UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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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, 2003

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
|- | ----------------------------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM  TO

COMMISSION FILE NUMBER 0-28218

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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)3380 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:

None

Securities registered pursuant to Section 12(g) of the Act:

Common
Stock, $0.01

Preferred
Stock Purchase Rights

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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 an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes ý    No o

The aggregate market value of the registrant's common stock held by non-affiliates of the
registrant at June 30, 2003, based on the closing price of such stock on the Nasdaq National Market on such date, was approximately $959.7 million.

The number of shares of the registrant's Common Stock, $0.01 par value, outstanding on March 1,
2004, was 60,288,152.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the Proxy Statement to be filed in connection with the 2004 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K Report where indicated.



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AFFYMETRIX, INC.
FORM 10-K
DECEMBER 31, 2003

TABLE OF CONTENTS

|Item No. |  | Page                                                                                          
|-------- |  | ----------------------------------------------------------------------------------------------
|PART I   |  |                                                                                               
|1.       |  | Business                                                                                      
|2.       |  | Properties                                                                                    
|3.       |  | Legal Proceedings                                                                             
|4.       |  | Submission of Matters to a Vote of Security Holders                                           
|PART II  |  |                                                                                               
|5.       |  | Market for Registrant's Common Equity and Related Stockholder Matters                         
|6.       |  | Selected Financial Data                                                                       
|7.       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations         
|7A.      |  | Quantitative and Qualitative Disclosure About Market Risk                                     
|8.       |  | Financial Statements and Supplementary Data                                                   
|9.       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|9A.      |  | Controls and Procedures                                                                       
|PART III |  |                                                                                               
|10.      |  | Directors and Executive Officers of the Registrant                                            
|11.      |  | Executive Compensation                                                                        
|12.      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|13.      |  | Certain Relationships and Related Transactions                                                
|14.      |  | Principal Accountant Fees and Services                                                        
|PART IV  |  |                                                                                               
|15.      |  | Exhibits, Financial Statement Schedule, and Reports on Form 8-K                               
|         |  | Signatures                                                                                    

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PART I

ITEM 1. BUSINESS

Forward-Looking Statements

All statements in this Annual Report on Form 10-K that are not historical are "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act as amended, 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 this Annual Report on Form 10-K on page 49. 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 systems for genetic analysis in the life sciences and are recognized as a market leader in
creating breakthrough tools that are advancing our understanding of the molecular basis of disease. 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 clinical diagnostics. Additional markets are emerging in
agricultural research, plant breeding, food testing, pathogen identification and consumer genetics to mention a few. Our integrated GeneChip® microarray 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. Related microarray technology also offered by Affymetrix includes instrumentation, software and 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 1500 peer-reviewed publications released in 2003 alone, which cited GeneChip®
technology. The clinical applications of GeneChip® technologies for diagnosing and treating disease is an emerging market opportunity in health management that seeks to improve the
effectiveness of health care by collecting information about DNA variation and RNA expression in patients at various times from prognosis, through diagnosis 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, Europe and Japan. We also sell our products through life science supply specialists acting as authorized
distributors in the Middle East, India and Asia Pacific regions.

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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 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 (sales, marketing and
administration, array research and development), Emeryville, California (bioinformatics and software development), Bedford, Massachusetts (instrument
research and development and manufacturing), and additional sales offices in the United Kingdom, Singapore and Japan.

Scientific Background and Technology



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 protein coding genes in the human genome is estimated to be between 35,000 and 40,000. The
number of non-coding sequences is the focus of current research interest. Though currently
unknown, the number of 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 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 of the complexities of the genome, and its characteristics in normal and diseased conditions. This should lead

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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 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 expect to include in future products. This effort is also prompting continued development of our sample preparation, array, instrumentation and data
analysis technologies.



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.



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." Photolithography is a technique which uses light to create exposure patterns on the
glass chip and

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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 either 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 1.3 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 up to 60 million unique
probe sequences based on current technology. These whole wafers have been used by an affiliate of Affymetrix, Perlegen, 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 12-18 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 been able to continually "shrink" the size of
features, or oligonucleotide probes of a given sequence, on our GeneChip® arrays. For instance, our first commercial GeneChip® products, shipped in 1994, had a feature size of
100 microns and by 2003, we introduced our HG-U133 product with an 11 micron feature size. We have thus been able to continually package nearly 100 times more genetic information onto our
GeneChip® arrays over the last decade.

Since
we manufacture our chips in wafer format, we can vary the number of chips manufactured per wafer. Therefore we can 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. We believe that our unique manufacturing process is a significant competitive advantage.

Products



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 government research foundations 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 target nucleic acids, a fluidics station for introducing the
test sample to the probe arrays, a hybridization oven for optimizing

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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 expression levels and investigation of genetic variation (DNA analysis including single nucleotide
polymorphism (SNP) genotype analysis and resequencing). Our GeneChip® expression monitoring arrays enable our customers to qualitatively and quantitatively measure gene expression levels
in a number of biologically relevant 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. Additionally, we market CustomExpress 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 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). 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 genetic analysis and testing products will be a core component in the area of clinical applications and we are developing our GeneChip® system
for clinical applications of both gene expression and DNA analysis. Together with our collaborative partners, we are focusing on the development and commercialization of clinical applications products
in cancer, osteoporosis, 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 applications strategy, we have established partnerships and customer relationships
with leading academic researchers, pharmaceutical and biotechnology companies, including F. Hoffmann-La Roche Ltd. ("Roche"), bioMérieux, Inc.
("bioMérieux"), Beckman Coulter, Inc. ("Beckman Coulter"), Arcturus Bioscience, Inc. ("Arcturus"), Boston University Medical Center, Caliper Life Sciences ("Caliper") and
the Whitehead Institute for Genome Research at the Massachusetts Institute of Technology (the "Whitehead Institute"). We believe that the rapid growth of the clinical applications market holds the
potential for GeneChip® technology applications ranging from basic research to clinical trials and, ultimately, into the clinic. As a result we are working with leaders in molecular
diagnostics providing custom made GeneChips®, to their specifications. Our partners' subsequently package the chips into kits 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."

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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 facilitate gene expression monitoring, we design and manufacture probe arrays with single-stranded DNA that are molecules complementary to sequences within
genes of interest. By synthesizing specific probes for multiple genes on a single probe array, we enable researchers to quickly, quantitatively and simultaneously monitor the expression of a large
number of genes 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 clinical applications
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.

The
range of GeneChip® Expression products is described below:





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

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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 genetics of complex disease have historically been challenging due to 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 trials and patient care. By using our resequencing 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 DNA 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." We currently market the following DNA analysis products:



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We offer a variety of sales programs for our gene expression monitoring and DNA Analysis arrays, tailored to the needs of industrial, biotech and
academic/government customers. Programs are tied to volume usage and customers can select a program that best meets their needs to receive favorable pricing per array. Selected expression profiling
customers with whom we have existing supply agreements for GeneChip® expression monitoring arrays include Roche, GeneLogic, Inc., GlaxoSmithKline plc, Millennium
Pharmaceuticals, Inc., Sankyo Co., Ltd., Howard Hughes Medical Institute, Harvard University, Medical Research Council (UK), Amgen Inc., Organon International, Inc., and
Schering-Plough Research Institute.

