businesses we acquire will become profitable or remain so. If our acquisitions do not reach our initial expectations, we may record impairment charges.

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        Factors that will affect the success of our acquisitions include:

•

presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;

•

any decrease in customer and distributor loyalty and product orders caused by dissatisfaction with the combined companies' product lines and sales and marketing practices, including price increases;

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our ability to retain key employees of the acquired company;

•

the ability of the combined company to achieve synergies among its constituent companies, such as increasing sales of the combined company's products, achieving expected cost savings and effectively combining technologies to develop new products; and

•

disruption in order fulfillment due to integration processes and therefore loss of sales.

Emerging market opportunities in molecular diagnostics may not develop as quickly as we expect and we depend on the efforts of our partners to be successful.

        The clinical applications of GeneChip® technologies for diagnosing and enabling informed disease management options in the treatment of disease is an emerging market opportunity in molecular diagnostics that seeks to improve the effectiveness of health care by collecting information about DNA variation and RNA expression in patients at various times from diagnosis through prognosis and on to the end of therapy. At this time, we cannot be certain that molecular diagnostic markets will develop as quickly as we expect. Although we believe that there will be clinical applications of our GeneChip® technologies that will be utilized for diagnosing and enabling informed disease management options in the treatment of disease, there can be no certainty of the technical or commercial success our technologies will achieve in such markets.

        Our success in the molecular diagnostics market depends to a large extent on our collaborative relationships and the ability of our collaborative partners to (1) achieve regulatory approval for such products in the United States and in overseas markets; and (2) successfully market and sell products using our GeneChip® technologies.

Risks Related to Our Sales

We face significant competition.

        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. We face significant competition as existing companies develop new or improved products and as new companies enter the market with new technologies.

        For example, companies such as Illumina, Agilent Technologies and Life Technologies have products for genetic analysis which are directly competitive with our GeneChip® products. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs.

        Many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content.

        In the molecular diagnostics field, competition will likely come from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases and other companies conducting research on new technologies to ascertain and analyze genetic information. Further, in the event that we develop new technology and products that compete with existing

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technology and products of well established companies, there can be no guarantee that the marketplace will readily adopt any such new technology and products that we may introduce in the future.

        The market for molecular diagnostics products is currently limited and highly competitive, with several large companies already having significant market share. Companies such as Beckman Coulter, Becton Dickinson, bioMérieux, Celera Diagnostics, Johnson & Johnson and Roche Diagnostics have made strategic commitments to diagnostics, have financial and other resources to invest in new technologies, and have substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. Established diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which are not compatible with the GeneChip® system and could deter acceptance of our products. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests.

Reduction in research and development budgets and government funding adversely impacts our sales.

        We expect that our revenues in the foreseeable future will be derived primarily from products and services provided to a relatively small number of pharmaceutical and biotechnology companies and academic, governmental and other research institutions. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. For example, recent delays and reductions in expenditures by our pharmaceutical customers, as well as governmental and research institutions, have adversely affected our results of operations.

        Factors that could affect the spending levels of our customers include:

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weakness in the global economy and changing market conditions that affect our customers;

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changes in the extent to which the pharmaceutical industry may use genetic information and genetic testing as a methodology for drug discovery and development;

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changes in government programs that provide funding to companies and research institutions;

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changes in the regulatory environment affecting life science companies and life science research; and

•

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

If we are unable to maintain our relationships with collaborative partners, we may have difficulty developing and selling our products and services.

        We believe that our success in penetrating our target markets depends in part on our ability to develop and maintain collaborative relationships with key companies as well as with key academic researchers. Relying on our collaborative relationships is risky to our future success because:

•

our partners may develop technologies or components competitive with our GeneChip® products;

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our existing collaborations may preclude us from entering into additional future arrangements;

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our partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;

•

some of our agreements may terminate prematurely due to disagreements between us and our partners;

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our partners may not devote sufficient resources to the development and sale of our products;

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•

our partners may be unable to provide the resources required for us to progress in the collaboration on a timely basis;

•

our collaborations may be unsuccessful; or

•

some of our agreements have expired and we may not be able to negotiate future collaborative arrangements on acceptable terms.

The size and structure of our current sales, marketing and technical support organizations may limit our ability to sell our products.

        Although we have invested significant resources to expand our direct sales force and our technical and support staff, we may not be able to establish a global sales, marketing or technical support organization that is sufficient to sell, market or support our products globally. To assist our sales and support activities, we have entered into distribution agreements through certain distributors, principally in markets outside of North America and Europe. These and other third parties on whom we rely for sales, marketing and technical support in these geographic areas may decide to develop and sell competitive products or otherwise become our competitors, which could harm our business.

Risks Related to the Manufacturing of Our Products

We depend on a limited number of suppliers and we will be unable to manufacture our products if shipments from these suppliers are delayed or interrupted.

        We depend on our suppliers to provide components of our products in required volumes, at appropriate quality and reliability levels, and in compliance with regulatory requirements. Key parts of the GeneChip® product line, including components of our manufacturing equipment and certain raw materials used in the manufacture of our products are currently available only from a single source or limited sources. This risk is increased by the recent consolidation among our suppliers, including the acquisition of Applied Biosystems by Invitrogen.

        If supplies from these vendors were delayed or interrupted for any reason, we would not be able to get manufacturing equipment, produce probe arrays, or sell scanners or other components for our GeneChip® products in a timely fashion or in sufficient quantities. Furthermore, our business is dependent on our ability to forecast the needs for components and products in the GeneChip® product line and our suppliers' ability to deliver such components and products in time to meet critical manufacturing and product release schedules. Our business could be adversely affected, for example, if suppliers fail to meet product release schedules, if we experience supply constraints, if we fail to negotiate favorable pricing or if we experience any other interruption or delay in the supply chain which interferes with our ability to manufacture our products or manage our inventory levels. For example, the supply of Acetonitrile (ACN), a highly pure solvent we use in the synthesis process is being allocated to customers due to world-wide shortages. These shortages began with Hurricane Ike last year, and were exacerbated by two plants being taken off line in China due to the Olympics. Recently, the supply has been further reduced by the impact that the economic downturn has had on demand for plastic parts used by the automotive industry, which has reduced the availability of a byproduct used to make ACN. We have two qualified suppliers today who have estimated that supplies of ACN will continue to be tight through 2010.

We need to adjust our manufacturing capacity based on business requirements or improvements made to our technological capabilities and there are risks associated with such adjustment.

        If demand for our products is reduced or if we implement technologies that increase the density or yields of our wafers, our manufacturing capacity could be under-utilized, and some of our long-lived assets including facilities and equipment may be impaired, which would increase our expenses. In

22

addition, factory planning decisions may shorten the useful lives of long-lived assets including facilities and equipment, and cause us to accelerate depreciation. These changes in demand for our products, and changes in our customers' product needs, could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenue, increase our costs, lower our gross margin percentage or require us to recognize impairments of our assets. In addition, if demand for our products is reduced or we fail to accurately forecast demand, we could be required to write down inventory, which would have a negative impact on our gross margin.

        We have in the past, and may in the future, adjust our capacity based on business requirements, which may include the rationalization of our facilities, including the abandonment of long-lived manufacturing assets and additional charges related to a reduction in capacity. In February 2008, we implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to increase our gross margins. In July 2008, we expanded our restructuring plan to include the closure of our West Sacramento, California facility and the consolidation of our manufacturing to three locations. Manufacturing and product quality issues may arise as we implement this transition process and increase our production rates and launch new products in our Singapore and Ohio facilities. We may lose customers if we are unable to manufacture products or if we experience delays in the manufacture of our products as a result of this transition.

We may lose customers or experience lost sales if we are unable to manufacture or experience delays in the manufacture of our products, or if we are unable to ensure their proper performance and quality.

        We produce our GeneChip® products in an innovative and complicated manufacturing process which has the potential for significant variability in manufacturing yields. We have encountered and may in the future encounter difficulties in manufacturing our products and, due to the complexity of our products and our manufacturing process, we may experience delays in the manufacture of our products or fail to ensure their proper performance or quality.

        We base our manufacturing capabilities on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which could adversely impact our financial results. Difficulties in meeting customer, collaborator and internal demand could also cause us to lose customers or require us to delay new product introductions, which could in turn result in reduced demand for our products.

        We rely on internal quality control procedures to verify our manufacturing processes. Due to the complexity of our products and manufacturing process, however, it is possible that probe arrays that do not meet all of our performance specifications may not be identified before they are shipped. If our products do not consistently meet our customers' performance expectations, demand for our products will decline. In addition, we do not maintain any backup manufacturing capabilities for the production of our products. Any interruption in our ability to continue operations at our existing manufacturing facilities could delay our ability to develop or sell our products, which could result in lost revenue and seriously harm our business, financial condition and results of operations.

We may not be able to deliver acceptable products to our customers due to the rapidly evolving nature of genetic sequence information upon which our products are based.

        The genetic sequence information upon which we rely to develop and manufacture our products is contained in a variety of public databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of such databases and resulting genetic research is dependent on various scientific interpretations and it is not expected that global genetic research efforts will result in standardized genetic sequence databases for particular genomes in the near future.

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        Although we have implemented ongoing internal quality control efforts to help ensure the quality and accuracy of our products, the fundamental nature of our products requires us to rely on genetic sequence databases and scientific interpretations which are continuously evolving. As a result, these variables may cause us to develop and manufacture products that incorporate sequence errors or ambiguities. The magnitude and importance of these errors depends on multiple and complex factors that would be considered in determining the appropriate actions required to remedy any inaccuracies. Our inability to timely deliver acceptable products as a result of these factors would likely adversely affect our relationship with customers, and could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Operations

We may not achieve sustained profitability.

        Although we were profitable for the year ended December 31, 2007, we incurred losses each year from our inception through the year ended December 31, 2002 and also for the years ended December 31, 2006 and December 31, 2008. As a result, we had an accumulated deficit of approximately $416.4 million on December 31, 2008. We expect to continue experiencing fluctuations in our operating results and cannot assure sustained profitability.

        If our revenues grow more slowly than we anticipate, or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenues, our business will be materially and adversely affected.

If we do not attract and retain key employees, our business could be impaired.

        To be successful, we must attract and retain qualified scientific, engineering, manufacturing, sales, marketing and management personnel. To expand our research, product development and sales efforts we need additional people skilled in areas such as bioinformatics, organic chemistry, information services, regulatory affairs, manufacturing, sales, marketing and technical support. Competition for these people is intense. If we are unable to hire, train and retain a sufficient number of qualified employees, we will not be able to expand our business or our business could be adversely affected.

        We also rely on our scientific advisors and consultants to assist us in formulating our research, development and commercialization strategy. All of these individuals are engaged by other employers and have commitments to other entities that may limit their availability to us.

We may not realize the expected benefits of our initiatives to reduce costs across our operations.

        We are pursuing and may continue to pursue a number of initiatives to reduce costs across our operations. These initiatives include workforce reductions in certain areas and the rationalization of our facilities. In 2006 and 2007, we implemented workforce reductions in certain areas in Bedford, Massachusetts and Santa Clara, California, respectively. In February 2008, we implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to increase our gross margins. In July 2008, we expanded our restructuring plan to include the closure of our West Sacramento, California facility. We expect the closure of our West Sacramento facility to be substantially complete by the end of the second quarter of 2009. We anticipate that we will incur some level of restructuring charges into 2009 as we continue to implement these initiatives.

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        We may not realize the expected benefits of our current and future initiatives to reduce costs. As a result of these initiatives, we expect to incur restructuring or other charges and we may experience disruptions in our operations, a loss of key personnel and difficulties in delivering products in a timely manner.

        Other factors that could affect our effective tax rate include levels of research and development spending and nondeductible expenses such as stock based compensation or merger related expenditures, and ultimate outcomes of income tax audits.

The recent financial crisis could negatively affect our business, results of operations, and financial condition.

        The recent financial crisis affecting the banking system and financial markets and the going concern threats to investment banks and other financial institutions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit and equity markets. Continued market turbulence may adversely affect our liquidity and financial condition and that of our customers. If these market conditions persist, they may limit our ability, and the ability of our customers, to obtain short-term financing or to access the capital markets to meet liquidity needs and invest in new technologies. In addition, there could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies; counterparty failures negatively impacting our treasury operations; increased expense or inability to obtain short-term financing of our operations from the issuance of commercial paper; and increased impairments from the inability of investee companies to obtain financing.

Due to the international nature of our business, political or economic changes or other factors could harm our business.

        A significant amount of our revenue is currently generated from sales outside the United States. Though such transactions are denominated in both U.S. dollars and foreign currencies, our future revenue, gross margin, expenses and financial condition are still affected by such factors as changes in foreign currency exchange rates; unexpected changes in, or impositions of, legislative or regulatory requirements, including export and trade barriers and taxes; longer payment cycles and greater difficulty in accounts receivable collection. We are also subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, potential hostilities and changes in diplomatic and trade relationships. We cannot assure investors that one or more of the foregoing factors will not have a material adverse effect on our business, financial condition and operating results or require us to modify our current business practices.

Our effective tax rate may vary significantly.

        Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. Significant estimates and judgments are required in determining our worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

        Certain jurisdictions have lower tax rates, and the amount of earnings in these jurisdictions may fluctuate. If we do not have profitable operations in these jurisdictions, our tax rate could be adversely impacted. Changes in tax laws and regulatory requirements in the countries in which we operate could have a material impact on our tax provision. To the extent that we are unable to continue to reinvest a substantial portion of our profits in our foreign operations, we may be subject to additional effective income tax rate increases in the future. Tax authorities may challenge the allocation of profits between our subsidiaries and we may not prevail in any such challenge. If we were not to prevail, we could be subject to higher tax rates or double tax.

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        We rely on our ability to project future taxable income to assess the likelihood that our net deferred tax asset will be realized. To the extent we believe that realization is not more likely than not, we establish a valuation allowance. Significant estimates are required in determining any valuation allowance to be recorded against our net deferred tax assets. Changes in the amount of valuation allowance required may adversely impact our financial results of operations. For example, in 2008, we recorded an increase of $75.1 million to our valuation allowance against our net deferred tax assets.

We may be required to record a significant charge to earnings if our goodwill or other identified intangible assets become impaired.

        Current accounting rules require that goodwill be assessed for impairment at least annually or whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. Factors that may be considered a change in circumstance indicating the carrying value of our intangible assets, including goodwill, may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization, and negative industry or economic trends. Additionally, we periodically evaluate the recoverability and the amortization period of our acquired technology rights.

        In the fourth quarter of 2008, the decline in our stock price led to the market value falling below our net equity value. The decline, along with other conditions in our business, are defined as indicators of impairment of goodwill and other intangibles under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles. Therefore, we were required to assess whether or not an impairment of our intangible assets had occurred by conducting an evaluation of the fair market value of these and other assets, including our deferred tax assets. Based on our analysis, we recorded a goodwill impairment charge of $239.1 million and other intangible assets impairment of $5.5 million.

        If economic conditions in our industry continue to deteriorate and adversely affect our business, we could be required to record further impairment charges related to our intangible assets which could harm our results of operations and financial condition.

Risks Related to Our Investments

Our strategic equity investments may result in losses.

        We periodically make strategic equity investments in various publicly traded and non-publicly traded companies with businesses or technologies that may complement our business. The market values of these strategic equity investments may fluctuate due to market conditions and other conditions over which we have no control. Other-than-temporary declines in the market price and valuations of the securities that we hold in other companies would require us to record losses relative to our ownership interest. This could result in future charges on our earnings and as a result, it is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.

Global credit and financial market conditions could negatively impact the value of our current portfolio of cash equivalents or short-term investments and our ability to meet our financing objectives.

        Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or short-term investments since December 31, 2008, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or

26

short-term investments or our ability to meet our financing objectives. Other-than-temporary declines in the market price and valuation of any of our short-term investments would require us to adjust the carrying value of the investment through an impairment charge.

Risks Related to Government Regulation and Litigation

We may not successfully obtain or retain regulatory approval of any diagnostic or other product or service that we or our collaborative partners develop.

        The FDA must approve certain in-vitro diagnostic products before they can be marketed in the U.S. Certain in-vitro diagnostic products must also be approved by the regulatory agencies of foreign governments or jurisdictions before the product can be sold outside the U.S. Commercialization of our and our collaborative partners' in-vitro diagnostic products outside of the research environment that may depend upon successful completion of clinical trials. Clinical development is a long, expensive and uncertain process and we do not know whether we, or any of our collaborative partners, will be permitted to undertake clinical trials of any potential in-vitro diagnostic products. It may take us or our collaborative partners many years to complete any such testing, and failure can occur at any stage. Delays or rejections of potential products may be encountered based on changes in regulatory policy for product approval during the period of product development and regulatory agency review. Moreover, if and when our projects reach clinical trials, we or our collaborative partners may decide to discontinue development of any or all of these projects at any time for commercial, scientific or other reasons. Any of the foregoing matters could have a material adverse effect on our business, financial condition and results of operations.

        Even where a product is exempted from FDA clearance or approval, the FDA may impose restrictions as to the types of customers to which we can market and sell our products. Such restrictions may materially and adversely affect our business, financial condition and results of operations.

        Medical device laws and regulations are also in effect in many countries, ranging from comprehensive device approval requirements to requests for product data or certifications. The number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining our foreign regulatory approvals. In addition, the export by us of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA or other export restrictions.

Healthcare reform and restrictions on reimbursements may limit our returns on molecular diagnostic products that we may develop with our collaborators.

        We are currently developing diagnostic and therapeutic products with our collaborators. The ability of our collaborators to commercialize such products may depend, in part, on the extent to which reimbursement for the cost of these products will be available under U.S. and foreign regulations that govern reimbursement for clinical testing services by government authorities, private health insurers and other organizations. In the U.S., third-party payer price resistance, the trend towards managed health care and legislative proposals to reform health care or reduce government insurance programs could reduce prices for health care products and services, adversely affect the profits of our customers and collaborative partners and reduce our future royalties.

Risks related to handling of hazardous materials and other regulations governing environmental safety

        Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous and radioactive materials and the generation, transportation and storage of waste. We could discover that we or an acquired business is not in material compliance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us,

27

whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.

We may be exposed to liability due to product defects.

        The risk of product liability claims is inherent in the testing, manufacturing, marketing and sale of human diagnostic and therapeutic products. We may seek to acquire additional insurance for clinical liability risks. We may not be able to obtain such insurance or general product liability insurance on acceptable terms or in sufficient amounts. A product liability claim or recall could have a serious adverse effect on our business, financial condition and results of operations.

Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our products.

        Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our molecular diagnostic products, which could have a material adverse effect on our business, financial condition and results of operations.

The matters relating to our internal review of our historical stock option granting practices and the restatement of our consolidated financial statements may have a material adverse effect on us.

        During 2006, we conducted an internal review, performed under the direction of our Audit Committee of the Board of Directors, of our historical stock option granting practices from January 1, 1997 through May 31, 2006. As a result of this review, we restated our consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 to record additional non-cash stock-based compensation expense and the related tax impact resulting from stock options granted during fiscal years 1997 to 1999. We have been, and may in the future be, subject to litigation or other proceedings or actions arising in relation to our historical stock option granting practices and the restatement of our prior period financial statements. For example, three purported derivative lawsuits have been filed against us and several of our current and former officers and directors alleging that the defendants breached their fiduciary duty by backdating stock option grants, as well as violations of federal securities laws in connection with the dissemination of our financial and proxy statements, violations of Generally Accepted Accounting Principles, violations of Section 162(m) of the Internal Revenue Code and violations of state law including violation of the California Corporations Code. For additional information our shareholders' derivative lawsuits, refer to Note 13 to the Consolidated Financial Statements in Item 8, Commitments and Contingencies of this Form 10-K for further information.

Risks Related to Our Intellectual Property

Our success will require that we establish a strong intellectual property position and that we can defend ourselves against intellectual property claims from others.

        Maintaining a strong patent position is critical to our business. Litigation on these matters has been prevalent in our industry and we expect that this will continue. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and the extent of future protection is highly uncertain, so we cannot assure you that the patent rights that we have or may obtain will be valuable. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, we will have to

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participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot assure you that our patent applications will have priority over those filed by others. Also, our intellectual property may be subject to significant administrative and litigation proceedings such as opposition proceedings against our patents in Europe, Japan and other jurisdictions. Because of the size and breadth of our patent portfolio we may or may not choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities.

        If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations. Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. For example, we currently are engaged in litigation regarding intellectual property rights with third parties. For additional information concerning intellectual property litigation and administrative proceedings, refer to Note 13 to the Consolidated Financial Statements in Item 8, Commitments and Contingencies of this Form 10-K for further information.

        In addition to patent protection, we also rely upon copyright and trade secret protection for our confidential and proprietary information. Such measures may not provide adequate protection for our copyrights, trade secrets or other proprietary information. In addition, we cannot be certain that trade secrets and other proprietary information will not be disclosed, or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose our trade secrets and other proprietary information. There can also be no assurance that we will be able to effectively protect our copyrights, trade secrets or other proprietary information. If we cannot obtain, maintain or enforce intellectual property rights, our competitors may be able to offer probe array systems similar to our GeneChip® technology.

        Our success also depends in part on us neither infringing patents or other proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of third-party patents that may relate to our technology. We routinely receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents.

        There can be no assurance that we will not infringe on these patents or other patents or proprietary rights or that we would be able to obtain a license to such patents or proprietary rights on commercially acceptable terms, if at all.

Risks Related to Our Common Stock

The market price of our common stock has been volatile.

        The market price of our common stock is volatile. During the twelve-month period ending December 31, 2008, the daily volume of our common stock fluctuated from 209,700 to 25,474,600 shares. Moreover, during that period, our common stock traded as low as $2.02 per share and as high as $23.85 per share.

        Furthermore, volatility in the stock price of other companies has often led to securities class action litigation against those companies. Any future securities litigation against us could result in substantial costs and divert management's attention and resources, which could seriously harm our business, financial condition and results of operations.

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Our quarterly results have historically fluctuated significantly and may continue to do so. Failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our stock price.

        Our revenues and operating results may fluctuate significantly due in part to factors that are beyond our control and which we cannot predict. The timing of our customers' orders may fluctuate from quarter to quarter. Historically, we have experienced customer ordering patterns for GeneChip® instrumentation and GeneChip® arrays where the majority of the shipments occur in the last month of the quarter. These ordering patterns may limit management's ability to accurately forecast our future revenues or product mix. Additionally, license revenue may also be unpredictable and may fluctuate due to the timing of payments of non-recurring licensing fees. Because our expenses are largely fixed in the short to medium term, any material shortfall in revenues will materially reduce our profitability and may cause us to experience losses.

        Because of this difficulty in predicting future performance, our operating results may fall below our own expectations and the expectations of securities analysts or investors in some future quarter or quarters. Our failure in the past to meet these expectations has adversely affected the market price of our common stock and may continue to do so.

        In addition to factors that affect the spending levels of our customers described above, additional factors could cause our operating results to fluctuate, including:

•

competition

•

our inability to produce products in sufficient quantities and with appropriate quality;

•

the frequency of experiments conducted by our customers;

•

our customers' inventory of GeneChip® products;

•

the receipt of relatively large orders with short lead times; and

•

our customers' expectations as to how long it takes us to fill future orders.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        Our corporate headquarters are located in Santa Clara, California, where we lease approximately 200,000 square feet. Our manufacturing facilities are located in West Sacramento, California and Singapore, where we own approximately 170,000 square feet and lease approximately 150,000 square feet, respectively. Additionally, we lease approximately 345,000 square feet of administrative and research and development space in California (Emeryville, Fremont, South San Francisco, Sunnyvale and West Sacramento), Ohio (Warrensville Heights and Maumee), Massachusetts (Bedford), China (Shanghai), Germany (Staufen), Japan (Osaka and Tokyo) and the United Kingdom (Wooburn Green). We believe that our existing properties are in good condition and are suitable for the conduct of our business.

ITEM 3.    LEGAL PROCEEDINGS

        Information pertaining to legal proceedings can be found in "Item 8. Financial Statements and Supplementary Data—Note 13. Commitments and Contingencies" to the consolidated financial statements, and is incorporated by reference herein.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted during the fourth quarter of the year ended December 31, 2008.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

        Our common stock is traded on the Nasdaq Global Market under the symbol of AFFX. The following table sets forth on a per share basis, for the periods indicated, the low and high closing prices of our common stock as reported by the Nasdaq Global Select Market.

	Low		High
2008
First Quarter	$	15.75	$	23.76
Second Quarter	$	10.06	$	17.89
Third Quarter	$	7.38	$	10.72
Fourth Quarter	$	2.16	$	7.81
2007
First Quarter	$	21.72	$	30.07
Second Quarter	$	24.21	$	31.60
Third Quarter	$	22.34	$	28.53
Fourth Quarter	$	20.00	$	27.88

        As of February 20, 2009, there were approximately 366 holders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company ("DTC"). All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and therefore are considered to be held of record by Cede & Co. as one shareholder.

        No dividends have been paid on our common stock. We currently intend to retain all future earnings, if any, for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

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Performance Graph

        The graph below compares the cumulative total return* on our common stock for the period commencing on December 31, 2003 and ending December 31, 2008 compared to the CRSP Total Return Index for the Nasdaq National Market (U.S. companies) and the CRSP Total Return Index for the Nasdaq Pharmaceutical Stocks (SIC 283). The stock price performance shown on the graph below is not necessarily indicative of future price performance.

	12/31/2003		12/31/2004		12/31/2005		12/31/2006		12/31/2007		12/31/2008
Affymetrix, Inc.		100.0		148.5		194.0		93.7		94.0		12.1
Nasdaq Stock Market (U.S. Companies)		100.0		108.8		111.2		122.1		132.4		63.8
Nasdaq Pharmaceuticals Stocks (SIC 283)		100.0		106.5		117.3		114.8		120.7		112.3

•

Assumes $100 invested on December 31, 2003 in our common stock and in each index listed above. The total return for our common stock and the indices used assumes the reinvestment of dividends, even though dividends have never been declared on our common stock.

        The information under the caption "Performance Graph" is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of Affymetrix under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this 10-K and irrespective of any general incorporation language in such filings.

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ITEM 6.    SELECTED FINANCIAL DATA

        The following selected historical consolidated financial information has been derived from our audited consolidated financial statements. The information below is not necessarily indicative of future operations and should be read in conjunction with Item 1A, "Risk Factors," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data" of this Form 10-K in order to fully understand the factors that may affect the comparability of the information presented below:

	Year Ended December 31,
	2008			2007		2006			2005		2004
	(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Total revenue	$	410,249		$	371,320	$	355,317		$	367,602	$	345,962
(Loss) income from operations		(242,539	)		6,080		(18,545	)		57,413		59,719
Net (loss) income(1)	$	(307,919	)	$	12,593	$	(13,704	)	$	65,787	$	47,608
Basic net (loss) income per common share	$	(4.49	)	$	0.18	$	(0.20	)	$	1.03	$	0.79
Diluted net (loss) income per common share	$	(4.49	)	$	0.17	$	(0.20	)	$	0.96	$	0.74
Consolidated Balance Sheet Data:
Cash, cash equivalents, and available-for-sale securities	$	397,739		$	584,274	$	247,752		$	284,932	$	205,715
Working capital		420,768			583,067		290,302			349,679		226,211
Total assets(2),(3)		713,310			1,133,591		781,215			775,094		499,771
Long-term obligations(4),(5)		330,896			451,143		134,662			139,790		153,845

(1)

In 2008, we recognized a goodwill impairment charge of $239.1 million that was presented in a single line item labeled "Goodwill impairment charges" in our Consolidated Statements of Operations. Additionally, we recognized approximately $43.7 million, $15.3 million, and $13.5 million in 2008, 2007, and 2006, respectively, of expense related to our restructuring plans that was presented in a single line item labeled "Restructuring charges" in our Consolidated Statements of Operations.

(2)

On October 21, 2005, we completed the $122.4 million acquisition of ParAllele BioScience, Inc. ("ParAllele"), a provider of comprehensive genetic discovery solutions to the life science research, pharmaceutical and diagnostic sectors.

In 2008, we completed the acquisitions of USB Corporation ("USB"), True Materials, Inc. ("TMI"), and Panomics, Inc. for approximately $163.0 million

(3)

In 2004, we redeemed a total of $267.5 million of our convertible notes which were previously recorded in short-term obligations.

(4)

In November 2007, we issued $316.3 million principal amount of 3.50% senior convertible notes.

(5)

In December 2008, a total of $119.9 million of our convertible debt was redeemed for cash as investors exercised their put right.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.

        This discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including "Item 1: Business"; "Item 1A: Risk Factors"; "Item 6: Selected Financial Data"; and "Item 8: Financial Statements and Supplementary Data." The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. Our actual results may differ materially.

Overview

        We are engaged in the development, manufacture, sale and service of consumables and systems for genetic analysis in the life sciences and clinical healthcare markets. There are a number of factors that influence the size and development of our industry, including: the availability of genomic sequence data for human and other organisms, technological innovation that increases throughput and lowers the cost of genomic and genetic analysis, the development of new computational techniques to handle and analyze large amounts of genomic data, the availability of government and private funding for basic and disease-related research, the amount of capital and ongoing expenditures allocated to research and development spending by biotechnology, pharmaceutical and diagnostic companies, the application of genomics to new areas including molecular diagnostics, agriculture, human identity and consumer goods, and the availability of genetic markers and signatures of diagnostic value.

        We have established our GeneChip® system as the platform of choice for acquiring, analyzing and managing complex genetic information. Our integrated GeneChip® platform includes disposable DNA probe arrays (chips) consisting of gene sequences set out in an ordered, high density pattern; certain reagents for use with the probe arrays; a scanner and other instruments used to process the probe arrays; and software to analyze and manage genomic information obtained from the probe arrays. We currently sell our products directly to pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies as well as academic research centers, government research laboratories, private foundation laboratories and clinical reference laboratories in North America and Europe. We also sell our products through life science supply specialists acting as authorized distributors in Latin America, India, the Middle East and Asia Pacific regions, including China. The following overview describes two of the key elements of our business strategy and our goals:

        Increase top-line revenue growth.    We intend to generate top-line revenue growth through the successful commercialization of our technologies and expansion of our customer base, including leveraging our technologies into new markets and through the acquisition of other companies, products and technology. We also believe that the genotyping market will continue to be one of the most attractive growth opportunities in life sciences and that new content packaged in versatile formats will drive growth for years to come. These opportunities include emerging cytogenetic and copy number diagnostics and our new Drug Metabolizing Enzymes and Transporters (DMET) product which we believe addresses a significant unmet need for our pharmaceutical partners.

        Improve operating efficiency.    Starting in February 2008 we implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to decrease our cost of manufacturing and operating expenses. We intend to move by mid 2009 our probe array manufacturing to our Singapore facility and our reagent manufacturing to our Cleveland facility. During 2008 we also terminated certain research and development programs and made reductions in selling, marketing, general and administrative areas. In connection with these efforts, during 2008 we incurred total

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non-cash charges of approximately $37.1 million related to the abandonment of certain long-lived assets and expenses of approximately $5.8 million related to employee severance.

        Targeted acquisitions to expand our market opportunities.    In addition to continued innovation, we are also pursuing acquisitions to expand our market opportunities. In 2008, we completed three acquisitions. The first was USB which is expected to accelerate next-generation reagents that will be used with new products that we have in development. The second was TMI which develops digitally encoded microparticle technology that is applicable to the research, applied, and diagnostic markets and is expected to enable us to enter low to mid-multiplex markets. The third was Panomics which is expected to enable us to provide customers with a suite of assay products for a wide variety of low- to mid-plex genetic, protein and cellular analysis applications.

CRITICAL ACCOUNTING POLICIES & ESTIMATES

General

        The following section of Management's Discussion and Analysis of 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 these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        Our significant accounting policies are fully described in Note 2 to our consolidated financial statements. However, certain accounting policies are particularly important to the reporting of our financial position and results of operations and require the application of significant judgment by our management. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the consolidated financial statements.

REVENUE RECOGNITION

        We enter into contracts to sell our products and, while the majority of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, 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 value of the arrangement should be allocated among the deliverable elements, when and how to recognize revenue for each element, and the period over which revenue should be recognized. We recognize revenue for delivered elements only when the fair values of undelivered elements are known and customer acceptance, if required, has occurred. Changes in the allocation of the sales price between delivered to undelivered elements might impact the timing of revenue recognition, but would not change the total revenue recognized on any arrangement.

ACCOUNTS RECEIVABLE

        We evaluate the collectability of our trade receivables based on a combination of factors. We regularly analyze our significant customer accounts, and, when we become aware of a specific

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customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position, we record specific bad debt allowances to reduce the related receivable to the amount we reasonably believe is collectible. We also record allowances for bad debt on a small portion of all other customer balances based on a variety of factors, including the length of time the receivables are past due, the financial health of the customer, macroeconomic considerations and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted.

INVENTORIES

        We enter into inventory purchases and commitments so that we can meet future shipment schedules based on forecasted demand for our products. The business environment in which we operate is subject to rapid changes in technology and customer demand. We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues. Based on this analysis, we record adjustments to inventory for potentially excess, obsolete or impaired goods, when appropriate, in order to report inventory at net realizable value. Revisions to our inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates.

NON-MARKETABLE EQUITY SECURITIES

        As part of our strategic efforts to gain access to potential new products and technologies, we invest in equity securities of certain private biotechnology companies. Our non-marketable equity securities are carried at cost unless we determine that an impairment that is other than temporary has occurred, in which case we write the investment down to its impaired value. We periodically review our investments for impairment; however, the impairment analysis requires significant judgment in identifying events or circumstances that would likely have significant adverse effect on the fair value of the investment. The analysis may include assessment of the investee's (i) revenue and earnings trend, (ii) business outlook for its products and technologies, (iii) liquidity position and the rate at which it is using its cash, and (iv) likelihood of obtaining subsequent rounds of financing. If an investee obtains additional funding at a valuation lower than our carrying value, we presume that the investment is other than temporarily impaired. We have experienced impairments in our portfolio due to the decline in the value of certain of our non-marketable investments over the past few years.

GOODWILL AND ACQUIRED TECHNOLOGY RIGHTS

        Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired arising from business combinations. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), goodwill is subject to impairment tests annually, and on an interim basis if indicators of potential impairment exist.

        As of December 31, 2007 and 2006, goodwill related to the acquisition of Neomorphic in October 2000 and the acquisition of ParAllele in October 2005. In 2008, we made three acquisitions and recorded a total of $114.0 million, net of additional goodwill. As of December 31, 2008, we performed our annual goodwill impairment analysis and determined that goodwill was impaired. We recorded goodwill impairment charges of $239.1 million, which included the goodwill amounts associated with its three acquisitions in 2008, in the line labeled "Goodwill impairment charges" in the Consolidated Statements of Operations during the year ended December 31, 2008. Refer to Note 10, "Goodwill and Acquired Technology Rights", for further information.

        Acquired technology rights are carried at cost less accumulated amortization and are comprised of licenses to technology covered by patents held by third parties or acquired by the Company.

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Amortization is computed over the estimated useful life of the underlying patents, which has historically ranged from one to thirteen years. SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. As of December 31, 2008, we performed an impairment analysis or our identified intangible assets and as a result of that analysis, recognized an impairment loss on acquisition-related intangible assets of $5.5 million of which $1.9 million was included as a component of "Cost of product sales", $3.2 million was included as a component of "Research and development", and $0.4 million was included as a component of "Selling, general and administration" expenses in the Consolidated Statements of Operations under during the year ended December 31, 2008. Refer to Note 10, "Goodwill and Acquired Technology Rights", for further information.

        The determination as to whether a write-down of goodwill and other intangible assets, including acquired technology rights, is necessary involves significant judgment based on short-term and long-term projections of our operations. The assumptions supporting the estimated future cash flows of the reporting unit, including profit margins, long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, discount rates and terminal growth rates, reflect our best estimates.

IMPAIRMENT OF LONG-LIVED ASSETS

        Long-lived assets and certain identifiable intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. In connection with the Company's restructuring activities in 2008, the Company wrote-down the value of certain of its property and equipment by approximately $37.1 million which was included as a component of "Restructuring charges" in the Consolidated Statements of Operations during the year ended December 31, 2008. Refer to Note 3, "Restructuring", for further information.

INCOME TAXES

        Income tax expense is based on pretax financial accounting income. Under the asset and liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We must assess the likelihood that the resulting deferred tax assets will be realized. To the extent we believe that realization is not more likely than not, we establish a valuation allowance. Significant estimates are required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our deferred tax assets. For example, in 2008, we recorded an increase of $75.1 million to our valuation allowance against our net deferred tax assets and have placed a full valuation allowance on U.S. deferred tax assets, net of FIN 48 reserves, as a result of negative evidence based on our cumulative net loss position. Some of these estimates are based on interpretations of existing tax laws or regulations. We believe that our estimates are reasonable and that our reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of our deferred tax assets or liabilities, future levels of research and development spending, nondeductible expenses, changes in overall levels, character, geographical mix of pretax earnings, and ultimate outcomes of income tax audits.

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        In December 2007, the FASB issued SFAS No. 141R, Business Combinations ("SFAS 141R"). The accounting treatment related to pre-acquisition uncertain tax positions will change when SFAS No. 141R becomes effective, which will be in first quarter of our fiscal year 2009. See "Recent Accounting Pronouncements" under Summary of Significant Accounting Policies included in the Consolidated Financial Statements in this annual report for further discussion.

        The total amount of unrecognized tax benefits as of December 31, 2008 was approximately $18.5 million. If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $1.4 million. As of December 31, 2008, we do not anticipate any material changes to the amount of unrecognized tax benefit during the next 12 months.

        We classify interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2008, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.1 million for a total cumulative amount of $0.3 million of non-current income taxes payable as of December 31, 2008.

        We file U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 1992 through 2008 tax years generally remain subject to examination by federal and state tax authorities. In significant foreign jurisdictions, the 2005 through 2008 tax years generally remain subject to examination by their respective tax authorities.

CONTINGENCIES

        We are subject to legal proceedings principally related to intellectual property matters. Based on the information available at the balance sheet dates, we assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. If losses are probable and reasonably estimable, we will record a reserve in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for Contingencies. Any reserves recorded may change in the future due to new developments in each matter.

ACCOUNTING FOR STOCK-BASED COMPENSATION

        We account for employee stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment ("SFAS 123R"). Under the provisions of SFAS 123R, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected term, volatility and forfeiture rates of the awards. The expected stock price volatility assumption was determined using a combination of historical and implied volatility of our common stock. We determined that blended volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods.

        SFAS 123R requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. Accordingly, in 2008, we recognized employee stock-based compensation of $7.6 million—$1.3 million in cost of product sales, $1.7 million in research and development expense and $4.6 million in selling, general and administrative expenses. We adopted SFAS 123R on a modified prospective basis. As of December 31, 2008, $32.9 million of total unrecognized compensation cost related to non-vested employee stock awards not yet recognized is expected to be allocated to cost of products sales and operating expenses over a weighted-average period of 3.1 years.

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        There was no stock-based compensation expense related to employee stock options recognized under SFAS 123R during the fiscal years prior to 2006.

RESTRUCTURING

        In recent years we engaged in, and may continue to engage in, restructuring actions, which require management to utilize significant estimates related to expenses for severance and other employee separation costs, lease cancellation, realizable values of assets that may become duplicative or obsolete, and other exit costs. If the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted. Refer to Note 3, "Restructuring", for further information.

RECENT ACCOUNTING PRONOUNCEMENTS

        In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

        In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity's derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We are currently assessing the impact of SFAS 161 on its consolidated results of operations and financial condition.

        Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements ("SFAS 157"). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

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Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

        The adoption of SFAS 157 did not have a material effect on our financial position, results of operations, or cash flows.

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        In October 2008, the FASB issued FSP 157-3 Determining Fair Value of a Financial Asset in a Market That Is Not Active ("FSP 157-3"). FSP 157-3 clarified the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have a material impact on our consolidated results of operations and financial condition.

        In December 2007, the FASB issued SFAS No. 141R, Business Combinations ("SFAS 141R"). SFAS 141R amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. The implementation of this standard did not have a material impact on our consolidated results of operations and financial condition.

        In December 2007 the FASB issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements ("EITF 07-1"). EITF 07-1 defines collaborative arrangements and requires that transactions with third parties that do not participate in the arrangement be reported in the appropriate income statement line items pursuant to the guidance in EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Income statement classification of payments made between participants of a collaborative arrangement are to be based on other applicable authoritative accounting literature. If the payments are not within the scope or analogy of other authoritative accounting literature, a reasonable, rational and consistent accounting policy is to be elected. EITF 07-1 is to be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. We do not anticipate that the adoption of this statement will have a material impact on our financial position, results of operations, or cash flows.

        In November 2008, the FASB issued EITF Issue No. 08-7, Accounting for Defensive Intangible Assets ("EITF 08-7"). EITF 08-7 addresses the accounting for assets acquired in a business combination or asset acquisition that an entity does not intend to actively use, otherwise referred to as a 'defensive asset.' EITF 08-7 requires defensive intangible assets to be initially accounted for as a separate unit of accounting and not included as part of the cost of the acquirer's existing intangible asset(s) because it is separately identifiable. EITF 08-7 also requires that defensive intangible assets be assigned a useful life in accordance with paragraph 11 of SFAS 142. We do not anticipate that the adoption of this statement will have a material impact on our financial position, results of operations, or cash flows.

RESULTS OF OPERATIONS

        The following discussion compares the historical results of operations for the years ended December 31, 2008, 2007 and 2006.

PRODUCT SALES

        The components of product sales are as follows (in thousands, except percentage amounts):

		Year ended December 31,						Dollar change from						Percentage change from
		2008		2007		2006		2007			2006			2007			2006
Consumables		$	248,903	$	253,150	$	228,336	$	(4,247	)	$	24,814			(2	)%		11	%
Instruments			21,489		38,678		47,101		(17,189	)		(8,423	)		(44	)		(18	)
	Total product sales	$	270,392	$	291,828	$	275,437	$	(21,436	)	$	16,391			(7	)		6

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        Total product sales decreased $21.4 million or 7% in 2008 as compared to 2007. Consumables sales decreased primarily due to a decline in volumes across most of the consumables product line, partially offset by higher consumables average selling prices due to mix shift to higher average selling priced products as well as higher reagents volumes associated with the acquisition of USB. In addition, instrument sales declined primarily due to a decrease in unit sales of our Probe Array systems and GeneChip® Scanners.

        Total product sales increased $16.4 million or 6% in 2007 as compared to 2006. Consumables increased primarily due to the consumables growth in unit sales. This increase was partially offset by a decrease in the average consumables selling price due to the implementation of our strategy to grow market share in the genotyping market. Instrument sales decreased primarily due to a decline of $4.0 million because of a drop in the average selling price of our GeneChip® Scanner 3000 and a decrease of $4.4 million primarily due to reduction in unit sale

        Consumable sales for the years ended December 31, 2008, 2007 and 2006 include $0.8 million, $12.0 million and $14.7 million, respectively, of revenue from Perlegen Sciences, Inc. ("Perlegen"), a related party.

SERVICES (in thousands, except percentage amounts)

	Year ended December 31,						Dollar change from						Percentage change from
	2008		2007		2006		2007			2006			2007			2006
Services	$	32,096	$	38,074	$	40,397	$	(5,978	)	$	(2,323	)		(16	)%		(6	)%

        Total services revenue decreased in 2008 as compared to 2007 primarily due to a decrease of $7.9 million in our genotyping services business because of the variable timing of projects, partially offset by an increase of $1.9 million in instrument service revenue.

        Total services revenue decreased in 2007 as compared to 2006 primarily due to a decrease of $3.4 million in our genotyping services business, partially offset by an increase of $1.1 million in instrument service revenue.

