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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.


Table of Contents

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

2


Table of Contents


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:

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

    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.

        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;

    the functionality of new and existing products;

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

    the existence of undetected product defects;

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

    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;

    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:

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

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

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

    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;

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

    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;

    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

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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

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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,

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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.

GRAPHIC

 
  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:

    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.

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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.

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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

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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 15th and July 15th 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.

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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).

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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  
               

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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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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AFFYMETRIX, INC.

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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  
                               

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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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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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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AFFYMETRIX, INC.

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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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  

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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.

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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.

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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