For
biotech, academic and government customers, array prices are related to quantity purchased during the year. For the industrial programs, customers self select a relevant program for
their particular use level and pay an upfront fee together with a price per arraythe higher the upfront payment, the lower the price per array.



We offer various reagents for use with GeneChip® expression monitoring arrays and GeneChip® DNA analysis arrays. Reagents assist
researchers at critical steps in the sample preparation process such as extracting, amplifying and labeling target nucleic acid. As an integral part of the GeneChip® system, standard
reagents and associated protocols help minimize experimental variations. For our GeneChip® expression probe arrays, we offer the following reagents: One-Cycle cDNA Synthesis
Kit, Two-Cycle cDNA Synthesis Kit, GeneChip® Expression 3'-Amplification Reagents for IVT Labeling, GeneChip® Sample Cleanup Module,, T7-Oligo(dT)
Promoter Primer Kit, Eukaryotic Poly-A RNA Control Kit and Eukaryotic Hybridization Control Kit. We offer the following reagents for our GeneChip® DNA analysis arrays:
GeneChip® Mapping 10K Xba Assay Kit, GeneChip® Resequencing Reagent Kit, and GenFlex Reagent Kit.



Our GeneChip® instruments provide a fully integrated system for conducting research using GeneChip® probe arrays. It 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 is used to control exposure of the hybridized probe array to solutions containing labeled
material that will bind to the test sample hybridized to the probe array. The fluidics station controls the delivery of labeled material and 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, an analytical 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
personal computer. The labeled material that is bound to the hybridized test sample emits fluorescent signals when exposed to the light from the laser. The location and intensity of the fluorescent
signal is 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 in an environment held at the optimum storage temperature.

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The
individual components of our GeneChip® instrument system are described in more detail below.



In
September 2003, we announced the introduction of a new High Throughput Array (HTA) system designed to process and analyze GeneChip® arrays in a new
96-well format so as to industrialize genome research. This new format is designed to reduce experimental costs and help scientists produce results more rapidly and effectively. The
GeneChip® HTA system will have the capacity to process hundreds of biological samples per day with minimal human supervision, reducing capital, labor, reagent and array expenses. The
GeneChip® HTA system adapts the same industry-standard GeneChip® technology and content that we use in our cartridges to a standard 96-well microtiter plate, which
runs on an automated system built with off-the-shelf robotic components. The

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GeneChip®
HTA system automates the most labor intensive steps in GeneChip® processing, dramatically reducing the cost per assay. The decrease in cost and increase in throughput
makes the GeneChip® HTA system well suited for downstream development applications such as compound profiling, molecular toxicology and clinical trials.

Through
a collaborative early access program, Johnson & Johnson Pharmaceutical Research & Development, L.L.C. (J&JPRD) became the first company to gain early access to the
new GeneChip® HighThroughputArray (HTA) system. For additional information concerning this collaboration, see the section of this Form 10-K entitled "Our Collaborative
Partners."



Our GeneChip® operating system software is supplied as part of an integrated system and runs on an industry standard PC platform. The fluorescence
intensity data captured from the scanner are used in conjunction with computer files containing the probe sequence and location of all the probes on the probe array to determine the expression level
of a particular gene or to identify particular DNA sequence variations of the test sample. The Data Mining Tool and GCOS Server software products allow for sophisticated analyses of gene expression
results and provide a means of linking and integrating this information with other databases. Additionally, 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 Developers 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.

The
software for our GeneChip®Systems and analysis tools offered consist of the:



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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 and medical device companies to develop, obtain regulatory approval for, and commercialize probe arrays and instrumentation
for broader use of probe arrays as components that can be incorporated into diagnostic products and other clinical 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 anticipated in the clinical diagnostic setting. To further our clinical applications strategy,
we have established a number of collaborations with leading academic researchers, pharmaceutical and biotechnology companies.

For
example, we are non-exclusively collaborating with Roche to develop and commercialize GeneChip® laboratory tests for DNA analysis, genotyping and resequencing
applications, as well as for RNA expression analysis, in a broad range of human disease areas. Using our GeneChip® technologies, Roche intends to develop and market tests for diseases such
as cancer, osteoporosis, cardiovascular, metabolic, infectious and inflammatory diseases. We and Roche believe that developing diagnostic products for cancer and other human diseases will establish
new standards for genetic clinical testing. Ultimately, these products will allow physicians to better diagnose and treat human disease.

In
addition, we have collaborations with several academic research centers, including Boston University Medical Center and the Whitehead Institute for Biomedical Research, to discover
and test molecular signatures for specific indications, as well as to develop and test new methods necessary to meet the requirements of diagnostic applications.

In
bacteriology, we have a non-exclusive collaborative development agreement and an associated supply agreement for probe arrays with bioMérieux to identify
the species and drug resistance profiles of those bacteria causing human infection. The agreements also allow for non-exclusive development of DNA probe arrays for certain viral clinical
diagnostic tests and in the fields of food and industrial testing.

We
have also entered into a series of agreements with Beckman Coulter that give Beckman Coulter the right to develop probe array-based diagnostic products that would use some elements of
our GeneChip® technology. Under these agreements, we agreed to grant Beckman Coulter licenses to commercialize probe arrays manufactured using certain of our technologies other than light-
directed synthesis. Under the arrangement, Beckman Coulter would pay us transfer prices and royalties on sales of these products.

For
additional information concerning our collaborations, see the section of this Form 10-K entitled "Our Collaborative Partners."

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Our Collaborative Partners

Our 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. Accordingly, we have entered into and intend to enter into additional collaborative agreements to further this
strategy. The table below sets forth a selected list of collaborators with whom we have current agreements, together with the related products and programs and the commencement dates of the most
recent agreement. The table is organized by reference to the product area that represents the most significant portion of the collaboration; however, the collaboration may also involve other areas of
our business and product line.

SUMMARY OF SELECTED COLLABORATORS

|Company                                                         |  | Type of Agreement                                                                                                                                                                                                           |  | Date          
|--------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Gene Expression Monitoring                                      |  |                                                                                                                                                                                                                             |  |               
|Millennium Pharmaceuticals, Inc.                                |  | Collaborative research and development agreement to develop gene expression array processes and applications.                                                                                                               |  | October 2001  
|Qiagen, GmbH                                                    |  | Agreement for Qiagen to supply nucleic acid purification products for Affymetrix to resell for use with GeneChip® arrays in the target labeling process.                                                                    |  | February 2002 
|NuGEN Technologies, Inc.                                        |  | Collaborative agreement to develop amplification reagents that replicate the entire length of mRNA transcripts and are optimized for use with GeneChip® technology.                                                         |  | September 2003
|PreAnalytiX GmbH                                                |  | Collaborative development agreement to optimize the PreAnalytiX PAXgene(TM) Blood RNA System for use with Affymetrix GeneChip® technology to improve gene expression profile results on RNA extracted from whole blood.     |  | October 2003  
|Arcturus Bioscience, Inc. (formerly Arcturus Engineering, Inc.) |  | Collaborative agreement to develop new tools that will enable researchers to conduct gene expression analysis on paraffin-embedded clinical biopsy samples using Arcturus reagents and a new Affymetrix custom human array. |  | November 2003 
|                                                                |  |                                                                                                                                                                                                                             |  |               