ROYALTY AND OTHER REVENUE (in thousands, except percentage amounts)

	Year ended December 31,						Dollar change from				Percentage change from
	2008		2007		2006		2007		2006		2007			2006
Royalties and other revenue	$	107,761	$	41,418	$	39,483	$	66,343	$	1,935		160	%		5	%

        Royalties and other revenue increased in 2008 as compared to 2007 primarily due to a non-recurring $90 million intellectual property payment received in January 2008, partially offset by higher license and grant revenue recognized in 2007. In January 2003, under the terms of an expanded collaboration agreement, Roche paid us an access fee of $70 million, which we recognized as a component of product related revenue in license fees over the research and development period of approximately five years. The amortization of this access fee was completed in 2007.

        Our royalties and other revenues are primarily dependent on the issuance of new licenses and other intellectual property payments, which may fluctuate. For example, other than the $90 million non-recurring payment received in 2008, we have been seeing an overall decrease in the revenues earned from licensing our technology and we expect that trend to continue in 2009.

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PRODUCT AND SERVICES GROSS MARGINS (in thousands, except percentage amounts)

	Year ended December 31,									Dollar/Point change from
	2008			2007			2006			2007			2006
Total gross margin on product sales	$	143,483		$	182,944		$	175,636		$	(39,461	)	$	7,308
Total gross margin on services		6,975			8,472			11,446			(1,497	)		(2,974	)
Product gross margin as a percentage of products sales		53	%		63	%		64	%		(10	)		(1	)
Service gross margin as a percentage of services		22	%		22	%		28	%		—			(6	)

        The decrease in product gross margin in 2008 as compared to 2007 is primarily due to asset impairments and restructuring related to the closing of our West Sacramento manufacturing facility, unfavorable factory utilization due to lower production volumes and a mix shift to lower margin instruments products. These decreases were partially offset by favorable consumable average selling prices due to a mix shift to higher margin products.

        Gross margin on product sales for the years ended December 31, 2008, 2007 and 2006 includes $0.4 million, $7.3 million and $9.5 million, respectively, of gross margin from Perlegen.

        The decrease in product gross margin in 2007 as compared to 2006 is primarily due to the following factors: a decline in the average selling price for our consumables and instrumentation products as well as lower factory utilization from ramping up our Singapore operations without corresponding volume growth.

        The decrease in service gross margin in 2007 as compared to 2006 is primarily due to lower capacity utilization from the decrease in the genotyping services volume.

RESEARCH AND DEVELOPMENT EXPENSES (in thousands, except percentage amounts)

	Year ended December 31,						Dollar change from					Percentage change from
	2008		2007		2006		2007		2006			2007			2006
Research and development	$	84,482	$	72,740	$	86,296	$	11,742	$	(13,556	)		16	%		(16	)%

        The increase in research and development expenses in 2008 as compared to 2007 was primarily due to higher headcount related expenses and increased spending for supplies and outside services. Also included in 2008 is an asset impairment charge of $3.2 million.

        The decrease in research and development expenses in 2007 as compared to 2006 was primarily due to a $4.9 million decrease in supplies and purchased services due to cost cutting measures and re-prioritization of projects, a $2.7 million decrease in total compensation and benefits due to a reduction in headcount, and a decrease in stock-based compensation expense of $1.6 million.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (in thousands, except percentage amounts)

	Year ended December 31,						Dollar change from						Percentage change from
	2008		2007		2006		2007			2006			2007			2006
Selling, general and administrative	$	127,161	$	138,488	$	145,126	$	(11,327	)	$	(6,638	)		(8	)%		(5	)%

        The decrease in selling, general and administrative expenses in 2008 as compared to 2007 was primarily due to a decrease in bonus and sales incentive based payments plus lower stock option based expenses.

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        The decrease in selling, general and administrative expenses in 2007 as compared to 2006 was primarily due to cost cutting efforts including $6.9 million of lower legal expenses, $6.0 million of lower headcount related costs and $2.8 million of lower stock-based compensation expense. These decreases were partially offset by an increase in variable compensation due to our improved operating results.

ACQUIRED IN-PROCESS TECHNOLOGY (in thousands, except percentage amounts)

	Year ended December 31,						Dollar change from				Percentage change from
	2008		2007		2006		2007		2006		2007			2006
Acquired in-process technology	$	6,200	$	—	$	—	$	6,200	$	—		100	%		—	%

        For each business acquisition, we determined the estimated fair value of certain research and development programs in-process at the acquisition date that had not yet reached technological feasibility and had no alternative future use and recorded approximately $0.8 million, $5.1 million and $0.3 million related to the acquisition of USB, TMI and Panomics, respectively, in the line item "Acquired in-process technology" in the Company's Consolidated Statements of Operations.. The fair values of these projects were determined using the Income Approach whereby we estimated each project's related future net cash flows. This discount rate is based on our estimated weighted average cost of capital adjusted upward for the risks associated with the projects acquired. The projected cash flows from the acquired projects were based on estimates of revenues and operating profits related to the projects of each acquired company considering the stage of development of each potential product acquired, the time and resources needed to complete the development and approval of each product, the life of each potential commercialized product and the inherent difficulties and uncertainties in developing products and services based on complex genetic technologies and biochemical processes.

        The largest research and development program in-process at the acquisition date primarily was the microRNA profiling project undertaken by TMI. The fair value of this project was determined using the Income Approach whereby we estimated the project's related future net cash flows between 2009 and 2015 and discounted them to their present value using a risk adjusted discount rate of approximately 30%. This discount rate is based on our estimated weighted average cost of capital adjusted upward for the risks associated with the project acquired. We expect to complete this project in fiscal 2009.

        The estimates used by us in valuing the licensed technologies and acquired in process technologies were based upon assumptions we believe to be reasonable but which are inherently uncertain and unpredictable. Our assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the projected results.

RESTRUCTURING (in thousands, except percentage amounts)

	Year ended December 31,						Dollar change from				Percentage change from
	2008		2007		2006		2007		2006		2007			2006
Restructuring	$	43,707	$	15,296	$	13,497	$	28,411	$	1,799		186	%		13	%

Fiscal 2008 Restructuring Plan

        In February 2008, we committed to a restructuring plan (the "2008 Plan") designed primarily to optimize our production capacity and cost structure and improve our future gross margins. The plan involves the closure of our West Sacramento manufacturing facility after which all of our products will

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be manufactured at our Singapore and Ohio facilities, as well as by third parties. We expect the closure of the West Sacramento facility to be substantially complete by the end of the second quarter of 2009.

        We estimate the total restructuring expenses to be incurred in connection with the 2008 Plan will be approximately $45.4 million. Of this total, approximately $8.2 million relates to employee severance and $37.2 million relates to non-cash charges associated with the abandonment and impairment of certain long-lived manufacturing assets. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), the costs relating to employee severance and relocation are being recognized as expense over the remaining service periods of the employees.

        The cash outlays to be incurred in connection with the 2008 Plan are estimated to be approximately $8.2 million. During the year ended December 31, 2008, we recognized approximately $5.8 million of expense for employee termination benefits associated with the 2008 Plan and $37.1 million of non-cash charges related to the abandonment and impairment of certain manufacturing assets. These expenses are presented as a component of "Restructuring charges" in our Consolidated Statements of Operations.

        In addition to the $45.4 million of restructuring costs noted above, we expect to incur a total of approximately $18.9 million of restructuring related costs through the second quarter of 2009 to be included as a component of "Cost of product sales" in our Consolidated Statements of Operations. Of this total, $12.4 million relates to accelerated depreciation charges associated with the continued use of certain long-lived manufacturing assets and $6.5 million relates to manufacturing transition and other costs.

Fiscal 2007 Restructuring Plan

        In July 2007, we announced that we were consolidating an administrative facility located in Sunnyvale, California into our main campus in Santa Clara, California (the "2007 Plan"). Additionally, in August and December 2007, we terminated certain employees in the research and development and selling, general and administrative functions. The Sunnyvale, California facility was vacated during the fourth quarter of 2007. The estimated cash outlays to be incurred in connection with these restructuring activities were approximately $4.6 million. During the year ended December 31, 2008, we recognized approximately $0.5 million related to contract termination costs and employee termination benefits associated with the 2007 Plan. During the year ended December 31, 2007, the Company recognized approximately $4.2 million of expense primarily related to employee termination benefits and contract termination costs associated with the 2007 Plan.

44

Fiscal 2006 Restructuring Plan

        In 2006, we initiated a restructuring plan (the "2006 Plan") to better align certain of our expenses with our current business outlook. Our primary focus of the 2006 Plan was in the general and administrative functions and included rationalizing our facilities. Cash outlays incurred in connection with these restructuring activities are estimated to be approximately $16.8 million. During the year ended December 31, 2008, the amount of expense recognized associated with the 2006 Plan was not material. During the years ended December 31, 2007 and 2006, the Company recognized approximately $11.1 million and $13.5 million of expense primarily related to employee termination benefits and contract termination costs associated with the 2006 Plan, respectively.

GOODWILL IMPAIRMENT CHARGES (in thousands, except percentage amounts)

	Year ended December 31,						Dollar change from				Percentage change from
	2008		2007		2006		2007		2006		2007			2006
Goodwill impairment charges	$	239,098	$	—	$	—	$	239,098	$	—		100	%		—	%

        SFAS 142 requires that goodwill be assessed for impairment at least annually or whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. Factors that may be considered a change in circumstance indicating the carrying value of our intangible assets, including goodwill, may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization, and negative industry or economic trends.

        We performed our required annual impairment test in June 2008 and determined that goodwill was not impaired. During the third quarter of 2008, our stock price fell below our net book value per share. The stock price decline, along with other conditions in our business such as decreases in our actual revenues as compared to our forecasted revenues and additional restructuring activities, are defined as indicators of impairment of goodwill and other intangibles under SFAS 142. Accordingly, we were required to assess whether or not an impairment of our intangible assets, including goodwill, had occurred. We performed an interim impairment assessment using a market based approach as of September 30, 2008 and determined that there was no impairment.

        The continued decline of our stock price in the fourth quarter of 2008 and the resulting book value per share being in excess of market value per share, along with other conditions in our business as noted above, were indicators that it was more likely than not that our fair value was less than the carrying value. We performed an interim impairment assessment using a market based approach as of December 31, 2008 and determined that the carrying amount of our goodwill was not recoverable and recorded an impairment charge of $239.1 million which was presented as "Goodwill impairment charges" in the Company's Consolidated Statements of Operations.

45

INTEREST INCOME AND OTHER, NET (in thousands, except percentage amounts)

        The components of interest income and other, net, are as follows:

		Year ended December 31,								Dollar change from						Percentage change from
		2008			2007		2006			2007			2006			2007			2006
Interest income		$	14,579		$	13,812	$	11,283		$	767		$	2,529			6	%		22	%
Realized gain (loss) on equity investments, net			1,201			1,273		(167	)		(72	)		1,440			(6	)		862
Currency (loss) gain, net			(2,188	)		276		3,003			(2,464	)		(2,727	)		(893	)		(91	)
Other			1,037			59		(41	)		978			100			1,658			244
	Total interest income and other, net	$	14,629		$	15,420	$	14,078		$	(791	)	$	1,342			(5	)		10

        Interest income and other, net decreased in 2008 as compared to 2007 primarily due to the recognition of $2.2 million in foreign currency losses and the recognition of a $6.0 million net gain on an equity investment in 2007. This decrease was partially offset by an increase in other income and interest earned on our higher average total cash balances.

        Interest income and other, net increased in 2007 as compared to 2006 primarily due to an increase in our cash and marketable securities balances, higher yields on those balances and the recognition of a $6.0 million net gain on an equity investment. These increases were partially offset by the write-down of a non-marketable equity investment of $3.0 million and a decrease in currency gains.

INTEREST EXPENSE (in thousands, except percentage amounts)

	Year ended December 31,									Dollar change from						Percentage change from
	2008			2007			2006			2007			2006			2007			2006
Interest expense	$	(14,091	)	$	(3,218	)	$	(1,600	)	$	(10,873	)	$	(1,618	)		338	%		101	%

        Interest expense increased for both 2008 as compared to 2007 and 2007 as compared to 2006 as we began recognizing interest expense on our $316.3 million 3.50% senior convertible notes issued in November 2007.

INCOME TAX PROVISION (in thousands, except percentage amounts)

	Year ended December 31,									Dollar change from					Percentage change from
	2008			2007			2006			2007			2006		2007			2006
Income tax provision	$	(65,918	)	$	(5,689	)	$	(7,637	)	$	(60,229	)	$	1,948		1,059	%		(26	)%

        The provision for income taxes in 2008 is more than the 35% U.S. federal statutory rate applied to consolidated income before income taxes primarily due to the recording of a full valuation allowance against our U.S. deferred tax assets, net of FIN 48 reserves. The provision for income taxes in 2007 is less than the 35% U.S. federal statutory rate primarily due to income tax benefits related to federal and state research tax credits in the United States and due to income generated in foreign jurisdictions taxed at a lower rate than the U.S. federal statutory rate. In 2006, the provision for income taxes was more than the 35% U.S. federal statutory rate primarily due to losses incurred in foreign jurisdictions and the tax impact of non-deductible stock-based compensation expenses under SFAS No.123R.

        SFAS No. 109, Accounting for Income Taxes ("SFAS 109") provides for the recognition of deferred tax assets if realization of such assets is more likely than not. As of December 31, 2008, we provided for a valuation allowance of $139.7 million against our net deferred tax assets. We have placed a full valuation allowance on U.S. deferred tax assets, net of FIN 48 reserves, as a result of negative evidence

46

based on our cumulative net loss position. We intend to maintain the valuation allowance until sufficient positive evidence exists to assure realization of these tax benefits through future taxable income.

        As of December 31, 2008, the Company had total net operating loss carryforwards of $207.6 million, comprised of $111.2 million for U.S. federal purposes, which expire in the years 2020 through 2028 if not utilized, and $96.4 million for state purposes, the majority of which expire in the years 2010 through 2018 if not utilized. Utilization of net operating loss carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of the net operating loss before utilization.

LIQUIDITY AND CAPITAL RESOURCES

Cashflow (in thousands)

	Year ended December 31,
	2008			2007			2006
Net cash provided by operating activities	$	83,511		$	32,336		$	31,262
Net cash used in investing activities		(151,062	)		(194,096	)		(22,350	)
Net cash (used in) provided by financing activities		(108,185	)		330,930			9,758
Effect of foreign currency translation on cash and cash equivalents		384			411			157
Net (decrease) increase in cash and cash equivalents	$	(175,352	)	$	169,581		$	18,827

Net Cash Provided by Operating Activities

        Cash provided by operating activities is net (loss) income adjusted for certain non-cash items and changes in operating assets and liabilities. For the year ended December 31, 2008, cash provided by operating activities was comprised of a net loss of $307.9 million and non-cash charges that included goodwill impairment of $239.1 million, a deferred tax asset valuation of $60.1 million, depreciation and amortization of $50.5 million, write-downs and loss on disposal of property and equipment of $37.0 million, stock-based compensation expense of $7.6 million and a charge for acquired in-process technology of $6.2 million.

        After eliminating the impact of the acquisitions, changes in operating assets and liabilities resulted in an increase of cash of approximately $2.9 million for the year ended December 31, 2008. The primary source of cash was a decrease in accounts receivable of $23.8 million. This decrease was primarily due to the $29.0 million reduction of revenue from the fourth quarter of 2007 compared to the fourth quarter of 2008. The primary uses of cash were decreases in accounts payable and accrued liabilities of $15.0 million and deferred revenue of $6.6 million.

Net Cash Used in Investing Activities

        Our investing activities, other than purchases, sales and maturities of available-for-sale securities, primarily consist of capital expenditures, strategic investments and purchased technology rights.

        Cash used for capital expenditures was $13.8 million, $27.4 million and $79.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. Our capital expenditures in 2008 primarily related to our manufacturing facility in Singapore and network upgrades, including the capitalization of cost related to our new enterprise resource planning system. Our capital expenditures in 2007 primarily related to the completion of our manufacturing expansion and the capitalization of our new enterprise resource planning system. Our capital expenditures in 2006 primarily related to our manufacturing expansion in West Sacramento and capital costs related to our new manufacturing facility in Singapore.

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        In 2008, we paid approximately $156.2 million, net of cash acquired, for acquisitions of businesses.

Net Cash Provided by Financing Activities

        Our financing activities for fiscal 2008 primarily consist of the redemption of $119.9 million of our 0.75% senior convertible notes, offset by excess tax benefits for stock-based compensation. Our financing activities for fiscal 2007 primarily consist of the issuance of $316.3 million principal amount of 3.50% senior convertible note due 2038. Interest on the 3.50% senior convertible notes is due January 15^th and July 15^th of each year, beginning July 15, 2008.

        Cash (used) provided by the issuance of stock, net of treasury shares withheld for taxes, under our employee stock plan was less than $(0.1) million, $13.7 million and $9.3 million in 2008, 2007 and 2006, respectively.

Liquidity

        We have financed our operations primarily through product sales, sales of equity and debt securities, collaborative agreements, interest income, and licensing of our technology. As of December 31, 2008, we had cash, cash equivalents, and available-for-sale securities of approximately $397.7 million. We anticipate that our existing capital resources along with the cash to be generated from operations will enable us to maintain currently planned operations, acquisitions and capital expenditures, for the foreseeable future. Capital expenditures are estimated to be approximately $15.0 to $17.0 million for the year ending December 31, 2009.

        However, this expectation is based on our current operating and financing plans, which are subject to change, and therefore we could require additional funding. Factors that may cause us to require additional funding may include: future acquisitions; our ability to maintain existing collaborative and customer arrangements and establish and maintain new collaboration and customer arrangements; the progress of our research and development programs; initiation or expansion of research programs and collaborations; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the effectiveness of product commercialization activities and arrangements; the purchase of patent licenses; and other factors.

        As of December 31, 2008, we have no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements; we will have to raise additional funds to continue the development of our technologies. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our stockholders. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into collaboration agreements on unattractive terms. Our inability to raise capital would have a material adverse effect on our business, financial condition and results of operations.

        From time to time, we may seek to retire, repurchase, or exchange our convertible securities in open market purchases, privately negotiated transactions dependent on market conditions, liquidity, and contractual obligations and other factors.

48

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

        As of December 31, 2008, we have no off balance sheet arrangements. The impact that our contractual obligations as of December 31, 2008 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):

		Total		2009		2010-2011		2012-2013		After 2013
Senior convertible notes		$	316,341	$	—	$	—	$	316,341	$	—
Interest on senior convertible notes(1)			55,346		11,069		22,138		22,139		—
Operating leases			34,681		8,721		13,978		11,077		905
Purchase commitments(2)			9,045		9,045		—		—		—
	Total contractual obligations	$	415,413	$	28,835	$	36,116	$	349,557	$	905

(1)

Our 0.75% senior convertible notes are due in 2033. However, holders may require us to repurchase all or a portion of their notes on December 31, 2013, 2018, 2023, and 2028. In December 2008, a total of $119.9 million of our convertible debt was redeemed for cash as investors exercised their put right. Our 3.50% senior convertible notes are due in 2038, however, holders may require us to repurchase all or a portion of their notes on January 15, 2013, 2018 and 2028.

(2)

Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding on Affymetrix and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

        The above table does not reflect unrecognized tax benefits of approximately $18.5 million, the timing of which is uncertain. Refer to Note 16 in the consolidated financial statements for additional discussion on unrecognized tax benefits.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

        Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.

        The primary objective of our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To

49

minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of less than three years.

	Periods of Maturity													Fair Value at December 31, 2008
	2009			2010			2011		Thereafter			Total
ASSETS:
Available-for-sale securities	$	267,927		$	26,892		$	—	$	—		$	294,819	$	297,404
Average interest rate		1.7	%		3.6	%		—		—
LIABILITIES:
0.75% senior convertible notes due 2014	$	—		$	—		$	—	$	91		$	91	$	90
Average interest rate										0.75	%
3.50% senior convertible notes due 2038	$	—		$	—		$	—	$	316,250		$	316,250	$	101,200
Average interest rate										3.5	%

	Periods of Maturity													Fair Value at December 31, 2007
	2008			2009			2010		Thereafter			Total
ASSETS:
Available-for-sale securities	$	450,649		$	90,322		$	—	$	—		$	540,971	$	537,488
Average interest rate		1.3	%		4.8	%		—		—
LIABILITIES:
0.75% senior convertible notes due 2033	$	120,000		$	—		$	—	$	—		$	120,000	$	120,150
Average interest rate		0.75	%
3.50% senior convertible notes due 2038	$	—		$	—		$	—	$	316,250		$	316,250	$	341,259
Average interest rate										3.5	%

Foreign Currency Exchange Rate Risk

        We derive a portion of our revenues in foreign currencies, predominantly in Europe and Japan. In addition, a portion of our assets are held in nonfunctional currencies of our subsidiaries. We conduct our hedging activities by using currency forward contracts to manage a portion of the currency exposures created from our activities denominated in foreign currencies. Our hedging program is designed to reduce, but does not entirely eliminate, the impact of currency exchange rate movements. Prior to 2007, we hedged a percentage of forecasted international revenue with forward contracts and the gains and losses on these contracts largely offset gains and losses on the transactions being hedged. Our revenue hedging policy was designed to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements. In 2007, we did not carry or initiate new currency forward contracts on a percentage of forecasted international revenue, based on management's internal assessment of the risk posed by extrapolating historical and potential future currency rate changes. Management will continue to reevaluate this risk on an ongoing basis. As of December 31, 2008, we had no open hedging contracts.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AFFYMETRIX, INC.

	Page No.
Report of Independent Registered Public Accounting Firm	52
Consolidated Balance Sheets	53
Consolidated Statements of Operations	54
Consolidated Statements of Comprehensive Income (Loss)	55
Consolidated Statements of Stockholders' Equity	56
Consolidated Statements of Cash Flows	57
Notes to Consolidated Financial Statements	58

51

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Affymetrix, Inc.

        We have audited the accompanying consolidated balance sheets of Affymetrix, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included 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 responsibility 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 Affymetrix, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, 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 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), Affymetrix, Inc.'s internal control over financial reporting as of December 31, 2008, 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 24, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP  

San Jose, California
February 24, 2009

52

AFFYMETRIX, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

			December 31, 2008			December 31, 2007
ASSETS:
Current assets:
	Cash and cash equivalents		$	113,292		$	288,644
	Restricted cash—short-term portion			4,402			—
	Available-for-sale securities—short-term portion			250,970			205,718
	Accounts receivable (net of allowances of $2,213 in 2008 and $2,372 in 2007)			62,726			81,941
	Inventories			51,333			42,912
	Deferred tax assets—current portion			1,077			28,584
	Notes receivable from employees—current portion			—			1,376
	Prepaid expenses and other current assets			15,725			17,933
		Total current assets		499,525			667,108
Available-for-sale securities—long-term portion				26,900			89,912
Property and equipment, net				89,345			143,884
Acquired technology rights, net				62,569			46,797
Goodwill				—			125,050
Deferred tax assets—long-term portion				4,764			18,426
Notes receivable from employees—long-term portion				—			487
Restricted cash—long-term portion				2,175			—
Other assets				28,032			41,927
Total assets			$	713,310		$	1,133,591
LIABILITIES AND STOCKHOLDERS' EQUITY:
	Accounts payable and accrued liabilities		$	62,559		$	61,543
	Deferred revenue—current portion			16,198			22,498
		Total current liabilities		78,757			84,041
Deferred revenue—long-term portion				3,583			3,922
Other long-term liabilities				10,972			10,971
Convertible notes				316,341			436,250
Stockholders' equity:
	Convertible redeemable preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued and outstanding at December 31, 2008 and 2007			—			—
	Common stock, $0.01 par value; 200,000 shares authorized; 70,267 and 69,217 shares issued and outstanding at December 31, 2008 and 2007, respectively			703			692
	Additional paid-in capital			721,641			704,189
	Accumulated other comprehensive (loss) income			(2,296	)		1,998
	Accumulated deficit			(416,391	)		(108,472	)
		Total stockholders' equity		303,657			598,407
Total liabilities and stockholders' equity			$	713,310		$	1,133,591

See Accompanying Notes

53

AFFYMETRIX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

			Year Ended December 31,
			2008			2007			2006
REVENUE:
	Product sales ($843 in 2008, $12,046 in 2007 and $14,694 in 2006 from Perlegen Sciences)		$	270,392		$	291,828		$	275,437
	Services			32,096			38,074			40,397
	Royalties and other revenue			107,761			41,418			39,483
		Total revenue		410,249			371,320			355,317
COSTS AND EXPENSES:
	Cost of product sales ($446 in 2008, $4,768 in 2007 and $5,218 in 2006 from Perlegen Sciences)			126,909			108,884			99,801
	Cost of services			25,121			29,602			28,951
	Cost of royalties and other revenue			110			230			191
	Research and development			84,482			72,740			86,296
	Selling, general and administrative			127,161			138,488			145,126
	Acquired in-process technology			6,200			—			—
	Restructuring charges			43,707			15,296			13,497
	Goodwill impairment charges			239,098			—			—
		Total costs and expenses		652,788			365,240			373,862
(Loss) income from operations				(242,539	)		6,080			(18,545	)
Interest income and other, net				14,629			15,420			14,078
Interest expense				(14,091	)		(3,218	)		(1,600	)
(Loss) income before income taxes				(242,001	)		18,282			(6,067	)
Income tax provision				(65,918	)		(5,689	)		(7,637	)
Net (loss) income			$	(307,919	)	$	12,593		$	(13,704	)
Basic net (loss) income per common share			$	(4.49	)	$	0.18		$	(0.20	)
Diluted net (loss) income per common share			$	(4.49	)	$	0.17		$	(0.20	)
Shares used in computing basic net (loss) income per common share				68,556			68,242			67,386
Shares used in computing diluted net (loss) income per common share				68,556			83,064			67,386

See Accompanying Notes

54

AFFYMETRIX, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

			Year Ended December 31,
			2008			2007			2006
Net (loss) income			$	(307,919	)	$	12,593		$	(13,704	)
Other comprehensive (loss) income :
	Foreign currency translation adjustment, net of tax			384			410			157
	Unrealized (losses) gains on available-for-sale and non-marketable
		securities, net of tax		(3,492	)		4,578			(192	)
		Reclassification adjustment for (losses) gains in net (loss) income		(1,201	)		(1,273	)		107
	Unrealized gains (losses) on cash flow hedges, net of tax			15			(18	)		(18	)
		Reclassification adjustment for gains (losses) in net (loss) income		—			18			(544	)
Net change in other comprehensive (loss) income				(4,294	)		3,715			(490	)
Comprehensive (loss) income			$	(312,213	)	$	16,308		$	(14,194	)

See Accompanying Notes

55

AFFYMETRIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER EQUITY

(In thousands)

			Year Ended December 31,
			2008			2007			2006
Convertible redeemable preferred stock:
	Balance, beginning of year		$	—		$	—		$	—
		Balance, end of year		—			—			—
Common stock:
	Balance, beginning of year			692			679			672
	Common stock issued			11			13			7
		Balance, end of year		703			692			679
Additional paid-in capital:
	Balance, beginning of year			704,189			674,428			646,186
	Issuance of common stock upon exercise of stock options and warrants and issuances of restricted stock, net			(80	)		13,714			9,248
	Stock-based compensation expense from stock options and restricted stock			7,611			10,727			15,050
	Stock-based compensation expense from stock options recorded as restructuring charges			—			—			7,544
	Income tax benefit from employee stock option exercises			9,921			5,320			7,199
	Reclass of deferred compensation into APIC pursuant to SFAS 123R			—			—			(10,799	)
		Balance, end of year		721,641			704,189			674,428
Deferred stock compensation:
	Balance, beginning of year			—			—			(10,799	)
	Reclass of deferred compensation into APIC pursuant to SFAS 123R			—			—			10,799
		Balance, end of year		—			—			—
Accumulated other comprehensive (loss):
	Balance, beginning of year			1,998			(1,717	)		(1,227	)
	Unrealized (loss) gain on investments, net of tax			(4,693	)		3,305			(85	)
	Unrealized gain (loss) on hedging contracts, net of tax			15			—			(562	)
	Foreign currency translation adjustment, net of tax			384			410			157
		Balance, end of year		(2,296	)		1,998			(1,717	)
Accumulated deficit:
	Balance, beginning of year			(108,472	)		(120,427	)		(106,723	)
	Net (loss) income			(307,919	)		12,593			(13,704	)
	Net effect of tax adjustment for adoption of FIN 48			—			(638	)		—
	Balance, end of year			(416,391	)		(108,472	)		(120,427	)
Total stockholders equity			$	303,657		$	598,407		$	552,963
Number of shares of common stock
	Balance, beginning of year			69,217			67,922			67,220
	Issuance of common stock for cash or services			1,050			1,295			702
		Balance, end of year		70,267			69,217			67,922

See Accompanying Notes

56

AFFYMETRIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

						Year Ended December 31,
						2008			2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net (loss) income					$	(307,919	)	$	12,593		$	(13,704	)
		Adjustments to reconcile net (loss) income to net cash provided by operating activities:
			Depreciation and amortization				37,058			23,779			22,796
			Goodwill impairment				239,098			—			—
			Amortization of intangible assets				13,453			8,328			8,315
			Charge for acquired in-process technology				6,200			—			—
			Amortization of investment premiums, net				389			(648	)		(101	)
			Excess tax benefits for stock-based compensation				(11,794	)		(952	)		(504	)
			Stock-based compensation				7,611			10,726			15,050
			Restructuring charges				(3,067	)		188			13,497
			Write-down of equity investments				—			3,861			211
			Realized gain on equity investments				(12	)		—			—
			Realized loss (gain) on the sales of investments				433			(599	)		(45	)
			Deferred tax assets				60,140			3,515			8,755
			Amortization of debt offering costs				2,080			931			758
			Accretion of interest on notes receivable				(7	)		(62	)		(62	)
			Impairment and loss on disposal of property and equipment				36,989			1,257			781
			Changes in operating assets and liabilities:
				Restricted cash			(6,577	)		—			—
				Accounts receivable, net			23,803			(4,098	)		19,267
				Inventories			495			3,594			(10,526	)
				Prepaid expenses and other assets			8,586			(15,889	)		(7,978	)
				Accounts payable and accrued liabilities			(14,968	)		(1,538	)		(15,173	)
				Deferred revenue			(6,639	)		(13,839	)		(10,991	)
				Other long-term liabilities			(1,841	)		1,189			916
					Net cash provided by operating activities		83,511			32,336			31,262
CASH FLOWS FROM INVESTING ACTIVITIES:
	Capital expenditures						(13,846	)		(27,419	)		(79,339	)
	Purchases of available-for-sale securities						(449,398	)		(280,133	)		(103,977	)
	Proceeds from sales and maturities of available-for-sale securities						468,671			112,588			162,341
	Acquisition of businesses, net of cash acquired						(156,178	)		—			—
	Purchase of non-marketable equity investments						(311	)		(800	)		(1,125	)
	Capital distribution of non-marketable equity investments						—			1,668			—
	Purchase of technology rights						—			—			(250	)
					Net cash used in investing activities		(151,062	)		(194,096	)		(22,350	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Issuance of common stock, net						(70	)		13,728			9,254
	Issuance of convertible subordinated notes						—			316,250			—
	Redemption of convertible subordinated debt						(119,909	)		—			—
	Excess tax benefits for stock-based compensation						11,794			952			504
					Net cash (used in) provided by financing activities		(108,185	)		330,930			9,758
Effect of exchange rate changes on cash and cash equivalents							384			411			157
Net (decrease) increase in cash and cash equivalents							(175,352	)		169,581			18,827
Cash and cash equivalents at beginning of period							288,644			119,063			100,236
Cash and cash equivalents at end of period						$	113,292		$	288,644		$	119,063
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
	Recognition of deferred tax assets relating to tax benefits from employee stock plans					$	—		$	5,320		$	7,635
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid for interest					$	8,358		$	904		$	900
	Cash paid for income taxes					$	6,804		$	2,369		$	2,945

See Accompanying Notes

57

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008

NOTE 1—NATURE OF OPERATIONS

        Affymetrix, Inc. ("Affymetrix" or the "Company") is engaged in the development, manufacture, sale and service of consumables and systems for genetic analysis in the life sciences and clinical healthcare markets. Affymetrix has developed its GeneChip® system and related microarray technology as the platform of choice for acquiring, analyzing and managing complex genetic information. The Company's integrated GeneChip®microarray platform includes: disposable DNA probe arrays (chips) consisting of nucleic acid sequences set out in an ordered, high density pattern, certain reagents for use with the probe arrays, a scanner and other instruments used to process the probe arrays, and software to analyze and manage genomic or genetic information obtained from the probe arrays. Related microarray technology also offered by Affymetrix includes licenses for fabricating, scanning, collecting and analyzing results from complementary technologies. The Company currently sells its products directly to pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies as well as academic research centers, government research laboratories, private foundation laboratories and clinical reference laboratories in North America and Europe. The Company also sells some of its products through life science supply specialists acting as authorized distributors in Latin America, India, the Middle East and Asia Pacific regions, including China.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

        The consolidated financial statements include the accounts of Affymetrix and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company has accounted for its ownership interest in Perlegen Sciences, Inc. ("Perlegen") using the equity method since March 30, 2001. Refer to Note 12, "Related Party Transactions and Notes Receivable from Employees", for further information.

        Certain prior year revenue and cost of sales amounts in the Company's consolidated statements of operations have been reclassified to conform to the current period presentation. Product sales includes consumables and instruments, including the contribution from sales to Perlegen Sciences. Services includes scientific services and associated consumables, field service, and professional service. Royalties and other includes software, subscription fees, licensing and royalties and research revenue.

USE OF ESTIMATES

        The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

FOREIGN CURRENCY

        Assets and liabilities of non-U.S. subsidiaries that use the local currency as their functional currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income (loss) within stockholders' equity. Income and expense accounts are translated at average exchange rates during the year. Foreign currency transaction gains and losses are recognized

58

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

in interest income and other, net and were comprised of a net loss of $2.2 million for the year ended December 31, 2008 and net gains of $0.3 million and $3.0 million for the years ended December 31, 2007 and 2006, respectively.

CASH EQUIVALENTS, AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS

Marketable Securities

        The Company's investments consist of U.S. government notes and bonds; corporate notes, bonds and asset-backed securities; mortgaged-backed securities, municipal notes and bonds; and publicly traded equity securities. The Company reports all debt securities with maturities at the date of purchase of three months or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. Cash equivalents and available-for-sale securities consist of marketable equity and debt securities. Management determines the appropriate classification of debt securities at the time of purchase. As of December 31, 2008 and 2007, the Company's investments in debt securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders' equity. The cost of debt securities is adjusted for amortization of premiums and discounts to maturity. This amortization is included in interest income and other, net. Realized gains and losses, as well as interest income, on available-for-sale securities are also included in interest income and other, net. The cost of securities sold is based on the specific identification method. The fair values of securities are based on quoted market prices. The Company includes its available-for-sale securities that have an effective maturity of less than twelve months as of the balance sheet date in current assets and those with an effective maturity greater than twelve months as of the balance sheet date in non-current assets. The Company monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments in public companies are determined using quoted market prices.

Non-marketable Securities

        The Company also has investments in non-marketable securities issued by privately held companies. These investments are included in other assets in the Consolidated Balance Sheets and are primarily carried at cost. The Company periodically monitors the liquidity and financing activities of the respective issuers to determine if any impairment exists and accordingly writes down to the extent necessary, the cost basis of our non-marketable equity securities to their estimated fair values. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook of the issuer for the company, including key operational and cash flow metrics, current market conditions; and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in estimated fair value.

ACCOUNTS RECEIVABLE

        Trade accounts receivable are recorded at net invoice value. The Company considers amounts past due based on the related terms of the invoice. The Company reviews its exposure to amounts

59

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

receivable and provides an allowance for specific amounts if collectability is no longer reasonably assured. The Company also provides an allowance for a percentage of the gross trade receivable balance (excluding any specifically reserved amounts) based on its collection history.

DERIVATIVE INSTRUMENTS

        The Company has international operations and during the normal course of business is exposed to foreign currency exchange risks as a result of transactions that are denominated in currencies other than the United States dollar. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company's foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. In addition, the Company does not enter into foreign currency forward contracts for trading or speculative purposes, is not party to any leveraged derivative instrument, and may only enter into derivative agreements with highly rated counterparties.

        The foreign currency forward contracts used by the Company are generally short-term in nature, maturing within one quarter. The Company has elected not to designate its derivatives for balance sheet purposes as fair value hedges under Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), and have appropriately recorded any changes in fair value to interest income and other, net.

INVENTORIES

        Inventory cost is computed on an adjusted standard basis (which approximates actual cost on a first-in, first-out basis). Provisions for slow moving, potentially excess and obsolete inventories are provided based on estimated demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues.

PROPERTY AND EQUIPMENT

        Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets or the lease term, whichever is shorter. Equipment and furniture is depreciated over useful lives generally ranging from 3 to 7 years, company-owned buildings are depreciated over 25 years and leasehold improvements are depreciated over the shorter of the expected life of the asset or lease terms generally ranging from 3 to 15 years. Maintenance and repair costs are expensed as incurred.

GOODWILL AND ACQUIRED TECHNOLOGY RIGHTS

        Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired arising from business combinations. As of December 31, 2007, goodwill related to the acquisition of Neomorphic in October 2000 and the acquisition of ParAllele in October 2005. In 2008, the Company made three acquisitions and recorded a total of $114.0 million, net of additional goodwill.

60

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        In accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142") requires that goodwill be assessed for impairment at least annually or whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. Factors that may be considered a change in circumstance indicating the carrying value of our intangible assets, including goodwill, may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization, and negative industry or economic trends. The impairment test for goodwill involves a two-step process: step one consists of a comparison of the market value of a reporting unit with its book value. If the book value is in excess of the market value, step two requires the comparison of the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the carrying value of the goodwill over the implied fair value of the goodwill will be recorded as an impairment loss.

        The Company performed its required annual impairment test in June 2008 and determined that goodwill was not impaired. During the third quarter of 2008, the Company's stock price fell below the Company's net book value per share. Accordingly, the Company was required to assess whether or not an impairment of its intangible assets, including goodwill, had occurred. The Company performed an interim impairment assessment using a market based approach as of September 30, 2008 and determined that there was no impairment.

        The continued decline of the Company's stock price in the fourth quarter of 2008 and the resulting book value per share being in excess of market value per share, along with other conditions in its business such as decreases in our actual revenues as compared to our forecasted revenues and additional restructuring activities, were indicators that it was more likely than not that the fair value of the Company was less than the carrying value. The Company performed an interim impairment assessment as of December 31, 2008 and determined that the carrying amount of its goodwill was not recoverable and recorded an impairment charge of $239.1 million which was presented as "Goodwill impairment charges" in the Company's Consolidated Statements of Operations.

        Acquired technology rights are carried at cost less accumulated amortization and are comprised of licenses to technology covered by patents held by third parties or acquired by the Company. Amortization is computed over the estimated useful life of the underlying patents, which has historically ranged from one to thirteen years. SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. As of December 31, 2008, the Company performed an impairment analysis over identified intangible assets and, as a result of that analysis, recognized an impairment loss on acquisition-related intangible assets of $5.5 million of which $1.9 million was included as a component of "Cost of product sales", $3.2 million was included as a component of "Research and development", and $0.4 million was included as a component of "Selling, general and administration" expenses in the Consolidated Statements of Operations during the year ended December 31, 2008. Refer to Note 10, "Goodwill and Acquired Technology Rights", for further information.

        The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company's operations. The assumptions supporting the estimated future cash flows of the reporting unit, including profit margins, long-term forecasts of the amounts and timing of overall market growth and the Company's percentage of that market, discount rates and terminal growth rates, reflect the Company's best estimates.

61

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

IMPAIRMENT OF LONG-LIVED ASSETS

        Long-lived assets and certain identifiable intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. In connection with the Company's restructuring activities in 2008, the Company wrote-down the value of certain of its property and equipment by approximately $37.1 million which was included as a component of "Restructuring charges" in the Consolidated Statements of Operations during the year ended December 31, 2008. Refer to Note 3, "Restructuring", for further information.

INCOME TAXES

        Income tax expense is based on pre-tax financial accounting income. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. To the extent the Company believes that realization is not more likely than not, the Company establishes a valuation allowance. Significant estimates are required in determining the Company's provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our net deferred tax asset. Some of these estimates are based on interpretations of existing tax laws or regulations. The Company believes that its estimates are reasonable and that its reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on the Company's future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of our deferred tax assets or liabilities, future levels of research and development spending, nondeductible expenses, changes in overall levels of characterization and geographical mix of pretax earnings (losses) and ultimate outcomes of income tax audits.

CONTINGENCIES

        The Company is subject to various legal proceedings principally related to intellectual property matters. Based on the information available at the most recent balance sheet date, the Company assesses the likelihood of any material adverse judgments or outcomes that may result from these matters, as well as the range of possible or probable loss, if any. If losses are probable and reasonably estimable, the Company will record a reserve in accordance with SFAS 5, Accounting for Contingencies. Any reserves recorded may change in the future due to new developments in each matter.

62

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

REVENUE RECOGNITION

Overview

        The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met.

        The Company derives the majority of its revenue from product sales of GeneChip® probe arrays, reagents, and related instrumentation that may be sold individually or combined with any of the products, services or other sources of revenue listed below. When a sale combines multiple elements, the Company accounts for multiple element arrangements under Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, ("EITF 00-21")

        EITF 00-21 provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. In accordance with EITF 00-21, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value. In the absence of fair value of a delivered element, the Company allocates revenue first to the fair value of the undelivered elements and the residual revenue to the delivered elements. The Company recognizes revenue for delivered elements when the delivered elements have standalone value and the Company has objective and reliable evidence of fair value for each undelivered element. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

Product Sales

        Product sales, as well as revenues from Perlegen Sciences (a related party, Refer to Note 12, "Related Party Transactions and Notes Receivable from Employees", for further information), include sales of GeneChip® probe arrays, reagents and related instrumentation. Probe array, reagent and instrumentation revenues are recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.

Services

        Services revenue includes equipment service revenue; scientific services revenue, which includes associated consumables; and revenue from custom probe array design fees.

        Revenue related to extended warranty arrangements is deferred and recognized ratably over the applicable periods. Revenue from custom probe array design fees associated with the Company's GeneChip® CustomExpress™ and CustomSeq™ products are recognized when the associated products are shipped.

63

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Revenue from scientific and DNA analysis services are recognized upon shipment of the required data to the customer.

Royalties and Other Revenue

        Royalties and other revenue include license revenue; royalties earned from third party license agreements; milestones and royalties earned from collaborative product development and supply agreements; subscription fees earned under GeneChip® array access programs; and research revenue which mainly consists of amounts earned under government grants; and non-recurring intellectual property payments.

        License revenues are generally recognized upon execution of the agreement unless the Company has continuing performance obligations, in which case the license revenue is recognized ratably over the period of expected performance.

        Royalty revenues are earned from the sale of products by third parties who have been licensed under the Company's intellectual property portfolio. Revenue from minimum royalties is amortized over the term of the creditable royalty period. Any royalties received in excess of minimum royalty payments are recognized under the terms of the related agreement, generally upon notification of manufacture or shipment of a product by a licensee.

        The Company enters into collaborative arrangements which generally include a research and product development phase and a manufacturing and product supply phase. These arrangements may include up-front nonrefundable license fees, milestones, the rights to royalties based on the sale of final product by the partner, product supply agreements and distribution arrangements.