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|Invitrogen Corporation                                                                    |  | Collaborative agreement to develop a new line of GeneChip® brand expression reagents including two new cDNA Synthesis Kits, optimized for use with Affymetrix GeneChip® technology, containing Invitrogen's industry-leading SuperScript
reverse transcriptase (RT). |  | November 2003                                              
|----------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|DNA Analysis                                                                              |  |                                                                                                                                                                                                                                                                       |  |                                                            
|Nuvelo, Inc. (formerly Hyseq Pharmaceuticals, Inc.) (Callida Genomics, Inc., N-Mer, Inc.) |  | Collaborative agreement for the development and commercialization of a universally applicable DNA analysis array.                                                                                                                                                     |  | October 2001                                               
|ParAllele BioScience, Inc.                                                                |  | Under a supply agreement, we provide certain instrumentation and arrays to be used by ParAllele in combination with its proprietary allele typing technology for research and third party genotyping services.                                                        |  | February 2003                                              
|Perlegen Sciences, Inc.                                                                   |  | Supply agreement for Perlegen's core SNP discovery and genotyping research. License to new single nucleotide polymorphism content and broader surveying methods; access to whole genome technologies to be made available through CustomSeq product
line.            |  | March 2001 and
January 2003                                
|Clinical Application                                                                      |  |                                                                                                                                                                                                                                                                       |  |                                                            
|Arcturus Bioscience, Inc. (formerly Arcturus Engineering, Inc.)                           |  | Under a supply agreement, Arcturus has broad access to our standard and custom GeneChip® brand arrays, instrumentation and software to monitor gene expression aimed at developing novel microgenomics array-based diagnostic content.                                |  | December 2002                                              
|bioMérieux, Inc.                                                                          |  | Collaborative agreements focused on bacteriology and virology clinical applications products; industrial and food testing products.                                                                                                                                   |  | September 1996,
December 1997,
January 1998, and
March 2003
|Boston University Medical Center                                                          |  | Collaborative agreement focused on developing screening and early detection of lung cancer.                                                                                                                                                                           |  | December 2002                                              
|                                                                                          |  |                                                                                                                                                                                                                                                                       |  |                                                            

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|F. Hoffmann-La Roche Ltd.                                         |  | Collaborative agreements to develop and commercialize GeneChip® based diagnostic products in a range of human disease areas.                                                                                                                                                                                                  |  | February 1998 and
January 2003
|----------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------
|Whitehead Institute                                               |  | Collaborative agreement focused on application of GeneChip® technology to cancer diagnosis and treatment.                                                                                                                                                                                                                     |  | September 2002                
|Other                                                             |  |                                                                                                                                                                                                                                                                                                                               |  |                               
|Beckman Coulter, Inc.                                             |  | Agreement to purchase Beckman Coulter's array business. We granted Beckman Coulter licenses to commercialize probe arrays manufactured using certain of our technologies other than light-directed synthesis.                                                                                                                 |  | July 1998                     
|Array Automation, Ltd. (Joint venture with Beckman Coulter, Inc.) |  | Array Automation is a joint venture between Affymetrix and Beckman Coulter, Inc. The joint venture was incorporated in July 2003, with the primary purpose of product research and development in the field of non-photolithographic arrays of
polynucleotide sequences and instruments.                                      |  | July 2003                     
|National Cancer Institute                                         |  | Collaborative research relating to RNA transcription regulation and activity.                                                                                                                                                                                                                                                 |  | January 2001                  
|Ingenuity Systems, Inc.                                           |  | Agency agreement to make available Ingenuity's Pathways Analysis product to Affymetrix customers. Ingenuity Pathways Analysis is a web-based application that is designed to enable Affymetrix customers to more easily discover, visualize and explore
therapeutically relevant networks in gene expression array data sets. |  | July 2003                     
|Johnson & Johnson Pharmaceutical Research & Development L.L.C.    |  | Under the supply agreement, Johnson & Johnson Pharmaceutical Research & Development, L.L.C. was given early access to the new GeneChip®HighThroughputArray (HTA) system.                                                                                                                                                      |  | September 2003                
|Caliper Life Sciences                                             |  | Collaboration and supply agreement to develop and provide automated target preparation instruments for the GeneChip® Probe Array system.                                                                                                                                                                                      |  | January 2004                  

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Millennium Pharmaceuticals, Inc.In October 2001, we entered into a four-year supply and research
and development agreement with Millennium Pharmaceuticals, Inc. ("Millennium") to co-develop GeneChip® technology applications for use in drug discovery and development.
Under the agreement, we and Millennium are jointly developing gene expression array processes and applications to enhance the productivity of genome-based drug discovery and development. We have the
right to commercialize certain technologies developed under this collaboration.

Qiagen, GmbH.In February 2002, we entered into a three-year supply agreement with Qiagen, GmbH ("Qiagen")
for Qiagen to supply us with certain nucleic acid purification products for use with our GeneChip® arrays for target labeling in expression analysis.

NuGEN Technologies Inc.In September 2003, we entered into a joint collaboration to develop NuGEN's Whole
Transcript Amplification (WT-SPIA(TM)) system for use with Affymetrix GeneChip® brand technology. In this collaboration, NuGEN plans to develop amplification reagents that
replicate the entire length of mRNA transcripts and are optimized for use with GeneChip® technology.

PreAnalytiX GmbH.In October 2003, we entered into a collaborative agreement with PreAnalytiX, a joint venture between
QIAGEN N.V. and Becton, Dickinson and Company. The goal of the collaboration will be to develop improved methods for the use of PreAnalytiX technology with GeneChip® expression analysis
arrays. By combining PreAnalytiX and Affymetrix technologies, our goal is to develop a complete, standardized process for expression profiling starting from whole blood samples.

Arcturus Bioscience Inc.In November 2003, we entered into a collaboration to develop new tools that will
enable researchers to conduct gene expression analysis on paraffin-embedded clinical biopsy samples using Arcturus reagents and a new Affymetrix custom human array. Paradise(TM) reagents, developed by
Arcturus can extract and amplify RNA from paraffin-embedded tissues. These samples are suitable
for use in gene expression analysis when used with a new custom microarray, the GeneChip® Human Genome X3P Array, which will be offered through the Affymetrix
Made-to-Order Program to any researcher interested in examining paraffin-embedded samples for gene expression.

Invitrogen Corporation.In November 2003 we signed a collaboration and supply agreement to develop and market a new
line of GeneChip® brand expression reagents including two new cDNA Synthesis Kits. Both of the new cDNA Synthesis Kits were developed in collaboration with Invitrogen and contain
Invitrogen's industry-leading SuperScript reverse transcriptase (RT). These reagents have been optimized for use with Affymetrix GeneChip technology, offering a complete, standardized
sample preparation system that is easier to use and will help customers produce more robust and consistent array results. The One-Cycle cDNA Synthesis Kit offers all necessary reagents for
standard target labeling. This protocol has been used by the majority of Affymetrix customers already, but the new kit provides improved configuration and greater convenience. The new
Two-Cycle cDNA Synthesis Kit offers customers a streamlined procedure for preparing samples using a small amount of material, such as biopsy or laser capture dissected samples.



Nuvelo, Inc.In October 2001, Nuvelo, Inc. (formerly Hyseq Pharmaceuticals, Inc.) ("Nuvelo")
created a new majority owned subsidiary, Callida Genomics, Inc. ("Callida"), which will focus on the development and commercialization of Nuvelo's
sequencing-by-hybridization ("SBH") technology. Nuvelo contributed all of its SBH patents to Callida. We have a 10% equity interest in Callida. Callida has entered into a
collaboration arrangement with us, through Callida's wholly owned subsidiary, N-Mer, Inc. ("N-Mer"), for the development and commercialization of a high speed DNA
sequencing chip. In connection with this collaboration, we entered into various cross-licensing arrangements with

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Nuvelo,
Callida, and N-Mer pursuant to which we are the exclusive array and system supplier to N-Mer and the exclusive sales agent for the distribution of any products
developed by N-Mer. We have an option, exercisable for five years, to purchase a majority interest in N-Mer.

We
paid Nuvelo a one-time license fee for the non-exclusive license described above, and loaned Nuvelo $4 million, all of which will be used to fund
Callida and N-Mer. The license fee has been capitalized in acquired technology rights and is being
amortized over the remaining patent lives. The loan bears interest at the rate of 7.5% and matures in 2006. The loan is repayable by Nuvelo at any time and, subject to specified conditions,
exchangeable for common stock of Nuvelo. The loan is secured by all of Nuvelo's equity interest in Callida and is recorded in other assets on the Consolidated Balance Sheet. Affymetrix and Nuvelo have
agreed to each make additional investments, which will be conditioned on N-Mer's attainment of a specified technical milestone and the procurement of third-party financing. For additional
information concerning our relationship with Nuvelo see Note 4 of the Notes to Consolidated Financial Statements.

ParAllele BioScience, Inc.In February 2003, Affymetrix and ParAllele BioScience, Inc. ("ParAllele")
entered into a supply and collaboration agreement. Under the terms of the agreement, we will sell to ParAllele certain instrumentation and GeneChip® arrays to use in third party services
in combination with ParAllele's proprietary allele typing technology. Affymetrix and ParAllele will collaborate to determine other joint opportunities.

Perlegen Sciences, Inc.In March 2001, we contributed to Perlegen the rights to use certain intellectual
property with no cost basis and we have rights to use and commercialize certain data generated by Perlegen in the array field. Using access to whole-wafer technology developed by Affymetrix, Perlegen
focuses on identifying the millions of genetic variations (known as single nucleotide polymorphisms or "SNPs") among individuals, and finding patterns in those variations that might be predictive of
disease susceptibility or drug response. In January 2003, we obtained accelerated access to Perlegen's SNP database which will further our efforts to develop these next generation arrays. In
addition, our collaborative arrangement with Perlegen provides us with access and commercialization rights to certain whole genome technologies, including 248,000 chip-optimized,
long-range polymerase chain reactions (or "PCRs") across the human genome that we intend to make available to our customers through our GeneChip® CustomSeq
Resequencing Array program which offers high-quality arrays for large-scale resequencing of the human genome. PCR is a process in which multiple copies of a strand of DNA are generated to
enhance the ability of researchers to identify and analyze it. For additional information concerning our relationship with Perlegen, including our ownership interest in Perlegen, our collaborative
relationship with Perlegen and existing relationships between certain of our directors and officers and Perlegen, see the section of this Form 10-K entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 10 of the Notes to the Consolidated Financial Statements.



Arcturus Bioscience, Inc.In December 2002, we entered into a strategic relationship with Arcturus
Bioscience, Inc. (formerly Arcturus Engineering, Inc.) ("Arcturus"), a leader in laser capture microdissection. Through our collaboration, Arcturus has broad access to our standard and custom
GeneChip® brand arrays, instrumentation and software to monitor gene expression for use in research and discovery efforts to develop novel microgenomics array-based diagnostic signatures.
We made a $3 million equity investment in Arcturus which represented an ownership interest of
approximately 6%. We see microgenomics as an important enabling technology for a broad set of applications in research and diagnostics.

bioMérieux, Inc.In September 1996, we entered into a collaborative development agreement and
associated supply agreement for probe arrays with bioMérieux, Inc. ("bioMérieux") to identify the

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species
and drug resistance profiles of bacteria causing human infection in a clinical setting. As part of the collaboration, bioMérieux is developing instrumentation for the use of
these probe arrays in a clinical diagnostic setting. Under the terms of the agreements, bioMérieux provides research and development support and makes payments to us upon achievement of
certain milestones. In addition, bioMérieux pays specified prices for the supply of probe arrays and royalties on any resulting product sales. In December 1997 and
January 1998, we expanded the collaboration with bioMérieux to include the non-exclusive development of DNA probe arrays for clinical diagnostics tests in the fields
of virology and food and industrial testing. In March 2003, the collaboration agreement was amended in order to reinstate bioMérieux's licenses. bioMérieux has
launched the FoodExpertID array under this collaboration. (Please see the section of this 10K entitled "DNA Analysis Products Powered by Affymetrix".)

Boston University Medical Center.In December 2002, we entered into a collaboration with Boston University Medical
Center for the use by Boston University Medical Center of our GeneChip® technology to identify predictive molecular signatures that may enable the screening and early detection of lung
cancer in "at risk" individuals, and to develop a less invasive sample acquisition method. Using GeneChip® probe arrays, researchers at Boston University Medical Center will study the use
of airway tissue derived gene expression signatures for early detection, prognosis, therapy selection and monitoring of lung cancer.

F. Hoffmann-La Roche Ltd.In February 1998, we 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 and reagents. In January 2003, we expanded our collaboration with Roche by granting Roche
access to our GeneChip® technologies to develop and commercialize GeneChip® laboratory tests for DNA analysis, genotyping and resequencing applications, as well as for RNA
expression analysis, in a broad range of human disease areas. Using our GeneChip® technologies, Roche intends to develop and market tests for diseases such as cancer, osteoporosis,
cardiovascular, metabolic, infectious and inflammatory diseases. Affymetrix and Roche believe that developing targeted microarray expression profiles for cancer, plus genotyping and resequencing
profiles for other diseases will enable the creation and commercialization of novel standardized diagnostic solutions. These solutions ultimately will allow physicians to better diagnose and treat
human disease. Under the terms of the collaborative agreement, Roche paid us an access fee of $70 million relating to the first five years of the arrangement. The agreement, which is subject to
Roche's option to terminate on December 31, 2007 or any time on or after June 2, 2013, with one year's prior notice, 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, milestone payments for
technical and commercial achievements, a manufacturing and supply agreement, and related license installments. As part of the agreement, Affymetrix will manufacture and supply Roche with microarrays
and related instrumentation based on Affymetrix' GeneChip® platform. In 2003 Roche announced that it launched the AmpliChip® CYP450 array which will be a research only use
product and that it intends to seek FDA approval.