        Any up-front, nonrefundable payments from collaborative product development agreements are recognized ratably over the research and product development period, and at-risk substantive based milestones are recognized when earned. Any payments received which are not yet earned are included in deferred revenue.

        Revenue from subscription fees earned under GeneChip® array access programs is recorded ratably over the related supply term.

        Research revenues result primarily from research grants received from U.S. Government entities or from subcontracts with other life science research-based companies which receive their research grant funding from the U.S. Government. Revenues from research contracts are generated from the efforts of the Company's technical staff and include the costs for material and subcontract efforts. The Company's research grant contracts generally provide for the payment of negotiated fixed hourly rates for labor hours incurred plus reimbursement of other allowable costs. Research revenue is recorded in the period in which the associated costs are incurred, up to the limit of the prior approval funding amounts contained in each agreement. The costs associated with these grants are reported as research and development expense.

64

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Transactions with Distributors

        The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price is fixed or determinable, and collectability is reasonably assured. The Company's agreements with distributors do not include rights of return.

RESEARCH AND DEVELOPMENT EXPENSES

        Research and development expenses consist of costs incurred for internal, collaborative and grant-sponsored research and development. Research and development expenses include salaries, contractor fees, building costs, utilities and allocations of shared corporate services. In addition, the Company funds research and development at other companies and research institutions under agreements which are generally cancelable. All such costs are charged to research and development expense as incurred.

SOFTWARE DEVELOPMENT COSTS

        SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. The Company's software is deemed to have achieved technological feasibility at the point a working model of the software product is developed. The Company has capitalized approximately $0.3 million and $4.5 million costs incurred subsequent to the establishment of technological feasibility for the years ended December 31, 2008 and 2007, respectively. These costs began to be amortized to cost of product sales in the fourth quarter of 2007. Amortization costs for the years ended December 31, 2008 and 2007 were $1.4 million and $0.2 million, respectively. The costs of developing routine software enhancements are expensed as research and development as incurred because of the short time between the determination of technological feasibility and the date of general release of the related products.

        Long-lived assets and certain identifiable intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. During the year ended December 31, 2008, the Company performed an analysis of the expected future cash flows as it related to the Company's capitalized software and determined that the carrying value exceeded the net realizable value by $2.3 million which was included as a component of "Cost of product sales" in the Consolidated Statements of Operations during the year ended December 31, 2008.

        The Company applies Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. In 2008 and 2007, the Company capitalized approximately $1.9 million and $10.7 million, respectively, related to the implementation of an enterprise resources planning system. The costs associated with software developed for internal use will be amortized at the time in which the software is ready for its intended use.

ADVERTISING COSTS

        The Company expenses advertising costs as incurred. Advertising costs were for the years ended December 31, 2008, 2007 and 2006 were $1.6 million, $0.5 million and $1.5 million, respectively.

65

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

STOCK-BASED COMPENSATION

        The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment ("SFAS 123R"). The Company recognizes the fair value of its stock option awards as compensation expense on a straight-line basis over the requisite service period of each award, generally four years. The fair value of options are estimated at the date of grant using a Black-Scholes option pricing model. The Company evaluates the assumptions used to value stock options awards under SFAS 123R on a quarterly basis.

COMPREHENSIVE (LOSS) INCOME

        Comprehensive (loss) income is comprised of net (loss) income and other comprehensive (loss) income. Other comprehensive (loss) income includes unrealized gains and losses on the Company's available-for-sale securities that are excluded from net (loss) income, changes in fair value of derivatives designated as and effective as cash flow hedges, and foreign currency translation adjustments. Total comprehensive (loss) income has been disclosed in the consolidated statement of comprehensive (loss) income.

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

	Year Ended December 31,
	2008			2007
Foreign currency translation adjustment, net of tax	$	42		$	(342	)
Unrealized (losses) gains on available-for-sale and non-marketable securities, net of tax		(2,338	)		2,356
Unrealized losses on cash flow hedges, net of tax		—			(16	)
Accumulated other comprehensive (loss) income	$	(2,296	)	$	1,998

NET (LOSS) INCOME PER COMMON SHARE

        Basic net (loss) income per common share is calculated using the weighted-average number of common shares outstanding during the period less the weighted-average shares subject to repurchase. Diluted (loss) income per common share gives effect to dilutive common stock subject to repurchase, stock options and warrants (calculated based on the treasury stock method), and convertible debt (calculated using an as-if-converted method).

66

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        The following table sets forth a reconciliation of basic and diluted net (loss) income per common share (in thousands, except per share amounts):

			Year Ended December 31,
			2008			2007			2006
Numerator:
	Net (loss) income—basic		$	(307,919	)	$	12,593		$	(13,704	)
	Add effect of dilutive securities:
		Interest on convertible notes (inclusive of amortization of debt issuance costs)		—			1,937			—
	Net (loss) income—diluted		$	(307,919	)	$	14,530		$	(13,704	)
Denominator:
	Weighted-average shares outstanding			69,818			68,727			67,479
	Less: weighted-average shares of common stock subject to repurchase			(1,262	)		(485	)		(93	)
Shares used in computing basic net (loss) income per common share				68,556			68,242			67,386
	Add effect of dilutive securities:
		Employee stock options		—			388			—
		Common stock subject to repurchase		—			65			—
		Convertible notes		—			14,369			—
Shares used in computing diluted net (loss) income per common share				68,556			83,064			67,386
Basic and diluted net (loss) income per common share			$	(4.49	)	$	0.18		$	(0.20	)
Diluted net (loss) income per common share			$	(4.49	)	$	0.17		$	(0.20	)

        Diluted earnings per share include certain common share equivalents from outstanding stock options (on the treasury stock method), common stock subject to repurchase, outstanding warrants to purchase common stock and convertible notes (on the as-if-converted basis).

        The securities excluded from diluted earnings per common share, on an actual outstanding basis, were as follows (in thousands):

		Year Ended December 31,
		2008		2007		2006
Employee stock options			6,071		3,368		6,466
Restricted stock subject to repurchase			1,671		—		93
Convertible notes			10,502		—		3,870
	Total		18,244		3,368		10,429

67

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RESTRUCTURING

        The Company has in recent years engaged in, and may continue to engage in, restructuring actions, which require management to utilize significant estimates related to expenses for severance and other employee separation costs, lease cancellation, realizable values of assets that may become duplicative or obsolete, and other exit costs. If the actual amounts differ from the Company's estimates, the amount of the restructuring charges could be materially impacted. Refer to Note 3, "Restructuring", for further information.

RECENT ACCOUNTING PRONOUNCEMENTS

        In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

        In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity's derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently assessing the impact of SFAS 161 on its consolidated results of operations and financial condition.

        Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements ("SFAS 157"). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or

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AFFYMETRIX, INC.

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DECEMBER 31, 2008

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

        The adoption of SFAS 157 did not have a material effect on the Company's financial position, results of operations, or cash flows.

        In October 2008, the FASB issued FSP 157-3 Determining Fair Value of a Financial Asset in a Market That Is Not Active ("FSP 157-3"). FSP 157-3 clarified the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have a material impact on the Company's consolidated results of operations and financial condition.

        In December 2007, the FASB issued SFAS No. 141R, Business Combinations ("SFAS 141R"). SFAS 141R amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. The implementation of this standard did not have a material impact on the Company's consolidated results of operations and financial condition.

        In December 2007 the FASB issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements ("EITF 07-1"). EITF 07-1 defines collaborative arrangements and requires that transactions with third parties that do not participate in the arrangement be reported in the appropriate income statement line items pursuant to the guidance in EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Income statement classification of payments made between participants of a collaborative arrangement are to be based on other applicable authoritative accounting literature. If the payments are not within the scope or analogy of other authoritative accounting literature, a reasonable, rational and consistent accounting policy is to be elected. EITF 07-1 is to be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations, or cash flows.

        In November 2008, the FASB issued EITF Issue No. 08-7, Accounting for Defensive Intangible Assets ("EITF 08-7"). EITF 08-7 addresses the accounting for assets acquired in a business combination or asset acquisition that an entity does not intend to actively use, otherwise referred to as a 'defensive asset.' EITF 08-7 requires defensive intangible assets to be initially accounted for as a separate unit of accounting and not included as part of the cost of the acquirer's existing intangible asset(s) because it is separately identifiable. EITF 08-7 also requires that defensive intangible assets be assigned a useful life in accordance with paragraph 11 of SFAS 142. The Company does not anticipate that the adoption of this statement will have a material impact on its financial position, results of operations, or cash flows.

69

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 3—RESTRUCTURING

Fiscal 2008 Restructuring Plan

        In February 2008, the Company committed to a restructuring plan (the "2008 Plan") designed primarily to optimize its production capacity and cost structure and improve its future gross margins. The plan involves the closure of its West Sacramento manufacturing facility after which all of the Company's products will be manufactured at its Singapore and Ohio facilities, as well as by third parties. The Company expects the closure of the West Sacramento facility to be substantially complete by the end of the second quarter of 2009.

        The Company estimates the total restructuring expenses to be incurred in connection with the 2008 Plan will be approximately $45.4 million. Of this total, approximately $8.2 million relates to employee severance and $37.2 million relates to non-cash charges associated with the abandonment and impairment of certain long-lived manufacturing assets. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), the costs relating to employee severance are being recognized as expense over the remaining service periods of the employees.

        The cash outlays to be incurred in connection with the 2008 Plan are estimated to be approximately $8.2 million. During the year ended December 31, 2008, the Company recognized approximately $5.8 million of expense for employee termination benefits associated with the 2008 Plan and $37.1 million of non-cash charges related to the abandonment and impairment of certain manufacturing assets. These expenses are presented as a component of "Restructuring charges" in the Company's Consolidated Statements of Operations.

        In addition to the $45.4 million of restructuring costs noted above, the Company expects to incur a total of approximately $18.9 million of restructuring related costs through the second quarter of 2009 to be included as a component of "Cost of product sales" in the Company's Consolidated Statements of Operations. Of this total, $12.4 million relates to accelerated depreciation charges associated with the continued use of certain long-lived manufacturing assets and $6.5 million relates to manufacturing transition and other costs.

Fiscal 2007 Restructuring Plan

        In July 2007, the Company announced that it was consolidating an administrative facility located in Sunnyvale, California into its main campus in Santa Clara, California (the "2007 Plan"). Additionally, in August and December 2007, the Company terminated certain employees in the research and development and selling, general and administrative functions. The Sunnyvale, California facility was vacated during the fourth quarter of 2007. The estimated cash outlays to be incurred in connection with these restructuring activities are estimated to be approximately $4.6 million. During the year ended December 31, 2008, the Company recognized approximately $0.5 million related to contract termination costs and employee termination benefits associated with the 2007 Plan. During the year ended December 31, 2007, the Company recognized approximately $4.2 million of expense primarily related to employee termination benefits and contract termination costs associated with the 2007 Plan.

Fiscal 2006 Restructuring Plan

        In 2006, the Company initiated a restructuring plan (the "2006 Plan") to better align certain of its expenses with the Company's current business outlook. The Company's primary focus of the 2006 Plan

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DECEMBER 31, 2008

NOTE 3—RESTRUCTURING (Continued)

was in the general and administrative functions and included rationalizing its facilities. Cash outlays incurred in connection with these restructuring activities were estimated to be approximately $16.8 million. During the year ended December 31, 2008, the amount of expense recognized associated with the 2006 Plan was not material. During the years ended December 31, 2007 and 2006, the Company recognized approximately $11.1 million and $13.5 million of expense primarily related to employee termination benefits and contract termination costs associated with the 2006 Plan, respectively.

        The activity for the restructuring plans above for the year ended December 31, 2008 and estimated costs for the amounts expected to be recognized as "Restructuring charges" in the Company's Consolidated Statements of Operations is as follows (in thousands):

															As of December 31, 2008
			Balance as of December 31, 2007		2008 Charges		Cash Payments			Non-Cash Settlements			Balance as of December 31, 2008		Total costs to date		Total expected costs
Fiscal 2008 Restructuring Plan:
	Employee severance and relocation benefits		$	—	$	5,793	$	(2,436	)	$	(179	)	$	3,178	$	5,793	$	8,200
	Abandonment and impairment of certain long-lived manufacturing assets			—		37,089		—			(37,089	)		—		37,089		37,200
Fiscal 2007 Restructuring Plan:
	Employee severance and relocation benefits			1,295		—		(1,295	)		—			—		2,888		3,000
	Contract termination costs			1,122		454		(1,065	)		(7	)		504		1,669		1,700
	Other restructuring costs			—		—		—			—			—		113		200
Fiscal 2006 Restructuring Plan:
	Employee severance and relocation benefits			140		—		(94	)		(46	)		—		20,197		20,200
	Contract termination costs			1,761		211		(861	)		111			1,222		2,602		2,900
	Other restructuring costs			—		206		(206	)		—			—		2,194		2,200
		Total	$	4,318	$	43,753	$	(5,957	)	$	(37,210	)	$	4,904	$	72,545	$	75,600

71

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 4—COLLABORATIVE AGREEMENTS

        The Company has agreements with several entities to develop and test probe arrays for the detection of certain gene sequences, mutations or organisms. Under such agreements, the Company may receive development fees and may receive payments upon achievement of certain technical goals. The Company also has research agreements with many universities and research organizations. The Company's material agreement is described below.

F. Hoffmann-La Roche Ltd. ("Roche")

        In February 1998, the Company entered into a non-exclusive collaborative development agreement with F. Hoffmann-La Roche Ltd. ("Roche") to initially develop human probe array-based diagnostic products. Under the terms of the agreement the parties are collaborating to develop mutually agreed upon arrays, as well as associated instrumentation, software, and reagents. In January 2003, the Company expanded its collaboration with Roche by granting Roche access to our GeneChip® technologies to develop and commercialize GeneChip® diagnostic laboratory tests for DNA analysis, genotyping and resequencing applications, as well as for RNA expression analysis, in a broad range of human disease areas. Under the terms of the collaborative agreement, Roche paid the Company an access fee of $70 million and the agreement also includes a broad range of other compensation payable by Roche to Affymetrix throughout the life of the agreement based on royalties on sales of diagnostic kits and milestone payments for technical and commercial achievements. As part of the agreement, Affymetrix will manufacture and supply Roche with microarrays and related instrumentation based on Affymetrix' GeneChip® platform.

        The parties amended the collaborative development agreement in December 2006. Under the terms of the amendment, Roche is relieved of certain future license installment payments that would have been payable by Roche to Affymetrix under the agreement beginning in 2008, Affymetrix is relieved of certain "most favorable terms and conditions" obligations to Roche, and Roche has agreed to pay to Affymetrix additional milestone payments related to future commercial achievements. The license agreement is subject to Roche's option to terminate on December 31, 2010 or any time on or after December 31, 2015, with one year's prior notice.

        The Company assessed the revenue recognition of the December 2006 collaborative agreement amendment in accordance with EITF 00-21 to account for the multiple deliverables in the arrangement and to evaluate the revenue allocated to each of the units of accounting (the research and development period and the manufacturing and supply period). In addition, the Company re-assessed the estimated remaining research and development period and determined that Roche's one-time, upfront payment of $70 million under the license agreement should continue to be recognized as a component of royalties and other revenue over the remaining estimated research and development through fiscal 2007. Research revenue under this contract was approximately $14.2 million for each of the two years ended December 31, 2007 and 2006, respectively. The amortization of this license agreement was completed in December 2007. The associated research costs are not significant for each of the years presented.

NOTE 5—CONCENTRATIONS OF RISK

        Cash equivalents and investments are financial instruments that potentially subject Affymetrix to concentrations of risk to the extent of amounts recorded in the consolidated balance sheets. Company

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DECEMBER 31, 2008

NOTE 5—CONCENTRATIONS OF RISK (Continued)

policy restricts the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued by the United States Government.

        The Company has not experienced significant credit losses from its accounts receivable. Affymetrix performs a regular review of its customer activity and associated credit risks and does not require collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable.

        Certain raw materials or components used in the synthesis of probe arrays or the assembly of instrumentation are currently available only from a single source or limited sources. No assurance can be given that these raw materials or other components of the GeneChip® system will be available in commercial quantities at acceptable costs from other vendors should the need arise. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive.

        In addition, the Company is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these vendors are delayed or interrupted for any reason, the Company's ability to develop and supply its products could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations.

        For the fiscal years 2008, 2007 and 2006, approximately 34%, 47% and 48% respectively, of the Company's total revenue is generated from sales outside the United States. The Company's results of operations are affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns and changes in regional or worldwide economic or political conditions. The risks of the Company's international operations are mitigated in part by the extent to which its sales are geographically distributed and its foreign currency hedging program.

NOTE 6—FAIR VALUE OF FINANCIAL INSTRUMENTS

        In accordance with SFAS 157, the following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2008 (in thousands):

		Level 1		Level 2		Total
Non-U.S. equity securities		$	842	$	—	$	842
U.S. government obligations and agencies			—		203,488		203,488
U.S. corporate debt			—		93,916		93,916
	Total	$	842	$	297,404	$	298,246

        As of December 31, 2008, the Company had no financial assets or liabilities requiring Level 3 classification.

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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 6—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Investments in Debt and Equity Securities

        The fair values of all available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities—short-term and available-for-sale securities—long-term on the Company's Consolidated Balance Sheets based on the securities maturity. The following is a summary of available-for-sale securities as of December 31, 2008 (in thousands):

			Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government obligations and agency securities			$	205,076	$	372	$	(134	)	$	205,314
U.S. corporate debt securities				95,755		32		(3,697	)		92,090
Non-U.S. equity securities				890		—		(48	)		842
	Total securities		$	301,721	$	404	$	(3,879	)	$	298,246
Amounts included in:
	Cash equivalents		$	21,979	$	20	$	—		$	21,999
	Available-for-sale securites			279,742		384		(3,879	)		276,247
		Total securities	$	301,721	$	404	$	(3,879	)	$	298,246
Amounts mature in:
	Less than one year		$	271,402	$	11	$	(68	)	$	271,345
	One to two years			30,319		393		(3,811	)		26,901
		Total securities	$	301,721	$	404	$	(3,879	)	$	298,246

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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 6—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

        The following is a summary of available-for-sale securities as of December 31, 2007 (in thousands):

			Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government obligations and agency securities			$	409,002	$	569	$	—		$	409,571
U.S. corporate debt securities				128,469		11		(1,453	)		127,027
Non-U.S. equity securities				917		—		(27	)		890
	Total securities		$	538,388	$	580	$	(1,480	)	$	537,488
Amounts included in:
	Cash equivalents		$	241,997	$	35	$	—		$	242,032
	Available-for-sale securites			296,391		545		(1,480	)		295,456
		Total securities	$	538,388	$	580	$	(1,480	)	$	537,488
Amounts mature in:
	Less than one year		$	447,194	$	409	$	(27	)	$	447,576
	One to two years			91,194		171		(1,453	)		89,912
		Total securities	$	538,388	$	580	$	(1,480	)	$	537,488

        Realized gains and (losses) for the year ended December 31, 2008 were $2.1 million and $(2.5) million, respectively. Realized gains and (losses) for the year ended December 31, 2007 were $0.2 million and $(0.2) million, respectively. Realized gains and (losses) are included in interest income and other, net in the accompanying Consolidated Statements of Operations. The gross unrealized losses as of December 31, 2008 were primarily caused by the degradation in the value of the assets held by financial institutions in which we owned certain U.S. corporate debt securities. The gross unrealized losses as of December 31, 2007 were primarily caused by credit concerns in the securitized market and interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of our securities. Based on the Company's review of these securities, including the assessment of the severity of the related unrealized losses, the Company has not recorded any other-than-temporary impairments on these securities.

        Excluding our available-for-sale marketable securities, the declines in estimated fair values of certain investments were determined to be other-than-temporary. Accordingly, the Company recorded net impairment losses on certain investments in both publicly-traded and non-marketable equity securities of less than $0.1 million, $0.9 million and $0.2 million during the years ended December 31, 2008, 2007 and 2006, respectively. Net investment losses are included in interest income and other, net in the Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment portfolio in the future.

Derivative Financial Instruments

        The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan. In addition, a portion of its assets are held in nonfunctional currencies of its subsidiaries. The

75

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 6—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Company's hedging program is designed to reduce, but does not entirely eliminate, the impact of currency exchange rate movements. Prior to 2007, the Company hedged a percentage of forecasted international revenue with forward contracts and the gains and losses on these contracts largely offset gains and losses on the transactions being hedged. The Company's revenue hedging policy is designed to reduce the negative impact on its forecasted revenue due to foreign currency exchange rate movements.

        Prior to 2007, the Company applied hedge accounting based upon the criteria established by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), whereby the Company designated its 2006 derivatives for revenue hedging purposes as cash flow hedges. The net realized foreign currency gains (losses) related to the foreign currency forward contracts related to revenue were $0.3 million for the year ended December 31, 2006. During the year ended December 31, 2006, all of the Company's hedges under SFAS 133 were deemed effective and the corresponding unrealized gains or losses were recorded as a component of other comprehensive income (loss) in stockholders' equity. The Company has elected not to designate its derivatives for balance sheet purposes as fair value hedges under SFAS 133 and have appropriately recorded any changes in fair value to interest income and other, net. As of December 31, 2008 and 2007, the Company had no open hedging contracts.

Other Financial Instruments

        The carrying amounts and estimated fair values of financial instruments, other than those accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, were as follows at December 31, 2008 and 2007 (in thousands):

		2008				2007
		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Non-marketable equity securities		$	13,009	$	13,009	$	20,710	$	20,710
Notes receivable from employees			—		—		1,863		1,863
Liability:
	Convertible notes		316,341		101,290		436,250		461,409

        The fair value estimates provided above for the Company's convertible notes were based on quoted market prices available at December 31, 2008 and 2007. All other fair values were based on current market rates, liquidation and net realizable values.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 7—INVENTORIES

        Inventories consist of the following at December 31, 2008 and 2007 (in thousands):

		2008		2007
Raw materials		$	22,799	$	20,507
Work-in-process			12,192		11,297
Finished goods			16,342		11,108
	Total	$	51,333	$	42,912

NOTE 8—PROPERTY AND EQUIPMENT

        Property and equipment consists of the following as of December 31, 2008 and 2007 (in thousands):

		2008			2007
Property and equipment:
	Construction-in-progress	$	5,183		$	55,209
	Equipment and furniture		161,340			140,237
	Building and leasehold improvements		84,865			91,188
	Land		1,310			1,310
			252,698			287,944
Less: accumulated depreciation and amortization			(163,353	)		(144,060	)
	Net property and equipment	$	89,345		$	143,884

        For the years ended December 31, 2008, 2007 and 2006, the Company recorded depreciation expense of $33.1 million, $23.6 million and $22.8 million, respectively. In 2008, the Company wrote down property and equipment in the amount of approximately $37.1 million in connection with its 2008 Plan. Refer to Note 3, "Restructuring", for further information.

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DECEMBER 31, 2008

NOTE 9—ACQUISITIONS

        The business acquisitions described below are accounted for by the Company under the purchase method of accounting in accordance with the provisions of SFAS No. 141, Business Combinations ("SFAS 141"). In accordance with SFAS 141, the Company recorded the assets acquired and liabilities assumed at their estimated fair value, with the excess purchase price reflected as goodwill. Additionally, certain costs directly related to the acquisitions were reflected as additional purchase price in excess of net assets acquired.

        A summary of the purchase acquisitions completed in 2008 is a follows (in thousands):

		Cash Consideration		Transaction Costs		Total Purchase Consideration		Assets/ (Liabilities) Assumed, Net			In-Process R&D Expense		Purchased Intangible Assets		Goodwill
USB Corporation		$	68,511	$	2,052	$	70,563	$	38		$	800	$	16,300	$	53,425
True Materials, Inc.			19,330		323		19,653		(713	)		5,100		—		15,266
Panomics, Inc.			71,758		924		72,682		3,492			300		16,400		52,490
	Total	$	159,599	$	3,299	$	162,898	$	2,817		$	6,200	$	32,700	$	121,181

        On January 30, 2008, the Company acquired 100% of the outstanding shares of USB Corporation ("USB"), a privately-held Cleveland, Ohio-based company that develops, manufactures and markets an extensive line of molecular biology and biochemical reagent products. The acquisition will enable the Company to accelerate the development and commercialization of new genetic analysis solutions and increase the value of its current product portfolio. The results of operations of USB since January 30, 2008 have been included in Affymetrix' consolidated financial statements for the year ended December 31, 2008.

        On July 17, 2008, the Company acquired 100% of the outstanding shares of True Materials, Inc. ("TMI"), a privately-held San Francisco, California-based company that develops digitally encoded microparticle technology. This technology is applicable to the research, applied and diagnostic markets and will enable the Company to enter low to mid-multiplex markets. The results of operations of TMI since July 17, 2008 have been included in Affymetrix' consolidated financial statements for the year ended December 31, 2008.

        On December 5, 2008, the Company acquired 100% of the outstanding shares of Panomics, Inc. ("Panonimcs"), a privately-held Fremont, California-based company that offers a suite of assay products for a wide variety of low to mid-plex genetic, protein and cellular analysis applications. The acquisition of Panomics opens up large and growing market opportunities that are downstream of whole genome analysis. The results of operations of Panomics since December 5, 2008 have been included in Affymetrix' consolidated financial statements for the year ended December 31, 2008.

Intangible Assets and Goodwill—USB

        A valuation of the purchased intangible assets was undertaken by Affymetrix' management in its determination of the estimated fair value of such assets. The $6.1 million value assigned to developed technology and patents and core technology is included in acquired technology rights on the Company's Consolidated Balance Sheet and will be amortized to cost of product sales over the estimated useful lives of these assets, generally four to five years. Affymetrix recorded amortization expense of

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DECEMBER 31, 2008

NOTE 9—ACQUISITIONS (Continued)

approximately $1.2 million for the year ended December 31, 2008 related to these acquired patents and technology. The $10.2 million value assigned to customer contracts and trade names and trademarks is included in acquired technology rights on the Company's Consolidated Balance Sheet and will be amortized to selling, general and administrative expenses over the estimated useful lives of these assets, generally four to eight years. Affymetrix recorded amortization expense of approximately $1.6 million for the year ended December 31, 2008, related to customer contracts and trade names and trademarks. Goodwill of $53.4 million was recorded as the excess of the purchase price over the fair value of net assets acquired. Based upon the impairment analysis performed in the fourth quarter of 2008, the Company wrote-off the entire $53.4 million. Refer to Note 10, "Goodwill and Acquired Technology Rights", for further information.

Intangible Assets and Goodwill—Panomics

        A valuation of the purchased intangible assets was undertaken by Affymetrix' management in its determination of the estimated fair value of such assets. The $6.1 million value assigned to existing technology is included in acquired technology rights on the Company's Consolidated Balance Sheet and will be amortized to cost of product sales over the estimated useful lives of these assets, generally four to seven years. Affymetrix recorded amortization expense of approximately $0.1 million for the year ended December 31, 2008 related to the acquired technology. The $7.9 million value assigned to customer contracts and related relationships, services and related relationships and order backlog is included in acquired technology rights on the Company's Consolidated Balance Sheet and will be amortized to selling, general and administrative expenses over the estimated useful lives of these assets, generally five to seven years. Affymetrix recorded amortization expense of approximately $0.2 million for the year ended December 31, 2008, related to these intangible assets. The $2.4 million value assigned to patents and core technology is included in acquired technology rights on the Company's Consolidated Balance Sheet and will be amortized to research and development expense over their estimated useful lives of four to six years. Affymetrix recorded amortization expense of less than $0.1 million for the year ended December 31, 2008, related to these patents and core technology assets. Goodwill of $52.5 million was recorded as the excess of the purchase price over the net assets acquired. Based upon the impairment analysis performed in the fourth quarter of 2008, the Company wrote-off the entire $52.5 million. Refer to Note 10, "Goodwill and Acquired Technology Rights", for further information.

In-process Technology

        For each business acquisition, management determined the estimated fair value of certain research and development programs in-process at the acquisition date that had not yet reached technological feasibility and had no alternative future use and recorded approximately $0.8 million, $5.1 million and $0.3 million related to the acquisition of USB, TMI and Panomics, respectively, in the line item "Acquired in-process technology" in the Company's Consolidated Statements of Operations. The fair values of these projects were determined using the Income Approach whereby management estimated each project's related future net cash flows. This discount rate is based on the Company's estimated weighted average cost of capital adjusted upward for the risks associated with the projects acquired. The projected cash flows from the acquired projects were based on estimates of revenues and operating profits related to the projects of each acquired company considering the stage of development of each

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DECEMBER 31, 2008

NOTE 9—ACQUISITIONS (Continued)

potential product acquired, the time and resources needed to complete the development and approval of each product, the life of each potential commercialized product and the inherent difficulties and uncertainties in developing products and services based on complex genetic technologies and biochemical processes.

        The largest research and development program in-process at the acquisition date primarily was the microRNA profiling project undertaken by TMI. The fair value of this project was determined using the Income Approach whereby the Company estimated the project's related future net cash flows between 2009 and 2015 and discounted them to their present value using a risk adjusted discount rate of approximately 30%. This discount rate is based on the Company's estimated weighted average cost of capital adjusted upward for the risks associated with the project acquired. The Company expects to complete this project in fiscal 2009.

        The estimates used by the Company in valuing the licensed technologies and acquired in process technologies were based upon assumptions the Company believes to be reasonable but which are inherently uncertain and unpredictable. The Company's assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the projected results.

Escrow Agreements

        Pursuant to the terms of the USB merger agreement, the Company withheld from the merger consideration $4.0 million and delivered those funds to an escrow account which shall be released to the USB shareholders upon achievement of certain revenue targets in fiscal 2008. Quarterly, the Company reviewed the revenue targets and to the extent they were achieved, all or a portion of the escrow funds shall be disbursed to the USB shareholders consistent with the terms of the merger agreement. If the prescribed revenue targets are not achieved, some or all of the escrow funds shall be released from restriction. As funds are disbursed to the USB shareholders, the Company will reflect these payments as additional goodwill and will reduce restricted cash. Any funds remaining in escrow at the end of the fiscal year 2008 which are not payable to the USB shareholders and are released from restriction will be reclassified to cash and cash equivalents. As of December 31, 2008, $1.8 million had been disbursed from the escrow account as a result of the achievement of certain revenue targets and $1.7 million has been accrued, but not yet paid. Accordingly, $2.2 million is presented as a component of restricted cash in the Company's Consolidated Balance Sheet at December 31, 2008 whereby $1.7 million will be released to USB shareholders and $0.5 million will be returned to the Company in the first quarter of 2009.

        Pursuant to the terms of the TMI merger agreement, the Company withheld from the merger consideration $5.1 million and delivered those funds to an escrow account, which shall be released to the founder and certain key employees of TMI upon achievement of certain employment milestones. As the continuous employment milestones are achieved, a portion of the escrow funds shall be disbursed to the founder and certain key employees consistent with the terms of the merger agreement. The Company records these expenses in research and development expense as earned. As of December 31, 2008, $0.8 million had been disbursed from the escrow account.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 10—GOODWILL AND ACQUIRED TECHNOLOGY RIGHTS

Goodwill

        Information regarding the changes to goodwill during 2008 is as follows (in thousands):

Balance at December 31, 2007		$	125,050
	USB acquisition		53,425
	TMI acquisition		15,266
	Panomics, Inc. acquisition		52,490
	Adjustment to ParAllele acquisition		(7,132	)
	Less: goodwill impairment		(239,099	)
Balance at December 31, 2008		$	—

        In 2008, the Company adjusted, by $7.1 million, the goodwill associated with its acquisition of ParAllele in 2005 as it released the valuation allowance originally established for ParAlelle's net operating losses in accordance with SFAS No. 109, Accounting for Income Taxes. There was no significant change from the balance of goodwill as of December 31, 2006 to December 31, 2007. The Company performed an interim impairment assessment as of December 31, 2008 and determined that the carrying amount of its goodwill was not recoverable and recorded an impairment charge of $239.1 million which was presented as "Goodwill impairment charges" in the Company's Consolidated Statements of Operations.

Acquired Technology Rights

        Acquired technology rights are comprised of licenses to technology covered by patents owned by third parties or patents acquired by the Company and are amortized over the expected useful lives of these assets, which range from one to fifteen years. Accumulated amortization of these rights amounted to $52.4 million and $39.0 million at December 31, 2008 and 2007, respectively.

        Based on a combination of factors, including a sustained decline in the Company's stock price, the Company concluded that there were sufficient indicators to require it to perform an impairment analysis of its acquired technology rights as of December 31, 2008. The impairment analysis for acquired technology rights indicated that some of the acquired technology rights were not recoverable as the sum of its estimated future undiscounted cash flows were below the asset's carrying value and accordingly, the Company estimated the fair value of these identified intangible assets using a discounted cash flow analysis to measure the impairment loss. As a result of this analysis, the Company wrote-off the difference between the acquired technology rights' estimated fair value and the carrying values which resulted in a non-cash impairment charge totaling $5.5 million, of which $1.9 million was included as a component of "Cost of product sales", $3.2 million was included as a component of "Research and development", and $0.4 million was included as a component of "Selling, general and administration" expenses in the Consolidated Statements of Operations. Based on the Company's impairment analysis, the remaining balance of identified intangible assets of $62.6 million is expected to be recoverable.

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DECEMBER 31, 2008

NOTE 10—GOODWILL AND ACQUIRED TECHNOLOGY RIGHTS (Continued)

        The expected future annual amortization expense of the Company's acquired technology rights is as follows (in thousands):

For the Year Ending December 31,		Amortization Expense
2009		$	13,213
2010			12,212
2011			12,031
2012			10,257
2013			7,749
Thereafter			7,107
	Total	$	62,569

NOTE 11—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

        Accounts payable and accrued liabilities as of December 31, 2008 and 2007 consist of the following (in thousands):

		December 31, 2008		December 31, 2007
Accounts payable		$	19,005	$	14,795
Accrued compensation and related liabilities			20,953		29,519
Accrued interest			5,073		1,421
Accrued taxes			5,399		5,292
Accrued legal			4,500		1,244
Accrued warranties			1,603		3,007
Other			6,026		6,265
	Total	$	62,559	$	61,543

NOTE 12—RELATED PARTY TRANSACTIONS AND NOTES RECEIVABLE FROM EMPLOYEES

Related Party Transactions

        As of December 31, 2008, the Company, and certain of its affiliates, including certain members of the Board of Directors, held approximately 22% ownership interest in Perlegen Sciences, Inc. ("Perlegen"), a privately-held biotechnology company. In addition, two members of Perlegen's Board of Directors are also members of the Company's Board of Directors.

        The Company accounts for its ownership interest in Perlegen using the equity method as the Company and its affiliates do not control the strategic, operating, investing and financing activities of Perlegen; however, the Company does have significant influence over Perlegen's operating activities. Further, the Company has no obligations to provide funding to Perlegen nor does it guarantee or otherwise have any obligations related to the liabilities or results of operations of Perlegen or its investors. As of June 30, 2005, the Company had reduced the carrying value of its investment to zero through the recording of its proportionate share of Perlegen's operating losses.

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DECEMBER 31, 2008

NOTE 12—RELATED PARTY TRANSACTIONS AND NOTES RECEIVABLE FROM EMPLOYEES (Continued)

        In accordance with Financial Accounting Standards Board Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 as amended, the Company has concluded that Perlegen is a variable interest entity in which the Company holds a variable interest, and that the Company is not the primary beneficiary.

Notes Receivable from Employees

        The Company has notes receivable from employees totaling zero and $1.9 million as of December 31, 2008 and 2007, respectively. The notes were generally due four to five years after the date of issuance and accrued interest was due based on the Internal Revenue Service imputed interest rate at the date of issuance.

NOTE 13—COMMITMENTS AND CONTINGENCIES

Operating Leases

        Affymetrix leases laboratory, office and manufacturing facilities under non-cancelable operating leases that expire at various times through 2016. Some of these leases contain renewal options ranging from two to five years and escalation clauses. Rent expense related to operating leases for the years ended December 31, 2008, 2007 and 2006 was approximately $11.0 million, $14.6 million and $10.9 million, respectively. In connection with some of these facility leases, the Company has made security deposits totaling $2.6 million, which are included in long-term other assets in the Consolidated Balance Sheets.

        Future minimum lease obligations, net of sublease income, at December 31, 2008 under all non-cancelable operating leases are as follows (in thousands):

For the Year Ending December 31,		Amount
2009		$	7,457
2010			6,409
2011			5,889
2012			5,597
2013			4,118
Thereafter			905
	Total	$	30,375

        Sublease income is expected to be approximately $1.3 million for fiscal 2009, $0.9 million for fiscal 2010, $0.8 million for fiscal years 2011 and 2012, $0.5 million for fiscal 2013 and $0 thereafter.

Product Warranty Commitment

        The Company provides for anticipated warranty costs at the time the associated revenue is recognized. Product warranty costs are estimated based upon the Company's historical experience and the warranty period. The Company periodically reviews the adequacy of its warranty reserve and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated

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DECEMBER 31, 2008

NOTE 13—COMMITMENTS AND CONTINGENCIES (Continued)

costs to be incurred. Since the beginning of 2007, the Company has noted that improvement in its internal quality control programs has resulted in an overall decline in product replacement claims. As a result, an adjustment decreasing the warranty reserve balance was made in 2007. Information regarding the changes in the Company's product warranty liability for the years ended December 31, 2007 and 2008 is as follows (in thousands):

		Amount
Balance at December 31, 2006		$	6,801
	New warranties issued		3,310
	Repairs and replacements		(5,167	)
	Adjustments		(1,937	)
Balance at December 31, 2007		$	3,007
	New warranties issued		2,542
	Repairs and replacements		(3,278	)
	Adjustments		(667	)
Balance at December 31, 2008		$	1,604

Non-Cancelable Supply Agreements

        As of December 31, 2008, the Company had approximately $3.9 million of non-cancelable inventory supply agreements that are in effect through 2009.

Indemnifications

        From time to time the Company has entered into indemnification provisions under certain of its agreements with other companies in the ordinary course of business, typically with business partners, customers, and suppliers. Pursuant to these agreements, the Company generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties on a case by case basis for losses suffered or incurred by the indemnified parties in connection with any U.S. patent or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification provisions is generally perpetual from the time of the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. In addition, the Company has entered into indemnification agreements with its officers and directors. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As of December 31, 2008, the Company had not accrued a liability for this guarantee, because the likelihood of incurring a payment obligation in connection with this guarantee is remote.

Legal Proceedings

        We have been in the past, and continue to be, a party to litigation which has consumed and may continue to consume substantial financial and managerial resources.

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DECEMBER 31, 2008

NOTE 13—COMMITMENTS AND CONTINGENCIES (Continued)

E8 Pharmaceuticals LLC

        On July 1, 2008, we were named as a defendant in a complaint filed by plaintiffs E8 Pharmaceuticals LLC and Massachusetts Institute of Technology (MIT) in the United States District Court of Massachusetts. In the complaint, the plaintiffs allege that we are infringing one patent owned by MIT and licensed to E8 Pharmaceuticals by making and selling our GeneChip® products to customers and teaching our customers how to use the products. The plaintiffs seek a permanent injunction enjoining us from further infringement, and unspecified monetary damages, including lost profits, enhanced damages pursuant to 35 U.S.C. § 284, costs, attorneys' fees and other relief as the court deems just and proper. We believe that the plaintiffs' claims are without merit and will vigorously defend against the claims advanced in the complaint.

Shareholder Derivative Lawsuits

        In 2006, three of our shareholders filed purported derivative lawsuits on behalf of our company, which lawsuits name us (as nominal defendant) and several of our current and former officers and directors, and allege that these officers and directors breached their fiduciary duties and breached other laws by participating in backdating stock options grants. Two of these lawsuits were filed in the United States District Court for the Northern District of California, one on August 30, 2006 and the other on September 13, 2006, and were subsequently consolidated. The third lawsuit was filed in the Superior Court of the State of California on October 20, 2006. The substance of the allegations in these cases is similar, and includes claims against the individual defendants for breach of fiduciary duties, unjust enrichment, and violations of federal securities laws, Generally Accepted Accounting Principles, Section 162(m) of the Internal Revenue Code, and certain state laws in each case in connection with the allegedly backdated options. The proposed settlement payment has been recorded in the Company's Consolidated Statement of Operations for the year ended December 31, 2008.

        On December 19, 2008, the parties executed a preliminary memorandum of understanding providing for the settlement of the shareholder derivative lawsuits. Under this memorandum, the parties tentatively agreed, among other things, to the adoption of certain corporate governance enhancements and the payment of $3.5 million to counsel for plaintiffs. The proposed settlement is subject to the negotiation and execution of a final memorandum of understanding and stipulation of settlement, and to court approval.

Enzo Litigation

        On October 28, 2003, Enzo Life Sciences, Inc., a wholly-owned subsidiary of Enzo Biochem, Inc. (collectively "Enzo") filed a complaint against us that is now pending in the United States District Court for the Southern District of New York for breach of contract, injunctive relief and declaratory judgment. The Enzo complaint relates to a 1998 distributorship agreement with Enzo under which we served as a non-exclusive distributor of certain reagent labeling kits supplied by Enzo. In its complaint, Enzo seeks monetary damages and an injunction against us from using, manufacturing or selling Enzo products and from inducing collaborators and customers to use Enzo products in violation of the 1998 agreement. Enzo also seeks the transfer of certain of our patents to Enzo. In connection with its complaint, Enzo provided us with a notice of termination of the 1998 agreement effective on November 12, 2003.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 13—COMMITMENTS AND CONTINGENCIES (Continued)

        On November 10, 2003, we filed a complaint against Enzo in the United States District Court for the Southern District of New York for declaratory judgment, breach of contract and injunctive relief relating to the 1998 agreement. In our complaint, we allege that Enzo has engaged in a pattern of wrongful conduct against us and other Enzo labeling reagent customers by, among other things, asserting improperly broad rights in its patent portfolio, improperly using the 1998 agreement and distributorship agreements with others in order to corner the market for non-radioactive labeling reagents, and improperly using the 1998 agreement to claim ownership rights to our proprietary technology. We seek declarations that we have not breached the 1998 agreement and that nine Enzo patents that are identified in the 1998 agreement are invalid and/or not infringed by us. We also seek damages and injunctive relief to redress Enzo's alleged breaches of the 1998 agreement, its alleged tortious interference with our business relationships and prospective economic advantage, and Enzo's alleged unfair competition. We filed a notice of related case stating that our complaint against Enzo is related to the complaints already pending in the Southern District of New York against eight other former Enzo distributors. The U.S. District Court for the Southern District of New York has related our case. There is no trial date in the actions between Enzo and us.

        We believe that the claims set forth in Enzo's complaint are without merit and have filed the action in the Southern District of New York to protect its interests. However, we cannot be sure that we will prevail in these matters.

Administrative Litigation and Proceedings

        Our intellectual property is subject to a number of significant administrative and litigation actions. These proceedings could result in our patent protection being significantly modified or reduced, and the incurrence of significant costs and the consumption of substantial managerial resources.

NOTE 14—SENIOR CONVERTIBLE NOTES

3.50% Senior Convertible Notes

        On November 13, 2007, the Company issued $316.3 million principal amount of 3.50% Senior Convertible Notes (the "3.50% Notes") due January 15, 2038. The net proceeds after issuance costs from the 3.50% Notes offering were approximately $309.4 million. The 3.50% Notes bear interest of 3.50% per year on the principal amount payable semi-annually in arrears on January 15 and July 15 of each year. The Company incurred underwriter discount and issuance costs of approximately $6.9 million, which are being amortized over the effective life of the 3.50% Notes which is five years, the period up to the first date that the Holders can require the Company to repurchase the notes.