Whitehead Institute.In September 2002, we extended our previous collaborative relationship with the Whitehead
Institute and announced a research collaboration to use our GeneChip® brand technology to conduct cancer clinical studies. The collaboration is designed to standardize experimental
procedures and further validate numerous studies demonstrating the power of expression data for cancer classification. The Whitehead Institute is initiating a research program to study sample
collection from tissue biopsies, amplification, data collection and analysis in order to accelerate the use of DNA array technology in clinical settings. The Whitehead Institute will conduct this work
in collaboration with clinical institutions. The results of these studies are expected to be published in the future.

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Beckman Coulter, Inc.In July 1998, we entered into an arrangement with Beckman Coulter, Inc. ("Beckman
Coulter") that involved the execution of a series of agreements including an asset purchase agreement. Pursuant to these agreements, which were implemented and became effective in June 1999, we
purchased Beckman Coulter's array business. Under the agreements, we agreed to grant Beckman Coulter licenses to commercialize probe arrays manufactured using certain of our technologies other than
light-directed synthesis, and the parties agreed to enter into an original equipment manufacturer supply agreement for products that use our GeneChip® array technology. Under the
arrangement, Beckman Coulter agreed to pay us transfer prices and royalties on sales of these products.

Array Automation Ltd.The Company is currently a partner in Array Automation, LLC ("AAL"), a joint
venture with Beckman Coulter, Inc. ("Beckman"). In July 1998, the Company entered into an asset purchase agreement with Beckman. As part of the asset purchase agreement, the Company
agreed to establish a joint venture with Beckman. AAL was incorporated in July 2003, with the primary purpose of product research and development in the field of
non-photolithographic arrays of polynucleotide sequences and instruments. (Please see Note 10 of the Notes to the Consolidated Financial Statements.)

National Cancer Institute.In January 2001, we entered into a collaboration agreement with the National Cancer
Institute on a human transcriptome initiative which seeks to construct maps locating the sites of RNA transcription across the entire human genome using high-density whole-genome arrays
interrogating at resolutions and throughput rates never before attempted. The transcriptome is defined as the complete collection of transcribed elements of the genome. In addition to mRNAs, it also
represents non-coding RNAs that are used for structural and regulatory purposes. Alterations in the structure or levels of expression of any one of these RNAs or their proteins could
contribute to disease. An understanding of the transcriptome may provide valuable insights in the research for novel drugs. We have made the data from this initiative freely available to the public
via the Web through a version of the data integration and analysis software platform developed by Biotique Systems, Inc., a company that provides decision support tools and services for the
emerging field of pharmacogenomics. We are using the Biotique Local Integration System to house this transcriptome data and to provide an interface for researchers to access, query and use this
information. This collaboration was extended during fiscal 2003 to address the identification of transcriptional binding sites, methylation sites, origins of replication and other genomic features.

Ingenuity Systems, Inc.In July 2003, we entered into an agency agreement with Ingenuity to deliver the
Ingenuity Pathways Analysis product to our customers. Ingenuity Pathways Analysis is a web-based application that is designed to enable our customers to more easily discover, visualize and
explore therapeutically relevant networks in gene expression array data sets. Pharmaceutical, biotech, and academic customers will be able to get access to the application through an annual
subscription fee. As part of the agreement, we made a $5 million equity investment in Ingenuity, which represents approximately a 4% ownership.

Johnson & Johnson Pharmaceutical Research & Development L.L.C.In September 2003, we signed a
collaboration agreement with Johnson & Johnson Pharmaceutical Research & Development L.L.C. (Johnson & Johnson) to grant them early access to the new GeneChip®
HighThroughputArray (HTA) system. Under the agreement, we will collaborate with Johnson & Johnson in the area of testing and evaluating Affymetrix' high throughput GeneChip® array
processing system for use in Johnson & Johnson's pharmaceutical research and development activities. Johnson & Johnson grants Affymetrix the right to use the data obtained from their
evaluation in the internal research and development of our HTA Systems.

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Caliper Life Sciences.In January 2004, we signed a collaboration and supply agreement to develop and provide
automated target preparation instruments for the GeneChip® Probe Array system. These new automation systems are expected to cut array processing, reduce variability and labor costs, and
enable researchers to industrialize their genomic research. The two companies will develop products that leverage Caliper's expertise in high-throughput automation and microfluidics with
Affymetrix' expertise in microarray technology and applications. The first products are expected to be launched later in 2004 and will automate GeneChip® microarray target preparation
steps including hybridization, washing and staining for expression and DNA analysis.
The automated system will enable a single operator to run up to 96 RNA samples at a time, compared to the current manual rate of 20 to 24 samples.

Marketing and Distribution

The markets for our products include all aspects of molecular biology research in the life sciences, including basic human disease research, genetic analysis,
pharmaceutical drug discovery and development, pharmacogenomics, 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 government research foundations and clinical and industrial
reference laboratories. The following factors, among others, influence the size and development of our markets:



In
North America, major European markets and Japan, 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 and Singapore through foreign sales subsidiaries. In some foreign countries, sales are made through various representative and
distributorship arrangements. In January 1, 2003, we began selling in Japan directly through Affymetrix Japan K.K., a wholly owned subsidiary of Affymetrix that was formed in June 2002,
in addition to using our distributorship arrangement with Amersham Biosciences K.K. Subsequent to January 1, 2004, Amersham Biosciences K.K. ceased to handle order processing, stockholding,
physical distribution and customer invoicing on our behalf. Currently, our office in Tokyo has local, dedicated sales, service and application support personnel who are primarily responsible for
expanding our existing Japanese customer base and building closer relationships with the local scientific community.

In
markets outside of North America, Europe and Japan, we sell our GeneChip® products principally through third party distributors, primarily in the Middle East, India and
Asia Pacific. 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.

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For
clinical and industrial applications market opportunities, we supply our partners with arrays, which they incorporate into diagnostic products and take on the primary
commercialization responsibilities. Current collaborative partners include Roche and bioMérieux. For additional information concerning our collaborative partners, see the section of
this Form 10-K entitled "Our Collaborative Partners."

Manufacturing and Raw Materials

We manufacture our GeneChip® probe arrays, GCS 3000 scanner, fluidics stations, instrument control software and certain reagents in-house
and contract with third-party suppliers to manufacture our hybridization oven and certain reagents for our GeneChip® system. Additionally, through our External Developers Network, 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.

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.

We
are currently manufacturing GeneChip® probe arrays for sale to customers as well as for internal and collaborative purposes. Probe arrays are manufactured at our dedicated
manufacturing facility located in West Sacramento, California. We also maintain a manufacturing process engineering and development facility in Santa Clara, California, and a manufacturing and
research and development facility in Bedford, Massachusetts to support our instrumentation products. All of our instrument and array manufacturing facilities comply with Good Manufacturing Practices
as a subset of the Quality System Regulation (21 CFR 820).

Currently,
we have physical capacity under optimal conditions to produce more than 32,000 wafers annually. We will continue to invest in additional capital equipment for our West
Sacramento facility to both increase production capacity and increase the flexibility of this capacity to produce a broader range of products. The actual number of probe arrays we are able to
manufacture depends on the available equipment capacity, the yield of probe arrays that pass quality control testing as well as the number of probe arrays manufactured on each wafer.