        The 3.50% Notes are convertible into 33.1991 shares of Affymetrix common stock per $1,000 principal amount of notes which equates to 10,499,215 shares of common stock, or a conversion price equivalent of $30.12 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of the following specified events:

•

issuing shares of the Company's common stock as a dividend or distribution of the Company's common stock;

•

effecting a stock split or stock combination;

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DECEMBER 31, 2008

NOTE 14—SENIOR CONVERTIBLE NOTES (Continued)

•

issuing to all or substantially all Holders of the Company's common stock any rights or warrants under certain circumstances and with certain entitlements;

•

distributing shares of the Company's common stock, evidences of indebtedness or other assets or property, to all or substantially all Holders of the Company's common stock, with certain exceptions;

•

making cash distributions to all or substantially all Holders of the Company's common stock; or

•

should the Company or any of its subsidiaries purchase shares of its common stock pursuant to a tender offer at a premium to market.

        Holders may convert their 3.50% Notes into shares of Affymetrix stock at any time at their option at the initial conversion rate, subject to adjustment, prior to the close of business on the business day prior to the maturity date.

        On January 15, 2013, 2018 and 2028, the security holders have the option to require the Company to repurchase the 3.50% Notes at a price equal to 100% of the principal amount of the 3.50% Notes plus accrued interest. Additionally, on or after January 15, 2013, Affymetrix has the option of redeeming for cash at 100% of the principal amount all or part of the then outstanding 3.50% Notes plus accrued interest.

        The 3.50% Notes are unsecured and rank equally with the Company's other existing and future senior indebtedness. The 3.50% Notes are structurally subordinated to any current or future indebtedness and other liabilities of the Company's subsidiaries.

0.75% Senior Convertible Notes

        On December 10, 2003, the Company issued $120.0 million of 0.75% Senior Convertible Notes (the "0.75% Notes") due December 15, 2033. The net proceeds after issuance costs from the 0.75% Notes offering were approximately $116.0 million. The 0.75% Notes bear interest of 0.75% per year on the principal amount payable semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2004. The Company used the net proceeds of the offering to repurchase its 4.75% Notes. The Company incurred broker discount and issuance costs of approximately $3.8 million which are being amortized over the effective life of the 0.75% Notes. The effective life of the 0.75% Notes due 2033 is five years, the period up to the first date that the Holders could require the Company to repurchase the notes.

        The 0.75% Notes were convertible into 32.2431 shares of Affymetrix common stock per $1,000 principal amount of notes which equated to 3,869,172 shares of common stock, or a conversion price equivalent of $31.01 per share of common stock. The conversion rate was subject to adjustment upon the occurrence of the following specified events:

•

issuing shares of the Company's common stock as a dividend or distribution of the Company's common stock;

•

effecting a stock split or stock combination;

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DECEMBER 31, 2008

NOTE 14—SENIOR CONVERTIBLE NOTES (Continued)

•

issuing to all or substantially all Holders of the Company's common stock any rights or warrants under certain circumstances and with certain entitlements;

•

distributing shares of the Company's common stock, evidences of indebtedness or other assets or property, to all or substantially all Holders of the Company's common stock, with certain exceptions;

•

making cash distributions to all or substantially all Holders of the Company's common stock; or

•

should the Company or any of its subsidiaries purchase shares of its common stock pursuant to a tender offer at a premium to market.

        Holders were able convert their 0.75% Notes into shares of Affymetrix' common stock prior to the close of business on the business day prior to the maturity date under the following circumstances: (1) during any quarterly conversion period prior to December 15, 2028, if the sales price of the Company's common stock for at least 20 trading days in the 30 consecutive trading-day period ending on the first day of such conversion period reaches a specified threshold, (2) on or after December 28, 2028, at any time after the sale price of the Company's common stock on any date is greater than 130% of the then current conversion price, (3) during the five consecutive trading-day period in which the average of the trading prices for the notes was less than 98% of the average of the sale price of the Company's common stock multiplied by the then applicable conversion rate, (4) the 0.75% Notes are called for redemption, or (5) specified corporate transactions have occurred.

        On December 15, 2008, the Company repurchased $119.9 million of the $120.0 million of 0.75% Notes as the security Holders exercised their option to require the Company to repurchase the 0.75% Notes at a price equal to 100% of the principal amount of the 0.75% Notes plus accrued and unpaid interest. The balance of the 0.75% Notes at December 31, 2008 was $0.1 million.

        The 0.75% Notes that remain outstanding are unsecured and rank equally with the Company's other existing and future senior indebtedness. The Notes are structurally subordinated to any current or future indebtedness and other liabilities of the Company's subsidiaries.

NOTE 15—STOCKHOLDERS' EQUITY

Stockholder Rights Plan

        On October 15, 1998, the Board of Directors of the Company declared a dividend of (i) one preferred share purchase right (a "Right") for each outstanding share of common stock of the Company, and (ii) a number of Rights for each share of Series AA Preferred Stock of the Company equal to the number of shares of common stock into which such share of Series AA Preferred Stock was convertible. The dividend was paid on October 27, 1998 (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series B Junior Participating Preferred Stock, par value $.01 per share, of the Company (the "Series B Preferred Stock") at a price of $62.50 per one one-thousandth of a share of Series B Preferred Stock, subject to adjustment. The Rights will be exercisable if a person or group hereafter acquires beneficial ownership of 15% or more of the common stock of the Company or announces a tender offer for 15% or more of the common stock. The Board of Directors will be entitled to redeem the Rights at one cent per Right at any time before any such person acquires

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DECEMBER 31, 2008

NOTE 15—STOCKHOLDERS' EQUITY (Continued)

beneficial ownership of 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 Right's exercise price, a number of shares of common stock having a market value at that time of twice the Right's exercise price. Rights held by the 15% holder will become void and will not be exercisable to purchase shares at the bargain purchase price. 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 the acquiring company's common shares having a market value at that time of twice the Right's exercise price.

        On February 7, 2000, the Company's Board of the Directors approved an amendment to its stockholders rights plan. The amendment increases the exercise price of the Preferred Share Purchase Rights to $625.00 and extends the expiration date of the plan to February 2010. Under the amended plan, each Preferred Share Purchase Right entitles stockholders to buy one one-thousandth of a share of Series B Junior Participating Preferred Stock of the Company at the new exercise price of $625.00. The Rights will be exercisable if a person or group acquires beneficial ownership of 15% or more of the common stock of the Company or announces a tender offer for 15% or more of the common stock.

Stock-Based Compensation Plans

        The Company has a stock-based compensation program that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and non-vested stock awards (also known as restricted stock) granted under various stock plans. Stock options are generally time-based, vesting 25% on each annual anniversary of the grant date over four years and expire 7 to 10 years from the grant date. Non-vested restricted stock awards are generally time-based, vesting 33% on each of the second, third and fourth anniversaries of the grant date. As of December 31, 2008, the Company had approximately 3.2 million shares of common stock reserved for future issuance under its stock-based compensation plans. New shares are issued as a result of stock option exercises and non-vested restricted stock awards. A more detailed description of the Company's current stock option plans follows below.

        In 1998, the Board of Directors adopted the Affymetrix 1998 Stock Incentive Plan (the "1998 Stock Plan") under which nonqualified stock options and restricted stock may be granted to employees and outside consultants, except that members of the Board of Directors and individuals who are considered officers of the Company under the rules of the National Association of Securities Dealers shall not be eligible. Options granted under the 1998 Stock Plan expire no later than ten years from the date of grant. The option price shall be at least 100% of the fair value of the Company's common stock on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options may be granted with different vesting terms from time to time as determined by the Board of Directors. A total of 3,600,000 shares of common stock are authorized for issuance under the 1998 Stock Plan.

89

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 15—STOCKHOLDERS' EQUITY (Continued)

        In 2000, the Board of Directors adopted the 2000 Equity Incentive Plan (the "2000 Stock Plan"), which was amended and restated in 2001, under which restricted shares, stock units, stock options and stock appreciation rights may be granted to employees, outside directors and consultants. Options granted under the 2000 Stock Plan expire no later than ten years from the date of grant. The option price shall be at least 100% of the fair value of the Company's common stock on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options may be granted with different vesting terms from time to time as determined by the Board of Directors. In 2008, the 2000 Stock Plan was amended and restated to increase share availability by 4,200,000 shares bringing the total shares of common stock authorized for issuance under the 2000 Stock Plan to 11,700,000.

        The following table sets forth the total stock-based compensation expense resulting from stock options and non-vested stock awards included in the Company's Condensed Consolidated Statements of Income (Loss) (in thousands):

		Years Ended December 31,
		2008		2007		2006
Costs of product sales		$	1,305	$	1,107	$	1,389
Research and development			1,665		2,064		3,653
Selling, general and administrative			4,641		7,215		10,008
Restructuring			—		340		7,544
	Total stock-based compensation expense	$	7,611	$	10,726	$	22,594

        Selling, general and administrative expense included a $1.1 million charge in 2006 due to the modification of an executive officer's stock option grant to include an extension of time to exercise, as well as the vesting of certain stock options without a requisite service period. Restructuring expense included a $7.5 million charge in 2006 due to the modification of a former Neomorphic employee's equity awards, all of which became fully vested under the terms of a prior leave of absence agreement when he was involuntarily terminated in connection with the Company's restructuring effort.

        As of December 31, 2008, $32.9 million of total unrecognized stock-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2012. The weighted-average term of the unrecognized stock-based compensation expense is 3.1 years.

Stock Options

        The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

	Years Ended December 31,
	2008			2007			2006
Risk free interest rate		3.0	%		4.4	%		5.0	%
Expected dividend yield		0.0	%		0.0	%		0.0	%
Expected volatility		44	%		42	%		40	%
Expected option term (in years)		4.5			4.5			4.5

90

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 15—STOCKHOLDERS' EQUITY (Continued)

        The risk free interest rate for periods within the contractual life of the Company's stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company's historical exercise trends over ten years. The expected volatility for the years ended December 31, 2008 and 2007 is based on a blend of historical and market-based implied volatility. Using the assumptions above, the weighted-average grant date fair value of options granted during the years ended December 31, 2008, 2007 and 2006 was $4.32, $10.18 and $11.61, respectively.

        Activity under the Company's stock plans for the year ended December 31, 2008 is as follows (in thousands, except per share amounts):

	Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Terms		Aggregate Intrinsic Value
						(in years)
Outstanding at December 31, 2007		5,475		$	30.91
Grants		2,678			11.06
Exercises		(42	)		11.04
Forfeitures or expirations		(1,854	)		29.06
Outstanding at December 31, 2008		6,257		$	23.09		4.12	$	75
Exercisable at December 31, 2008		3,175		$	31.58		2.33	$	20
Vested and expected to vest at December 31, 2008		5,390		$	24.55		3.82	$	59

        The following table summarizes information concerning currently outstanding and exercisable options at December 31, 2008:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number		Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price Per Share		Number		Weighted-Average Exercise Price Per Share
	(in thousands)		(in years)				(in thousands)
$0.26—$8.71		318		6.50	$	4.45		27	$	3.21
$8.78—$10.29		1,589		6.20	$	10.25		7	$	9.65
$10.52—$21.96		1,036		5.06	$	18.08		309	$	19.71
$22.01—$25.52		1,059		1.49	$	24.46		977	$	24.50
$25.67—$30.45		1,083		3.64	$	28.26		773	$	28.83
$30.47—$47.85		1,027		2.54	$	42.19		950	$	42.38
$48.01—$132.59		145		3.41	$	56.57		132	$	57.08
Total		6,257		4.12	$	23.09		3,175	$	31.58

        The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company's closing stock price on the last trading day of its fourth quarter of 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2008.

91

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 15—STOCKHOLDERS' EQUITY (Continued)

The amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised is $0.3 million, $6.2 million, and $6.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Reserved Shares

        At December 31, 2008, the Company has shares reserved for future issuance as follows (in thousands):

Options outstanding	6,257
Options available for future grants	3,216
Convertible subordinated notes	10,502
	19,975

Restricted Stock

        The following table summarizes the Company's non-vested restricted stock activity for the year ended December 31, 2008 (in thousands, except per share amounts):

	Number of Shares			Weighted-Average Grant Date Fair Value
Non-vested stock outstanding at December 31, 2007		724		$	25.53
Granted		1,412		$	10.78
Vested		(140	)	$	25.71
Forfeited		(358	)	$	20.50
Non-vested stock outstanding at December 31, 2008		1,638		$	13.86

        Total fair value of shares vested is $22.7 million and $18.5 million for the years ended December 31, 2008 and 2007, respectively.

92

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 16—INCOME TAXES

        The following table presents the U.S. and foreign components of consolidated (loss) income before income taxes and the provision for income taxes (in thousands):

		Year Ended December 31,
		2008			2007			2006
(LOSS) INCOME BEFORE INCOME TAXES:
	U.S.	$	(244,479	)	$	11,372		$	14,760
	Foreign		2,478			6,910			(20,827	)
(Loss) income before income taxes		$	(242,001	)	$	18,282		$	(6,067	)
PROVISION FOR INCOME TAXES:
Current:
	Federal	$	12,042		$	153		$	13,203
	State		2,780			14			888
	Foreign		2,598			2,002			41
Subtotal			17,420			2,169			14,132
Deferred:
	Federal		43,012			5,251			(5,565	)
	State		5,317			(1,207	)		(1,261	)
	Foreign		169			(524	)		331
Subtotal			48,498			3,520			(6,495	)
Provision for income taxes		$	65,918		$	5,689		$	7,637

        The difference between the provision (benefit) for income taxes and the amount computed by applying the federal statutory income tax rate (35%) to income (loss) before taxes is explained as follows (in thousands):

	Year Ended December 31,
	2008			2007			2006
Tax at federal statutory rate	$	(84,700	)	$	6,398		$	(2,123	)
State taxes, net		(3,344	)		(1,213	)		704
Non-deductible stock compensation		294			559			3,840
Foreign rate differential		1,543			164			7,018
Research credits		(1,142	)		(849	)		(2,163	)
Goodwill impairment		64,986			—			—
Change in valuation allowance		85,603			—			—
Other		2,678			630			361
	$	65,918		$	5,689		$	7,637

93

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 16—INCOME TAXES (Continued)

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's assets are as follows (in thousands):

				December 31,
				2008			2007
Deferred tax assets:
	Net operating loss carryforwards			$	38,501		$	46,367
	Tax credit carryforwards				39,426			35,088
	Deferred revenue				1,768			2,022
	Capitalized research and development costs				1,012			1,706
	Intangibles				23,776			685
	Stock-based compensation				9,085			8,512
	Accrued compensation				2,701			2,850
	Accrued warranty				639			1,206
	Inventory reserve				4,976			4,213
	Reserves and other				11,657			6,393
	Depreciation and amortization				18,176			6,031
	Other, net				3,404			1,097
			Total deferred tax assets		155,121			116,170
Valuation allowance for deferred tax assets					(139,712	)		(64,592	)
	Net deferred tax assets				15,409			51,578
Net deferred tax liabilities:
	Acquired intangibles				(6,728	)		(1,235	)
	Other, net				(2,840	)		(3,333	)
			Total deferred tax liabilities		(9,568	)		(4,568	)
		Net deferred tax assets		$	5,841		$	47,010

        As of December 31, 2008, the Company had total net operating loss carryforwards of $207.6 million, comprised of $111.2 million for U.S. federal purposes, which expire in the years 2020 through 2028 if not utilized, and $96.4 million for state purposes, the majority of which expire in the years 2010 through 2018 if not utilized. Additionally, the Company has federal research and development tax credit carryforwards of approximately $21.6 million, which expire in the years 2010 through 2028 if not utilized. The Company also has state research and development tax credit carryforwards and other various tax credit carryforwards of approximately $35.1 million. Substantially all of the state tax credits can be carried forward indefinitely. Utilization of net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of the net operating loss before utilization.

        As of December 31, 2008, the Company has determined that it is not more likely than not the deferred tax assets in the U.S. will be realized and as such the Company has recorded a full valuation

94

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 16—INCOME TAXES (Continued)

allowance against these assets, net of FIN 48 reserves, as of December 31, 2008. The valuation allowance increased by $75.1 million and decreased by $3.4 million for the years ended December 31, 2008 and 2007, respectively. The increase during fiscal year 2008 is primarily attributable to the recording of a full valuation allowance against all U.S. deferred tax assets, net of FIN 48 reserves, as of December 31, 2008. Approximately $41.4 million of the valuation allowance as of December 31, 2008 is attributable to the income tax benefits of stock option deductions, the benefit of which will be credited to stockholders' equity when, and if, realized. Approximately $10.0 million of the valuation allowance as of December 31, 2008 is attributable to tax attributes related to the Company's acquisitions, the benefit of which will be credited to income tax expense under SFAS No. 141R when, and if, realized.

        Not included in the deferred tax assets as of December 31, 2008, pursuant to SFAS No. 123R, is approximately $4.2 million of tax benefits related to employee stock plans. When realized, the tax benefit of these assets will be accounted for as a credit to additional paid-in capital, rather than a reduction of the income tax provision.

        As of December 31, 2008, cumulative un-remitted foreign earnings that are considered to be permanently invested outside the United States and on which no U.S. taxes have been provided were approximately $20.4 million. The residual U.S. tax liability, if such amounts were remitted, would be nominal.

        Of the total tax benefits resulting from the exercise of employee stock options and other employee stock programs, the amounts recorded to stockholders' equity were approximately $11.7 million and $5.4 million for the years ended December 31, 2008 and 2007 respectively.

        A portion of the Company's operations in Singapore operate under various tax holidays and tax incentive programs, which expire in whole or in part at various dates through 2017. There was a minimal net impact of these tax holidays and tax incentive programs for the year ended December 31, 2008.

        The following table presents the total amount of gross unrecognized tax benefits (in thousands):

	2008			2007
Unrecognized tax benefits, beginning of year	$	17,350		$	16,028
Gross increases—tax positions in prior period		328			130
Gross decreases—tax positions in prior period		(263	)		(40	)
Gross increases—current period tax positions		1,130			1,469
Settlements		—			(239	)
Unrecognized tax benefits, end of year	$	18,545		$	17,348

        If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $1.4 million. As of December 31, 2008, the Company does not anticipate any material changes to the amount of unrecognized tax benefits during the next 12 months. The Company classifies interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2008, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.1 million for a total cumulative amount included in non-current income taxes payable of $0.3 million as of December 31, 2008.

95

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 16—INCOME TAXES (Continued)

        The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Our major tax jurisdictions are the U.S., California, Singapore, and the U.K. The federal and California statute of limitations on assessment remain open for the tax years 1992 through 2008. The major foreign jurisdictions remain open for examination in general for tax years 2005 through 2008.

NOTE 17—SEGMENT AND GEOGRAPHIC INFORMATION

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

        The Company reported total revenue by type and by region as follows (in thousands):

			Year Ended December 31,
			2008		2007		2006
Total product and product related revenue:
	Product sales		$	270,392	$	291,828	$	275,437
	Services			32,096		38,074		40,397
	Royalties and other revenue			107,761		41,418		39,483
		Total revenue	$	410,249	$	371,320	$	355,317

			Year Ended December 31,
			2008		2007		2006
Customer location:
	United States		$	269,159	$	197,677	$	185,591
	Europe			92,487		114,188		109,154
	Japan			23,861		31,572		38,143
	Other			24,742		27,883		22,429
		Total	$	410,249	$	371,320	$	355,317

        Excluding a $90 million non-recurring intellectual property payment received in January 2008, there were no customers representing 10% or more of total revenue in 2008, 2007 and 2006.

        The Company's long-lived assets other than purchased intangible assets, which the Company does not allocate to specific geographic locations as it is impracticable to do so, are composed principally of net property, plant and equipment.

96

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 17—SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

        Net property, plant and equipment, classified by major geographic areas in which the Company operates was as follows (in thousands):

			Year Ended December 31,
			2008		2007		2006
Net property, plant and equipment:
	United States		$	67,680	$	107,028	$	108,967
	Singapore			20,164		35,275		30,298
	Other countries			1,501		1,581		2,057
		Total	$	89,345	$	143,884	$	141,322

NOTE 18—DEFINED-CONTRIBUTION SAVINGS PLANS

401(k) Plan

        The Company maintains a defined-contribution savings plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time U.S. employees. Participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company's expense associated with matching employee contributions for the years ended December 31, 2008, 2007 and 2006 totaled $3.3 million, $3.7 million and $3.8 million, respectively. Company contributions to employees vest ratably over four years.

Director and Executive Deferred Compensation Plan

        In December 2004, the Board of Directors approved the creation of the Affymetrix, Inc. Deferred Compensation Plan (the "Plan"). The Plan provides directors, executive officers and other eligible employees with the opportunity to enter into agreements to defer specified percentages of their cash compensation derived from base salary, bonus awards and other specified compensation (including director fees). Distributions occur upon termination of service (or the 6-month anniversary after termination), death, or upon such other dates that may be elected by the participant in accordance with the terms of the Plan. Generally, participants may elect for distributions of deferred amounts upon termination or death to be paid in the form of either a lump sum or in annual installments. Distributions would be made in the event of a change of control of Affymetrix. Deferrals are adjusted for gain or loss based on the performance of one or more investment options selected by the participant from among investment funds chosen by the Compensation Committee of the Board. The Company in its sole discretion may suspend or terminate the Plan or revise or amend it in any respect, except that no such action may reduce vested amounts credited to deferral accounts, and such accounts will continue to be owed to the participants or beneficiaries and will continue to be a liability of the Company until paid. For the years ended December 31, 2008 and 2007, the Company incurred no significant expenses in connection with the Plan.

97

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

NOTE 19—UNAUDITED QUARTERLY FINANCIAL INFORMATION

	2008											2007
	Fourth Quarter			Third Quarter			Second Quarter			First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
	(in thousands, except per share amounts)
Total revenue	$	78,574		$	75,189		$	86,911		$	169,575	$	107,592	$	94,986	$	88,307	$	80,435
Total cost of goods sold	$	43,318		$	38,167		$	39,000		$	31,655	$	37,941	$	35,592	$	36,566	$	28,617
Net (loss) income	$	(318,716	)	$	(31,820	)	$	(3,635	)	$	46,252	$	12,777	$	2,580	$	1,242	$	(4,006	)
Basic net (loss) income per common share	$	(4.65	)	$	(0.46	)	$	(0.05	)	$	0.68	$	0.19	$	0.04	$	0.02	$	0.06
Diluted net (loss) income per common share	$	(4.65	)	$	(0.46	)	$	(0.05	)	$	0.58	$	0.17	$	0.04	$	0.02	$	0.06

        In the first quarter of 2008, total revenue includes a non-recurring $90 million intellectual property payment. In the fourth quarter of 2008, the Company recorded a goodwill impairment charge of $239.1 million.

98

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

        As required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, Affymetrix' management, including our Chief Executive Officer and Principal Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of Affymetrix' disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that Affymetrix' disclosure controls and procedures were effective as of the end of the period covered by this report.

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). Under the supervision of our Chief Executive Officer and Chief Financial Officer and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the operations acquired from Panomics, Inc. on December 5, 2008, which are included in our fiscal 2008 consolidated financial statements and which, in the aggregate, consisted of $23.8million or 3.3% and $18.5million or 6.1% of total assets and net assets, respectively, as of December 31, 2008 and which in the aggregate, represented $0.8 million or 0.2% and $1.5 million or 0.5% of revenues and loss from operations, respectively, for the year then ended. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

        The effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by Ernst &Young LLP, our independent registered public accounting firm, as stated in their report which is included below.

99

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        To the Board of Directors and Stockholders of Affymetrix, Inc.

        We have audited Affymetrix, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Affymetrix, 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 included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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.

        As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Panomics, Inc., which is included in the 2008 consolidated financial statements of Affymetrix, Inc. and constituted $23.8 million or 3.3% and $18.5 million or 6.1% of total and net assets, respectively, as of December 31, 2008 and $0.8 million or 0.2% and $1.5 million or 0.5% of revenues and loss from operations, respectively, for the year then ended. Our audit of internal control over financial reporting of Affymetrix, Inc. also did not include an evaluation of the internal control over financial reporting of Panomics, Inc.

        In our opinion, Affymetrix, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, 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 Affymetrix, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three fiscal years in the period ended December 31, 2008 of Affymetrix, Inc. and our report dated February 24, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP  

San Jose, California
February 24, 2009

100

Changes in Internal Control Over Financial Reporting

        There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

        Not applicable.

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        Information regarding our directors and executive officers is incorporated by reference to the sections of the Company's proxy statement for the 2009 Annual Meeting of Stockholders (the "Proxy Statement") entitled "Election of Directors" and "Management."

        The information concerning our corporate governance, including our audit committee, required by this Item is incorporated by reference to the sections of the Proxy Statement entitled "Governance of the Company" and "Report of the Audit Committee."

        The information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference to the section of the Proxy Statement entitled "Section 16(a) Beneficial Ownership Reporting Compliance" under the heading "Stock Ownership of Principal Stockholders and Management."

CODE OF ETHICS

        Affymetrix has adopted a code of business conduct and ethics for directors, officers (including Affymetrix' Chief Executive Officer, Chief Financial Officer and Corporate Controller) and employees, known as the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on Affymetrix' website at http://www.affymetrix.com in the Corporate Governance section under the "Investors" link. Stockholders may request a free copy of the Code of Business Conduct and Ethics by sending an email request to investor@affymetrix.com.

ITEM 11.    EXECUTIVE COMPENSATION

        Incorporated by reference to the sections of the Proxy Statement entitled "Executive Compensation," "Compensation Discussion and Analysis," "Compensation Committee Report," "Certain Transactions" and "Compensation of Directors."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

        Incorporated by reference to the section of the Proxy Statement entitled "Stock Ownership of Principal Stockholders and Management."

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        Incorporated by reference to the sections of the Proxy Statement entitled "Certain Transactions" and "Governance of the Company."

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

        Information about principal accountant fees and services as well as related pre-approval policies appears under "Fees Paid to Ernst & Young LLP" and "Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm" in the Proxy Statement. Those portions of the Proxy Statement are incorporated by reference into this report.

101

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

        (a)(1)  Financial Statements. The financial statements as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference.

        (a)(2)  Financial Statement Schedule—Schedule II—Valuation and Qualifying Accounts. All other schedules have been omitted as they are not required, not applicable or the information is otherwise included.

        (a)(3)  Exhibits:

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENT
	2.1†	Agreement and Plan of Merger by and among Panomics, Inc., the Company, Panda Acquisition Corporation and the Equityholders' Representative dated as of November 11, 2008.
	3.1(1)	Restated Certificate of Incorporation.
	3.2(2)	Amended and Restated Bylaws.
	3.3(3)	Summary of Rights to Purchase Shares of Preferred Stock pursuant to the Rights Agreement dated as of October 15, 1998.
	4.1(4)	Rights Agreement, dated October 15, 1998, between the Company and American Stock Transfer & Trust Company, as Rights Agent.
	4.2(5)	Amendment No. 1 to Rights Agreement, dated as of February 7, 2000, between the Company and American Stock Transfer & Trust Company, as Rights Agent.
	4.3(6)	Indenture dated as of December 15, 2003, between the Company and The Bank of New York, as Trustee.
	4.4(7)	Indenture dated as of November 16, 2007, between the Company and the Bank of New York Trust Company, N.A. as Trustee.
	10.1(8)‡	1993 Stock Plan, as amended.
	10.2(8)‡	1996 Nonemployee Directors Stock Option Plan.
	10.3(9)	Lease between Sobrato Interests and the Company dated June 12, 1996 (3380 Central Expressway, Santa Clara, CA).
	10.4(9)	Lease between Sobrato Interests and the Company dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA).
	10.5(10)‡	1998 Stock Incentive Plan.
	10.6(10)‡	Form of Officer and Director Indemnification Agreement.
	10.7(11)‡	Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of the Company
	10.8(12)‡	Amended and Restated 1996 Non-Employee Directors Stock Plan.
	10.9(13)*	Common Terms Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.10(13)*	License Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.

102

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENT
	10.11(13)*	Affymetrix Instrument and Chip Supply Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.12(13)*	Research & Development Collaboration Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.13(13)*	Diagnostic Product and Instrument Agency Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.14(13)*	Affymetrix Instrument Agency Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.15(14)	Lease between Sobrato Interests and the Company dated July 3, 2002 (3420 Central Expressway, Santa Clara, CA).
	10.16(14)	First Amendment to Lease between Sobrato Interests and the Company dated September 30, 2003 (3420 Central Expressway, Santa Clara, CA).
	10.17(15)‡	Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan, as adopted effective March 9, 2000 and amended through June 23, 2008.
	10.18(16)‡	Form of Non-Qualified Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 1996 Non-Employee Directors Stock Plan.
	10.19‡	Form of Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
	10.20(A)(17)‡	Nonqualified Supplemental Deferred Compensation Plan of the Company
	10.20(B)(17)‡	Nonqualified Supplemental Deferred Compensation Plan Adoption Agreement.
	10.21(18)	Fifth Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3380 Central Expressway, Santa Clara, CA).
	10.22(18)	First Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3450 Central Expressway, Santa Clara, CA).
	10.23(19)	Lease between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated as of January 1, 2006 (7 Gul Circle, Singapore 629363).
	10.24‡	Form of Restricted Stock Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
	10.25(20)‡	Agreement between the Company and Thane Kreiner, Ph.D. dated May 10, 2006.
	10.26(21)‡	Agreement between the Company and Susan E. Siegel dated May 30, 2006.
	10.27(22)‡	Offer Letter from the Company to Kevin M. King dated December 18, 2006.
	10.28(23)**	Amendment Agreement dated December 22, 2006 by and among F. Hoffmann-La Roche Ltd., Roche Molecular Systems, Inc. and the Company
	10.29(24)‡	Offer Letter from the Company to John C. Batty dated May 16, 2007.
	10.30(25)‡	Separation Agreement dated July 27, 2007 between the Company and Thane Kreiner.
	10.31(26)	Settlement and Release Agreement dated January 9, 2008 between the Company and Illumina, Inc.
	10.32(27)	Affymetrix, Inc. Change of Control Plan, as amended through November 5, 2008.

103

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENT
	10.33(27)‡	Offer Letter from the Company to John F. (Rick) Runkel dated October 6, 2008.
	10.34	Offer Letter from the Company to Frank Witney dated November 7, 2008.
	21	List of Subsidiaries.
	23	Consent of Independent Registered Public Accounting Firm.
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
	32.2	Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to Registrant's Form 8-K as filed on June 13, 2000 (File No. 000-28218).

(2)

Incorporated by reference to Registrant's Form 10-Q as filed on November 7, 2008 (File No. 000-28218).

(3)

Incorporated by reference to Registrant's Form 8-K as filed on October 16, 1998 (File No. 000-28218).

(4)

Incorporated by reference to Registrant's Form 8-A as filed on October 16, 1998 (File No. 000-28218).

(5)

Incorporated by reference to Registrant's Form 8-A/A as filed on March 29, 2000 (File No. 000-28218).

(6)

Incorporated by reference to Registrant's Form S-3 as filed on January 29, 2004 (File No. 333-112311).

(7)

Incorporated by reference to Registrant's Form 8-K as filed on November 19, 2007 (File No. 000-28218).

(8)

Incorporated by reference to Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended.

(9)

Incorporated by reference to Registrant's Quarterly Report on Form 10-Q as filed on August 14, 1996 (File No. 000-28218).

(10)

Incorporated by reference to Registrant's Report on Form 10-K as filed on March 31, 1999 (File No. 000-28218).

(11)

Incorporated by reference to Registrant's Registration Statement on Form S-3 as filed on July 12, 1999 (File No. 333-82685), as amended.

(12)

Incorporated by reference to Registrant's Form 10-Q as filed on May 15, 2001 (File No. 000-28218).

(13)

Incorporated by reference to Registrant's Form 10-Q as filed on May 15, 2003 (File No. 000-28218).

104

(14)

Incorporated by reference to Registrant's Form 10-K as filed on March 15, 2004 (File No. 000-28218).

(15)

Incorporated by reference to Registrant's Form 10-Q as filed on August 8, 2008 (File No. 000-28218).

(16)

Incorporated by reference to Registrant's Form 10-Q as filed on November 9, 2004 (File No. 000-28218).

(17)

Incorporated by reference to Registrant's Form 8-K as filed on November 7, 2008 (File No. 000-28218).

(18)

Incorporated by reference to Registrant's Form 10-K as filed on March 16, 2005 (File No. 000-28218).

(19)

Incorporated by reference to Registrant's Form 10-K as filed on March 9, 2006 (File No. 000-28218).

(20)

Incorporated by reference to Registrant's Form 10-K as filed on March 1, 2007 (File No. 000-28218).

(21)

Incorporated by reference to Registrant's Form 8-K as filed on May 30, 2006 (File No. 000-28218).

(22)

Incorporated by reference to Registrant's Form 8-K as filed on December 19, 2006 (File No. 000-28218).

(23)

Incorporated by reference to Registrant's Form 8-K as filed on December 22, 2006 (File No. 000-28218).

(24)

Incorporated by reference to Registrant's Form 8-K as filed on June 6, 2007 (File No. 000-28218).

(25)

Incorporated by reference to Registrant's Form 8-K as filed on August 1, 2007 (File No. 000-28218).

(26)

Incorporated by reference to Registrant's Form 10-K as filed on February 29, 2008 (File No. 000-28218).

(27)

Incorporated by reference to Registrant's Form 10-Q as filed on November 7, 2008 (File No. 000-28218).

†

The merger agreement has been included with this Form 10-K to provide you with information regarding its terms and is not intended to modify or supplement any factual disclosures about the Company or Panomics in our public reports filed with the SEC. In particular, the merger agreement is not intended to be, and should not be relied upon as, disclosure regarding any facts and circumstances relating to the Company or Panomics. The representations and warranties were negotiated with the principal purpose of establishing the circumstances in which a party may have the right not to close the merger if the representations and warranties of the other party proved to be untrue due to a change in circumstance or otherwise, and allocated risk between the parties rather than establishing matters as facts. The representations and warranties also may be subject to a contractual standard of materiality different from those generally applicable to shareholders.

‡

Management contract, compensatory plan, contract or arrangement

*

Confidential treatment granted

**

Confidential treatment requested

105

AFFYMETRIX, INC.

Schedule II—Valuation and Qualifying Accounts

(in thousands)

		Balance at Beginning of Period		Additions Charged to Operations or Other Accounts(1)		Write-offs, net of recoveries			Balance at End of Period
Allowance for Doubtful Accounts:
	Year Ended December 31, 2008	$	2,372	$	683	$	(842	)	$	2,213
	Year Ended December 31, 2007	$	1,534	$	934	$	(96	)	$	2,372
	Year Ended December 31, 2006	$	415	$	1,486	$	(367	)	$	1,534

(1)

2008 includes $101K for USB Opening Balance Sheet

106

SIGNATURES

        Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AFFYMETRIX, INC. (Registrant)
March 2, 2009	By:	/s/ KEVIN M. KING Kevin M. King. DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

        Each individual whose signature appears below constitutes and appoints John F. Runkel, Jr. and John C. Batty, and each of them singly, his or her true and lawful attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby ratifies and confirms all that said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue thereof.

	Name	Title	Date
By:	/s/ KEVIN M. KING Kevin M. King	Director, President and Chief Executive Officer (Principal Executive Officer)	March 2, 2009
By:	/s/ JOHN C. BATTY John C. Batty	Executive Vice President and Chief Financial Officer	March 2, 2009
By:	/s/ STEPHEN P.A. FODOR, PH.D. Stephen P.A. Fodor, Ph.D.	Founder and Executive Chairman of theBoard	March 2, 2009
By:	/s/ PAUL BERG, PH.D. Paul Berg, Ph.D.	Director	March 2, 2009
By:	/s/ SUSAN D. DESMOND-HELLMANN, M.D. Susan D. Desmond- Hellmann, M.D.	Director	March 2, 2009
By:	/s/ JOHN D. DIEKMAN, PH.D. John D. Diekman, Ph.D.	Director	March 2, 2009
By:	/s/ ROBERT H. TRICE, PH.D. Robert H. Trice, Ph.D.	Director	March 2, 2009
By:	/s/ ROBERT P. WAYMAN Robert P. Wayman	Director	March 2, 2009
By:	/s/ JOHN A. YOUNG John A. Young	Director	March 2, 2009

107

INDEX TO EXHIBITS

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENT
	2.1†	Agreement and Plan of Merger by and among Panomics, Inc., the Company, Panda Acquisition Corporation and the Equityholders' Representative dated as of November 11, 2008.
	3.1(1)	Restated Certificate of Incorporation.
	3.2(2)	Amended and Restated Bylaws.
	3.3(3)	Summary of Rights to Purchase Shares of Preferred Stock pursuant to the Rights Agreement dated as of October 15, 1998.
	4.1(4)	Rights Agreement, dated October 15, 1998, between the Company and American Stock Transfer & Trust Company, as Rights Agent.
	4.2(5)	Amendment No. 1 to Rights Agreement, dated as of February 7, 2000, between the Company and American Stock Transfer & Trust Company, as Rights Agent.
	4.3(6)	Indenture dated as of December 15, 2003, between the Company and The Bank of New York, as Trustee.
	4.4(7)	Indenture dated as of November 16, 2007, between the Company and the Bank of New York Trust Company, N.A. as Trustee.
	10.1(8)‡	1993 Stock Plan, as amended.
	10.2(8)‡	1996 Nonemployee Directors Stock Option Plan.
	10.3(9)	Lease between Sobrato Interests and the Company dated June 12, 1996 (3380 Central Expressway, Santa Clara, CA).
	10.4(9)	Lease between Sobrato Interests and the Company dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA).
	10.5(10)‡	1998 Stock Incentive Plan.
	10.6(10)‡	Form of Officer and Director Indemnification Agreement.
	10.7(11)‡	Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of the Company
	10.8(12)‡	Amended and Restated 1996 Non-Employee Directors Stock Plan.
	10.9(13)*	Common Terms Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.10(13)*	License Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.11(13)*	Affymetrix Instrument and Chip Supply Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.12(13)*	Research & Development Collaboration Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.13(13)*	Diagnostic Product and Instrument Agency Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.
	10.14(13)*	Affymetrix Instrument Agency Agreement between F. Hoffmann-La Roche Ltd. and the Company dated January 29, 2003.

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENT
	10.15(14)	Lease between Sobrato Interests and the Company dated July 3, 2002 (3420 Central Expressway, Santa Clara, CA).
	10.16(14)	First Amendment to Lease between Sobrato Interests and the Company dated September 30, 2003 (3420 Central Expressway, Santa Clara, CA).
	10.17(15)‡	Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan, as adopted effective March 9, 2000 and amended through June 23, 2008.
	10.18(16)‡	Form of Non-Qualified Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 1996 Non-Employee Directors Stock Plan.
	10.19‡	Form of Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
	10.20(A)(17)‡	Nonqualified Supplemental Deferred Compensation Plan of the Company
	10.20(B)(17)‡	Nonqualified Supplemental Deferred Compensation Plan Adoption Agreement.
	10.21(18)	Fifth Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3380 Central Expressway, Santa Clara, CA).
	10.22(18)	First Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3450 Central Expressway, Santa Clara, CA).
	10.23(19)	Lease between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated as of January 1, 2006 (7 Gul Circle, Singapore 629363).
	10.24‡	Form of Restricted Stock Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
	10.25(20)‡	Agreement between the Company and Thane Kreiner, Ph.D. dated May 10, 2006.
	10.26(21)‡	Agreement between the Company and Susan E. Siegel dated May 30, 2006.
	10.27(22)‡	Offer Letter from the Company to Kevin M. King dated December 18, 2006.
	10.28(23)**	Amendment Agreement dated December 22, 2006 by and among F. Hoffmann-La Roche Ltd., Roche Molecular Systems, Inc. and the Company
	10.29(24)‡	Offer Letter from the Company to John C. Batty dated May 16, 2007.
	10.30(25)‡	Separation Agreement dated July 27, 2007 between the Company and Thane Kreiner.
	10.31(26)	Settlement and Release Agreement dated January 9, 2008 between the Company and Illumina, Inc.
	10.32(27)	Affymetrix, Inc. Change of Control Plan, as amended through November 5, 2008.
	10.33(27)‡	Offer Letter from the Company to John F. (Rick) Runkel dated October 6, 2008.
	10.34	Offer Letter from the Company to Frank Witney dated November 7, 2008.
	21	List of Subsidiaries.
	23	Consent of Independent Registered Public Accounting Firm.
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENT
	32.2	Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to Registrant's Form 8-K as filed on June 13, 2000 (File No. 000-28218).

(2)

Incorporated by reference to Registrant's Form 10-Q as filed on November 7, 2008 (File No. 000-28218).

(3)

Incorporated by reference to Registrant's Form 8-K as filed on October 16, 1998 (File No. 000-28218).

(4)

Incorporated by reference to Registrant's Form 8-A as filed on October 16, 1998 (File No. 000-28218).

(5)

Incorporated by reference to Registrant's Form 8-A/A as filed on March 29, 2000 (File No. 000-28218).

(6)

Incorporated by reference to Registrant's Form S-3 as filed on January 29, 2004 (File No. 333-112311).

(7)

Incorporated by reference to Registrant's Form 8-K as filed on November 19, 2007 (File No. 000-28218).

(8)

Incorporated by reference to Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended.

(9)

Incorporated by reference to Registrant's Quarterly Report on Form 10-Q as filed on August 14, 1996 (File No. 000-28218).

(10)

Incorporated by reference to Registrant's Report on Form 10-K as filed on March 31, 1999 (File No. 000-28218).

(11)

Incorporated by reference to Registrant's Registration Statement on Form S-3 as filed on July 12, 1999 (File No. 333-82685), as amended.

(12)

Incorporated by reference to Registrant's Form 10-Q as filed on May 15, 2001 (File No. 000-28218).

(13)

Incorporated by reference to Registrant's Form 10-Q as filed on May 15, 2003 (File No. 000-28218).

(14)

Incorporated by reference to Registrant's Form 10-K as filed on March 15, 2004 (File No. 000-28218).

(15)

Incorporated by reference to Registrant's Form 10-Q as filed on August 8, 2008 (File No. 000-28218).

(16)

Incorporated by reference to Registrant's Form 10-Q as filed on November 9, 2004 (File No. 000-28218).

(17)

Incorporated by reference to Registrant's Form 8-K as filed on November 7, 2008 (File No. 000-28218).

(18)

Incorporated by reference to Registrant's Form 10-K as filed on March 16, 2005 (File No. 000-28218).

(19)

Incorporated by reference to Registrant's Form 10-K as filed on March 9, 2006 (File No. 000-28218).

(20)

Incorporated by reference to Registrant's Form 10-K as filed on March 1, 2007 (File No. 000-28218).

(21)

Incorporated by reference to Registrant's Form 8-K as filed on May 30, 2006 (File No. 000-28218).

(22)

Incorporated by reference to Registrant's Form 8-K as filed on December 19, 2006 (File No. 000-28218).

(23)

Incorporated by reference to Registrant's Form 8-K as filed on December 22, 2006 (File No. 000-28218).

(24)

Incorporated by reference to Registrant's Form 8-K as filed on June 6, 2007 (File No. 000-28218).

(25)

Incorporated by reference to Registrant's Form 8-K as filed on August 1, 2007 (File No. 000-28218).

(26)

Incorporated by reference to Registrant's Form 10-K as filed on February 29, 2008 (File No. 000-28218).

(27)

Incorporated by reference to Registrant's Form 10-Q as filed on November 7, 2008 (File No. 000-28218).

†

The merger agreement has been included with this Form 10-K to provide you with information regarding its terms and is not intended to modify or supplement any factual disclosures about the Company or Panomics in our public reports filed with the SEC. In particular, the merger agreement is not intended to be, and should not be relied upon as, disclosure regarding any facts and circumstances relating to the Company or Panomics. The representations and warranties were negotiated with the principal purpose of establishing the circumstances in which a party may have the right not to close the merger if the representations and warranties of the other party proved to be untrue due to a change in circumstance or otherwise, and allocated risk between the parties rather than establishing matters as facts. The representations and warranties also may be subject to a contractual standard of materiality different from those generally applicable to shareholders.

‡

Management contract, compensatory plan, contract or arrangement

*

Confidential treatment granted

**

Confidential treatment requested

EX-2.1

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

dated as of

November 11, 2008

among

PANOMICS, INC.,

AFFYMETRIX, INC.,

PANDA ACQUISITION CORPORATION

and

ANDREW SCHWAB, as Equityholders’ Representative

INDEX TO EXHIBITS

Exhibit A	Form of Escrow Agreement
Exhibit B	Form of Voting Agreement
Exhibit C	Form of Proprietary Invention Agreement
Exhibit D	Form of Opinion of Morrison & Foerster LLP

INDEX TO ANNEXES

Annex A	List of Persons executing Key Employee Employment Agreements
Annex B	List of directors, officers and Major Shareholders executing Voting Agreements
Annex C	List of Company Constructive Knowledge Persons
Annex D	List of Company Actual Knowledge Persons
Annex E	Amended and Restated Articles of Incorporation of the Surviving Corporation

i

TABLE OF CONTENT

	Page
ARTICLE 1
DEFINITIONS
Section 1.01. Definitions	2
ARTICLE 2
MERGER CONSIDERATION; THE MERGER
Section 2.01. The Merger	14
Section 2.02. Effective Time	14
Section 2.03. Conversion of Shares	15
Section 2.04. Escrow	15
Section 2.05. Company Stock Options	16
Section 2.06. Company Warrants	16
Section 2.07. Purchase Price Adjustment Statement	17
Section 2.08. Closing Payment Schedule	17
Section 2.09. Withholding Rights	18
Section 2.10. Dissenting Shares	19
Section 2.11. Surrender and Payment	19
Section 2.12. Lost Certificates	20
Section 2.13. Adjustments	21
Section 2.14. Tax Treatment of Escrow Payment	21
ARTICLE 3
THE SURVIVING CORPORATION
Section 3.01. Articles of Incorporation	21
Section 3.02. Bylaws	21
Section 3.03. Directors and Officers	21
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 4.01. Corporate Existence and Power	22
Section 4.02. Corporate Authorization	22
Section 4.03. Governmental Authorization	23
Section 4.04. Non-Contravention	23
Section 4.05. Capitalization	24
Section 4.06. Subsidiaries	26
Section 4.07. Financial Statements	26
Section 4.08. Absence of Certain Changes	27
Section 4.09. No Undisclosed Liabilities	29
Section 4.10. Compliance with Laws and Court Orders	29

ii

TABLE OF CONTENT

(continued)

	Page
Section 4.11. Agreements, Contracts and Commitments	29
Section 4.12. Litigation	32
Section 4.13. Finders’ Fees	32
Section 4.14. Tax Representations	32
Section 4.15. Employee Matters and Employment Benefit Plans	34
Section 4.16. Real and Personal Property; Absence of Liens and Encumbrances	37
Section 4.17. Products	38
Section 4.18. Intellectual Property	38
Section 4.19. Insurance Coverage	40
Section 4.20. Licenses and Permits	41
Section 4.21. Inventories	41
Section 4.22. Receivables	41
Section 4.23. Environmental Matters	41
Section 4.24. Certain Interests	42
Section 4.25. Customers; Suppliers	43
Section 4.26. Books and Records	43
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT
Section 5.01. Corporate Existence and Power	44
Section 5.02. Corporate Authorization	44
Section 5.03. Governmental Authorization	44
Section 5.04. Non-Contravention	45
Section 5.05. Sufficient Funds	45
ARTICLE 6
COVENANTS OF THE COMPANY
Section 6.01. Conduct of the Company	45
Section 6.02. Shareholder Approval; Information Statement	49
Section 6.03. Access to Information	49
Section 6.04. No Solicitation; Other Offers	49
Section 6.05. Key Employees; Other Benefit Matters	50
ARTICLE 7
COVENANTS OF PARENT
Section 7.01. Obligations of Merger Subsidiary	52
Section 7.02. Indemnification of Officers and Directors	52
ARTICLE 8
COVENANTS OF PARENT AND THE COMPANY
Section 8.01. Commercially Reasonable Efforts	52

iii

TABLE OF CONTENT

(continued)

	Page
Section 8.02. Cooperation	53
Section 8.03. Public Announcements	53
Section 8.04. Further Assurances	53
Section 8.05. Notices of Certain Events	54
Section 8.06. Confidentiality	54
ARTICLE 9
CONDITIONS TO THE MERGER
Section 9.01. Conditions to the Obligations of Each Party	55
Section 9.02. Conditions to the Obligations of the Company	55
Section 9.03. Conditions to the Obligations of Parent and Merger Subsidiary	56
ARTICLE 10
TAX MATTERS
Section 10.01. Responsibility for Filing Tax Returns	58
Section 10.02. Amended Returns	58
Section 10.03. Transfer Taxes	58
ARTICLE 11
SURVIVAL; INDEMNIFICATION
Section 11.01. Survival	59
Section 11.02. Indemnification	59
Section 11.03. Equityholders’ Representative	61
ARTICLE 12
TERMINATION
Section 12.01. Termination	63
Section 12.02. Effect of Termination	64
ARTICLE 13
MISCELLANEOUS
Section 13.01. Notices	64
Section 13.02. Amendments; No Waivers	66
Section 13.03. Expenses	66
Section 13.04. Successors and Assigns	66
Section 13.05. Governing Law	66
Section 13.06. Jurisdiction	66
Section 13.07. WAIVER OF JURY TRIAL	67
Section 13.08. Counterparts; Effectiveness; Benefit	67
Section 13.09. Entire Agreement	67

iv

TABLE OF CONTENT

(continued)

	Page
Section 13.10. Captions	67
Section 13.11. Severability	67
Section 13.12. Specific Performance	68

v

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER (the “Agreement”) dated as of November 11, 2008, by and among Panomics, Inc., a California corporation (the “Company”), Affymetrix, Inc., a Delaware corporation (“Parent”), Panda Acquisition Corporation, a California corporation and a wholly-owned subsidiary of Parent (“Merger Subsidiary”), and Andrew Schwab, as equityholders’ representative (“Equityholders’ Representative”).

WHEREAS, upon the terms and subject to the conditions of this Agreement and in accordance with California Law, Parent and the Company will enter into a business combination transaction pursuant to which Merger Subsidiary will merge with and into the Company (the “Merger”) and the Company will survive as a wholly owned subsidiary of Parent.

WHEREAS, the Board of Directors of the Company (i) has determined that the Merger is fair to, and in the best interests of, the Company and its shareholders and has approved and adopted this Agreement and the transactions contemplated by this Agreement and (ii) has unanimously recommended the approval and adoption of this Agreement by the shareholders of the Company in accordance with California Law.

WHEREAS, pursuant to the Merger, among other things, each of the issued and outstanding shares of capital stock of the Company shall be converted into the right to receive consideration as set forth in Article 2 hereof.

WHEREAS, concurrently with the execution of this Agreement, and as a condition and inducement to Parent’s and Merger Subsidiary’s willingness to enter into this Agreement, each of the individuals listed on Annex A hereto (the “Key Employees”) has entered into an employment agreement with the Surviving Corporation (each, a “Key Employee Employment Agreement”).

WHEREAS, concurrently with the execution of this Agreement, and as a condition and inducement to Parent’s and Merger Subsidiary’s willingness to enter into this Agreement, each of the directors, officers and Major Shareholders of the Company listed on Annex B hereto has entered into a Voting Agreement in the form attached hereto as Exhibit B (each, a “Voting Agreement”).

WHEREAS, the Company, on the one hand, and Parent and Merger Subsidiary, on the other hand, desire to make certain representations, warranties, covenants and other agreements in connection with the Merger.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Merger Subsidiary and the Company hereby agree as follows:

ARTICLE 1

DEFINITIONS

Section 1.01.  Definitions.  (a)  The following terms, as used herein, have the following meanings:

“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person.

“Aggregate Option Exercise Price” means the aggregate of the exercise prices paid, deemed paid or payable with respect to (i) all shares of Company Series Z Preferred Stock outstanding immediately prior to the Effective Time and (ii) all unexpired and unexercised in-the-money Company Stock Options outstanding immediately prior to the Effective Time.

“Applicable Law” means, with respect to any Person, any federal, state or local law (statutory, common or otherwise), constitution, treaty, convention, ordinance, code, rule, regulation, order, injunction, judgment, decree, ruling or other similar requirement enacted, adopted, promulgated or applied by a Governmental Authority that is binding upon or applicable to such Person, as amended unless expressly specified otherwise.

“As-Converted” means, with respect to the Company Common Stock, all outstanding shares of Company Common Stock and all shares of Company Common Stock issuable in respect of Company Preferred Stock (including shares issuable as a result of multiple or successive conversions of Company Preferred Stock), without adjustment for any amounts that may be payable in connection with the conversion of Company Preferred Stock.

“Business Day” means a day other than Saturday, Sunday or any day on which commercial banks in San Francisco, California are authorized or required by law to close.

“California Law” means the General Corporation Law of the State of California.

“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and any rules or regulations promulgated thereunder.

“Closing Cash” means an amount equal to the sum of (i) Actual Cash as of the earlier of (A) the Effective Time and (B) 11:59 P.M. (California time) on December 31, 2008, plus (ii) an amount equal to the aggregate exercise prices of all unexpired and unexercised in-the-money Company Stock Options outstanding immediately prior to the Effective Time plus (iii) an amount equal to the aggregate exercise prices of all unexpired and unexercised Company Warrants outstanding immediately prior to the Effective Time.  Notwithstanding the foregoing, in no event shall Closing Cash be deemed reduced by (i) cash bonuses not to exceed $200,000 in the aggregate to certain employees as set forth on Schedule 6.01(k)(iv), or (ii) that certain license fee in an amount not to exceed

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$300,000 paid or payable by the Company on or prior to December 31, 2008 pursuant to that certain agreement set forth on Schedule 1.01(a)(i) hereto.

“Closing Date Payment” means an amount equal to the excess of (i) the Merger Consideration over (ii) the Escrow Amount.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Balance Sheet” means the balance sheet of the Company as of September 30, 2008 and the footnotes thereto.

“Company Balance Sheet Date” means September 30, 2008.

“Company Common Stock” means the shares of Common Stock, no par value per share, of the Company.

“Company Convertible Securities” means all outstanding (i) shares of Company Preferred Stock, (ii) options (including, without limitation, Company Stock Options), warrants (including, without limitation, Company Warrants), stock appreciation rights, convertible promissory notes or other securities convertible into, or exercisable or exchangeable for shares of Company Common Stock and/or Company Preferred Stock and (iii) other conversion or exchange rights or other rights or agreements to purchase, redeem, repurchase or otherwise acquire any equity or equity-linked security of the Company.

“Company Intellectual Property” means all Intellectual Property that is owned by the Company or any of its Subsidiaries.

“Company Investor Preferred Stock” means the Company Series A-1 Preferred Stock, the Company Series B1-1 Preferred Stock, the Company Series B2-1 Preferred Stock, Company Series C-1 Preferred Stock and the Company Series C-2 Preferred Stock.

“Company Preferred Stock” means the Company Investor Preferred Stock and the Company Series Z Preferred Stock.

“Company Series A-1 Preferred Stock” means the shares of Series A-1 Preferred Stock, no par value per share, of the Company.

“Company Series B1-1 Preferred Stock” means the shares of Series B1-1 Preferred Stock, no par value per share, of the Company.

“Company Series B2-1 Preferred Stock” means the shares of Series B2-1 Preferred Stock, no par value per share, of the Company.

“Company Series C-1 Preferred Stock” means the shares of Series C-1 Preferred Stock, no par value per share, of the Company.

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“Company Series C-2 Preferred Stock” means the shares of Series C-2 Preferred Stock, no par value per share, of the Company.

“Company Series Z Preferred Stock” means the shares of Series Z Preferred Stock, no par value per share, of the Company.

“Company Stock” means the Company Common Stock and the Company Preferred Stock.

“Company Stock Option” means each unexpired and unexercised option in respect of Company Series Z Preferred Stock under the Company Stock Option Plan.

“Company Stock Option Plan” means the 2004 Series Z Preferred Stock Incentive Plan of the Company.

“Company Warrants” means all outstanding warrants or other rights (including commitments to grant warrants or other rights, but excluding Company Stock Options) to purchase or otherwise acquire Company Stock, whether or not vested, held by any Person.

“Environmental Law” means any applicable federal, state, local, regional or foreign law (including, without limitation, common law), judicial decision, regulation, rule, judgment, order, decree, injunction, permit or governmental requirement or any agreement with any Person, relating to (i) the environment or (ii) the generation, use, handling, treatment, storage, release, transportation, manufacture, processing, transfer, recycling, reclamation, investigation, removal, remediation, distribution or disposal (or arranging for the disposal) of, or exposure to, or human health and safety as it relates to, pollutants, contaminants, wastes or chemicals or any toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous substances, wastes or materials.

“Environmental Permit” means any permit, license, franchise, certificate, approval or other similar authorization of a Governmental Authority relating to any Environmental Law and relating in any way to the business of the Company or any of its Subsidiaries as currently conducted.

“ERISA” means the Employee Retirement Income Security Act of 1974.

“ERISA Affiliate” of any entity means any other entity that, together with such entity, would be treated as a single employer under Section 414 of the Code.

“Escrow Allocated Portion” means:

(a)as to each share of Company Series A-1 Preferred Stock, an amount in cash, without interest, equal to the product of (i) the Investor Preferred Escrow Allocated Portion Per Share and (ii) the Series A-1 Conversion Multiplier;

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(b)as to each share of Company Series B1-1 Preferred Stock, an amount in cash, without interest, equal to the product of (i) the Investor Preferred Escrow Allocated Portion Per Share and (ii) the Series B1-1 Conversion Multiplier;

(c)as to each share of Company Series B2-1 Preferred Stock, an amount in cash, without interest, equal to the product of (i) the Investor Preferred Escrow Allocated Portion Per Share and (ii) the Series B2-1 Conversion Multiplier;

(d)as to each share of Company Series C-1 Preferred Stock, an amount in cash, without interest, equal to the product of (i) the Investor Preferred Escrow Allocated Portion Per Share and (ii) the Series C-1 Conversion Multiplier;

(e)as to each share of Company Series C-2 Preferred Stock, an amount in cash, without interest, equal to the product of (i) the Investor Preferred Escrow Allocated Portion Per Share and (ii) the Series C-2 Conversion Multiplier; and

(f)as to each share of Company Series Z Preferred Stock, an amount in cash, without interest, equal to the Series Z Preferred Escrow Allocated Portion Per Share.

“Escrow Amount” means 10% of the Merger Consideration.

“Escrow Release” means the aggregate amount (if any) distributed by the Escrow Agent from the Escrow Account in respect of the Shareholders, the holders of Company Stock Options and the holders of Company Warrants pursuant to the terms of the Escrow Agreement.

“Fully Diluted” means, with respect to any class or series of Company Stock, all outstanding shares and all shares issuable in respect of all stock appreciation rights, options (including the Company Stock Options) and warrants (including the Company Warrants) for shares of such class or series of Company Stock.

“Governmental Authority” means any transnational, domestic or foreign federal, state or local governmental authority, department, court, tribunal, arbitrator, agency, commission, regulator or official, including any political subdivision thereof.

“Guarantee” by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness, (ii) to reimburse a bank for amounts drawn under a letter of credit for the purpose of paying such Indebtedness or (iii) entered into for the purpose of assuring in any other manner the holder of such Indebtedness of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part).

“Hazardous Substances” means any pollutant, contaminant, waste or chemical or any toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous substance,

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waste or material, including petroleum, its derivatives, by-products and other hydrocarbons, toxic mold, infectious waste, biomedical waste and any substance, waste or material regulated under any Environmental Law.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all Indebtedness of others secured by a Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, and (d) all Guarantees by such Person of Indebtedness of others.  The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor.  For the avoidance of doubt, the Indebtedness of the Company shall not include obligations of the Company under that certain agreement set forth on Schedule 1.01(a)(ii) hereto.

“Initial Allocated Portion” means

(a)as to each share of Company Series A-1 Preferred Stock, an amount in cash, without interest, equal to the sum of (i) the Series A-1 Liquidation Preference Per Share and (ii) the Series A-1 Initial Participation Amount Per Share;

(b)as to each share of Company Series B1-1 Preferred Stock, an amount in cash, without interest, equal to the sum of (i) the Series B1-1 Liquidation Preference Per Share and (ii) the Series B1-1 Initial Participation Amount Per Share;

(c)as to each share of Company Series B2-1 Preferred Stock, an amount in cash, without interest, equal to the sum of (i) the Series B2-1 Liquidation Preference Per Share and (ii) the Series B2-1 Initial Participation Amount Per Share;

(d)as to each share of Company Series C-1 Preferred Stock, an amount in cash, without interest, equal to the sum of (i) the Series C-1 Liquidation Preference Per Share and (ii) the Series C-1 Initial Participation Amount Per Share;

(e)as to each share of Company Series C-2 Preferred Stock, an amount in cash, without interest, equal to the sum of (i) the Series C-2 Liquidation Preference Per Share and (ii) the Series C-2 Initial Participation Amount Per Share; and

(f)as to each share of Company Series Z Preferred Stock, an amount in cash, without interest, equal to the Series Z Preferred Initial Allocated Portion Per Share.

“Intellectual Property” means (i) patents and all proprietary rights associated therewith, (ii) trademarks, service marks, trade names, trade dress, domain names, brand

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names, certification marks, and other similar indications of origin, together with all goodwill symbolized by and related to the foregoing, (iii) copyrights and copyrightable designs and all proprietary rights associated therewith, (iv) all proprietary inventions, trade secrets, processes, formulae, methods, schematics, drawings, blue prints, technology, know-how, computer software programs and applications, discoveries and improvements, (v) all registrations of any of the foregoing and all applications therefor and (vi) other proprietary information and materials.

“Investor Preferred Escrow Allocated Portion” means the amount equal to the excess of (i) the Escrow Release over (ii) the Series Z Preferred Escrow Allocated Portion.

“Investor Preferred Escrow Allocated Portion Per Share” means the amount obtained by dividing (i) the Investor Preferred Escrow Allocated Portion by (ii) the aggregate number of shares of Company Common Stock issuable upon conversion of the Company Investor Preferred Stock outstanding immediately prior to the Effective Time, calculated on a Fully Diluted basis.

“Investor Preferred Initial Participation Amount” means the amount equal to the excess of (i) the Closing Date Payment over (ii) the sum of (A) the Total Investor Preferred Liquidation Preference and (B) the Series Z Preferred Initial Allocated Portion.

“Investor Preferred Initial Participation Amount Per Share” means the amount obtained by dividing (i) the Investor Preferred Initial Participation Amount by (ii) the aggregate number of shares of Company Common Stock issuable upon conversion of the Company Investor Preferred Stock outstanding immediately prior to the Effective Time, calculated on a Fully Diluted basis.

“Knowledge of the Company,” or “the Company’s Knowledge” means (i) the knowledge of any of the Persons set forth on Annex C, after reasonable inquiry, and (ii) the actual knowledge of any of the Persons set forth on Annex D.

“Lien” means, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest, encumbrance or other adverse claim of any kind in respect of such property or asset.  For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any property or asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such property or asset.

“Major Shareholder” means a beneficial holder of Company Stock listed on Annex B hereto.

“Material Adverse Effect” means, with respect to any Person, any change or effect that is, or is reasonably likely to be, materially adverse to the condition (financial or otherwise), business (including the continued operation thereof in accordance with past practice), assets or results of operations of such Person and its Subsidiaries, taken as a whole, provided, however, that in no event shall any of the following, in and of

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themselves, be deemed to constitute a Material Adverse Effect: (i) any changes resulting from or arising out of general economic conditions in the United States or any other jurisdictions in which such Person and its Subsidiaries conducts business (including any changes arising out of acts of terrorism or weather conditions) to the extent such changes do not disproportionately affect such Person, (ii) any changes resulting from or arising out of conditions in the life science research industry to the extent such changes do not disproportionately affect such Person and its Subsidiaries, (iii) any changes resulting from changes in law or regulation, or (iv) any loss of customers or employees, delay or cancellation of customer orders or disruption in supplier, partner or similar relationships arising from the execution, announcement or pendency of this Agreement or the Merger.

“Merger Consideration” means the sum of (i) $73,000,000.00 and (ii) the Purchase Price Adjustment.

“Net Cash” means (i) Closing Cash less (ii) Indebtedness (it being understood that Net Cash may be a positive or negative number).

“1933 Act” means the Securities Act of 1933, as amended.

“1934 Act” means the Securities Exchange Act of 1934, as amended.

“officer” of any Person means any executive officer of such Person.

“Participation Amount” means the amount equal to the excess of (i) the sum of (A) the Closing Date Payment and (B) the Escrow Release over (ii) the Total Investor Preferred Liquidation Preference.

“Person” means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

“Post-Closing Tax Period” means any Tax period beginning after the Closing Date; and, with respect to a Tax period that begins on or before the Closing Date and ends thereafter, the portion of such Tax period beginning after the Closing Date.

“Pre-Closing Tax Period” means any Tax period ending on or before the Closing Date; and, with respect to a Tax period that begins on or before the Closing Date and ends thereafter, the portion of such Tax period ending on the Closing Date.

“Purchase Price Adjustment” means (i) Net Cash less (ii) Transaction Expenses (it being understood that the Purchase Price Adjustment may be a positive or a negative number).

“Related Agreements” means the Escrow Agreement, each Key Employee Employment Agreement and each Voting Agreement.

“Representative” means, with respect to any party, its Affiliates and its and their respective directors, officers, Affiliates, employees, partners, agents or advisors

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(including, without limitation, attorneys, accountants, consultants and investment bankers).

“Series A-1 Conversion Multiplier” means the amount obtained by dividing (i) 6.00 by (ii) 1.010499.

“Series A-1 Initial Participation Amount Per Share” means an amount equal to the product of (i) the Investor Preferred Initial Participation Amount Per Share and (ii) the Series A-1 Conversion Multiplier.

“Series A-1 Liquidation Preference Per Share” means an amount per share of Company Series A-1 Preferred Stock equal to $6.00.

“Series B1-1 Conversion Multiplier” means the amount obtained by dividing (i) 6.90 by (ii) 1.087920.

“Series B1-1 Initial Participation Amount Per Share” means an amount equal to the product of (i) the Investor Preferred Initial Participation Amount Per Share and (ii) the Series B1-1 Conversion Multiplier.

“Series B1-1 Liquidation Preference Per Share” means an amount per share of Company Series B1-1 Preferred Stock equal to $6.90.

“Series B2-1 Conversion Multiplier” means the amount obtained by dividing (i) 7.504 by (ii) 1.139884.

“Series B2-1 Initial Participation Amount Per Share” means an amount equal to the product of (i) the Investor Preferred Initial Participation Amount Per Share and (ii) the Series B2-1 Conversion Multiplier.

“Series B2-1 Liquidation Preference Per Share” means an amount per share of Company Series B2-1 Preferred Stock equal to $7.504.

“Series C-1 Conversion Multiplier” means the amount obtained by dividing (i) 0.5967 by (ii) 0.498075.

“Series C-1 Initial Participation Amount Per Share” means an amount equal to the product of (i) the Investor Preferred Initial Participation Amount Per Share and (ii) the Series C-1 Conversion Multiplier.

“Series C-1 Liquidation Preference Per Share” means an amount per share of Company Series C-1 Preferred Stock equal to $0.5967.

“Series C-2 Conversion Multiplier” means the amount obtained by dividing (i) 0.5967 by (ii) 0.498075.

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“Series C-2 Initial Participation Amount Per Share” means an amount equal to the product of (i) the Investor Preferred Initial Participation Amount Per Share and (ii) the Series C-2 Conversion Multiplier.

“Series C-2 Liquidation Preference Per Share” means an amount per share of Company Series A-1 Preferred Stock equal to $0.5967.

“Series Z Preferred Escrow Allocated Portion” means the greater of (i) the Series Z Preferred Net Allocated Portion and (ii) the Series Z Preferred Net Participation Amount.

“Series Z Preferred Escrow Allocated Portion Per Share” means the amount obtained by dividing (i) the Series Z Preferred Escrow Allocated Portion by (ii) the aggregate number of shares of the Company Series Z Preferred Stock outstanding immediately prior to the Effective Time, calculated on a Fully Diluted basis.

“Series Z Preferred Initial Allocated Portion” means the amount equal to the sum of (i) the product of (A) 0.05 and (B) the Closing Date Payment and (ii) the Aggregate Option Exercise Price.

“Series Z Preferred Initial Allocated Portion Per Share” means the amount obtained by dividing (i) the Series Z Preferred Initial Allocated Portion by (ii) the aggregate number of shares of the Company Series Z Preferred Stock outstanding immediately prior to the Effective Time, calculated on a Fully Diluted basis.

“Series Z Preferred Minimum Net Proceeds” means the sum of (i) the product of (A) 0.05 and (B) the sum of (1) the Closing Date Payment and (2) the Escrow Release and (ii) the Aggregate Option Exercise Price.

“Series Z Preferred Net Allocated Portion” means the excess of (i) the Series Z Preferred Minimum Net Proceeds over (ii) the Series Z Preferred Initial Allocated Portion.

“Series Z Preferred Net Participation Amount” means the excess (if any) of (i) the Series Z Preferred Participation Amount over (ii) the Series Z Preferred Initial Allocated Portion.

“Series Z Preferred Participation Amount” means the amount obtained by multiplying (i) the Participation Amount by (ii) a fraction, the numerator of which is (A) the sum of (1) the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time and (2) the aggregate number of shares of Company Common Stock issuable upon conversion of the outstanding Series Z Preferred Stock immediately prior to the Effective Time, calculated on a Fully Diluted basis, and the denominator of which is (B) the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time, calculated on an As-Converted, Fully Diluted basis.

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“Shareholders” means the holders of the Company Stock.

“Subsidiary” means, with respect to any Person, any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at any time directly or indirectly owned by such Person.

“Tax” means (i) any tax, or similar governmental fee, assessment or charge of any kind whatsoever (including, but not limited to, withholding on amounts paid to or by any Person), together with any interest, penalty, addition to tax or additional amount imposed by any Governmental Authority responsible for the imposition of any such tax (domestic or foreign) (a “Taxing Authority”), and any liability for any of the foregoing as transferee, (ii) in the case of the Company or any Subsidiary of the Company, liability for the payment of any amount of the type described in clause (i) as a result of being or having been before the Effective Time a member of an affiliated, consolidated, combined or unitary group, or a party to any agreement or arrangement, as a result of which liability of the Company or any of its Subsidiaries to a Taxing Authority is determined or taken into account with reference to the activities of any other Person, and (iii) liability of the Company or any Subsidiary of the Company for the payment of any amount as a result of being party to any Tax Sharing Agreement or with respect to the payment of any amount imposed on any Person of the type described in (i) or (ii) as a result of any existing express or implied agreement or arrangement (including, but not limited to, an indemnification agreement or arrangement).

“Tax Asset” means any net operating loss, net capital loss, investment tax credit, foreign tax credit, charitable deduction or any other credit or tax attribute that could be carried forward or back to reduce Taxes (including without limitation deductions and credits related to alternative minimum Taxes).

“Tax Return” means any Tax return, statement, report, election, declaration, disclosure, schedule or form (including any estimated Tax or information return or report) required to be filed with any Taxing Authority.

“Tax Sharing Agreements” means all existing agreements or arrangements (whether or not written) binding the Company or any Subsidiary of the Company that provide for the allocation, apportionment, sharing or assignment of any Tax liability or benefit, or the transfer or assignment of income, revenues, receipts, or gains for the purpose of determining any Person’s Tax liability (excluding any indemnification agreement or arrangement pertaining to the sale or lease of assets or subsidiaries).

“Third Party” means any Person as defined in this Agreement or in Section 13(d) of the 1934 Act, other than Parent or any of its Affiliates.

“Total Investor Preferred Liquidation Preference” means the amount equal to the sum of (i) the Total Series A-1 Liquidation Preference, plus (ii) the Total Series B1-1 Liquidation Preference, plus (iii) the Total Series B2-1 Liquidation Preference, plus (iv)

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the Total Series C-1 Liquidation Preference plus (v) the Total Series C-2 Liquidation Preference.

“Total Series A-1 Liquidation Preference” means the product of (i) the number of shares of Company Series A-1 Preferred Stock outstanding immediately prior to the Effective Time and (ii) the Series A-1 Liquidation Preference Per Share.

“Total Series B1-1 Liquidation Preference” means the product of (i) the number of shares of Company Series B1-1 Preferred Stock outstanding immediately prior to the Effective Time, calculated on a Fully Diluted basis, and (ii) the Series B1-1 Liquidation Preference Per Share.

“Total Series B2-1 Liquidation Preference” means the product of (i) the number of shares of Company Series B2-1 Preferred Stock outstanding immediately prior to the Effective Time, calculated on a Fully Diluted basis, and (ii) the Series B2-1 Liquidation Preference Per Share.

“Total Series C-1 Liquidation Preference” means the product of (i) the number of shares of Company Series C-1 Preferred Stock outstanding immediately prior to the Effective Time, calculated on a Fully Diluted basis, and (ii) the Series C-1 Liquidation Preference Per Share.

“Total Series C-2 Liquidation Preference” means the product of (i) the number of shares of Company Series C-2 Preferred Stock outstanding immediately prior to the Effective Time, calculated on a Fully Diluted basis, and (ii) the Series C-2 Liquidation Preference Per Share.

“Transaction Expenses” means the aggregate amount of all unpaid out-of-pocket expenses incurred by or on behalf of or otherwise payable by the Company or any of its Subsidiaries in connection with the negotiation and performance of this Agreement and the transactions contemplated hereby, including the Merger, which shall be deemed to include, without limitation, the following (i) fifty percent (50%) of any Transfer Taxes, (ii) any amounts that are or may become payable pursuant to the agreements set forth on Schedules 6.01(k)(v) and 6.05(c), (iii) any accrued vacation pay that is or becomes payable to an employee of the Company at or before 11:59 P.M. (California time) on December 31, 2008, (iv) any amounts that are or may become payable to the Payment Agent for services rendered and expenses incurred in connection with the administration by the Payment Agent of the exchange of the Certificates for the Merger Consideration, but only to the extent that such amounts do not exceed an aggregate amount of $16,000, and (v) any employer-related Taxes arising as a result of the payments to the holders of Company Stock Options contemplated by Section 2.05, but only to the extent such employer-related Taxes exceed in the aggregate either (A) $24,000, if the Effective Time occurs at or before 11:59 P.M. (California time) on December 31, 2008, or (B) $57,000, if the Effective Time occurs at or after 12:00 A.M. (California time) on January 1, 2009.

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“Transfer Taxes” mean all transfer, documentary, sales, use, stamp, registration, value added and other such Taxes (including any penalties and interest) incurred in connection with transactions contemplated by this Agreement.

Any reference in this Agreement to a statute shall be to such statute, as amended from time to time, and to the rules and regulations promulgated thereunder.

(b)Each of the following terms is defined in the Section set forth opposite such term:

Term	Section
Actual Cash	4.07(b)
Agreement	Recitals
Allocated Portion	2.03(a)
Breach	11.02(a)
Certificates	2.11(a)
Closing	2.02
Closing Date	2.02
Closing Date Optionholder	2.08(a)(i)
Closing Date Shareholder	2.08(a)(i)
Closing Date Warrantholder	2.08(a)(i)
Closing Payment Schedule	2.08(a)
Company	Recitals
Company Disclosure Schedule	Article 4
Company Shareholder Approval	4.02(a)
Company Registered Intellectual Property	4.18(c)
Company Securities	4.05(g)
Competing Transaction	6.04
Confidentiality Agreement	6.03
Damages	11.02(a)
Deductible Amount	11.02(b)
Effective Time	2.02
Employee Plans	4.15(a)
End Date	12.01(b)(i)
Equipment	4.16(c)
Equityholders’ Representative	Recitals
Equityholders’ Representative’s Expenses	11.03(c)
Escrow Account	2.04
Escrow Agent	2.04
Escrow Agreement	2.04
Escrow Fund	2.04
GAAP	4.07(a)
Indemnified Parties	11.02(a)
Indemnifying Party	11.02(c)
Indemnitors	11.02(a)
Information Statement	6.02
Key Employee Employment Agreement	Recitals

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Term	Section
Key Employees	Recitals
Letter of Transmittal	2.11(a)
Material Contract	4.11(b)
Merger	Recitals
Merger Subsidiary	Recitals
Minimum Claim Amount	11.02(b)
Multiemployer Plan	4.15(c)
Necessary Intellectual Property	4.18(a)
Off-the-Shelf Software	4.18(a)
Parent	Recitals
Parent Plans	6.05(e)
Payment Agent	2.11(a)
Permits	4.20
Purchase Price Adjustment Statement	2.07(a)
Schedule	Article 4
Specified Representations	11.01
Subsidiary Securities	4.06(b)
Surviving Corporation	2.01(a)
Third Party Interests	4.06(c)
Voting Agreement	Recitals
WARN Act	4.15(n)

ARTICLE 2

MERGER CONSIDERATION; THE MERGER

Section 2.01.  The Merger.  (a) At the Effective Time, and subject to and upon the terms and conditions of this Agreement, Merger Subsidiary shall be merged with and into the Company in accordance with California Law, whereupon the separate existence of Merger Subsidiary shall cease, and the Company shall be the surviving corporation (the “Surviving Corporation”).

(b)From and after the Effective Time, the Merger shall have the effect set forth under California Law, and without limiting the foregoing, from and after the Merger, the Surviving Corporation shall succeed without transfer to all rights and properties of the Company and Merger Subsidiary, and shall be subject to the debts and liabilities of the Company and Merger Subsidiary as if the Surviving Corporation had incurred such debts and liabilities, all as provided under California Law.

Section 2.02.  Effective Time.  Unless this Agreement is earlier terminated pursuant to Section 12.01, the closing of the transactions contemplated by this Agreement (the “Closing”) will take place as promptly as practicable, but no later than two (2) Business Days, following the satisfaction or, to the extent permitted hereunder, waiver of the conditions set forth in Article 9 (other than conditions that by their nature are to be

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satisfied at the Closing, but subject to the satisfaction or waiver of such conditions), at the offices of Davis Polk & Wardwell, 1600 El Camino Real, Menlo Park, California, unless another place or date is agreed to by Parent and the Company.  The date upon which the Closing occurs is herein referred to as the “Closing Date.”  On the Closing Date, the parties hereto shall file an agreement of merger in customary form with the Secretary of State of the State of California and make all other filings or recordings required by Applicable Law in connection with the Merger.  The Merger shall become effective at such time (the “Effective Time”) as the agreement of merger is duly filed with the Secretary of State of the State of California or at such later time as may be specified in the agreement of merger.

Section 2.03.  Conversion of Shares.  At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Subsidiary, the Company or the Shareholders:

(a)Except as otherwise provided in Section 2.03(b), Section 2.03(c) and Section 2.10, (i) each share of Company Preferred Stock shall automatically be canceled and retired and shall cease to exist, and shall thereafter represent only the right to receive, in cash, without interest, (A) payment of an amount equal to its Initial Allocated Portion and (B) payment of its Escrow Allocated Portion (if any) upon release of the Escrow Fund (or any portion thereof) from the Escrow Account pursuant to the terms of the Escrow Agreement, and (ii) each share of Company Common Stock outstanding immediately prior to the Effective Time shall be canceled and retired and shall cease to exist, and no payment shall be made with respect thereto.  (The amount payable with respect to each share of Company Stock pursuant to this Section 2.03(a) referred to herein as its “Allocated Portion.”)

(b)Each share of Company Stock held by the Company as treasury stock or owned by Parent immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto.

(c)Each share of Company Stock held by any Subsidiary of either the Company or Parent shall be converted into such number of shares of stock of the Surviving Corporation such that each such Subsidiary owns the same percentage of the outstanding capital stock of the Surviving Corporation immediately following the Effective Time as such Subsidiary owned in the Company immediately prior to the Effective Time.

(d)Each share of common stock of Merger Subsidiary outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock of the Surviving Corporation with the same rights, powers and privileges as the shares so converted and, together with the stock of the Surviving Corporation described in Section 2.03(c) above, shall constitute the only outstanding shares of capital stock of the Surviving Corporation.

Section 2.04.  Escrow.  At the Effective Time, Parent shall withhold from the Merger Consideration otherwise payable in connection with the Merger to the

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Shareholders, the holders of Company Stock Options and the holders of Company Warrants an aggregate amount of cash equal to the Escrow Amount.  Prior to or at the Effective Time, the Equityholders’ Representative and Parent shall enter into an escrow agreement (the “Escrow Agreement”) with U.S. Bank National Association (the “Escrow Agent”) in the form of Exhibit B hereto.  Pursuant to the terms of the Escrow Agreement, at the Effective Time, Parent shall deposit the Escrow Amount into an escrow account (the “Escrow Account”), which account is to be managed by the Escrow Agent.  Distributions of cash shall be governed by the terms and conditions of this Agreement and the Escrow Agreement (the cash in the Escrow Account, including all accrued interest, being referred to as the “Escrow Fund”).  The Escrow Amount shall be security for the indemnity provided for in Article 11 hereof and shall be disbursed in accordance with the terms thereof.  Notwithstanding the foregoing or anything to the contrary contained herein, any distribution to the Shareholders, the holders of Company Stock Options and the holders of Company Warrants shall be reduced by expenses, including the Equityholders’ Representative’s Expenses, incurred in connection with such distribution.

Section 2.05.  Company Stock Options.  At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Subsidiary, the Company or the holders of Company Stock Options, each Company Stock Option outstanding immediately prior to the Effective Time shall become fully vested and shall be canceled and extinguished, and each holder thereof shall cease to have any rights with respect thereto, other than the right to receive, in cash, without interest, (i) payment from the Surviving Corporation (which Parent shall cause Surviving Corporation to pay) promptly following the Effective Time of an amount equal to the excess of (A) the Series Z Preferred Initial Allocated Portion Per Share over (B) the exercise price required to be paid to acquire the corresponding share of Company Series Z Preferred Stock and (ii) payment of an amount equal to the Series Z Preferred Escrow Allocated Portion Per Share (if any) upon release of the Escrow Amount (or any portion thereof) from the Escrow Account.  Notwithstanding anything to the contrary herein, any amounts that would otherwise be disbursed from the Escrow Account to a Closing Date Optionholder, in its capacity as such, shall be disbursed from the Escrow Account to the Surviving Corporation.  Promptly after receiving such amounts, the Surviving Corporation shall disburse such amounts, net of any applicable withholding taxes, to the applicable Closing Date Optionholder.

Section 2.06.  Company Warrants.  (a)  Prior to the Effective Time, the Company shall use its commercially reasonable efforts to cause the exercise or conversion of all of the outstanding Company Warrants for or into shares of Company Stock in accordance with the terms of the applicable Company Warrants.

(b)At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Subsidiary, the Company or the holders of Company Warrants, each Company Warrant outstanding immediately prior to the Effective Time shall be canceled and extinguished, and each holder thereof shall cease to have any rights with respect thereto, other than the right to receive, in cash, without interest, (i) payment of an amount equal to the excess of (A) the Initial Allocated Portion payable with respect to the

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shares of Company Stock subject to such Company Warrant over (B) the exercise price required to be paid to acquire the shares of Company Stock subject to such Company Warrant and (ii) payment of an amount equal to the Escrow Allocated Portion (if any) payable with respect to the shares of Company Stock subject to such Company Warrant upon release of the Escrow Amount (or any portion thereof) from the Escrow Account to such holder pursuant to the terms of the Escrow Agreement.

Section 2.07.  Purchase Price Adjustment Statement.  (a) At Closing, the Company shall deliver to Parent a certificate (the “Purchase Price Adjustment Statement”) of the Company executed by an executive officer of the Company, which certificate shall set forth the following, and contain a representation and warranty of the Company as to the accuracy and completeness thereof, in each case as of the Closing:

(i)a schedule setting forth all Transaction Expenses, together with a description, the amount and reasonable documentation in respect of each element thereof, and payment instructions therefor; and

(ii)a statement of the Company’s calculation of Net Cash, including:

(A)a schedule setting forth (A) the exercise price of each unexpired and unexercised in-the-money Company Stock Option outstanding immediately prior to the Effective Time and (B) the exercise price of each unexpired and unexercised Company Warrant outstanding immediately prior to the Effective Time;

(B)a statement of the Company’s Actual Cash as of the close of business on the Business Day immediately preceding the Closing Date, together with printouts of online bank account balances or other reasonable documentation thereof; and

(C)a statement of the Company’s Indebtedness as of the close of business on the Business Day immediately preceding the Closing Date, together with a description of each element thereof.

(b)In addition, at least two (2) Business Days prior to the Closing Date, the Company shall deliver to Parent a certificate of the Company setting forth its good faith estimate of the foregoing.

Section 2.08.  Closing Payment Schedule.  (a)  At least two (2) Business Days prior to the Closing Date, the Company shall deliver to Parent and the Payment Agent a definitive closing payment schedule (the “Closing Payment Schedule”) in the format of, and using the formulae set forth in, an Excel spreadsheet previously reviewed by the parties, a copy of which is attached as attached Schedule 2.08, executed by an executive officer of the Company, which schedule shall reflect all payments to which the Shareholders, the holders of Company Stock Options and the holders of Company Warrants shall be entitled at Closing in accordance with this Article 2 and shall set forth

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the following and contain a representation and warranty of the Company as to the accuracy and completeness thereof, in each case as of the Closing:

(i)the name and mailing address (or other delivery instructions reasonably acceptable to Parent and the Payment Agent) of (A) each holder of record of outstanding shares of Company Stock immediately prior to the Effective Time (each, a “Closing Date Shareholder”), (B) each holder of unexpired and unexercised in-the-money Company Stock Options outstanding immediately prior to the Effective Time (each, a “Closing Date Optionholder”) and (C) each holder of unexpired and unexercised Company Warrants outstanding immediately prior to the Effective Time (each, a “Closing Date Warrantholder”)

(ii)(A) the number of shares of Company Stock of each class and series held by each Closing Date Shareholder immediately prior to the Effective Time, (B) the aggregate Initial Allocated Portion payable to each Closing Date Shareholder at the Effective Time and (C) the number and class of Dissenting Shares, if any, held by each Closing Date Shareholder immediately prior to the Effective Time;

(iii)(A) the number of unexpired and unexercised in-the-money Company Stock Options held by each Closing Date Optionholder immediately prior to the Effective Time, (B) the aggregate Initial Allocated Portion payable to each Closing Date Optionholder at the Effective Time and (C) the aggregate of the exercise prices of the unexpired and unexercised in-the-money Company Stock Options held by each Closing Date Optionholder immediately prior to the Effective Time; and

(iv)(A) the number of unexpired and unexercised Company Warrants held by each Closing Date Warrantholder immediately prior to the Effective Time, (B) the aggregate Initial Allocated Portion payable to each Closing Date Warrantholder at the Effective Time and (C) the aggregate of the exercise prices of the unexpired and unexercised Company Warrants held by each Closing Date Warrantholder immediately prior to the Effective Time.

(b)Concurrently with the delivery of the Closing Payment Schedule, the Company also shall deliver to Parent, in such detail as shall be reasonably acceptable to Parent, all information on which the calculations reflected in the Closing Payment Schedule are based.  If there are any changes between the date of delivery of the Closing Payment Schedule and the Closing Date in any items that are determined as of or immediately prior to the Effective Time, the Company shall deliver to Parent and the Payment Agent at the Closing an updated Closing Payment Schedule that reflects such changes.  Any updated Closing Payment Schedule shall be executed by an executive officer of the Company and shall contain a representation and warranty of the Company as to the accuracy and completeness thereof, in each case as of the Closing.