We
test selected probe arrays from each wafer and selected probes on such probe arrays. We therefore rely on in-process and internal quality control procedures, including
controls on the manufacturing process and sample testing, to verify the correct completion of the manufacturing process. In addition, we and our customers rely on the accuracy of genetic sequence
information contained in the public databases upon which our products are based. Our probe array manufacturing process is designed to allow us to meet our performance specifications before arrays are
shipped. We have a customer inquiry and complaint process in place and we rely on this process to identify and resolve product performance issues that may arise from time to time.

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, as 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, as any such delays or interruptions could in turn delay our ability to
produce probe arrays or other components for

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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 additional high throughput markets such as toxicogenomics, pharmacogenomics, clinical and applied testing applications. Our research and development effort is divided into the major
areas of basic research, product research and development and manufacturing process development. Our research and development expenses for the years ended December 31, 2003, 2002 and 2001, were
$65.9 million, $69.5 million and $68.2 million, respectively.



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 initial focus is on basic technology research including high throughput systems, high
resolution chip fabrication and detection, genotyping, gene expression and analysis of the human transcriptome and of other model organism genomes. We are focusing our genotyping research efforts on
the development of new assays principally designed to perform whole genome analysis at various resolutions. We believe that products based on this research will ultimately help researchers to develop
more effective therapeutics and help identify the diagnostic markers and tests useful in clinical applications.



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. Our research and
development efforts are intended to continue to develop new products based on information from the human and other genomes of model organisms as well as new genotyping and DNA analysis products. In
addition, we intend to continue developing custom product lines for both expression and DNA analysis so that customers can analyze gene expression or DNA variability for any organism. We plan
continued software and instrumentation development efforts to enhance the performance and level of automation of our entire GeneChip® system solution.



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 chips closely following Moore's Law. Moore's Law is the observation that the number of transistors per square inch on a silicon chip had doubled every 18 months since the
silicon chip was invented. To date, we have also been able to achieve rapid advances in genetic information content, reducing commercial product feature size from 100 microns in 1994 to 11 microns in
2003. We are continuing research aimed at

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using
smaller feature technology in commercial products and implementing novel, cost-effective packaging approaches for the small array formats including packaging these into the standard
industry microtitre plate format.

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 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 projects and the commercialization of our current and future products. We have been issued 266
patents in the United States and we hold approximately 444 pending United States patent applications. Many of these patents and applications have been filed and/or issued in one or more foreign
countries. 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 diversion of our effort and our efforts may not be
successful. (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 clinical applications 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.

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In
the gene expression monitoring and DNA analysis fields, existing competitive technologies include gel-based sequencing using instruments provided by companies such as
Applied Biosystems, Beckman Coulter and Amersham Biosciences. Other companies developing or marketing potentially competitive DNA array technology include: Agilent Technologies, Inc., Amersham
Biosciences K.K. (pending acquisition by GE), Applied Biosystems, Inc., Axon Instruments, Inc., BD Biosciences Clontech, CombiMatrix Corporation, Digital Gene Technologies, Inc.,
febit ag, Illumina, Inc., Lynx Therapeutics, Inc., Nanogen, Inc., NimbleGen Systems, Inc., Sequenom, Inc., Xeotron, Inc., and Visible Genetics Inc.
(recently acquired by Bayer). 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.

In
Japan, Amersham Biosciences K.K., from which we have transitioned to our own direct sales operation during 2003, is a competitor, as well as a licensee of certain of our technology.
In addition, we have several other third party licensees that could offer products that compete with our product offering.

The
market for clinical applications products derived from gene discovery is currently limited and highly competitive, with several large institutional corporations already having
significant market share. Established diagnostic companies could compete with us by developing new products. Companies such as Abbott Laboratories, Becton Dickinson, Bayer AG, Roche, Johnson &
Johnson, bioMérieux and Beckman Coulter 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. 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. During the course of 2003 we have significantly expanded our network of approved service providers in America, Japan and Europe. 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 clinical
applications 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.

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 that may be developed by us or our collaborative partners. In particular, diagnostic products developed by us or our collaborators may require regulatory approval by
governmental agencies when distributed outside of the research environment.

Commercially
available diagnostic tests are regulated as medical devices and in most cases are subject to rigorous testing and other approval procedures by the United States Food and
Drug Administration (the "FDA") in the United States and similar health authorities in other countries. Obtaining these clearances or approvals and the compliance with these regulations require the

26

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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. Moreover, various federal and state statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and marketing of such products or components of such products. Additionally, the FDA's Quality System Regulations ("QSR") may
apply if we manufacture arrays as components for use in diagnostic products developed by our partners.

Medical
device laws and regulations are also in effect in 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 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 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 payors 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 payor, or is experimental, unnecessary or inappropriate.
Furthermore, third-party payors are increasingly challenging the prices charged for health care products and services. The trend towards managed health care in the United States, which could control
or significantly influence the purchase of health care products and services, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower
prices for health care products and services commercialized by our customers and collaborative partners. This could reduce the amount of future royalty payments that may be due to us on such product
sales or services. The cost containment measures that health care providers are instituting and the impact of any health care reform may also adversely affect the profits of our customers and
collaborative partners. As a result, pharmaceutical and biotechnology companies may choose to reduce or eliminate certain research and development programs that utilize our products.

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. In addition, 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 December 31, 2003, we had 871 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 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.

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Seasonality

Customer purchasing patterns do not show significant seasonal variation, although demand for instrumentation systems is usually highest in the fourth quarter of
the calendar year as customers spend unused budget allocations before the end of the financial year.

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 industry. Our
operations are treated as one segment as we only report operating information on a total enterprise level to our chief operating decision-makers. Further, resource allocations are also made at the
enterprise level by our chief operating decision-makers.

Financial Information About Geographic Areas

During the year ended December 31, 2003, we made significant investments in Japan as we transitioned from a distributor sales model to direct sales. We
began selling our products direct to customers in Japan in January 2003. However, our distributor, Amersham Biosciences K.K. continued to handle order processing, stockholding, physical
distribution and customer invoicing on our behalf through the year ended December 31, 2003. As of December 31, 2003, our distributor agreement with Amersham Biosciences K.K. terminated.

We
expect to see increased sales growth in international regions than within the United States until our sales more closely match other mature providers of tools to the life sciences
businesses.

Our
consolidated product and product related revenue from customers outside of the United States for fiscal years 2003, 2002 and 2001 were $127.8, $88.0 and $62.9 million, or
45.5%, 35.4% and 32.3%, respectively, of our consolidated product and product related revenue. A summary of revenues from external customers attributed to each of our geographic areas for the fiscal
years ended December 31,
2003, 2002 and 2001, is included in Note 17 of the Notes to Consolidated Financial Statements included in this report.

Available Information

Our internet address iswww.affymetrix.com. 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 Securities and Exchange Commission (SEC). In addition, copies of the Annual Report will be made 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 ishttp://www.sec.gov.