Section 2.09.  Withholding Rights.  Each of the Surviving Corporation and Parent shall be entitled to deduct and withhold from the consideration otherwise payable to any

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Person pursuant to this Agreement such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign tax law.  If the Surviving Corporation or Parent, as the case may be, so withholds amounts, such amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which the Surviving Corporation or Parent, as the case may be, made such deduction and withholding.

Section 2.10.  Dissenting Shares.  (a) Notwithstanding Section 2.03, shares of Company Stock outstanding immediately prior to the Effective Time held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such shares in accordance with California Law shall not be converted into a right to receive any portion of the Merger Consideration in accordance with Section 2.03, but the holder thereof shall be entitled only to such rights as are provided by California Law, unless such holder fails to perfect, withdraws or otherwise loses its right to appraisal.  If, after the Effective Time, such holder fails to perfect, withdraws or loses its right to appraisal, such shares shall be treated as if they had been converted as of the Effective Time into a right to receive an a portion of the Merger Consideration pursuant to Section 2.03(a).  The Company shall give Parent prompt notice of any demands received by the Company for appraisal of shares of Company Stock, and Parent shall have the right to participate in all negotiations and proceedings with respect to such demands.  Except with the prior written consent of Parent, the Company shall not make any payment with respect to, or settle or offer to settle, any such demands.

Section 2.11.  Surrender and Payment.  (a) Parent will appoint U.S. Bank National Association to act as payment agent (the “Payment Agent”) for the purpose of exchanging certificates representing the shares of Company Stock (the “Certificates”) for the Merger Consideration.  Immediately following the Effective Time, Parent will make available the Merger Consideration, less any amounts to be paid to holders of Company Stock Options pursuant to Section 2.05 (which shall be paid by Parent to the Surviving Corporation as promptly as practicable and in any event immediately following the Effective Time) less any amounts withheld pursuant to Section 2.09, to be paid in respect of the Certificates in accordance with the provisions set forth in this Article 2.  Promptly following the Effective Time, Parent or the Payment Agent shall mail to every holder of record of Company Preferred Stock that was issued and outstanding immediately prior to the Effective Time and that has not previously delivered its Certificates together with a properly completed and duly executed letter of transmittal (a “Letter of Transmittal”), in each case to the mailing address (or pursuant to the other delivery instructions) set forth in the Closing Payment Schedule, (x) a Letter of Transmittal and (y) instructions for use of such Letter of Transmittal in effecting the surrender of certificates.

(b)Each holder of outstanding Company Preferred Stock that has been converted into the right to receive a portion of the Merger Consideration pursuant to Section 2.03(a) will be entitled to receive, upon surrender to the Payment Agent of a Certificate, together with a properly completed Letter of Transmittal (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Certificate to the Payment Agent), the Allocated Portion, if any, payable

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for each share of Company Preferred Stock represented by such Certificate in accordance with the procedures set forth in this Article 2.  Until so surrendered, from and after the Effective Time each such Certificate shall represent for all purposes only the right to receive the Allocated Portion, if any, payable for each share of Company Stock represented thereby.

(c)If any portion of the Merger Consideration is to be paid to a Person other than the Person in whose name the surrendered Certificate is registered, it shall be a condition to such payment that the Certificate so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Payment Agent any transfer or other Taxes required as a result of such payment to a Person other than the registered holder of such Certificate or establish to the satisfaction of the Payment Agent that such Tax has been paid or is not payable.

(d)From and after the Effective Time, there shall be no further registration of transfers of shares of Company Stock.  If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged for the Allocated Portion, if any, provided for, and in accordance with the procedures set forth, in this Article 2.

(e)Any portion of the Merger Consideration made available to the Payment Agent pursuant to Section 2.11(a) (and any interest or other income earned thereon) that remains unclaimed by the holders of shares of Company Stock sixty (60) Business Days after the Effective Time shall be returned to Parent, upon demand, and any such holder who has not exchanged shares of Company Stock for the Merger Consideration payable in respect of such shares of Company Stock in accordance with this Section 2.11 prior to that time shall thereafter look only to Parent for payment of the Allocated Portion payable in respect of such shares of Company Stock without any interest thereon.  Notwithstanding the foregoing, Parent shall not be liable to any holder of shares of Company Stock for any amount paid to a public official pursuant to applicable abandoned property, escheat or similar laws.  Immediately prior to such time when amounts remaining unclaimed by holders of shares of Company Stock would otherwise escheat to or become property of any Governmental Authority, such unclaimed amounts shall become, to the extent permitted by Applicable Law, the property of Parent free and clear of any claims or interest of any Persons previously entitled thereto.

(f)Any portion of the Merger Consideration made available to the Payment Agent pursuant to Section 2.11(a) to pay for any Dissenting Shares shall be returned to Parent, upon demand.

Section 2.12.  Lost Certificates.  If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the entry by such Person into an indemnification agreement in form satisfactory to Parent, or the posting by such Person of a bond, in such reasonable amount as the Surviving Corporation may direct, as indemnity against any claim that may be made against it with respect to such Certificate, the Payment Agent will pay, in exchange for such lost, stolen

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or destroyed Certificate, the Allocated Portion, if any, payable in respect of the shares of Company Stock evidenced by such Certificate, in accordance with the procedures set forth in this Article 2.

Section 2.13.  Adjustments.  Notwithstanding anything to the contrary herein, the parties hereto acknowledge that (a) the Initial Allocated Portion payable to each holder of Company Stock as of the Effective Time may differ from the Initial Allocated Portion that would have been payable to each holder of Company Stock as of the Effective Time for various reasons, including if (i) any Damages had reduced the Closing Date Payment instead of being payable from the Escrow Amount or (ii) any deficiencies in the Company’s calculations of the Purchase Price Adjustment had reduced the Closing Date Payment instead of being payable from the Escrow Amount; (b) the Equityholders’ Representative may make any appropriate adjustments to the provisions of this Article 2 in order to correct any such discrepancy (including adjusting the Escrow Allocated Portion payable with respect to any share of Company Stock), provided that no such adjustment shall require any additional payment by Parent or the Surviving Corporation; and (c) none of the Equityholders’ Representative, Parent, the Surviving Corporation, the Payment Agent and any Affiliate of the foregoing shall have any liability for any such adjustment (or the failure to make any adjustment).

Section 2.14.  Tax Treatment of Escrow Payment.  The parties acknowledge and agree (i) that any amount distributed by the Escrow Agent from the Escrow Account to the Shareholders and the holders of Company Warrants pursuant to the terms of the Escrow Agreement shall be treated, for U.S. federal income tax purposes, as additional consideration paid to the Shareholders for their Company Stock pursuant to the Merger as and when such amount is distributed, and (ii) a portion of each such distribution shall be treated as a payment of interest in accordance with Section 483 of the Code.

ARTICLE 3

THE SURVIVING CORPORATION

Section 3.01.  Articles of Incorporation.  The articles of incorporation of the Company in effect at the Effective Time shall be the articles of incorporation of the Surviving Corporation until amended in accordance with Applicable Law, provided that, at the Effective Time, such articles of incorporation shall be amended as set forth in Annex E.

Section 3.02.  Bylaws.  The bylaws of Merger Subsidiary in effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance with Applicable Law.

Section 3.03.  Directors and Officers.  From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with Applicable Law, (i) the directors of Merger Subsidiary at the Effective Time shall be the directors of the Surviving Corporation and (ii) the officers of Merger Subsidiary at the Effective Time shall be the officers of the Surviving Corporation.

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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to Parent that each of the statements contained in this Article 4 are true and complete at and as of the date hereof and at and as of the Effective Time except as otherwise provided herein and except as specifically disclosed in the schedules attached hereto (each, a “Schedule” and together, the “Company Disclosure Schedule”).  Each exception set forth in the Company Disclosure Schedule and each other reference to this Agreement set forth in the Company Disclosure Schedule shall be identified by reference to, or grouped under a heading referring to, a specific individual section or subsection of this Agreement and shall relate only to such section or subsection except to the extent that (a) one portion of the Company Disclosure Schedule specifically refers to another portion thereof by specific cross reference or (b) it is readily apparent to Parent from the text of the disclosure in the Company Disclosure Schedule that an item disclosed in one section or subsection of the Company Disclosure Schedule is omitted from another section or subsection where such disclosure would be appropriate, in which case such item shall be deemed to have been disclosed in the section or subsection of the Company Disclosure Schedule from which such item is omitted.

Section 4.01.  Corporate Existence and Power.  The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California and has all corporate powers and all governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted, except for those licenses, authorizations, permits, consents and approvals the absence of which would not be material to the Company and its Subsidiaries, taken as a whole.  The Company is duly qualified to do business and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not have, individually or in the aggregate, a Material Adverse Effect on the Company or any of its Subsidiaries, taken as a whole.

Section 4.02.  Corporate Authorization.  (a) The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby are within the Company’s corporate powers and, except for the required approval of the Shareholders in connection with the consummation of the Merger, have been duly authorized by all necessary corporate action on the part of the Company.  The Company has heretofore delivered or made available to Parent true and complete copies of the articles of incorporation and bylaws of the Company as currently in full force and effect.  The Company is not in violation of any of the provisions of its articles of incorporation or bylaws.  The affirmative votes of (i) the holders of a majority of the outstanding shares of Company Common Stock and Company Preferred Stock (voting together as a single class on an As-Converted basis), (ii) the holders of at least two-thirds of the outstanding shares of Company Investor Preferred Stock (voting together as a single class on an As-Converted basis) and (iii) the holders of a majority of the outstanding shares of the Company Common Stock are the only votes of the Shareholders necessary in connection with the consummation of the Merger and the other transactions contemplated hereby (the “Company Shareholder

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Approval”).  This Agreement constitutes a valid and binding agreement of the Company, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws relating to or affecting creditors’ rights generally and to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

(b)At a meeting duly called and held, the Company’s Board of Directors has (i) unanimously determined that the Merger is fair to and in the best interests of the Shareholders, (ii) unanimously approved and adopted this Agreement and the transactions contemplated hereby, and (iii) unanimously resolved to recommend approval and adoption of this Agreement and approval of the Merger and the other transactions contemplated hereby by the Shareholders.

Section 4.03.  Governmental Authorization.  The execution, delivery and performance by the Company of this Agreement and the Escrow Agreement and the consummation by the Company of the transactions contemplated hereby and thereby require no action on the part of the Company by or in respect of, or filing with, any Governmental Authority, other than (i) the filing of the agreement of merger with the Secretary of State of the State of California and appropriate documents with the relevant authorities of other states in which Company is qualified to do business, (ii) compliance with any applicable requirements of the 1933 Act, the 1934 Act, and any other applicable securities laws, whether state or foreign, (iii) such filings as may be required under the HSR Act and (iv) any actions or filings the absence of which would not be reasonably expected to be, individually or in the aggregate, material to the Company or to impair the ability of the Company to consummate the transactions contemplated by this Agreement.

Section 4.04.  Non-Contravention.  The execution, delivery and performance by the Company of this Agreement and the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby do not and will not (i) contravene, conflict with, or result in any violation or breach of any provision of the articles of incorporation or bylaws of the Company or any of its Subsidiaries, (ii) assuming compliance with the matters referred to in Section 4.03, contravene, conflict with, or result in a violation or breach of any provision of any Applicable Law, (iii) require any consent or other action by any Person under, constitute a default, or an event that, with or without notice or lapse of time or both, could become a default, under, or cause or permit the termination, cancellation, acceleration or other change of any right or obligation or the loss of any benefit to which the Company or any of its Subsidiaries is entitled under any provision of any agreement or other instrument binding upon the Company or any of its Subsidiaries or any license, franchise, permit, certificate, approval or other similar authorization affecting, or relating in any way to, the assets or business of  the Company and its Subsidiaries or (iv) result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries, with such exceptions, in the case of each of clauses (ii) through (iv), as would not be reasonably expected to be, individually or in the aggregate, material to the Company or materially to impair the ability of the Company to consummate the actions contemplated by this Agreement.

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Section 4.05.  Capitalization.  (a) The authorized capital stock of the Company consists of 302,143,593 shares, including (i) 200,000,000 shares of Company Common Stock, of which 10,926,670 shares are issued and outstanding, (ii) 251,692 shares of Company Series A-1 Preferred Stock, of which 251,692 shares are issued and outstanding, (iii) 827,419 shares of Company Series B1-1 Preferred Stock, of which 806,927 shares are issued and outstanding, (iv) 297,171 shares of Company Series B2 1 Preferred Stock, of which 286,511 shares are issued and outstanding, (v) 55,433,992 shares of Company Series C-1 Preferred Stock, of which 55,182,609 shares are issued and outstanding, (vi) 15,840,446 shares of Company Series C-2 Preferred Stock, of which 13,664,445 shares are issued and outstanding and (vii) 29,492,873 shares of Company Series Z Preferred Stock, of which 216,027 shares are issued and outstanding.  The Company has no other capital stock authorized, issued or outstanding.  The Company Stock is, as of the date hereof, held by the Persons and in the amounts set forth in Schedule 4.05(a), with the latest known addresses of such Persons indicated thereon.  All outstanding shares of the Company are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, the articles of incorporation or bylaws of the Company or any agreement to which the Company is a party or by which it is bound, and all outstanding shares of Company Stock and Company Convertible Securities have been issued in compliance in all material respects with federal and state securities laws.  There are no declared or accrued unpaid dividends with respect to any shares of the Company Stock.

(b)The Company has reserved 14,746,436 shares of Company Series Z Preferred Stock for issuance to employees, directors and consultants pursuant to the Company Stock Option Plan, of which 216,027 shares are outstanding pursuant to option exercises through the date hereof, 13,802,263 shares are subject to outstanding unexercised options as of the date hereof and 728,146 shares remain available for future grant as of the date hereof.  Schedule 4.05(b) of the Company Disclosure Schedule sets forth each Company Stock Option outstanding, the name of the optionholder, whether the optionholder is an employee of the Company, the address of record for such optionholder, the grant date and number of shares of Company Series Z Preferred Stock subject to such option, the exercise price of such option, the date on which such option expires and whether and to what extent such option is intended to qualify as an incentive stock option as defined in Section 422 of the Code.  All of the Company Stock Options will become fully vested and exercisable immediately prior to the Effective Time provided that the optionholder has not terminated or ceased providing services to the Company.  Each such option was granted with an exercise price per share equal to or greater than the fair market value of the underlying shares on the date of grant as determined in good faith by the Company’s board of directors.  The Company has heretofore delivered or made available to Parent true and complete copies of the standard form of stock option agreement, any stock option agreements which differ from such standard form and a stock option ledger showing the vesting schedule and the number of shares vested to date.

(c)The Company has reserved 20,492 shares of Company Series B1-1 Preferred Stock, 10,660 shares of Company Series B2-1 Preferred Stock, 251,383 shares

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of Company Series C-1 Preferred Stock and 1,176,001 shares of Company Series C-2 Preferred Stock for issuance upon exercise of Company Warrants, of which no shares of Company Series B1-1 Preferred Stock, Series B2-1 Preferred Stock, C-1 Preferred Stock or Series C-2 Preferred Stock are outstanding pursuant to exercises of Company Warrants through the date hereof and 20,492 shares of Company Series B1-1 Preferred Stock, 10,660 shares of Company Series B2-1 Preferred Stock, 251,383 shares of Company Series C-1 Preferred Stock and 1,176,001 shares of Company Series C-2 Preferred Stock are subject to outstanding unexercised Company Warrants.  Schedule 4.05(c) of the Company Disclosure Schedule sets forth each Company Warrant outstanding, the name of the holder, the address of record for the holder, the grant date and number and series of shares of Company Preferred Stock subject to such warrant, the exercise price of such warrant, the initial exercise date for such warrant, the expiration date of such warrant and to what extent the expiration of such warrant will be accelerated as a result of the transactions contemplated by this Agreement (indicating the circumstances that may cause such acceleration).  The Company has heretofore delivered or made available to Parent true and complete copies of all Company Warrants, and all amendments thereto.

(d)There are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any securities of the Company or obligating the Company to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement.

(e)No outstanding Company Stock is subject to vesting or forfeiture or rights of repurchase by the Company.  There are no outstanding or authorized stock appreciation, dividend equivalent, phantom stock, profit participation, or other similar rights with respect to the Company or any of its securities.  In addition, there are no declared or accrued unpaid dividends with respect to any share of the Company Stock.

(f)There are no voting trusts, proxies, or other agreements or understandings with respect to the voting stock of the Company or any other matters involving any securities of the Company.

(g)Except as set forth in Sections 4.05(a), 4.05(b) and 4.05(c), there are no outstanding (i) shares of capital stock or voting securities of the Company or (ii) Company Convertible Securities (the items in clauses (i) and (ii) being referred to collectively as the “Company Securities”).  Except as set forth in Sections 4.05(a), 4.05(b) and 4.05(c), there are no outstanding obligations, rights, commitments or agreements of any character, written or oral, to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any Company Securities.

(h)None of the Company Securities are owned by any Subsidiary of the Company.

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Section 4.06.  Subsidiaries.  (a) Each Subsidiary of the Company is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers and all governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted, except for those licenses, authorizations, permits, consents and approvals the absence of which would not be material to the Company and its Subsidiaries, taken as a whole.  Each such Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not have, individually or the aggregate, a Material Adverse Effect on the Company.  No Subsidiary is in violation of any of the provisions of its articles or certificate of incorporation or bylaws.  Schedule 4.06 sets forth for each Subsidiary its name, jurisdiction of incorporation or other organization and all jurisdictions in which it is authorized to do business.

(b)All of the outstanding shares of capital stock of, or other voting securities or ownership interests in, each Subsidiary of the Company are owned by the Company, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other voting securities or ownership interests).  There are no outstanding (i) securities of the Company or any of its Subsidiaries convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary of the Company or (ii) options or other rights to acquire from the Company or any of its Subsidiaries, or other obligation of the Company or any of its Subsidiaries to issue, any capital stock or other voting securities or ownership interests in, or any securities convertible into or exchangeable for any capital stock or other voting securities or ownership interests in, any Subsidiary of the Company (the items in clauses (i) and (ii) being referred to collectively as the “Subsidiary Securities”).  There are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any of the Subsidiary Securities.

(c)Other than the Subsidiaries of the Company, neither the Company nor any of its Subsidiaries own, directly or indirectly, any shares of capital stock of, other securities or ownership interests of, or investments in, any other Person (collectively, “Third Party Interests”).  Neither the Company nor any of its Subsidiaries have any rights to, or are bound by any commitment or obligation to, acquire by any means, directly or indirectly, any Third Party Interests or to make any investment in, or contribution or advance to, any Person.

Section 4.07.  Financial Statements.  (a) The audited balance sheets as of December 31, 2007 and 2006 and the related audited statements of income and cash flows for each of the years ended December 31, 2007, 2006 and 2005, and the unaudited interim financial statements for the nine months ended September 30, 2008 of the Company have been provided to Parent and are attached hereto as Schedule 4.07.  The audited balance sheets as of December 31, 2007 and 2006 and the related audited statements of income and cash flows for each of the years ended December 31, 2007, 2006 and 2005 fairly present, in conformity with U.S. generally accepted accounting principles (“GAAP”) applied on a consistent basis (except as may be indicated in the

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notes thereto), the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended.  The unaudited interim financial statements for the nine months ended September 30, 2008 fairly present, in all material respects, in conformity with U.S. GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended (subject only to normal year-end adjustments and an absence of footnotes).  Each of the foregoing financial statements includes all adjustments that are necessary for a fair presentation of the consolidated financial position and results of operations and cash flows of the Company and its Subsidiaries as of the date thereof and for the period covered thereby.  The Company maintains a system of internal controls over financial reporting that is adequate to the business of the Company as currently conducted.

(b)The Company’s unrestricted cash and cash equivalents consist solely of cash held in checking accounts, investments in a Janus Institutional Money Market Fund and certificates of deposit not in excess of $100,000 held at separate banks (“Actual Cash”) and do not consist of any investments in auction rate preferred securities, the Reserve Primary Fund, the Reserve Yield Plus Fund or the Reserve International Liquidity Fund.

Section 4.08.  Absence of Certain Changes.  Since the Company Balance Sheet Date, the business of the Company and its Subsidiaries has been conducted in the ordinary course consistent with past practices and there has not been:

(a)any event, occurrence, development or state of circumstances or facts that has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company;

(b)any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company;

(c)with respect to any outstanding shares of capital stock or other securities of, or other ownership interests in, the Company, any direct or indirect (i) reclassification, combination, split or subdivision or (ii) redemption, repurchase, purchase or other acquisition by the Company, except for repurchases by the Company of Company Series Z Preferred Stock made in connection with the termination of employment of Company employees;

(d)any incurrence, assumption or guarantee by the Company or any of its Subsidiaries of any indebtedness for borrowed money or guarantees thereof, other than trade payables incurred in the ordinary course of business consistent with past practices;

(e)any creation or other incurrence by the Company or any of its Subsidiaries of any material Lien on any material asset;

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(f)any making of any loan, advance or capital contributions to or investment in any Person, except for (i) reasonable advances to employees and consultants for travel and business expenses in the ordinary course of business consistent with past practices, (ii) purchases of inventory and materials by the Company in the ordinary course of business consistent with past practices and (iii) transactions in the ordinary course of business with its wholly-owned Subsidiaries;

(g)any damage, destruction or other casualty loss (whether or not covered by insurance) materially affecting the business or assets of the Company or any of its Subsidiaries;

(h)any transaction or commitment made, or any contract or agreement entered into, by the Company or any of its Subsidiaries relating to its assets or business (including the acquisition or disposition of any assets) or any relinquishment by the Company or any of its Subsidiaries of any contract or other right, in either case, material to the Company and its Subsidiaries, taken as a whole;

(i)any change in any method of accounting or accounting principles or practice by the Company, except for any such change required by reason of a concurrent change in GAAP;

(j)any (i) grant of any severance pay to (or amendment to any existing arrangement with) any director, officer or employee of the Company or any of its Subsidiaries, (ii) increase in severance benefits payable to any director, officer or employee of the Company or any of its Subsidiaries under any existing severance pay policies or employment agreements, (iii) entering into any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of the Company or any of its Subsidiaries, (iv) establishment, adoption or amendment (except as required by Applicable Law) of any collective bargaining, bonus, profit-sharing, thrift, pension, retirement, deferred compensation, compensation, stock option, restricted stock or other benefit plan or arrangement covering any director, officer or employee of the Company or any of its Subsidiaries or (v) increase in compensation, bonus or other benefits payable to any director, officer or employee of the Company or any of its Subsidiaries;

(k)any hiring, employment, or entry into a contract or agreement with any new employees or independent contractors or consultants;

(l)any material labor dispute, other than routine individual grievances of the Company’s employees;

(m)any material Tax election made or changed, any annual Tax accounting period changed, any method of Tax accounting adopted or changed, any material amended Tax Returns or claims for Tax refunds filed, any closing agreement entered into, any material Tax claim, audit or assessment settled, or any right to claim a material Tax refund, offset or other reduction in Tax liability surrendered;

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(n)any receipt of notice by the Company of any actual or threatened termination by any customer, supplier, distributor, licensor or other Person material to the business of the Company and its Subsidiaries, taken as a whole;

(o)any material change in pricing or royalties set or charged by the Company to its customers or licensees or in pricing or royalties set or charged by licensors to the Company;

(p)any capital expenditure, or commitment for a capital expenditure, for additions or improvements to property, plant and equipment, except such capital expenditures or commitments that do not, either individually or in the aggregate, exceed $50,000; or

(q)agreement by the Company or any officer or employee thereof in their capacities as such to do any of the things described in the preceding clauses (a) through (p) (other than negotiations with Parent and its representatives regarding the transactions contemplated by this Agreement).

Section 4.09.  No Undisclosed Liabilities.  There are no liabilities or obligations of the Company or any of its Subsidiaries of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances that could reasonably be expected to result in such a liability or obligation, other than:

(a)liabilities or obligations disclosed and provided for in the Company Balance Sheet or in the notes thereto,

(b)liabilities or obligations incurred in the ordinary course of business consistent with past practices since the Company Balance Sheet Date that would not reasonably be expected to be, individually or in the aggregate, material to the Company.

Section 4.10.  Compliance with Laws and Court Orders.  The business of the Company and each of its Subsidiaries is and has at all times since its inception been conducted in compliance in all material respects with, and to the Knowledge of the Company is not under investigation with respect to and has not been threatened to be charged with or given notice of any violation of, any Applicable Law.

Section 4.11.  Agreements, Contracts and Commitments.  (a)  Neither the Company nor any of its Subsidiaries is a party to or bound by:

(i)    any lease or sublease (whether of real or personal property) providing for annual rentals of $50,000 or more;

(ii)   any agreement for the purchase or license of technology, materials, supplies, goods, services, equipment or other tangible or intangible assets that provides for either (A) annual payments by the Company or its Subsidiaries of $50,000 or more to be made after the date of this Agreement or (B) aggregate

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payments by the Company or its Subsidiaries of $50,000 or more to be made after the date of this Agreement;

(iii)any license, sales, distribution or other similar agreement providing for the sale or license by the Company or any of its Subsidiaries of technology, materials, supplies, goods, services, equipment or other assets that provides for either (A) annual payments to the Company or its Subsidiaries of $50,000 or more or (B) aggregate payments to the Company and the Subsidiaries of $50,000 or more;

(iv)any partnership, joint venture or other similar agreement or arrangement;

(v)any agreement, contract or commitment relating to the acquisition or disposition of any business (whether by merger, sale of stock, sale of assets or otherwise);

(vi)any agreement relating to indebtedness for borrowed money or the deferred purchase price of property (in either case, whether incurred, assumed, guaranteed or secured by any asset), except any such agreement with an aggregate outstanding principal amount not exceeding $50,000 and which may be prepaid on not more than thirty (30) days’ notice without the payment of any penalty;

(vii)except for agreements with customers by the Company or its Subsidiaries in the ordinary course of business consistent with past practices, any option (other than employee stock options), license, franchise or similar agreement;

(viii)any alliance, agency, dealer, sales representative, marketing, distribution, original equipment manufacturer, remarketer, joint marketing, channel partner or other similar agreement;

(ix)any development or collaboration agreement or other agreement for development of products and services for the Company or any of its Subsidiaries;

(x)any agreement that limits the freedom of the Company or any Subsidiary to compete in any line of business or with any Person or in any area or which could reasonably be expected to so limit the freedom of the Company or any Affiliate after the Effective Time;

(xi)any agreement with any Affiliate of the Company (or any Subsidiary), with any director or officer of the Company or any of its Subsidiaries, or, to the Knowledge of the Company with any “associate” or any member of the “immediate family” (as such terms are respectively defined in Rules 12b-2 and 16a-1 of the 1934 Act) of any such director or officer;

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(xii)   any employment or consulting agreement, contract or commitment with an employee or individual consultant or salesperson or consulting or sales agreement with a firm or other organization;

(xiii)   any employment or consulting agreement or any agreement with severance, change in control or similar arrangements, that will result in any obligation (absolute or contingent) of the Company or any Subsidiary to make any payment as a result of the transactions contemplated by this Agreement, termination of employment or both;

(xiv)   any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; or

(xv)   any other agreement, commitment, arrangement or plan not made in the ordinary course of business that is material to the Company and its Subsidiaries, taken as a whole, including without limitation, any agreement involving annual payments by any customer to the Company and its Subsidiaries in excess of $75,000.

(b)Each agreement, contract, plan, lease, arrangement or commitment disclosed in any Schedule to this Agreement or required to be disclosed pursuant to this Section (each, a “Material Contract”) is a valid and binding agreement of the Company or its Subsidiaries, as the case may be, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws relating to or affecting creditors’ rights generally and to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and is in full force and effect with respect to the Company or any Subsidiary of the Company and, to the Knowledge of the Company, each other party thereto, and none of the Company, any Subsidiary of the Company or, to the Knowledge of the Company, any other party thereto is in default or breach in any material respect under the terms of any such agreement, contract, plan, lease, arrangement or commitment, and, to the Knowledge of the Company, no event or circumstance has occurred that, with notice or lapse of time or both, would reasonably be expected to constitute any event of default thereunder.  True and complete copies of each such agreement, contract, plan, lease, arrangement or commitment have been made available to Parent.

(c)To the Knowledge of the Company, as of the date of this Agreement, no person is renegotiating, or has a right (absent any default or breach of a Material Contract) pursuant to the terms of any Material Contract to renegotiate, any material amount paid or payable to the Company under any Material Contract or any other material term or provision of any Material Contract.  As of the date of this Agreement, the Company has not received any written or verbal indication of an intention to terminate any of the Material Contracts by any of the parties to any of the Material

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Contracts.  To the Knowledge of the Company, as of the Effective Time, no person is renegotiating, or has a right (absent any default or breach of a Material Contract) pursuant to the terms of any Material Contract to renegotiate, any material amount paid or payable to the Company under any Material Contract or any other material term or provision of any Material Contract, except as would not be material to the Company and its Subsidiaries taken as a whole.  As of the Effective Time, the Company has not received any written or verbal indication of an intention to terminate any of the Material Contracts by any of the parties to any of the Material Contracts, except as would not be material to the Company and its Subsidiaries taken as a whole.

(d)The Company and each Subsidiary have fulfilled all material obligations required pursuant to each Material Contract to have been performed by the Company prior to the date hereof.

(e)The transactions contemplated by this Agreement will not give rise to any notice requirements under any contract disclosed in response to Section 4.11(a).

(f)The transactions contemplated by this Agreement will not give rise to any consent requirements under any contract disclosed in response to Section 4.11(a).

(g)The transactions contemplated by this Agreement will not give rise to any rights of termination under any contract disclosed in response to Section 4.11(a).

Section 4.12.  Litigation.  There is no material action, suit, investigation or proceeding (or, to the Knowledge of the Company, any basis therefor) pending against, or, to the Knowledge of the Company, threatened against or affecting, the Company or any of its Subsidiaries, or, to the Knowledge of the Company, pending or threatened against or affecting any present or former officer, director or employee of the Company or any of its Subsidiaries or any other Person in each case for whom the Company or any such Subsidiary would reasonably be expected to be liable or any of their respective properties or that in any manner challenges or seeks to prevent, enjoin, alter or materially delay the Merger or any of the other transactions contemplated hereby before any Governmental Authority.

Section 4.13.  Finders’ Fees.  Except for Thomas Weisel Partners LLC and EMA Partners, LLC, copies of whose engagement agreements have been provided or made available to Parent, there is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of the Company or any of its Subsidiaries who might be entitled to any fee or commission from the Company or any of its Affiliates in connection with the transactions contemplated by this Agreement.

Section 4.14.  Tax Representations.

(a)Filing and Payment.  (i) All Tax Returns required to be filed by or on behalf of the Company or any of its Subsidiaries have been filed when due (taking into account any extension of time to file) in accordance with all Applicable Laws; (ii) as of the time of filing, the Tax Returns were true and complete in all material respects; and (iii) all

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Taxes shown as due and payable on the Tax Returns that have been filed have been timely paid, or withheld and remitted to the appropriate Taxing Authority.

(b)Financial Records.  (i) The charges, accruals and reserves for Taxes with respect to the Company and its Subsidiaries reflected on the books of the Company and its Subsidiaries (excluding any provision for deferred income taxes reflecting either differences between the treatment of items for accounting and income tax purposes or carryforwards) are adequate to cover Tax liabilities accruing through the end of the last period for which the Company and its Subsidiaries ordinarily record items on their respective books and (ii) since the end of the last period for which the Company and its Subsidiaries ordinarily record items on their respective books, neither the Company nor any of its Subsidiaries has incurred any liability for material Taxes other than in the ordinary course of business.

(c)Procedure and Compliance.  (i) All income and franchise Tax Returns filed with respect to the Company and its Subsidiaries through the Tax year ended December 31, 2003 have been examined and closed or are Tax Returns with respect to which the applicable period for assessment under Applicable Law, after giving effect to extensions or waivers, has expired; (ii) neither the Company nor any of its Subsidiaries has requested any extension of time within which to file any Tax Return and has not yet filed such Tax Return; (iii) neither the Company nor any of its Subsidiaries has granted any extension or waiver of the statute of limitations period applicable to any Tax Return, which period (after giving effect to such extension or waiver) has not yet expired; (iv) no adjustment that would materially increase the Tax liability, or materially reduce any Tax Asset, of the Company or any of its Subsidiaries has been made, proposed or threatened in writing (or otherwise to the Knowledge of the Company) by a Taxing Authority during any audit of a Pre-Closing Tax Period which could reasonably be expected to be made, proposed or threatened in an audit of any subsequent Pre-Closing Tax Period or Post-Closing Tax Period; (v) there is no claim, audit, action, suit, proceeding or investigation now pending or threatened in writing (or otherwise to the Knowledge of the Company) against the Company or its Subsidiaries in respect of any Tax or Tax Asset; (vi) the Company has not received a written Tax opinion with respect to any transaction relating to the Company, other than a transaction in the ordinary course of business; and (vii) there are no requests for rulings or determinations in respect of any Tax or Tax Asset pending between the Company or any of its Subsidiaries and any Taxing Authority.

(d)Taxing Jurisdictions.  Schedule 4.14(d) sets forth a list of all jurisdictions (whether foreign or domestic) in which the Company or any of its Subsidiaries files Tax Returns.  No claim has ever been made in writing (or otherwise to the Knowledge of the Company) by a Taxing Authority in a jurisdiction where the Company or any of its Subsidiaries does not file Tax Returns that the Company or any of its Subsidiaries is or may be subject to taxation in that jurisdiction nor is there a more likely than not basis for any such claim.

(e)Tax Sharing, Consolidation and Similar Arrangements.  (i) Neither the Company nor any of its Subsidiaries has been a member of an affiliated, consolidated, combined or unitary group other than one of which the Company was the common

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parent, or made any election or participated in any arrangement whereby any Tax liability or any Tax Asset of the Company or any of its Subsidiaries was determined or taken into account for Tax purposes with reference to or in conjunction with any Tax liability or any Tax Asset of any other Person; (ii) neither the Company nor any of its Subsidiaries is party to any Tax Sharing Agreement or to any other agreement or arrangement referred to in clause (ii) or (iii) of the definition of “Tax”; and (iii) neither the Company nor any of its Subsidiaries has entered into any formal agreement or arrangement with any Taxing Authority with regard to the Tax liability of the Company or any of its Subsidiaries affecting any Tax period for which the applicable statute of limitations, after giving effect to extensions or waivers, has not expired.

(f)Certain Elections, Agreements and Arrangements.  (i) No election has been made under Treasury Regulations Section 301.7701-3 or any similar provision of Tax law to treat the Company or any of its Subsidiaries as an association, corporation or partnership; (ii) none of the Company or any of its Subsidiaries is disregarded as an entity for Tax purposes; (iii) during the five-year period ending on the date hereof, none of the Company or any of its Subsidiaries was a distributing corporation or a controlled corporation in a transaction intended to be governed by Section 355 of the Code; and (iv) neither the Company nor any of its Subsidiaries is a party to any understanding or arrangement described in Section 6662(d)(2)(C)(ii) of the Code, or has “participated” in a “reportable transaction” within the meaning of Treasury Regulations Section 1.6011-4.

(g)Property and Leases.  (i) Neither the Company nor any of its Subsidiaries owns an interest in real property in any jurisdiction in which a Tax is imposed, or the value of the interest is reassessed, on the transfer of an interest in real property and which treats the transfer of an interest in an entity that owns an interest in real property as a transfer of the interest in real property; and (ii) none of the property owned by the Company or any of its Subsidiaries is “tax-exempt use property” within the meaning of Section 168(h) of the Code.

(h)Post-Closing Attributes.  (i) Neither the Company nor any of its Subsidiaries will be required to include any adjustment in taxable income for any Post-Closing Tax Period under Section 481(c) of the Code (or any similar provision of the Tax laws of any jurisdiction) as a result of a change in method of accounting for a Pre-Closing Tax Period; and (ii) neither the Company nor any of its Subsidiaries will be required to include for a Post-Closing Tax Period taxable income attributable to income economically realized in a Pre-Closing Tax Period, including any distributions in a Pre-Closing Tax Period from an entity that is fiscally transparent for Tax purposes and any income that would be includible in a Post-Closing Tax Period as a result of the installment method or the look-back method (as defined in Section 460(b) of the Code).

Section 4.15.  Employee Matters and Employment Benefit Plans.  (a)  Schedule 4.15(a) contains a correct and complete list identifying each “employee benefit plan”, as defined in Section 3(3) of ERISA, each employment, severance or similar contract, plan, arrangement or policy and each other plan or arrangement (written or oral) providing for compensation, bonuses, profit-sharing, stock option or other stock related rights or other forms of incentive or deferred compensation, vacation benefits, insurance (including any

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self-insured arrangements), health or medical benefits, employee assistance program, disability or sick leave benefits, workers’ compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, health, medical or life insurance benefits) which is maintained, administered or contributed to by the Company or any of its Affiliates and covers any current or former employee, director or independent contractor of the Company or any of its Subsidiaries, or with respect to which the Company or any of its Subsidiaries has any liability.  Copies of such plans (and, if applicable, related trust or funding agreements or insurance policies) and all amendments thereto and written interpretations thereof have been made available to Parent together with the most recent annual report (Form 5500 including, if applicable, Schedule B thereto) and tax return (Form 990) prepared in connection with any such plan or trust.  Such plans are referred to collectively herein as the “Employee Plans”.

(b)Neither the Company nor any ERISA Affiliate nor any predecessor thereof does or is required to sponsor, maintain or contribute to, or has in the past sponsored, maintained or contributed to, any Employee Plan subject to Title IV of ERISA or any non-U.S. defined benefit plan.

(c)Neither the Company nor any ERISA Affiliate nor any predecessor thereof does or is required to contribute to, or has in the past contributed to, any multiemployer plan, as defined in Section 3(37) of ERISA (a “Multiemployer Plan”), or any multiple employer plan.

(d)Each Employee Plan which is intended to be qualified under Section 401(a) of the Code is so qualified and has been so qualified during the period since its adoption.  The Company has made available to Parent copies of the most recent Internal Revenue Service determination or opinion letters with respect to each such Employee Plan.

(e)Each Employee Plan has been maintained in material compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including but not limited to ERISA and the Code, which are applicable to such Employee Plan.  No material events have occurred with respect to any Employee Plan that could result in payment or assessment by or against the Company of any material excise taxes under Sections 4972, 4975, 4976, 4977, 4979, 4980B, 4980D, 4980E or 5000 of the Code.

(f)The consummation of the transactions contemplated by this Agreement will not (either alone or together with any other event) entitle any current or former employee, director or independent contractor of the Company or any of its Subsidiaries to severance pay, bonus, retirement, job security or similar benefit or accelerate the time of payment or vesting or trigger any payment of funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or trigger any other material obligation pursuant to, any Employee Plan or any other employment or benefit arrangement.

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(g)There is no contract, plan or arrangement (written or otherwise) covering any current or former employee, director or independent contractor of the Company or any of its Subsidiaries that, individually or collectively, could reasonably be expected to give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G of the Code.

(h)Neither the Company nor any of its Subsidiaries has any liability in respect of post-employment or post-retirement health, medical or life insurance benefits for retired, former or current employees of the Company or its Subsidiaries except as required under Section 4980B of the Code or similar applicable state law.  No condition exists that would prevent the Company or any of its Subsidiaries from amending or terminating any Employee Plan providing health or medical benefits in respect of any active employee of the Company or any of its Subsidiaries, to the extent permitted under applicable law.  No Employee Plan is subject to Section 409A of the Code.  Any such plan set forth on Schedule 4.15(h) is and has been operated in good faith compliance with Section 409A of the Code and the applicable guidance issued thereunder.

(i)All contributions and payments accrued under each Employee Plan, determined in accordance with prior funding and accrual practices, as adjusted to include proportional accruals for the period ending as of the date hereof, have been discharged and paid on or prior to the date hereof except to the extent reflected as a liability on the Company Balance Sheet.

(j)There has been no amendment to, written interpretation or announcement (whether or not written) by the Company or any of its Affiliates relating to, or change in employee participation or coverage under, an Employee Plan which could increase materially the expense of maintaining such Employee Plan above the level of the expense incurred in respect thereof for the fiscal year ended December 31, 2007.

(k)Neither the Company nor any of its Subsidiaries is a party to or subject to, or is currently negotiating in connection with entering into, any collective bargaining agreement or other contract or understanding with a labor union or labor organization.

(l)There is no action, suit, investigation, audit or proceeding pending against or involving or, to the Knowledge of the Company, threatened against or involving, any Employee Plan before any court or arbitrator or any state, federal or local governmental body, agency or official.

(m)The Company and its Subsidiaries are in material compliance with all currently applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and are not engaged in any unfair labor practice.  There is no unfair labor practice complaint pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries before the National Labor Relations Board.

(n)Neither the Company nor any of its Subsidiaries has engaged in any workforce reduction within the last 90 days which, alone or when aggregated with any

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other workforce reduction before or after the date hereof, would trigger obligations under the Worker Adjustment and Retraining Notification Act (the “WARN Act”), or any similar state or local laws regulating layoffs or employment terminations, with respect to its employees.

(o)The Company has no Knowledge that any Key Employee intends to resign or retire as a result of the transactions contemplated by this Agreement or otherwise within one year after the Effective Time.

(p)Attached as Schedule 4.15(p) is a true, complete and correct list of the employees of the Company identified by each employee’s title, along with information regarding each employee’s location of employment, salary and other compensation paid to the employee by the Company.  The Company does not employ any part-time employees or pay for the services of any independent contractors.

Section 4.16.  Real and Personal Property; Absence of Liens and Encumbrances.  (a) The Company and its Subsidiaries do not own any real property and have never owned any real property.  Schedule 4.16(a) sets forth a list of all real property currently leased by the Company or any of its Subsidiaries, the name of the lessor, the date of the lease and each amendment thereto.  All such leases are in full force and effect and enforceable by the Company or its Subsidiaries (except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, or other similar laws now or hereafter in effect relating to creditors’ generally and by general equitable principles, and regardless of whether enforceability is considered in a proceeding in equity or at law), and there is not, under any of such leases, any existing default by the Company or its Subsidiaries or, to the Knowledge of the Company, by the other party thereto or event of default (or event which with notice or lapse of time, or both, would constitute such a default).  The Company has heretofore made available to Parent true and complete copies of all such leases.

(b)The Company or its Subsidiaries have good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of their tangible properties and assets, real, personal and mixed, used or held for use in their respective businesses, free and clear of any Liens, except as reflected in the Company Balance Sheet and except for Liens for Taxes not yet due and payable, municipal and zoning ordinances, easements for public utilities and such imperfections of title and encumbrances, if any, which are not material in character, amount or extent, and which do not materially detract from the value, or materially interfere with the present use, of the property subject thereto or affected thereby.

(c)Schedule 4.16(c) lists all material items of equipment (the “Equipment”) owned or leased by the Company or any of its Subsidiaries with a book or fair market value for each item in excess of $50,000 and such Equipment is, in the aggregate, in all material respects, (i) adequate for the conduct of the business of the Company and its Subsidiaries as currently conducted and (ii) in good operating condition, regularly and properly maintained, subject to normal wear and tear.

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Section 4.17.  Products.  To the Company’s Knowledge, each of the products produced or sold by the Company or any of its Subsidiaries is, and at all times up to and including the sale thereof has been, (i) in compliance in all material respects with the terms and requirements of any applicable warranty or other contract between the Company and such Person, (ii) in conformance in all material respects with any promises or affirmations of fact made in connection with its sale, and (iii) in compliance in all material respects with Applicable Law.  All repair services and other services that have been performed by the Company and its Subsidiaries were performed properly and in conformity in all material respects with the terms and requirements of all applicable warranties and other Contracts and with Applicable Law, except for any deficiencies that can be corrected without incurring expense materially in excess of the Company’s warranty reserves.  To the Company’s Knowledge, none of the Company and its Subsidiaries will incur or otherwise become subject to any liability arising directly or indirectly from any product manufactured or sold, or any repair services or other services performed by, the Company or any of its Subsidiaries on or at any time prior to the Closing Date in excess of the Company’s warranty reserves.  To the Company’s Knowledge, there are no material unresolved claims or threatened claims by any customer or other Person against the Company or any of its Subsidiaries (i) under or based upon any warranty provided by or on behalf of the Company or any of its Subsidiaries that have been received in writing by the Company or any of its Subsidiaries, or (ii) under or based upon any other warranty relating to any product sold by the Company or any of its Subsidiaries or any services performed by the Company or any of its Subsidiaries.  To the Company’s Knowledge no event has occurred, and no condition or circumstance exists, that could reasonably be expected (with or without notice or lapse of time) to directly or indirectly give rise to or serve as a basis for the assertion of any such claim.  No product manufactured or sold by the Company or any of its Subsidiaries has been the subject of any recall or other similar action; and no event has occurred, and to the Company’s Knowledge no condition or circumstance exists, that could (with or without notice or lapse of time) directly or indirectly give rise to or serve as a basis for any such recall or other similar action relating to any such product.

Section 4.18.  Intellectual Property.  (a) To the Company’s Knowledge, without conducting any special investigation or study beyond that provided to Parent, Schedule 4.18(a) sets forth all material Intellectual Property necessary to conduct the business of the Surviving Corporation as currently conducted (the “Necessary Intellectual Property”).  The Company and/or its Subsidiaries own or otherwise have sufficient rights to use the Necessary Intellectual Property.  Consummation of the transactions contemplated by this Agreement will not encumber, impair or extinguish any rights of the Company or its Subsidiaries in the Necessary Intellectual Property, excluding any off-the-shelf software licensed to the Company and/or its Subsidiaries that is generally available commercially on nondiscriminatory terms (“Off-the-Shelf Software”).  There are no claims pending or threatened in writing (or otherwise threatened, to the Company’s Knowledge) against the Company or its Subsidiaries by any third party (i) challenging or seeking to deny or restrict the rights of the Company or any of its Subsidiaries in any Necessary Intellectual Property or (ii) alleging that any Intellectual Property right of any third party is infringed or otherwise violated by the

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business of the Surviving Corporation as currently conducted or by any services or products offered by the Company or its Subsidiaries.

(b)(i) To the Knowledge of the Company, the Company and its Subsidiaries are the sole and exclusive owners of the Company Intellectual Property, free and clear of any Lien and there are no material restrictions on the disclosure, use, license or transfer of the Company Intellectual Property or the Necessary Intellectual Property by the Company and its Subsidiaries or by their respective assigns and successors; and (ii) no third party has been granted any material current or contingent license right by the Company and/or its Subsidiaries to utilize any material Company Intellectual Property; in each case except pursuant to licenses granted to or by the Company and/or its Subsidiaries in the ordinary course of business and set forth in the agreements listed in Schedule 4.18(b).  None of the Company Intellectual Property has been adjudged in a court as invalid, unenforceable, or not infringed, and there are no proceedings pending or third party claims pending (excluding patent prosecution before the patent offices of the world) or threatened in writing, in each case challenging the scope, validity, or enforceability of any of the Company Intellectual Property.  To the Company’s Knowledge, none of the Necessary Intellectual Property has been adjudged in a court as invalid, unenforceable, or not infringed, and there are no proceedings pending (excluding patent prosecution before the patent offices of the world) or third party claims pending or threatened in writing, in each case challenging the scope, validity or enforceability of any of the Necessary Intellectual Property.

(c)Schedule 4.18(c) sets forth a list of all U.S. and foreign (i) issued patents and patent applications, (ii) trademark registrations and applications (including domain name registrations), and (iii) copyright registrations and applications, included in the Company Intellectual Property (“Company Registered Intellectual Property”).  All applications for Company Registered Intellectual Property and all registrations for Company Registered Intellectual Property are subsisting (i.e., have not been finally abandoned), and all annuity, maintenance, renewal and other fees necessary to maintain any Company Registered Intellectual Property are current.  Effective written assignments constituting an unbroken, complete chain-of-title from the original owner(s) to the Company or its Subsidiaries have been obtained with respect to all of the patent applications and patents within the Company Registered Intellectual Property and have been duly recorded with the appropriate governmental authorities, except where the failure to do so is correctible within ninety (90) days after the Effective Time.

(d)Schedule 4.18(d) lists all agreements under which the Company or its subsidiaries are granted any license right or immunity with respect to the Intellectual Property of any third party that constitutes Necessary Intellectual Property, excluding Off-the-Shelf Software.  To the Knowledge of the Company, each such agreement is in full force and effect, and the Company has in all material respects performed its obligations thereunder.

(e)Except for Company Intellectual Property that has become publicly available or known through patenting, the publication of a patent application, or inherently through the sale or distribution in the ordinary course of business of products

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or methods incorporating Company Intellectual Property, the Company and its Subsidiaries have used reasonable commercial efforts to maintain the confidentiality of all Company Intellectual Property that is material to the business of the Company.

(f)None of the Company or any of its Subsidiaries has given to any Person an indemnity in connection with any Intellectual Property right, other than indemnities (i) that, individually or in the aggregate, could not result in liability to the Company in excess of $100,000; (ii) under Contracts disclosed in Schedule 4.18(f); or (iii) that arise under a standard form sales contract of the Company or any of its Subsidiaries and whose terms do not materially differ from the sample attached in Schedule 4.18(f).

(g)All products sold by the Company or its Subsidiaries and covered by a patent, trademark or copyright included in the Company Intellectual Property have been marked with appropriate notices to the extent legally required in order to collect damages.

(h)To the extent that any Company Intellectual Property listed in Schedule 4.18(c) has been developed or created by any party (including any current or former employee of the Company or any of its Subsidiaries) for the Company or any of its Subsidiaries, the party has assigned exclusive ownership to the Company and/or its Subsidiaries with respect thereto.  To the extent that any Company Intellectual Property has been developed or created by any current or former employee of the Company or any of its Subsidiaries, such person has signed a Proprietary Invention Agreement substantially in the form of the agreement set forth in Exhibit C or a form of agreement that is no less restrictive than such agreement.

(i)No third party possesses any current or future contingent rights with respect to any source code that is a material part of the software included in the Company Intellectual Property.  Except as set forth in Schedule 4.18(i), no Governmental Authority, university, college, other educational institution or research center has any claim or right in or to the Company Intellectual Property.

Section 4.19.  Insurance Coverage.  Schedule 4.19 contains a complete and accurate list of, and the Company has furnished or made available to Parent true and complete copies of, all insurance policies and fidelity bonds relating to the assets, business, operations, employees, officers or directors of the Company and its Subsidiaries.  There is no claim by the Company or any of its Subsidiaries pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds or in respect of which such underwriters have reserved their rights.  All premiums payable under all such policies and bonds have been timely paid and the Company and its Subsidiaries have otherwise complied in all material respects with the terms and conditions of all such policies and bonds.  Such policies of insurance and bonds (or other policies and bonds providing substantially similar insurance coverage) have been in effect since February 1, 2007 and remain in full force and effect.  The Company has no Knowledge of any threatened termination of, premium increase with respect to, or material alteration of coverage under, any of such policies or bonds.

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Section 4.20.  Licenses and Permits.  Schedule 4.20 correctly lists each material license, franchise, permit, certificate, approval or other similar authorization necessary to the business of the Company and its Subsidiaries as conducted as of the date of the Agreement (the “Permits”) together with the name of the government agency or entity issuing such Permit.  The Permits are valid and in full force and effect.  Neither the Company nor any Subsidiary is in default under, and no condition exists that with notice or lapse of time or both would reasonably be expected to constitute a default under, the Permits.  None of the Permits will be terminated or impaired or become terminable, in whole or in part, as a result of the transactions contemplated hereby.  The Company and each Subsidiary have made all material filings with governmental entities and have received all material permits, registrations, licenses, franchises, certifications and other approvals necessary to conduct and operate its business as currently conducted or operated by it and to permit the Company to own or use its assets in the manner in which such assets are currently owned or used.

Section 4.21.  Inventories.  The inventories set forth in the Company Balance Sheet were properly stated therein at the lesser of cost or fair market value determined in accordance with GAAP consistently maintained and applied by the Company.  Since the Company Balance Sheet Date, the inventories of the Company and its Subsidiaries have been maintained in the ordinary course of business.  All such inventories are owned free and clear of all Liens.  All of the inventories recorded on the Company Balance Sheet consist of, and all inventories of the Company and its Subsidiaries on the Closing Date will consist of, items of a quality usable or saleable in the ordinary course of business consistent with Parent’s past practices and are and will be in quantities sufficient for the normal operation of the business of the Company and its Subsidiaries in accordance with past practice.

Section 4.22.  Receivables.  All accounts, notes receivable and other receivables (other than receivables collected since the Company Balance Sheet Date) reflected on the Company Balance Sheet are, and all accounts and notes receivable arising from or otherwise relating to the business of the Company and its Subsidiaries as of the Effective Time will be, valid and genuine.  All accounts, notes receivable and other receivables arising out of or relating to the business of the Company and its Subsidiaries as of the Company Balance Sheet Date have been included in the Company Balance Sheet and all reserves for doubtful accounts reflected thereon were taken in accordance with GAAP applied on a consistent basis.  No person has any Lien on any such accounts receivable and, to the Company’s Knowledge, no request or agreement for deduction or discount has been made with respect to any such accounts receivable.

Section 4.23.  Environmental Matters.  (a) No written notice, notification, complaint, demand, request for information, citation, summons or order has been received by the Company or any of its Subsidiaries, no outstanding penalty has been assessed and no investigation, action, claim, suit or proceeding is pending, or to the Knowledge of the Company, is threatened by any Person with respect to any matters relating to the Company or any of its Subsidiaries and relating to any Environmental Law, any Hazardous Substance or any Environmental Permit actually or allegedly held or required by the Company or any of its Subsidiaries.

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(b)Each of the Company and its Subsidiaries is and, except as has been fully resolved, at all times since its inception has been in compliance, in all material respects, with all Environmental Laws and has obtained and is and, except as has been fully resolved, at all times since its inception has been in compliance, in all material respects, with all Environmental Permits; such Environmental Permits are valid and in full force and effect and will not be terminated or impaired or become terminable, in whole or in part, as a result of the transactions contemplated hereby.

(c)No Hazardous Substance has been discharged, disposed of, dumped, injected, pumped, deposited, spilled, leaked, emitted or released at, on, from, under, to, in or within any property now or previously owned, leased or operated by the Company or any of its Subsidiaries in a manner which would reasonably result in a material liability.

(d)No property now or previously owned, leased or operated by the Company or any of its Subsidiaries or any property to which the Company or any of its Subsidiaries has, directly or indirectly, transported or arranged for the transportation of any Hazardous Substances is listed or, to the Knowledge of the Company, proposed for listing, on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS (as defined in CERCLA) or on any similar federal, state or foreign list of sites requiring investigation or clean-up, which listing has resulted in, or would reasonably result in, a material liability.

(e)Neither the Company nor any of its Subsidiaries owns, leases or operates or has owned, leased or operated any real property, or conducts or has conducted any operations, in New Jersey or Connecticut.

(f)For purposes of this Section 4.23, the terms “Company” and “Subsidiaries” shall include any entity that is, in whole or in part, a predecessor of the Company or any of its Subsidiaries.

Section 4.24.  Certain Interests.  (a)  To the Knowledge of the Company, none of the shareholders of the Company or its Subsidiaries or any officer or director of the Company or its Subsidiaries and no member of such person’s “immediate family” (as such term is defined in Rule 16a-1 of the 1934 Act):

(i)has been an officer, director or shareholder of any significant supplier or customer of the Company, or of any company which holds, directly or indirectly, 50% or more of the outstanding shares of any such supplier or customer, provided, however, that the ownership of securities representing not more than 1% of the outstanding voting power of any supplier or customer, and which are listed on any national securities exchange or traded actively in the national over-the-counter market, shall not be deemed to be a “shareholder” as long as the person owning such securities has no other connection or relationship with such supplier or customer;

(ii)is a party to or directly or indirectly interested in any license, partnership or alliance agreement with the Company or any of its Subsidiaries;

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(iii)owns, directly or indirectly, in whole or in part, or has any other interest in any tangible or intangible property which the Company or any of its Subsidiaries uses or has used in the conduct of its business or otherwise (except for any such ownership or interest resulting from the ownership of securities in a public company); or

(iv)has outstanding any indebtedness to the Company or any of its Subsidiaries.

(b)Except for the payment of employee compensation in the ordinary course of business, the Company does not have any liability or any other obligation of any nature whatsoever to any Shareholder or any affiliate thereof or to any officer or director of the Company or, to the Knowledge of the Company, to any immediate relative or spouse (or immediate relative of such spouse) of any such officer or director.

Section 4.25.  Customers; Suppliers.  (a) Schedule 4.25(a) sets forth the names of the five (5) most significant customers (by dollar amount of revenue) of the Company and its Subsidiaries for each of the year ended December 31, 2007, and the period from January 1, 2008 through September 30, 2008, and the dollar amount of revenue for each such customer during such periods.  The Company has received no notice and has no Knowledge that any customer listed on Schedule 4.25(a) has ceased to purchase or license the products of the Company, or has substantially reduced, or intends to substantially reduce, the purchase or license of such products from the Company.  As of the date of this Agreement, the Company received no notice and has no Knowledge that any customer listed on Schedule 4.25(a) is reasonably likely to cease to purchase or license the products of the Company.  As of the Effective Time, the Company has received no notice and has no Knowledge that any customer listed on Schedule 4.25(a) is reasonably likely to cease to purchase or license the products of the Company, except as would not be material to the Company and its Subsidiaries taken as a whole.

(b)Schedule 4.25(b) sets forth the names of the five (5) most significant suppliers (by dollar amount of purchases) of the Company and its Subsidiaries for each of the year ended December 31, 2007, and the period from January 1, 2008 through September 30, 2008, and any sole-source suppliers that are material to the business of the Company as presented, conducted or as proposed to be conducted, in each case specifying the dollar amount of the purchases by the Company and its Subsidiaries from each such supplier for each of the year ended December 31, 2007, and the period from January 1, 2008 through September 30, 2008.  The Company has received no notice and has no Knowledge that any supplier listed on Schedule 4.25(b) has threatened to (x) terminate or modify in a manner adverse to the Company its relationship with the Company, (y) reduce the amount of goods or services that it is willing to supply to the Company or (z) increase the price of any good or service that it has previously supplied or that it expects to supply to the Company.

Section 4.26.  Books and Records.  The books of account and other financial records of the Company have been maintained in accordance with sound business practices that are adequate for the size and nature of the business of the Company as

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conducted as of the date of this Agreement.  The minute books of the Company made available to Parent contain complete and accurate records in all material respects of all actions taken, and summaries of all meetings held, by the Shareholders, the Board of Directors and any committees of the Board of Directors of the Company since inception until the date hereof.  At the Effective Time, all of those books and records will be in the possession of the Company.  The Company has previously made available all of these books, records and accounts to Parent.

ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT

Parent represents and warrants to the Company that:

Section 5.01.  Corporate Existence and Power.  Each of Parent and Merger Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate powers and all governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted, except for those licenses, authorizations, permits, consents and approvals the absence of which would not have, individually or in the aggregate, a Material Adverse Effect on Parent.  Since the date of its incorporation, Merger Subsidiary has not engaged in any activities other than in connection with or as contemplated by this Agreement.

Section 5.02.  Corporate Authorization.  The execution, delivery and performance by Parent and Merger Subsidiary of this Agreement and the Escrow Agreement and the consummation by Parent and Merger Subsidiary of the transactions contemplated hereby and thereby are within the corporate powers of Parent and Merger Subsidiary, respectively, and have been duly authorized by all necessary corporate action on the part of Parent and Merger Subsidiary, respectively.  This Agreement, assuming due authorization, execution and delivery by the other parties hereto, constitutes a valid and binding agreement of Parent and Merger Subsidiary, respectively.

Section 5.03.  Governmental Authorization.  The execution, delivery and performance by Parent and Merger Subsidiary of this Agreement and the consummation by Parent and Merger Subsidiary of the transactions contemplated hereby require no action by or in respect of, or filing with, any Governmental Authority, other than (i) the filing of an agreement of merger with respect to the Merger with the Secretary of State of the State of California and appropriate documents with the relevant authorities of other states in which Parent is qualified to do business, (ii) compliance with any applicable requirements of the 1933 Act, the 1934 Act and any other applicable securities or takeover laws, whether state or foreign, (iii) such filings as may be required under the HSR Act and (iv) any actions or filings the absence of which could not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on Parent or materially to impair the ability of Parent and Merger Subsidiary to consummate the transactions contemplated by this Agreement.

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Section 5.04.  Non-Contravention.  The execution, delivery and performance by Parent and Merger Subsidiary of this Agreement and the consummation by Parent and Merger Subsidiary of the transactions contemplated hereby do not and will not (i) contravene, conflict with, or result in any violation or breach of any provision of the certificate of incorporation or bylaws of Parent or the articles of incorporation or bylaws of Merger Subsidiary, or (ii) assuming compliance with the matters referred to in Section 5.03, contravene, conflict with, or result in any violation or breach of any provision of any Applicable Law, except for such contraventions, conflicts and violations that would not be reasonably expected to materially impair the ability of Parent and Merger Subsidiary to consummate the transactions contemplated by this Agreement.

Section 5.05.  Sufficient Funds.  As of the date hereof, Parent has, and as of the Closing Parent will have, sufficient funds available to enable it to consummate the transactions contemplated by this Agreement.

ARTICLE 6
COVENANTS OF THE COMPANY

The Company agrees that:

Section 6.01.  Conduct of the Company.  From the date hereof until the earlier of the Effective Time and the termination of this Agreement in accordance with Article 12, the Company shall, and shall cause each of its Subsidiaries to, conduct its business in the ordinary course consistent with past practice and in material compliance with all Applicable Laws and use its commercially reasonable efforts to (i) preserve intact its present business organization, properties and assets, (ii) maintain in effect all of its foreign, federal, state and local licenses, permits, consents, franchises, approvals and authorizations, (iii) keep available the services of its directors, officers and key employees, (iv) maintain satisfactory relationships with its customers, suppliers, distributors, licensors, licensees, and others having material business relationships with it, (v) manage its working capital (including the timing of collection of accounts receivable and of the payment of accounts payable and the management of inventory) in the ordinary course of business consistent with past practice, (vi) maintain its Equipment in good operating condition and (vii) maintain the insurance policies described in Section 4.19, its books and accounts and its Intellectual Property Rights, in each case, consistent with past practice and in accordance, in all material respects, with Applicable Law.  Without limiting the generality of the foregoing, except pursuant to the prior written consent of Parent or as expressly contemplated by this Agreement, the Company shall not, nor shall it permit any of its Subsidiaries to:

(a)amend its articles of incorporation, bylaws or other similar organizational documents (whether by merger, consolidation or otherwise);

(b)split, combine or reclassify any shares of capital stock of the Company or any of its Subsidiaries or declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of the capital

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stock of the Company or its Subsidiaries, or redeem, repurchase or otherwise acquire or offer to redeem, repurchase, or otherwise acquire any Company Securities or any Subsidiary Securities;

(c)(i) issue, deliver, sell, pledge, encumber or dispose of, or authorize the issuance, delivery, sale, pledge, encumbrance or disposition of, any shares of any Company Securities or Subsidiary Securities, other than the issuance of (A) any shares of the Company Stock upon the exercise of Company Stock Options and Company Warrants that are outstanding on the date of this Agreement in accordance with the terms of those Company Stock Options and Company Warrants on the date of this Agreement and (B) any Subsidiary Securities to the Company or any other Subsidiary or (ii) amend any term of any Company Security or any Subsidiary Security (in each case, whether by merger, consolidation or otherwise);

(d)adopt a plan or agreement of, or resolutions providing for or authorizing, complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization;

(e)acquire (by merger, consolidation, acquisition of stock or assets or otherwise), directly or indirectly, any assets, securities, properties, interests or businesses, other than supplies in the ordinary course of business of the Company and its Subsidiaries in a manner that is consistent with past practice;

(f)sell, lease or otherwise transfer, or create or incur any Lien on, any of the Company’s or its Subsidiaries’ assets, securities, properties, interests or businesses, other than sales of products in the ordinary course of business consistent with past practice;

(g)incur any capital expenditures or any obligations or liabilities exceeding $50,000 in the aggregate in respect thereof;

(h)create, incur, assume, suffer to exist or otherwise be liable with respect to any liabilities or any indebtedness for borrowed money or guarantees thereof, other than trade payables incurred in the ordinary course of business consistent with past practice;

(i)make any loan, advance or capital contribution to or investment in any Person other than transactions in the ordinary course with its wholly-owned Subsidiaries;

(j)other than as set forth on Schedule 6.01(j), (i) enter into any agreement or arrangement that limits or otherwise restricts in any material respect the Company, any of its Subsidiaries or any of their respective Affiliates or any successor thereto or that could, after the Closing Date, limit or restrict in any material respect the Company, any of its Subsidiaries, the Surviving Corporation, Parent or any of their respective Affiliates, from engaging or competing in any line of business, in any location or with any Person, (ii) enter into any agreement (including any strategic alliance, joint development or joint marketing agreement or any loan agreement or instrument), amend or modify in any material respect or terminate any agreement or otherwise waive, release or assign any material rights, claims or benefits of the Company or any of its Subsidiaries under any

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agreement, in each case except in the ordinary course of business consistent with past practice or (iii) waive any material benefits of, or agree to modify in any materially adverse respect, or fail to enforce, or consent to any matter with respect to which its consent is required under, any confidentiality, standstill or similar agreement to which the Company or any of its Subsidiaries is a party;

(k)(i) grant or increase any severance pay to (or amend any existing severance arrangement with) any director, officer or employee of the Company or any of its Subsidiaries, (ii) increase severance benefits payable under any existing severance or termination pay policies or employment agreements, (iii) enter into any employment, deferred compensation or other similar agreement (or amend any such existing agreement) with any director, officer or employee of the Company or any of its Subsidiaries, (iv) other than the payment of cash bonuses not to exceed $200,000 in the aggregate to certain employees as set forth on Schedule 6.01(k)(iv), establish, adopt or amend (except as required by Applicable Law) any collective bargaining, bonus, profit-sharing, thrift, pension, retirement, deferred compensation, compensation, stock option, restricted stock or other benefit plan or arrangement covering any director, officer or employee of the Company or any of its Subsidiaries, (v) other than the payment in cash of a consulting fee not to exceed $50,000 pursuant to the agreement set forth on Schedule 6.01(k)(v), pay or agree to pay any consulting fees or (vi) increase compensation, bonus or other benefits payable to any director, officer or employee of the Company or any of its Subsidiaries;

(l)(i) transfer, sell or exclusively license to any Person any rights to any Intellectual Property rights owned by or exclusively licensed to the Company or its Subsidiaries or enter into with any Person any distribution agreement, reseller agreement, security agreement, assignment or other conveyance or option for the foregoing, with respect to any Intellectual Property rights owned by or exclusively licensed to the Company or its Subsidiaries other than in the ordinary course of business consistent with past practice, (ii) extend, amend or modify any rights to any Intellectual Property rights owned by or exclusively licensed to the Company or its Subsidiaries, (iii) purchase or acquire any Intellectual Property rights of any Person or enter into any license agreement, distribution agreement, reseller agreement, security agreement, assignment or other conveyance or option for the foregoing, with respect to the Intellectual Property rights of any Person (other than in the ordinary course of business consistent with past practice, other than off the shelf shrink wrap, click through or similar licenses for commercially available software, in each case with no recurring license fee) or (iv) enter into, or amend, any agreement with respect to the development of any Intellectual Property rights with a Third Party;

(m)give to any Person an indemnity in connection with any Intellectual Property right, other than indemnities that arise under the standard form terms and conditions of sale of the Company or any of its Subsidiaries;

(n)disclose any secret or confidential Intellectual Property rights (except by way of issuance of a patent) or permit to lapse or go abandoned any Intellectual Property rights (or any registration or grant thereof or any application relating thereto) to which, or

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under which, the Company or any of its Subsidiaries has any right, title, interest or license;

(o)change any method of accounting or accounting practice except for any such change required by reason of a concurrent change in GAAP;

(p)commence, or threaten to commence, settle, or offer or propose to settle, (i) any litigation, investigation, arbitration, proceeding or other claim involving or against the Company or its Subsidiaries or (ii) any litigation, arbitration, proceeding or dispute that relates to the transactions contemplated by this Agreement;

(q)make or change any material Tax election, change any annual Tax accounting period, adopt or change any material method of Tax accounting, amend any material Tax Returns or file claims for Tax refunds, enter into any closing agreement, settle any material Tax claim, audit or assessment, or surrender any right to claim a material Tax refund, offset or other reduction in Tax liability, consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment or take or omit to take any other action that would have the effect of materially increasing the Tax liability or materially reducing any Tax Asset of the Company or any of its Subsidiaries;

(r)shorten or lengthen the customary payment terms or other terms of any contracts with customers or suppliers other than in the ordinary course of business consistent with past practices;

(s)enter into any transaction or commitment with any Affiliate, other than transactions between the Company and its wholly-owned Subsidiaries or among the Company’s wholly-owned Subsidiaries and other than the payment of employee compensation or expense reimbursements in the ordinary course of business consistent with past practices;

(t)enter into any lease, contract or agreement with regard to real property other than renewals of existing leases on a month-to-month basis on terms similar to such existing leases;

(u)permit any insurance policy naming it as a beneficiary or a loss payee to be cancelled or terminated unless such insurance policy is replaced with a substantially equivalent policy on substantially equivalent terms;

(v)take any action that would make any representation or warranty of the Company hereunder, or omit to take any action necessary to prevent any representation or warranty of the Company hereunder from being, inaccurate in any respect at, or as of any time before, the Effective Time; or

(w)agree, resolve or commit to do any of the foregoing, or any other action that would prevent the Company from performing or cause the Company not to perform its obligation hereunder.

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Section 6.02.  Shareholder Approval; Information Statement.  As promptly as practicable following the date of this Agreement, the Company shall submit this Agreement, the Merger and the transactions contemplated thereby to all of the Shareholders as of the record date for approval and adoption pursuant to and in strict accordance with California Law, the articles of incorporation and the bylaws of the Company.  Such submission shall contain an information statement (the “Information Statement”) to each Shareholder in a form reasonably acceptable to Parent and that complies with applicable securities laws and California Law.  In connection therewith, the Information Statement shall include a summary of the terms and conditions of this Agreement and a statement to the effect that the Board of Directors of the Company unanimously (i) determined that the Merger is advisable and fair to, and in the best interests of, the Company and the Shareholders, (ii) approved this Agreement, the Merger and the other transactions contemplated thereby and (iii) recommends that the Shareholders adopt and approve this Agreement, the Merger and the other transactions contemplated thereby.  The Information Statement shall specify that adoption of this Agreement shall constitute approval by the Shareholders of (A) the escrow and indemnification obligations of the Shareholders set forth in Article 12 hereof and deposit of the Escrow Amount into the Escrow Account and (B) the appointment of Andrew Schwab as Equityholders’ Representative, under and as defined in this Agreement.  None of the information about the Company included in the Information Statement delivered to Shareholders will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading.  The Company shall provide Parent (and its counsel) with an opportunity to review and comment on the Information Statement and any amendment or supplement thereto prior to the submission of such materials to the Shareholders.

Section 6.03.  Access to Information.  From the date hereof until the earlier of the Effective Time and the termination of this Agreement in accordance with Article 12 and subject to Applicable Law and the Mutual Non-Disclosure Agreement dated April 10, 2008 between the Company and Parent (the “Confidentiality Agreement”), the Company shall (i) give Parent and its Representatives full access to the offices, properties, books and records of the Company and the Subsidiaries, (ii) furnish to Parent and its Representatives financial and operating data and other information as such Persons may reasonably request and (iii) instruct the Representatives of the Company and its Affiliates to cooperate with Parent in its investigation of the Company and its Subsidiaries and its integration planning activities.  Any investigation pursuant to this Section 6.03 shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Company and its Subsidiaries.  No investigation by Parent or information or knowledge obtained by Parent shall operate as a waiver or otherwise affect or be deemed to modify any representation or warranty or agreement made by the Company hereunder.

Section 6.04.  No Solicitation; Other Offers.  (a) From the date hereof until the earlier of the Effective Time and the termination of this Agreement in accordance with Article 12, neither the Company nor any of its Affiliates nor any of their respective

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Representatives shall, directly or indirectly, take any of the following actions with any Person other than Parent and its Representatives (i) solicit, initiate, entertain or agree to any proposals or offers from any Person relating to (A) any merger, share exchange, business combination, reorganization, consolidation or similar transaction involving the Company or any of its Subsidiaries, (B) the acquisition of beneficial ownership of any equity interest in the Company or any of its Subsidiaries, whether by issuance by the Company or any of its Subsidiaries or by purchase from the Shareholders of the Company or otherwise, (C) the license or transfer of all or a material portion of the assets of the Company, or (D) any transaction that may be inconsistent with or that may have an adverse effect upon the Merger (any of the transactions described in clauses (A) through (D), a “Competing Transaction”), or (ii) participate in any discussions or negotiations regarding, or furnish to any Person any information with respect to, or otherwise cooperate with, facilitate or encourage any effort or attempt by any Person to do or seek, a Competing Transaction.

(b)Each of the Company and its Affiliates shall (and shall cause its Representatives to) cease immediately any and all discussions or negotiations with any Person (other than Parent and its Representatives) regarding a Competing Transaction.  Each of the Company and its Affiliates shall enforce the terms and conditions of any confidentiality agreement entered into with such Third Party with respect to any Competing Transaction and instruct any Third Party (or its agents or advisors) in possession of confidential information about the Company that was furnished by or on behalf of the Company in connection with a potential Competing Transaction to return or destroy all such information.

(c)The parties hereto agree that irreparable damage would occur in the event that the provisions of this Section 6.04 were not performed in accordance with their specific terms or were otherwise breached.  It is accordingly agreed by the parties that Parent shall be entitled to an immediate injunction or injunctions, without the necessity of proving the inadequacy of money damages as a remedy and without the necessity of posting any bond or other security, to prevent breaches of the provisions of this Section 6.04 and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which Parent may be entitled at law or in equity.  Without limiting the foregoing, it is understood that any violation of the restrictions set forth above by the Company, its Affiliates or any of the Representatives of the Company and any of its Affiliates shall be deemed to be a breach of this Agreement by the Company.

Section 6.05.  Key Employees; Other Benefit Matters.  (a) The Company will use its commercially reasonable efforts to assist Parent in its efforts to offer employment and retention packages for Key Employees at no out-of-pocket cost to the Company and will give Parent access to all employee compensation information and records, to the extent permitted by Applicable Law.  The Company will not make and will cause its officers, directors, and Affiliates not to make any statement which disparages Parent or its Affiliates in writing, orally or otherwise to employees of the Company and its Subsidiaries or otherwise.

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(b)   Prior to the Effective Time, the Company shall (i) pay cash bonuses not to exceed $200,000 in the aggregate to the individual employees and in the amounts set forth on Schedule 6.01(k)(iv) and (ii) pay in cash that consulting fee to the individual and in the amount set forth on Schedule 6.01(k)(v).

(c)   Unless otherwise directed by Parent at least ten (10) Business Days prior to the Effective Time, the Company shall terminate any and all Employee Plans intended to qualify as a qualified cash or deferred arrangement under Section 401(k) of the Code effective immediately preceding the Effective Time, together with any amendments or restatements required by Applicable Law or the plan administrator, and provide Parent with evidence that such Employee Plans have been so terminated.  The Company shall terminate the deferred compensation agreement set forth on Schedule 6.05(c) effective as of the Effective Time.

(d)   The Company shall use commercially reasonable efforts to obtain shareholder approval of any payments or benefits that could be considered parachute payments for purposes of Section 280G of the Code such that such payments and benefits shall not be subject to Section 280G of the Code.

(e)   For one year following the Closing Date, Parent shall arrange for each Company employee who continues as an employee of the Company or a related entity to receive benefits under benefit plans that are comparable in the aggregate to those provided to other similarly situated (as to seniority, job description, salary and location) employees of Parent and its subsidiaries in effect at the date of this Agreement (the “Parent Plans”).

(f)    Each Company employee shall, to the extent permitted by Applicable Law, receive credit for purposes of determining eligibility to participate and vesting (other than with respect to equity plans) under Parent Plans for years of service with Company prior to the Closing Date.  Parent shall cause any and all pre-existing condition limitations, eligibility waiting periods and evidence of insurability requirements under any group health plans (except to the extent such limitations or waiting periods already are in effect with respect to such employees and have not been satisfied under the comparable Benefit Plans immediately prior to the Effective Time) to be waived with respect to the Company employees and their eligible dependents and, to the extent Company Employees are moved to Parent Plans prior to January 1, 2009, shall use reasonable efforts to provide them with credit for any co-payments, deductibles, and offsets (or similar payments) arising prior to the Closing Date for purposes of satisfying any applicable deductible, out-of-pocket, or similar requirements under any Parent Plans in which they are eligible to participate after the Closing Date.  Notwithstanding the foregoing, none of the provisions contained herein shall operate to duplicate any employee benefit provided to any Company employee or the funding of any such benefit.

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ARTICLE 7

COVENANTS OF PARENT

Parent agrees that:

Section 7.01.  Obligations of Merger Subsidiary.  Parent shall take all action necessary to cause Merger Subsidiary to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement.

Section 7.02.  Indemnification of Officers and Directors.  For six (6) years after the Effective Time, Parent will cause the Surviving Corporation to honor and fulfill in all respects the obligations of the Company and its Subsidiaries under any indemnification agreement outstanding on the date hereof and in effect immediately prior to the Effective Time between the Company and any of its current or former directors and officers.  In addition, for a period of six (6) years following the Effective Time, Parent shall (and shall cause the Surviving Corporation to) cause the articles of incorporation and bylaws (and other similar organizational documents) of the Surviving Corporation to contain provisions with respect to indemnification and exculpation that are at least as favorable to the beneficiaries thereof as the indemnification and exculpation provisions contained in the articles of incorporation and bylaws (or other similar organizational documents) of the Company and its Subsidiaries immediately prior to the Effective Time, and during such six-year period, such provisions shall not be amended, repealed or otherwise modified in any respect, except as required by Applicable Law.

ARTICLE 8

COVENANTS OF PARENT AND THE COMPANY

The parties hereto agree that:

Section 8.01.  Commercially Reasonable Efforts.  Subject to the terms and conditions of this Agreement, the Company and Parent shall use their commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under Applicable Law to consummate the transactions contemplated by this Agreement, including (i) preparing and filing as promptly as practicable with any Governmental Authority or other Third Party all documentation to effect all necessary filings, notices, petitions, statements, registrations, submissions of information, applications and other documents and (ii) obtaining and maintaining all approvals, consents, registrations, permits, authorizations and other confirmations required to be obtained from any Governmental Authority or other Third Party that are necessary, proper or advisable to consummate the transactions contemplated by this Agreement; provided that the parties hereto understand and agree that the commercially reasonable efforts of any party hereto shall not be deemed to include (i) entering into any settlement, undertaking, consent decree, stipulation or agreement with any Governmental Authority in connection with the transactions contemplated hereby or (ii) divesting or otherwise holding separate (including by establishing a trust or otherwise), or taking any other action (or otherwise agreeing to do

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any of the foregoing) with respect to any of its or the Surviving Corporation’s Subsidiaries or any of their respective Affiliates’ businesses, assets or properties.

(b)   In furtherance and not in limitation of the foregoing, each of Parent and the Company shall make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated hereby as promptly as practicable and in any event within five (5) Business Days of the date hereof and to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and to use their commercially reasonable efforts to take all other actions necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act as soon as practicable.

(c)   The parties agree to cooperate and to use their respective commercially reasonable efforts to respond to any requests for information from a Governmental Authority.  Each party shall (i) give the other parties hereto prompt notice upon obtaining knowledge of the making or commencement of any request, inquiry, investigation, action or legal proceeding by or before any Governmental Authority with respect to the Merger or any of the other transactions contemplated by this Agreement, (ii) keep the other parties hereto informed as to the status of any such request, inquiry, investigation, action or legal proceeding, and (iii) promptly inform the other parties hereto of any communication to or from the U.S. Federal Trade Commission or the U.S. Department of Justice.  The parties will consult and cooperate with one another, and consider in good faith the views of one another, in connection with, and provide to the other parties in advance, any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals to be made or submitted by or on behalf of any party hereto in connection with any inquiry, investigation, action or legal proceeding.

Section 8.02.  Cooperation.  The Company and Parent shall cooperate with one another in determining whether any action by or in respect of, or filing with, any Governmental Authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any Material Contracts, in connection with the consummation of the transactions contemplated by this Agreement and in seeking timely to obtain any such actions, consents, approvals or waivers.

Section 8.03.  Public Announcements.  The parties agree to consult with and solicit the consent of each other before issuing any press release or making any public statement with respect to this Agreement and the transactions contemplated hereby and, except for any press releases or public statements of Parent the making of which may be required by Applicable Law or any listing agreement with or rule of any national securities exchange, will not issue any such press release or make any such public statement prior to such consultation and consent.

Section 8.04.  Further Assurances.  At and after the Effective Time, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of the Company or Merger Subsidiary, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Company or Merger Subsidiary, any other actions and things to vest, perfect or confirm of record or

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otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets of the Company acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger.

Section 8.05.  Notices of Certain Events.  Each of Parent, the Company and the Equityholder Representative shall promptly notify the other parties of:

(a)        any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement, or that any compensation or other benefit is due to be paid to such Person on the basis of any of the transactions contemplated by this Agreement, other than payments expressly provided for herein;

(b)        any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement;

(c)        any actions, suits, claims, investigations or proceedings commenced or, to its knowledge, threatened against, relating to or involving or otherwise affecting the Company or any of its Subsidiaries that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 4.10, Section 4.12, Section 4.13 or Section 4.23, as the case may be, or that relate to the consummation of the transactions contemplated by this Agreement;

(d)        any inaccuracy of any representation or warranty contained in this Agreement at any time during the term hereof that would reasonably be expected to cause the conditions set forth in Section 9.02(a) or Section 9.03(a), as the case may be, not to be satisfied; and

(e)        any failure of any party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

Section 8.06.  Confidentiality.  (a)  The parties acknowledge that the Company and Parent previously have executed the Confidentiality Agreement, which will continue in full force and effect in accordance with its terms.

(b)        Prior to the Effective Time and after any termination of this Agreement, the Company shall hold, and shall use its best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by Applicable Law or any Governmental Authority, all confidential documents and information concerning Parent or Merger Subsidiary furnished to it or its Affiliates in connection with the Merger and the other transactions contemplated by this Agreement, except to the extent that such information can be shown to have been (i) previously known on a non-confidential basis by such party, (ii) in the public domain through no fault of such party or (iii) later lawfully acquired by such party from sources other than the other party (provided that such sources are not known by such party to be bound by a confidentiality agreement or otherwise prohibited from disclosing the information).  The Company shall satisfy its obligation to hold any such

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information in confidence if it exercises the same care with respect to such information as it would take to preserve the confidentiality of its own similar information, and in any event at least reasonable care.  If this Agreement is terminated, the Company shall, and shall cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to, destroy or deliver to Parent, upon request, all documents and other materials, and all copies thereof, that it or its Affiliates obtained, or that were obtained on their behalf, from Parent or Merger Subsidiary in connection with this Agreement and that are subject to such confidence.

ARTICLE 9

CONDITIONS TO THE MERGER

Section 9.01.  Conditions to the Obligations of Each Party.  The obligations of the Company, Parent and Merger Subsidiary to consummate the Merger are subject to the satisfaction of the following conditions:

(a)        The Company Shareholder Approval shall have been obtained in accordance with Applicable Law and shall be in full force and effect.

(b)        No provision of Applicable Law shall prohibit the consummation of the Merger.

(c)        Any applicable waiting period under the HSR Act relating to the Merger shall have expired or been terminated.

(d)        All actions by or in respect of, or filings with, any Governmental Authority, required to permit the consummation of the Merger shall have been taken, made or obtained.

(e)        No temporary restraining order, preliminary injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition prohibiting the consummation of the Merger shall be in effect; nor shall any Applicable Law be enacted, entered or enforced which prohibits the consummation of the Merger.

(f)         The Escrow Agent shall have executed and delivered the Escrow Agreement, and such agreement shall be in full force and effect.

Section 9.02.  Conditions to the Obligations of the Company.  The obligation of the Company to consummate the Merger is subject to the satisfaction of the following further conditions:

(a)        The representations and warranties of the Parent and Merger Subsidiary contained in this Agreement shall be true and correct (in the case of representations and warranties qualified as to materiality or Material Adverse Effect) or true and correct in all material respects (in the case of other representations and warranties) at and as of the date of this Agreement and at and as of the Effective Time as if made at and as of such time

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(other than such representations and warranties that by their terms address matters only as of another specified time, in which case only as of such time), except for those failures to be so true and correct as have not had and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the ability of Parent and Merger Subsidiary to consummate the Merger.

(b)        Parent shall have performed or complied in all material respects with all covenants and obligations required to be performed by it under this Agreement at or prior to the Effective Time.

(c)        Parent shall have delivered to the Company a certificate of Parent, executed by an executive officer of Parent, that each of the conditions set forth in Section 9.02(a) and (b) has been satisfied in all material respects.

(d)        Parent shall have delivered to the Company a copy of the Escrow Agreement, duly and validly executed by Parent.

Section 9.03.  Conditions to the Obligations of Parent and Merger Subsidiary.  The obligations of Parent and Merger Subsidiary to consummate the Merger are subject to the satisfaction of the following further conditions:

(a)        (i) The representations and warranties of the Company contained in this Agreement shall be true and correct (in the case of representations and warranties qualified as to materiality or Material Adverse Effect) or true and correct in all material respects (in the case of other representations and warranties) at and as of the date of this Agreement and at and as of the Effective Time as if made at and as of such time (other than such representations and warranties that by their terms address matters only as of another specified time, in which case only as of such time); and (ii) the representations and warranties of the Company contained in any certificate or other writing delivered by the Company pursuant to this Agreement shall be true and correct at and as of the date delivered and at and as of the Effective Time as if made at and as of such time (other than such representations and warranties that by their terms address matters only as of another specified time, in which case only as of such time).

(b)        The Company shall have performed or complied in all material respects with all covenants and obligations required to be performed by it under this Agreement at or prior to the Effective Time.

(c)        The Company shall have received all consents, authorizations or approvals from the Governmental Authorities referred to in Section 4.03, in each case in form and substance reasonably satisfactory to Parent, and no such consent, authorization or approval shall have been revoked.

(d)        There shall not have occurred any event, occurrence, revelation or development of a state of circumstances or facts which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect on the Company.

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(e)   The Company shall have delivered to Parent a certificate of the Company, executed by an executive officer of the Company, that each of the conditions set forth in Section 9.03(a) through (d) has been satisfied in all respects.