ITEM 2. PROPERTIES

The following chart indicates the facilities that we own or lease, the location and size of each such facility and their designated use. We believe that these
facilities are sufficient to meet our business needs in the foreseeable future.

|Location        |  | Approximate
Square Feet |  | Operation                          |  | Own or Lease
(Expiration)
|--------------- |  | ----------------------- |  | ---------------------------------- |  | -------------------------
|Bedford         |  | 80,000 sq. ft.          |  | R&D, manufacturing, administrative |  | Lease expires 2011       
|Emeryville      |  | 11,000 sq. ft.          |  | Software development               |  | Lease expires 2005       
|Osaka, Japan    |  | 710 sq. ft.             |  | Administrative                     |  | Lease expires 2005       
|Santa Clara     |  | 92,000 sq. ft.          |  | R&D, administrative                |  | Lease expires 2013       
|                |  | 108,000 sq. ft.         |  | Administrative                     |  | Lease expires 2013       
|Singapore       |  | 1,700 sq. ft.           |  | Administrative                     |  | Lease expires 2004       
|Sunnyvale       |  | 31,000 sq. ft.          |  | R&D                                |  | Lease expires 2008       
|                |  | 57,000 sq. ft.          |  | Administrative                     |  | Lease expires 2010       
|Tokyo           |  | 11,000 sq. ft.          |  | Administrative                     |  | Lease expires 2005       
|United Kingdom  |  | 10,000 sq. ft.          |  | Administrative                     |  | Lease expires 2016       
|West Sacramento |  | 52,000 sq. ft.          |  | Manufacturing                      |  | Own (facility and land)  

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ITEM 3. LEGAL PROCEEDINGS

GENERAL

We have been in the past and continue to be a party to litigation which has consumed and may in the future continue to consume substantial financial and
managerial resources and which could adversely affect our business, financial condition and results of operations. If in any pending or future intellectual property litigation involving us or our
collaborative partners, we are found to have infringed the valid intellectual property rights of third parties, we, or our collaborative partners, could be subject to significant liability for
damages, could be required to obtain a license from a third party, which may not be available on reasonable terms or at all, or could be prevented from manufacturing and selling our products. In
addition, if we are unable to enforce our patents and other intellectual property rights against others, or if our patents are found to be invalid or unenforceable, third parties may more easily be
able to introduce and sell DNA array technologies that compete with our GeneChip® technology, and our competitive position could suffer. We expect to devote substantial financial and
managerial resources to protect our intellectual property rights and to defend against the claims described below as well as any future claims asserted against us. Further, because of the substantial
amount of discovery required in connection with any litigation, there is a risk that confidential information could be compromised by disclosure.

Applera Corporation Litigation

On July 5, 2000, Applera Corporation and related corporate plaintiffs ("Applera") filed a lawsuit in the United States District Court for the District of
Delaware alleging that certain of our products infringe five Applera patents related to processes for making oligonucleotides and reagents that we purchased from Applera licensed vendors. Applera
served us with the complaint on October 16, 2000. On January 30, 2001, we filed a motion to dismiss Applera's lawsuit pending in Delaware for lack of subject matter jurisdiction. On
January 25, 2001, we filed a declaratory judgment action against Applera in the United States District Court for the Southern District of New York seeking, among other things, a declaration
that we have not infringed any of Applera's subject patents, which lawsuit was stayed by the Court in New York pending the Delaware Court's ruling on the aforementioned motion to dismiss. On
September 27, 2001, the District Court for the District of Delaware granted our motion to dismiss for lack of subject matter jurisdiction. On October 3, 2001, the New York Court restored
the New York case to active status.

On
April 17, 2002, the New York Court heard oral arguments on Applera's motions to bifurcate or dismiss certain of our claims, including claims of breach of contract and antitrust
violations by Applera. On May 24, 2002, the Court rejected Applera's motion to dismiss our breach of contract and antitrust claims and agreed to bifurcate and stay discovery on antitrust issues
as well as on all damages issues. Following the Court's order, on June 6, 2002, Applera filed its counterclaim in the New York case alleging infringement of four of the five patents originally
asserted in the Delaware action. We filed a motion seeking summary judgment that the last to expire of Applera's subject patents had, in fact, expired as a matter of law in 2001 in accordance with a
terminal disclaimer that had been filed in the Patent Office during prosecution of that patent. On December 24, 2002, the court granted our motion. As a result of the Court's ruling, it is now
clear that all of the patents asserted by Applera have expired.

On
December 16, 2003, the Court heard argument on our three motions for summary judgment that the Applera patents are unenforceable due to inequitable conduct before the
U.S.P.T.O. and that certain of the Applera patent claims are invalid for anticipation and inoperability. On January 27, 2004, the Court granted our motion for summary judgment on anticipation
and invalidated many of the claims in the '066 and '418 patents. The Court denied our motion for summary judgment on the issue of the inoperability of the '679 patent. The Court denied our motion for
summary judgment on

29

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inequitable
conduct, but ordered a bench trial on that issue. Following the Court's summary judgment rulings, on February 23, 2004 the parties announced to the Court that they had reached a
settlement agreement. On March 12, 2004, we completed the settlement with Applera. Under the terms of the settlement, we are not required to pay any sums to Applera or license any of Applera's
patents and, as such, the settlement is not expected to result in a material adverse effect on our business, financial condition and results of operations.

Purported Shareholder Class Action Lawsuits

On April 10, 2003, two individuals filed a purported shareholder class action lawsuit under the federal securities laws in the United States District Court
for the Northern District of California. The defendants in this case include the Company, three of its executive officers and one outside director. The lawsuit relates to our January 29, 2003
announcement of our financial expectations for 2003 and subsequent announcement on April 3, 2003, updating our financial guidance for the first quarter of 2003. The lawsuit alleges, among other
things, that our January 29, 2003 financial guidance was misleading and GlaxoSmithKline plc sold our shares during the first quarter of 2003 while in possession of material nonpublic
information. On June 10, 2003, the plaintiffs in this action filed a notice of voluntary dismissal of the lawsuit without prejudice, and the Court granted the dismissal by order dated
June 12, 2003.

On
May 20, 2003, two other individuals filed a second purported shareholder class action lawsuit in the United States District Court for the Northern District of California that
is substantively identical to the one filed on April 10, 2003. The second lawsuit alleges the same claims against the same defendants on behalf of the same purported class of shareholders
(those who purchased securities of Affymetrix between January 29, 2003 and April 3, 2003) as the earlier-filed lawsuit. This case is still in the pleading stage. On September 5,
2003, the Court granted the plaintiffs' unopposed motion for appointment of themselves as lead plaintiffs and approved their selection of lead counsel for the purported class. The plaintiffs filed an
amended complaint on November 7, 2003. Affymetrix and the individual defendants filed a motion to dismiss the amended complaint on December 22, 2003 and on March 11, 2004 the
Court granted the motion to dismiss without prejudice in order to allow the plaintiffs the opportunity to attempt to remedy the pleading defects in their amended complaint if they choose to do so.

We
believe that the claims set forth in the purported class action lawsuit are without merit. However, we cannot be sure that we will prevail in these matters. Our failure to
successfully defend against these allegations could result in a material adverse effect on our business, financial condition and results of operations.

Multilyte Litigation

Multilyte Ltd., a British corporation, and Affymetrix have commenced legal proceedings in the United States, United Kingdom and German courts to address
allegations made by Multilyte that we infringe certain patents owned by Multilyte (the "Multilyte patents") by making and selling the GeneChip® DNA microarray products.