(f)    There shall not have been any action taken, or any Applicable Law proposed, enacted, enforced, promulgated, issued or deemed applicable to the Merger, by any Governmental Authority, other than the application of the waiting period provisions of the HSR Act to the Merger, that, in the judgment of Parent, is likely, directly or indirectly, (i) to make illegal, delay materially or otherwise directly or indirectly restrain or prohibit the consummation of the Merger, (ii) to restrain or prohibit Parent’s or the Surviving Corporation’s ownership or operation of all or any material portion of the Company or any of its Subsidiaries, or of Parent and its Subsidiaries taken as a whole, (iii) to compel Parent or the Surviving Corporation to dispose of or hold separate all or any material portion of the business or assets of the Company or any of its Subsidiaries, or of Parent and its Subsidiaries, taken as a whole, or (iv) to have a Material Adverse Effect on the Company or any of its Subsidiaries, taken as a whole.

(g)   Appraisal, dissenters’ or similar rights under Applicable Law with respect to any of the transactions contemplated by this Agreement shall not remain outstanding with respect to more than ten percent (10%) of the outstanding shares of Company Stock (on an As-Converted basis).

(h)   Parent shall have received an opinion of Morrison & Foerster LLP, counsel to the Company, dated as of the Closing Date, in the form attached hereto as Exhibit E.

(i)    The Company shall have provided notice in accordance with the terms of each agreement identified in Schedule 4.11(e) of the Company Disclosure Schedule.

(j)    Each Key Employee Employment Agreement with each Key Employee set forth on Schedule 9.03(j) shall be in full force and effect.

(k)   Each of the contracts set forth on Schedule 9.03(k) shall be in full force and effect.

(l)    Parent shall have been furnished evidence reasonably satisfactory to it that (x) all Company Stock Options and Company Warrants have been exercised or terminated at or prior to the Effective Time and that there are no Company Stock Options or Company Warrants outstanding as of the Effective Time and (y) all required notifications of the Merger and the other transactions contemplated hereby to the holders of Company Stock, Company Stock Options and Company Warrants have been properly and timely delivered.

(m)  The Company shall have delivered (i) a certification for the Company, dated not more than 30 days prior to the Closing Date and signed by the Company, that satisfies the requirements of Treasury Regulation Sections 1.897-2(h)(2) and 1.1445-2(c)(3) and confirms that the Company is not, nor has it been within 5 years of the date of the certification, a “United States real property holding corporation” as defined in Section

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897 of the Code and (ii) a notice to the Internal Revenue Service, signed by the Company, that satisfies the requirements of Treasury Regulation Section 1.897-2(h)(2).

(n)   The Company shall have delivered to the Parent the Purchase Price Adjustment Statement and the Closing Payment Schedule upon the terms and subject to the conditions of Section 2.07 and Section 2.08, respectively, of this Agreement.

(o)   The Company and the Equityholders’ Representative shall have delivered to Parent a copy of the Escrow Agreement, duly and validly executed by the Company and the Equityholders’ Representative, respectively.

(p)   Parent shall have received such customary documents from the Company as Parent may reasonably request in good faith for the purpose of facilitating the consummation of the Merger and the other transactions contemplated by this Agreement and the Related Agreements.

ARTICLE 10

TAX MATTERS

Section 10.01.  Responsibility for Filing Tax Returns.  Parent shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company related to a Pre-Closing Tax Period and required to be filed after the Closing Date.  Parent shall permit the Equityholders’ Representative to review and comment on each such Tax Return prior to filing to the extent that such Tax Return would result in a Tax liability for which an indemnification claim under Article 11 may be made by a Parent Indemnified Party against the Indemnitors and shall reasonably consider such revisions to such Tax Returns as a requested by the Equityholders’ Representative, and shall make any revision to such Tax Return as may be requested by the Equityholders’ Representative to cause such Tax Return to be consistent with the prior practice of the Company (unless otherwise required by applicable Tax law) if such revision would result in a reduction of indemnity liability of the Indemnitors in respect of the Tax liabilities of the Company.  Parent shall timely remit (or cause to be timely remitted) by or on behalf of the Company all Taxes that become due from the Company after the Closing Date.

Section 10.02.  Amended Returns.  Parent shall not amend (or cause to be amended) a Tax Return of the Company with respect to a taxable period beginning before the Closing Date if such amendment would reasonably be expected to result in a Tax liability for which an indemnification claim under Article 11 may be made by a Parent Indemnified Party, without the consent of the Equityholders’ Representative, which consent shall not be unreasonably withheld or delayed.

Section 10.03.  Transfer Taxes.  Notwithstanding the requirements of any Applicable Laws to the contrary, Parent shall be responsible for and shall pay, or cause to be paid, any Transfer Taxes when due, and shall, at its own expense, file any necessary Tax Returns and other documentation with respect to all such Transfer Taxes.  For the

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avoidance of doubt, 50% of all Transfer Taxes shall be deemed included in Transaction Expenses.

ARTICLE 11

SURVIVAL; INDEMNIFICATION

Section 11.01.  Survival.  The Company’s representations and warranties contained in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time until the date that is eighteen months after the Closing Date; provided, however, that the representations and warranties contained in Sections 4.02, 4.05, 4.08(c) and 4.13 and in the Purchase Price Adjustment Statement delivered pursuant to Section 2.07 (collectively, the “Specified Representations”) shall survive the Effective Time until the date that is three years after the Closing Date.  The covenants and agreements of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Effective Time indefinitely or for the shorter period explicitly specified therein, except that for such covenants and agreements that survive for such shorter period, breaches thereof shall survive indefinitely or until the latest date permitted by law.  Notwithstanding the preceding sentences, any breach of representation, warranty, covenant or agreement in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentences, if notice of the inaccuracy or breach thereof giving rise to such right of indemnity shall have been given to the party against whom such indemnity may be sought prior to such time.  All of Parent’s and Merger Subsidiary’s representations and warranties contained herein or in any instrument delivered pursuant to this Agreement shall terminate at the Effective Time.

Section 11.02.  Indemnification.  (a) The Shareholders, the Closing Date Optionholders and the Closing Date Warrantholders (collectively, for the purposes of this Article 11, the “Indemnitors”) hereby severally, but not jointly, indemnify Parent and its Affiliates (including, after the Effective Time, the Surviving Corporation and its Subsidiaries) and their respective successors and assigns (collectively, the “Indemnified Parties”) against and agree to hold each of them harmless from any and all damage, loss, liability and expense (including reasonable expenses of investigation and reasonable attorneys’ and consultants’ fees and expenses in connection with any action, suit or proceeding whether involving a Third Party claim or a claim solely between the parties hereto), and any incidental, indirect or consequential damages, losses, liabilities or expenses, and any lost profits or diminution in value (“Damages”), incurred, suffered or accrued by any Indemnified Party arising out of any misrepresentation or breach of warranty (without giving effect to any qualification or exception as to materiality or Material Adverse Effect or any similar qualification or standard including specified dollar thresholds contained therein in determining the amount of any Damages) or breach of covenant or agreement made or to be performed by the Company pursuant to this Agreement (the “Breach”) regardless of whether such Damages arise as a result of the

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negligence, strict liability or any other liability under any theory of law or equity of, or violation of any law by, the Indemnified Parties.

(b)   With respect to indemnification under Section 11.02(a) by the Indemnitors (other than (x) a Breach of any Specified Representation and (y) claims arising out of fraud, willful misrepresentation or willful breach of covenant), (i) no Indemnified Party shall be entitled to indemnification pursuant to this Section 11.02 for Damages arising out of any single Breach (or series of related Breaches) unless such Damages exceed $5,000 (the “Minimum Claim Amount”), (ii) no Indemnified Party shall be entitled to indemnification pursuant to this Section 11.02 until such time as the total amount of all Damages that have been directly or indirectly suffered, incurred or accrued by any one or more of the Indemnified Parties, or to which any one or more of the Indemnified Parties has or have otherwise become subject, exceeds $300,000 in the aggregate (the “Deductible Amount”) and only to the extent of such excess, and (iii) the Indemnitors’ maximum liability to Indemnified Parties pursuant to this Section 11.02 shall not exceed the Escrow Fund (it being understood that the Escrow Fund shall be the sole recourse of the Indemnified Parties for any such Breach).  With respect to indemnification by the Indemnitors for a Breach of any Specified Representation and for claims arising out of fraud, willful misrepresentation or willful breach of covenant, the Indemnified Parties shall be indemnified from the first dollar and without regard to the Minimum Claim Amount or the Deductible Amount and each Indemnitor shall be liable only for that portion of the Damages equal to its pro rata share of the Merger Consideration to which it is entitled pursuant to Section 2.03(a).  The maximum liability of an Indemnitor with respect to indemnification for a Breach of any Specified Representation or claims arising out of fraud, willful misrepresentation or willful breach of covenant shall be 100% of the Merger Consideration to which it is entitled pursuant to Section 2.03(a).  The indemnification provided by this Section 11.02 and resort to the Escrow Fund shall be the sole and exclusive remedy available to the Indemnified Parties after the Effective Time for any claim related to this Agreement or the transactions contemplated hereby, except with respect to (i) claims arising out of fraud, willful misrepresentation or willful breach of covenant and (ii) claims arising out of any Breach of a Specified Representation, which are limited as provided by the two immediately preceding sentences.  The Indemnitors hereby waive any and all rights of indemnification, contribution or subrogation against the Company with respect to any indemnification payment made by any party pursuant to this Article 11.

(c)   Any Indemnified Party seeking indemnification from another party hereto (the “Indemnifying Party”) under this Section 11.02 shall give the Escrow Agent and the Equityholders’ Representative notice of the assertion of any claim or the commencement of any suit, action or proceeding by any Third Party in respect of which indemnity may be sought under this Agreement, stating in reasonable detail the basis for indemnification (taking into account the information then available to the Indemnified Party).  The failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent such failure shall have materially and adversely prejudiced the Indemnifying Party.  All fees, expenses and other Damages of the Indemnified Party in connection with any matter for which indemnity may be

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sought shall be reimbursed from the Escrow Account in accordance with the Escrow Agreement.

(d)   If (x) the Equityholders’ Representative shall not have objected to the amount claimed by the Indemnified Party for indemnification from the Escrow Fund with respect to any Damages in accordance with the procedures set forth herein and in the Escrow Agreement or (y) the Equityholders’ Representative shall have delivered notice of its disagreement as to the amount of any indemnification requested by the Indemnified Party from the Escrow Fund and either (i) the Equityholders’ Representative and the Indemnified Party shall have, subsequent to the giving of such notice, mutually agreed that the Indemnified Party is entitled to indemnification from the Escrow Fund for a specified amount and shall have so jointly notified the Escrow Agent or (ii) a final judgment shall have been rendered by the court having jurisdiction over the matters relating to such claim by the Indemnified Party for indemnification from the Escrow Fund, and the Escrow Agent shall have received, in the case of clause (i) above, joint written instructions from the Equityholders’ Representative and the Indemnified Party or, in the case of clause (ii) above, a copy of the final judgment of the court and written instructions from the Indemnified Party, the Escrow Agent shall deliver to the Indemnified Party funds from the Escrow Fund in respect of any amount determined to be owed to the Indemnified Party under this Section in accordance with the Escrow Agreement.

(e)   In all matters relating to this Section, the Equityholders’ Representative shall be the only party entitled to assert the rights of the Indemnitors, and the Equityholders’ Representative shall perform all of the obligations of the Indemnitors hereunder.  Parent shall be entitled to rely on all statements, representations and decisions of the Equityholders’ Representative.

(f)    The representations and warranties and the covenants and agreements of the Company, and the rights and remedies that may be exercised by the Indemnified Parties, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or Knowledge of, any Indemnified Party.

Section 11.03.  Equityholders’ Representative.  (a) Effective upon and by virtue of the vote of the Shareholders approving and adopting this Agreement and the Merger, and without any further act of any of the Indemnitors, the Equityholders’ Representative shall be hereby appointed as the representative of the Indemnitors and as the attorney-in-fact and agent for and on behalf of each Indemnitor with respect to (i) any claims by any Indemnified Party against the Escrow Fund under Articles 2 and 11 of this Agreement and (ii) any amendments to the Escrow Agreement.  The Equityholders’ Representative hereby accepts such appointment.  The Equityholders’ Representative shall have the authority to take any and all actions and make any decisions required or permitted to be taken by the Equityholders’ Representative under the Escrow Agreement and this Agreement, including the exercise of the power to (iii) authorize the payment of all or any part of the Escrow Amount, (iv) agree to, negotiate, enter into settlements and compromises of, commence any suit, action or proceeding, demand arbitration of, and comply with orders of courts or awards of arbitrators with respect to, claims by any

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Indemnified Party against the Escrow Fund under Articles 2 and 11 of this Agreement, (v) arbitrate, litigate, resolve, settle or compromise any dispute that may arise pursuant to the Escrow Agreement and (vi) take all actions necessary in the judgment of the Equityholders’ Representative for the accomplishment of the foregoing.  The Equityholders’ Representative will have sole authority and power to act on behalf of each Indemnitor with respect to the disposition, settlement or other handling of all claims against the Escrow Fund under this Agreement and all related rights or obligations of the Indemnitors arising under this Agreement.  The Equityholders’ Representative will also have sole authority and power to act on behalf of each Indemnitor with respect to any amendments to the Escrow Agreement.

(b)   In all matters relating to the disposition, settlement or other handling of claims against the Escrow Fund under this Agreement or any amendments to the Escrow Agreement, the Equityholders’ Representative (or his or her successor) shall be the only party entitled to assert the rights of the Indemnitors.  A decision, act, consent or instruction of the Equityholders’ Representative hereunder shall constitute a decision, act, consent or instruction of all Indemnitors and shall be final, binding and conclusive upon each of such Indemnitors, and the Escrow Agent and Parent may rely upon any such decision, act, consent or instruction of the Equityholders’ Representative as being the decision, act, consent or instruction of each and every Indemnitor.  The Escrow Agent and Parent shall be relieved from any liability to any Person for any acts done by them in accordance with such decision, act, consent or instruction of the Equityholders’ Representative.

(c)   The Equityholders’ Representative shall have the right to recover from the Escrow Fund his reasonable out-of-pocket expenses (the “Equityholders’ Representative’s Expenses”), prior to any distribution to the Indemnitors, but after any disbursement from the Escrow Fund to any Indemnified Party and the Escrow Agent pursuant to the terms and conditions of the Escrow Agreement; provided, however, that the Equityholders’ Representative shall have the right to recover from the Escrow Fund Equityholders’ Representative’s Expenses in an aggregate amount of up to $100,000 prior to any distribution to the Indemnitors and prior to any disbursement from the Escrow Fund to any Indemnified Party and the Escrow Agent.  The Equityholders’ Representative’s Expenses will be paid to the Equityholders’ Representative from the Escrow Fund promptly following delivery by the Equityholders’ Representative to the Escrow Agent of a written request for payment of such Equityholders’ Representative’s Expenses (which written request shall include reasonable documentation to support such Equityholders’ Representative’s Expenses).  In the event the Escrow Fund is insufficient to satisfy the Equityholders’ Representative’s Expenses, then each Indemnitor will be obligated to pay a pro rata portion of the Equityholders’ Representative’s Expenses in excess of the Escrow Fund.

(d)   The Equityholders’ Representative will incur no liability with respect to any action taken or suffered by any party in reliance upon any notice, direction, instruction, consent, statement or other document believed by such Equityholders’ Representative to be genuine and to have been signed by the proper person (and shall have no responsibility

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to determine the authenticity thereof), nor for any other action or inaction, except his or her own gross negligence, bad faith or willful misconduct.

(e)   The Indemnitors shall severally but not jointly indemnify the Equityholders’ Representative and hold the Equityholders’ Representative harmless against any loss, liability or expense incurred without gross negligence, bad faith or willful misconduct, to the extent permitted by Applicable Law, on the part of the Equityholders’ Representative and arising out of or in connection with the acceptance or administration of the Equityholders’ Representative’s duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Equityholders’ Representative.

(f)    At any time during the term of the Escrow Agreement, a majority-in-interest of holders of any amounts then held in the Escrow Fund may, by written consent, appoint a new representative as the Equityholders’ Representative.  Notice together with a copy of the written consent appointing such new representative and bearing the signatures of holders of a majority-in-interest of those holders must be delivered to Parent and the Escrow Agent not less than ten (10) calendar days prior to such appointment.  Such appointment will be effective upon the later of the date indicated in the consent or the date such consent is received by Parent and the Escrow Agent.

(g)   In the event that the Equityholders’ Representative becomes unable or unwilling to continue in his or its capacity as Equityholders’ Representative, or if the Equityholders’ Representative resigns as a Equityholders’ Representative, a majority-in-interest of the holders of any amounts then held in the Escrow Fund may, by written consent, appoint a new representative as the Equityholders’ Representative.  Notice and a copy of the written consent appointing such new representative and bearing the signatures of the holders of a majority-in-interest of such holders must be delivered to Parent and the Escrow Agent.  Such appointment will be effective upon the later of the date indicated in the consent or the date such consent is received by Parent and the Escrow Agent.

ARTICLE 12

TERMINATION

Section 12.01.  Termination.  This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of this Agreement by the Shareholders):

(a)        by mutual written agreement of the Company and Parent;

(b)        by either the Company or Parent, if:

(i)    the Merger has not been consummated on or before January 31, 2009 (the “End Date”); provided that the right to terminate this Agreement pursuant to this Section 12.01(b)(i) shall not be available to any party

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whose breach of any provision of this Agreement results in the failure of the Merger to be consummated by such time; or

(ii)   there shall be any Applicable Law that (A) makes consummation of the Merger illegal or otherwise prohibited or (B) enjoins the Company or Parent from consummating the Merger and such injunction shall have become final and nonappealable.

(c)        by Parent, if:

(i)    a breach of any representation or warranty or failure to perform any covenant or agreement on the part of the Company set forth in this Agreement shall have occurred, in either case such that Parent’s related condition to the consummation of the Merger as set forth in Article 9 would fail to be satisfied, and such condition is incapable of being satisfied by the End Date; or

(ii)   the Company shall have intentionally and materially breached any of its obligations under Section 6.02 or Section 6.04.

(d)        by the Company, if a breach of any representation or warranty or failure to perform any covenant or agreement on the part of the Parent or Merger Subsidiary set forth in this Agreement shall have occurred in any case such that the Company’s related condition to the consummation of the Merger as set forth in Article 9 would fail to be satisfied, and such condition is incapable of being satisfied by the End Date.

The party desiring to terminate this Agreement pursuant to this Section 12.01 (other than pursuant to Section 12.01(a)) shall give notice of such termination to the other party in accordance with Section 13.01.

Section 12.02.  Effect of Termination.  If this Agreement is terminated pursuant to Section 12.01, this Agreement shall become void and of no effect without liability of any party (or any Shareholder, director, officer, employee, agent, consultant or representative of such party) to the other party hereto; provided that, if such termination shall result from the willful (i) failure of either party to fulfill a condition to the performance of the obligations of the other party or (ii) failure of either party to perform a covenant hereof, such party shall be fully liable for any and all liabilities and damages incurred or suffered by the other party as a result of such failure.  The provisions of this Section 12.02 and Sections 13.03, 13.05, 13.06, 13.07 and 13.08 shall survive any termination hereof pursuant to Section 12.01.

ARTICLE 13

MISCELLANEOUS

Section 13.01.  Notices.  All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission) and shall be given or made (and shall deemed to have been duly given or made upon receipt) by delivery in

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person, by cable, telecopy, facsimile, telegram, telex or courier or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 13.01):

if to Parent or Merger Subsidiary, to:

Affymetrix, Inc.

3420 Central Expressway

Santa Clara, California  95051

Attention:  John F. (Rick) Runkel, Executive Vice

 President and General Counsel

Facsimile No.: (408) 731-5380

with a copy to:

Davis Polk & Wardwell

1600 El Camino Real

Menlo Park, California  94025

Attention:  Sarah K. Solum

Facsimile No.: (650) 752-2111

if to the Company or the Equityholders’ Representative to:

on or before December 31, 2008:

5AM Ventures

3000 Sand Hill Road

Building 4, Suite 230

Menlo Park, California  94025

Attention:  Andrew J. Schwab

Facsimile No.: (650) 233-8923

on or after January 1, 2009:

5AM Ventures

2200 Sand Hill Road, Suite 110

Menlo Park, California  94025

Attention:  Andrew J. Schwab

Facsimile No.: (650) 233-8923

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in either case, with a copy to:

Morrison & Foerster LLP

755 Page Mill Road

Palo Alto, California  94034

Attention:  Paul “Chip” L. Lion III

Facsimile No.: (650) 494-0792

or such other address or facsimile number as such party may hereafter specify for the purpose by notice to the other parties hereto.  All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day in the place of receipt.  Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.

Section 13.02.  Amendments; No Waivers.  (a) Any provision of this Agreement may be amended or waived prior to the Effective Time if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement or, in the case of a waiver, by each party against whom the waiver is to be effective.

(b)        No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

Section 13.03.  Expenses.  Except as otherwise provided herein, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense.

Section 13.04.  Successors and Assigns.  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of each other party hereto, except that Parent or Merger Subsidiary may transfer or assign, in whole or from time to time in part, to one or more of their Affiliates, the right to enter into the transactions contemplated by this Agreement, but any such transfer or assignment will not relieve Parent or Merger Subsidiary of its obligations hereunder.

Section 13.05.  Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law rules of such state.

Section 13.06.  Jurisdiction.  The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be

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brought in any federal court located in the Northern District of California or any California state court located in Santa Clara County, California, and each of the parties hereby irrevocably consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.  Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court.  Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 13.01 shall be deemed effective service of process on such party.

Section 13.07.  WAIVER OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 13.08.  Counterparts; Effectiveness; Benefit.  This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.  This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by all of the other parties hereto.  Until and unless each party has received a counterpart hereof signed by the other party hereto, this Agreement shall have no effect and no party shall have any right or obligation hereunder (whether by virtue of any other oral or written agreement or other communication).  No provision of this Agreement is intended to confer any rights, benefits, remedies, obligations, or liabilities hereunder upon any Person other than the parties hereto and their respective successors and assigns.

Section 13.09.  Entire Agreement.  This Agreement and the Related Agreements constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement.

Section 13.10.  Captions.  The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof.

Section 13.11.  Severability.  If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party.  Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.

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Section 13.12.  Specific Performance.  The parties hereto agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement or to enforce specifically the performance of the terms and provisions hereof in any federal court located in the Northern District of the State of California or any California state court located in Santa Clara County, California, in addition to any other remedy to which they are entitled at law or in equity.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan of Merger to be duly executed by their respective authorized officers as of the day and year first above written.

PANOMICS, INC.
By:	/s/ Frank Witney
	Name:	Frank Witney
	Title:	President and Chief Executive Officer
AFFYMETRIX, INC.
By:	/s/ John Batty
	Name:	John Batty
	Title:	Executive Vice President and Chief Financial Officer
PANDA ACQUISITION CORPORATION
By:	/s/ Kevin King
	Name:	Kevin King
	Title:	President
ANDREW SCHWAB
By:	/s/ Andrew Schwab
	Name:	Andrew Schwab
	Title:	Equityholders’ Representative

EX-10.19

Exhibit 10.19

AFFYMETRIX, INC.

NON-QUALIFIED STOCK OPTION GRANT NOTICE AND AGREEMENT

<Name>	Option Number:
<Address>	ID:
<Address>	Plan:   Affymetrix Amended and
<Address>	Restated 2000 Equity Incentive Plan
<City, State, Country, Postal Code>

1. Grant of Option.  AFFYMETRIX, INC., a Delaware corporation (the “Company”) hereby grants to <First and Last Name> ( “Optionee”) a Non-Qualified Stock Option (the “Option”) to purchase common stock of the Company as specified below, subject to (i) the Terms and Conditions of Stock Options attached as Exhibit A, and (ii) the Affymetrix, Inc. Amended & Restated 2000 Equity Incentive Plan( the “Plan”) incorporated herein by reference.

2. Definitions.  As used in this Agreement, including the Terms and Conditions of Grant, the following terms shall have the meanings set forth in this section 2.

Grant Date:
Number of Shares Covered:
Option Termination Date:
Exercise Price:	$
Vesting Schedule:

Shares	Vest Type	Full Vest
	On Vest Date
	On Vest Date
	On Vest Date
	On Vest Date

AFFYMETRIX, INC.

Date:

Exhibit A

Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan

Terms and Conditions of Stock Options

Tax Treatment	This option is intended to be an incentive stock option or a nonstatutory option, as provided in the Stock Option Grant Notice (the “Grant Notice”) to which these Terms and Conditions are attached (together with the Grant Notice, this “Agreement”). If specified as an ISO, such ISO will only be granted up to the allowable limit under IRS Regulations.
Vesting	This Option becomes exercisable in installments, as shown in the Grant Notice. No additional shares become exercisable after Optionee’s service in any one of the positions of employee, consultant or director of the Company (or a subsidiary of the Company) has terminated for any reason.
Term	This Option expires in any event on the Option Termination Date set forth in the Grant Notice, which in any event shall be no more than seven (7) years following the Grant Date set forth in the Grant Notice, subject to earlier termination as described below or in the Plan.
Regular Termination	If Optionee’s service in any one of the positions of an employee, consultant or director of the Company or a subsidiary of the Company terminates for any reason except death or total and permanent disability, then this Option will expire at the close of business at Company headquarters on the date 90 days after Optionee’s termination date. The Company determines when Optionee’s service terminates for this purpose.
Death	If Optionee dies as an employee, consultant or director of the Company or a subsidiary of the Company, then this Option will expire at the close of business at Company headquarters on the date 12 months after the date of death.
Disability	If Optionee’s service as an employee, consultant or director of the Company or a subsidiary of the Company terminates because of Optionee’s total and permanent disability, then this Option will expire at the close of business at Company headquarters on the date 12 months after Optionee’s termination date. For all purposes under this Agreement, “total and permanent disability” means that Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year.
Leaves of Absence	For purposes of this option, Optionee’s service does not terminate when Optionee goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of service is required by the terms of the leave or by applicable law. But Optionee’s service terminates when the approved leave ends, unless Optionee immediately return to active work. Vesting will be suspended during leave of absence unless continued vesting was approved by the Company in writing.
Restrictions on Exercise	The Company will not permit Optionee to exercise this Option if the issuance of shares at that time would violate any law or regulation.
Notice of Exercise	When Optionee wishes to exercise this Option, Optionee must contact the Company’s preferred broker. The preferred broker will notify the Company of Optionee’s intent to exercise. With the Company’s approval, Optionee may notify the Company by filing the proper “Notice of Exercise” form. Optionee’s notice must specify how many shares Optionee wishes to purchase. Optionee’s notice must also specify method of receipt of shares (physical certificate or transferred electronically to Optionee’s broker). The notice will be effective when it is received along with the full payment of the exercise price and any applicable taxes by the Company. If someone else wants to exercise this Option after Optionee’s death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.

Form of Payment When Optionee submits a notice of exercise, Optionee must include payment of the option exercise price for the shares Optionee is purchasing. Payment may be made in cash or cash equivalents (Optionee’s personal check, a cashier’s check or a money order) or, unless otherwise determined by the Committee, by the following means:

·	Irrevocable directions to a securities broker approved by the Company to sell all or part of Optionee’s option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to Optionee.) The directions must be given by signing a special “Notice of Exercise” form provided by the Company.
In addition, to the extent permitted by the Committee and applicable law, payment may be made by one of the following means:
·	Certificates for shares of Company stock that Optionee owns, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price. Instead of surrendering shares of Company stock, Optionee may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the option shares issued to Optionee. However, Optionee may not surrender, or attest to the ownership of, shares of Company stock in payment of the exercise price if Optionee’s action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this Option for financial reporting purposes.
·	Such other form as approved by the Committee, or any combination of the foregoing.

Withholding Taxes and Stock Withholding	Optionee will not be allowed to exercise this Option unless Optionee makes arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the option exercise, which payment shall be by one of the methods as set forth above for form of payment of the exercise price. In addition, the Committee may (but shall not be required) to permit withholding shares of Company stock that otherwise would be issued to Optionee when Optionee exercises this Option. The value of these shares, determined as of the effective date of the option exercise, will be applied to the withholding taxes in an amount up to the statutory minimum withholding obligations.
Restrictions on Resale	By exercising the Option, Optionee agrees not to sell any option shares at a time when applicable laws, Company policies (including the Insider Trading Policy) or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as Optionee is an employee, consultant or director of the Company or a subsidiary of the Company.
Transfer of Option	Prior to Optionee’s death, only Optionee may exercise this Option. Optionee cannot transfer or assign this Option. For instance, Optionee may not sell this Option or use it as security for a loan. If Optionee attempts to do any of these things, this Option will immediately become invalid. Optionee may, however, dispose of this Option in Optionee’s will or a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from Optionee’s former spouse, nor is the Company obligated to recognize Optionee’s former spouse’s interest in Optionee’s option in any other way.
Exchange of Unexercised Options for SAR	The Company shall have the ability at any time, to substitute stock appreciation rights (“SARs”) for all of Optionee’s unexercised Options. The grant price of a substitute SAR shall be equal to the exercise price of the replaced Option. Upon exercise of an SAR, Optionee shall receive from the Company an amount equal to (i) the number of Common Shares with respect to which the SAR is exercised multiplied by (ii) the excess of the fair market value of a Common Share on the exercise date over the grant price of the SAR, payable in Common Shares.
Retention Rights	Neither the Option nor this Agreement give Optionee the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate Optionee’s employment or service at any time, with or without cause.
Stockholder Rights	Optionee, or Optionee’s estate or heirs, has no rights as a stockholder of the Company until Optionee has exercised this Option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before Optionee exercises this Option, except as described in the Plan.
Adjustments	In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this Option and the exercise price per share may be adjusted pursuant to the Plan.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions).

The Plan and
Other Agreements The text of the Plan is incorporated in this Agreement by reference.

This Agreement and the Plan constitute the entire understanding between Optionee and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. This Agreement may be amended only by another written agreement.

BY ACCEPTING THIS AWARD, OPTIONEE AGREES TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THIS AGREEMENT AND IN THE PLAN.

EX-10.24

Exhibit 10.24

AFFYMETRIX, INC.

RESTRICTED STOCK GRANT NOTICE AND AGREEMENT

<Name>	Option Number:
<Address>	ID:
<Address>	Plan: Affymetrix Amended and
<Address>	Restated 2000 Equity Incentive Plan
<City, State, Country, Postal Code>

1.Grant of Restricted Stock.  In consideration for Recipient’s services rendered to the Company, AFFYMETRIX, INC., a Delaware corporation (the “Company”) hereby grants to <First and Last Name> (“Recipient”) restricted shares of common stock of the Company as specified below (the “Restricted Shares”), subject to (i) the Terms and Conditions of Restricted Shares attached as Exhibit A, and (ii) the Affymetrix, Inc. Amended & Restated 2000 Equity Incentive Plan (as amended from time to time, the “Plan”) incorporated herein by reference.

2.Definitions.  As used in this Agreement, including the Terms and Conditions of Restricted Shares, the following terms shall have the meanings set forth in this Section 2.

Grant Date:

Number of Shares:

Vesting Commencement Date:

Vesting Schedule:

Shares Full Vest

AFFYMETRIX, INC.

By:

Exhibit A

TERMS AND CONDITIONS OF RESTRICTED SHARES

1.Grant.  Pursuant to the Restricted Stock Grant Notice (the “Grant Notice”) to which these Terms and Conditions are attached (together with the Grant Notice, this “Agreement”), AFFYMETRIX, INC., a Delaware corporation (the “Company”), has granted to Recipient the right to receive the number of Restricted Shares under the Plan as set forth in the Grant Notice (terms used but not defined herein have the meaning set forth in the Grant Notice or the Plan).

2.Tax Treatment.  Any withholding tax liabilities incurred in connection with the Restricted Shares becoming vested and non-forfeitable or otherwise incurred in connection with the Restricted Shares and any other amounts or rights hereunder shall be satisfied by (x) only at the option and request of the Company, Recipient paying to the Company in cash or by check an amount equal to the minimum amount of taxes that the Company concludes it is required to withhold under applicable law within one business day of the day the tax event arises or (y) unless not permitted by the Committee or the Board, the Company withholding a portion of the Restricted Shares that have vested and become non-forfeitable having a fair market value approximately equal to the minimum amount of taxes that the Company concludes it is required to withhold under applicable law.  Notwithstanding the foregoing, Recipient acknowledges and agrees that he or she is responsible for all taxes that arise in connection with the Restricted Shares becoming vested and non-forfeitable or otherwise incurred in connection with the Restricted Shares.  The Company shall not be obligated to release any shares to Recipient unless and until satisfactory arrangements to pay such withholding taxes have been made and shall be entitled to withhold from any amounts or shares due to you hereunder or otherwise in an amount sufficient to pay its withholding obligations.

3.Vesting.  The Restricted Shares shall become vested and non-forfeitable in installments, as shown in the Grant Notice.  No additional shares become vested after Recipient’s service in any one of the positions of an employee, consultant or director of the Company (or a subsidiary of the Company) has terminated for any reason.

4.Termination of Service.  If Recipient’s service in any one of the positions of an employee, consultant or director of the Company or a subsidiary of the Company terminates for any reason, then all Restricted Shares that have not vested on or before the date of termination of service shall automatically be forfeited to the Company and all of Recipient’s rights with respect thereto shall cease immediately upon termination. The Company determines when Recipient’s service terminates for this purpose.

5.Leaves of Absence.  For purposes of this Agreement, service does not terminate as a result of a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of service is required by the terms of the leave or by applicable law; provided that service shall terminate when the approved leave ends, unless Recipient immediately returns to active work.

6.Restrictions on Transfer.  Recipient may not sell, transfer, pledge or otherwise dispose of any of the Restricted Shares until after the applicable shares have become vested and non-forfeitable on the schedule set forth in the Grant Notice and have been issued to Recipient.  Recipient further agrees not to sell, transfer or otherwise dispose of any shares at a time when

2

applicable laws or Company policies prohibit a sale, transfer, pledge or other disposition.  Recipient agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent.  The Company shall not be required (i) to transfer on its books any Restricted Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Restricted Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Restricted Shares shall have been so transferred.

7.Stock Certificates.  Certificates evidencing the Restricted Shares shall be issued by the Company and registered in the name of Recipient on the stock transfer books of the Company.  Unless otherwise determined by the Committee or the Board, such certificates shall remain in the physical custody of the Company or its designee at all times until the applicable shares have become vested and non-forfeitable.

8.Stockholder Rights.  Recipient will have the same voting and other rights as the Company’s other stockholders with respect to each Restricted Share until or unless such Restricted Share is forfeited pursuant to Section 2 hereof.  Any additional shares of Common Stock or other amounts that become payable to Recipient as a result of capitalization adjustments under the Plan shall remain subject to forfeiture pursuant to Section 2 hereof and the same restrictions as the existing Restricted Shares, unless otherwise determined by the Committee or the Board.

9.No Retention Rights.  The Restricted Shares and this Agreement do not give Recipient the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate Recipient’s service at any time, with or without cause.

10.Adjustments.  In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this Agreement may be adjusted pursuant to the Plan.

11.Applicable Law.  This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions).

12.The Plan and Other Agreements.  The text of the Plan is incorporated in this Agreement by reference.

This Agreement and the Plan constitute the entire understanding between Recipient and the Company regarding this Agreement. Any prior agreements, commitments or negotiations concerning the Restricted Shares are superseded. This Agreement may be amended only by another written agreement, signed by both parties.

BY ACCEPTING THIS AWARD, RECIPIENT AGREES TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THIS AGREEMENT AND IN THE PLAN.

3

EX-10.34

Exhibit 10.34

Affymetrix, Inc.

3420 Central
Expressway

Santa Clara, CA 95051

Tel: 888-362-2447

Fax: 408-731-5447

November 7, 2008

Frank Witney

Panomics

6519 Dumbarton Circle

Fremont, CA 94555

Dear Frank,

It is our pleasure to offer you the position of Senior Vice President with Affymetrix at an annual salary of $400,000 (bi-weekly $15,384.62) reporting to Kevin King, President of Affymetrix. This offer is contingent upon the completion of the acquisition of Panomics, Inc. by Affymetrix (the “Acquisition”) and supersedes any existing offer letter or employment agreement between you and Panomics.  Please note that for most purposes under the Affymetrix benefit and compensation plans, your service date will be reflected as your hire date at Panomics.

You will be eligible to participate in the Affymetrix Annual Bonus Program with an award level targeted at 40% of annual base salary beginning in 2009.  The actual bonus amount is determined each year by the Compensation Committee of the Board of Directors based on corporate achievement — financial performance and corporate goals — and your individual goal achievement.

In addition, we will recommend to the Compensation Committee of the Board of Directors of Affymetrix that you be granted two equity awards.  The first is a grant of 56,300 stock options of Affymetrix.  These options will vest 25% per year over a four (4) year period beginning on your date of hire, and will have an exercise price equal to fair market value on the grant date.

The second is a grant of 12,000 full-value restricted shares of common stock of Affymetrix.  These restricted shares will vest 25% per year over a four (4) year period beginning on your date of hire. The terms of these grants will be governed in all respects by the terms of the applicable Affymetrix equity incentive plan and the equity agreement that will be provided to you after commencement of your employment.

Subject to the terms of the applicable benefit plans, you will be entitled to receive other benefits of employment generally available to other executive and managerial employees at Affymetrix, including medical, dental, life and disability insurance benefits.  Affymetrix, however, reserves the right to modify such plans at any time.

You will also be entitled to the same vacation benefits extended to similarly situated executive and managerial employees.

As a condition of employment, we will require that you expressly consent to be bound by Affymetrix standard employment policies and sign certain agreements,

including the  Confidentiality and Nondisclosure Agreement, the acknowledgement of at-will status, your receipt and understanding of the employee intranet handbook, the Conflict of Interest Policy, the Computer Compliance Policy, and the Insider Trading Policy.

Federal Immigration Law requires that all employers verify each individual’s eligibility to work in the United States, including U.S. citizens.  Your employment offer is contingent upon your providing satisfactory proof of identity and authorization to work in the United States.  Please bring the appropriate original documentation on your first day of work.  A list of acceptable I-9 documentation is attached for your review.

As indicated above, your employment is at will and may be terminated by you or by Affymetrix for any or no reason, with or without cause or notice.  This offer is contingent upon the completion of Affymetrix’s acquisition of Panomics and satisfactory completion of reference and background checks.

If you have any questions, please feel free to contact me at (408) 731-5622.  To indicate acceptance of this offer, please return a signed copy of this letter to me by Monday, November 10, 2008, close of business.  You can fax the letter back to me at (408) 731-5855.

Frank, your skills, experience and high potential are respected and valued by everyone with whom you met here at Affymetrix.  We look forward to having you accept this offer and join us in strengthening our leadership team and realize the promise of our technology to enhance the quality of life.

Sincerely,

Lori Ciano

Senior Vice President, Human Resources

/s/ Lori Ciano

Offer Acceptance:

/s/ Frank Witney	11-07-2008
Frank Witney	Date

EX-21

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EXHIBIT 21

AFFYMETRIX, INC.
LIST OF SUBSIDIARIES

        Affymetrix, UK Ltd, wholly-owned subsidiary incorporated in the United Kingdom and doing business under such name.

        Affymetrix France S.A.S., wholly-owned subsidiary incorporated in France and doing business under such name.

        Affymetrix GmbH, wholly-owned subsidiary incorporated in Germany and doing business under such name.

        Affymetrix Japan K.K., a wholly-owned subsidiary incorporated in Japan and doing business under such name.

        Affymetrix Pte Ltd, wholly-owned subsidiary incorporated in Singapore and doing business under such name.

        Affymetrix Italia, SRL, wholly-owned subsidiary incorporated in Italy and doing business under such name.

        Anatrace, Inc., wholly-owned subsidiary incorporated in Ohio and doing business under such name.*

        Genetic MicroSystems, Inc., wholly-owned subsidiary incorporated in Massachusetts and doing business under such name.

        Neomorphic, Inc., wholly-owned subsidiary incorporated in California and doing business under such name.

        Panomics, Inc. wholly-owned subsidiary incorporated in California and doing business under such name.***

        Panomics SRL, wholly-owned subsidiary incorporated in Italy and doing business under such name.***

        Pinecone Acquisition, Inc., wholly-owned subsidiary incorporated in California and doing business under such name.

        True Materials Incorporated, wholly-owned subsidiary incorporated in Delaware and doing business under such name.**

        USB Corporation, wholly-owned subsidiary incorporated in Ohio and doing business under such name.*

        USB Europe, GmbH, wholly-owned subsidiary incorporated in Germany and doing business under such name.*

*

This entity became a wholly-owned subsidiary of Affymetrix, Inc. on January 30, 2008.

**

This entity became a wholly-owned subsidiary of Affymetrix, Inc. on July 17, 2008.

***

This entity became a wholly-owned subsidiary of Affymetrix, Inc. on December 5, 2008.

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EXHIBIT 21

AFFYMETRIX, INC. LIST OF SUBSIDIARIES

EX-23

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EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-11299, No. 333-35287, No. 333-85575, No. 333-59158, No. 333-34320, No. 333-52804, No. 333-59160, No. 333-123452, No. 333-129269 and No. 333-151771) pertaining to the 1993 Stock Plan, the 1996 Nonemployee Directors Stock Option Plan, the 1998 Stock Incentive Plan, the GMS/Affymetrix 1998 Stock Plan, the Affymetrix/Neomorphic, Inc. 1998 Stock Option Plan, the Amended and Restated 2000 Equity Incentive Plan of Affymetrix, Inc. and the ParAllele BioScience, Inc. 2001 Stock Option Plan of Affymetrix, Inc. of our reports dated February 24, 2009, with respect to the consolidated financial statements and schedule of Affymetrix, Inc., and the effectiveness of internal control over financial reporting of Affymetrix, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2008.

/s/ ERNST & YOUNG LLP

San Jose, California
February 24, 2009

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EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-31.1

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EXHIBIT 31.1

Certification

I, Kevin M. King, Director, President and Chief Executive Officer, certify that:

1.

I have reviewed this report on Form 10-K for the period ended December 31, 2008 of Affymetrix, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d.

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

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

a.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

March 2, 2009	/s/ KEVIN M. KING
	Name:	Kevin M. King
	Title:	Director, President and Chief Executive Officer

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EXHIBIT 31.1

Certification

EX-31.2

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EXHIBIT 31.2

Certification

I, John C. Batty, Executive Vice President and Chief Financial Officer, certify that:

1.

I have reviewed this report on Form 10-K for the period ended December 31, 2008 of Affymetrix, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d.

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

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

a.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

March 2, 2009	/s/ JOHN C. BATTY
	Name:	John C. Batty
	Title:	Executive Vice President and Chief Financial Officer

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EXHIBIT 31.2

Certification

EX-32.1

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EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002

        The certification set forth below is being submitted in connection with this Annual Report on Form 10-K for the year ended December 31, 2008 (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.

        Kevin M. King, the Director, President and Chief Executive Officer of Affymetrix, Inc. certifies that, to the best of his knowledge:

1.

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



2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Affymetrix, Inc.

March 2, 2009	/s/ KEVIN M. KING
	Name:	Kevin M, King
	Title:	Director, President and Chief Executive Officer

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EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002

EX-32.2

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EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002

        The certification set forth below is being submitted in connection with this Annual Report on Form 10-K for the period ended December 31, 2008 (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.

        John C. Batty, the Executive Vice President and Chief Financial Officer of Affymetrix, Inc. certifies that, to the best of his knowledge:

1.

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



2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Affymetrix, Inc.

March 2, 2009	/s/ JOHN C. BATTY
	Name:	John C. Batty
	Title:	Executive Vice President and Chief Financial Officer

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EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002