In
the actions pending in Germany, on July 18, 2003, Multilyte filed proceedings in the state court of Dusseldorf, alleging infringement of the Multilyte patents. On
October 16, 2003, the Dusseldorf court held its first hearing in the case and ruled that the case be divided into two formally separate cases (one dealing with European patent EP 0 134 215 and
the other with European patent EP 0 304 202). The trial date for the actions pending in the Dusseldorf court are scheduled for August 10, 2004. In a separate action in Germany, on
October 15, 2003, we commenced nullity proceedings in German Federal Patent Court in Munich alleging that the German part of Multilyte's two European patents are

30

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invalid.
Trial date for the action pending in the German Federal Patent Court in Munich is scheduled for June 28 and 29, 2004.

In
the action pending in the U.K., on August 14, 2003, we commenced proceedings in the English High Court seeking a declaratory judgment that the Multilyte patents are not
infringed and are invalid. On September 25, 2003, Multilyte counterclaimed in the U.K. proceedings, alleging that we infringed the Multilyte patents in the U.K. and claiming damages, an
injunction and legal costs. The English High Court has directed that the issues of whether the Multilyte patents are valid and whether they have been infringed by us are to be heard together. The
trial of the action in the English High Court is set to begin on October 11, 2004. Multilyte sought a stay of the UK proceedings. The English High Court denied Multilyte's motion.

In
the action pending in the U.S., on August 13, 2003, we commenced proceedings in the United States District Court for the Northern District of California seeking a declaratory
judgment that eight Multilyte patents are not infringed and are invalid. Multilyte has agreed that we do not infringe five of the eight named patents. On October 24, 20003, we filed an amended
complaint seeking a declaratory judgment as to three of the original eight named patentsU.S. Patents 5,432,099, 5,599,720 and 5,807,755. On November 12, 2003, Multilyte filed an
answer to our complaint for
declaratory judgment and asserted counterclaims against us alleging infringement of the three patents named by us in our complaint. Multilyte has voluntary submitted the three patents in suit to the
United States Patent and Trademark Office for voluntary re-examination. Typically, re-examination proceedings take at least 12 months. A Markman hearing in which the
Court will construe the scope of the claims of the Multilyte patents in this action is scheduled for May 24, 2004, and a trial date is scheduled for January 2005.

We
believe that Multilyte's claims are without merit and have filed the declaratory judgment and nullity actions to protect our interests. However, we cannot be sure that we will prevail
in these matters. Our failure to successfully defend against these allegations could result in a material adverse effect on our business, financial condition and results of operations.

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 in the United States District Court for the Eastern 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 Affymetrix 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.

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, that we are entitled to sell our remaining inventory of Enzo reagent labeling kits, 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

31

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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 Southern District of New York has related our case. We have also filed
a motion to transfer Enzo's Eastern District of New York complaint to the Southern District of New York which was heard on January 30, 2004. The Eastern District of New York granted our motion
and transferred the case to the Southern District of New York.There is no trial date in this action.

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 our interests. However, we cannot be
sure that we will prevail in these matters. Our failure to successfully defend against these allegations could result in a material adverse effect on our business, financial condition and results of
operation.

Administrative Litigation and Proceedings

Our intellectual property is expected to be subject to significant additional administrative and litigation actions. For example, in Europe and Japan, third
parties are expected to oppose significant patents that we own or control. Currently, Multilyte Ltd. and ProtoGene Laboratories, Inc. are parties that have filed oppositions against our
EP 0-619-321 patent in the European Patent Office, and PamGene B.V. has filed an opposition against our EP 0-728-520. Also, Abbott Laboratories,
Applera, Clondiag and CombiMatrix are parties in opposition against our EP 0-834-575. Abbott Laboratories, CombiMatrix, PamGene B.V., Applera and Dr. Peter Schneider
have filed oppositions against our EP 0-834-576. CombiMatrix has filed an opposition against EP 0-695-941. These procedures will result in the patents
being either upheld in their entireties, allowed to issue in amended form in designated European countries, or revoked.

Further,
in the United States, we expect that third parties will continue to "copy" the claims of our patents in order to provoke interferences in the United States Patent &
Trademark Office, and we may copy the claims of others. These proceedings could result in our patent protection being significantly modified or reduced, and could result in significant costs and
consume substantial managerial resources.

At
this time, we cannot determine the outcome of any of the matters described above.

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, 2003.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER           MATTERS

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

Low

High2002First Quarter

$
21.19

$
41.95Second Quarter

$
19.21

$
29.49Third Quarter

$
13.80

$
24.08Fourth Quarter

$
19.50

$
29.172003First Quarter

$
21.13

$
29.93Second Quarter

$
16.25

$
28.47Third Quarter

$
18.76

$
26.45Fourth Quarter

$
20.45

$
26.56


As
of March 1, 2004, there were approximately 425 holders of record of our common stock.

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.

Recent Sales of Unregistered Securities.

Since January 1, 2001, the Company has sold the following securities without registration under the Securities Act of 1933:



The
issuances of these securities were exempt from registration under the Securities Act pursuant to Section 4(2).

33

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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 balance sheet data
as of December 31, 2003 and 2002 and statements of operations data for each of the three years in the period ended December 31, 2003 are derived from audited consolidated financial
statements included in this Form 10-K. You should read this table in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Item 8, "Financial Statements and Supplementary Data."

|                                                                                                     |                                                       | Year Ended December 31,  |         
|---------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------ | --------
|
|
|Consolidated Statement of Operations Data:                                                           |                                                       |                          |         
|Revenue(1):                                                                                          |                                                       |                          |         
|                                                                                                     | Product sales                                         |                          | $       
|                                                                                                     | Product related revenue                               |                          |         
|                                                                                                     |                                                       |                          |         
|                                                                                                     | Total product and product related revenue             |                          |         
|                                                                                                     | Royalties and other revenue                           |                          |         
|                                                                                                     | Revenue from Perlegen Sciences                        |                          |         
|                                                                                                     |                                                       |                          |         
|                                                                                                     |                                                       | Total revenue            |         
|                                                                                                     |                                                       |                          |         
|Cost and expenses(1):                                                                                |                                                       |                          |         
|                                                                                                     | Cost of product sales                                 |                          |         
|                                                                                                     | Cost of product related revenue                       |                          |         
|                                                                                                     | Cost of revenue from Perlegen Sciences                |                          |         
|                                                                                                     | Research and development                              |                          |         
|                                                                                                     | Selling, general and administrative(2)                |                          |         
|                                                                                                     | Merger related costs(3)                               |                          |         
|                                                                                                     | Amortization of deferred stock compensation(3)        |                          |         
|                                                                                                     | Amortization of goodwill and purchased intangibles(4) |                          |         
|                                                                                                     | Charge for acquired in-process technology(5)          |                          |         
|                                                                                                     |                                                       |                          |         
|                                                                                                     |                                                       | Total costs and expenses |         
|                                                                                                     |                                                       |                          |         
|Income (loss) from operations                                                                        |                                                       |                          | 17,544  
|Interest income and other, net(6)                                                                    |                                                       |                          | 16,662  
|Interest expense                                                                                     |                                                       |                          | (17,358 
|                                                                                                     |                                                       |                          |         
|Income (loss) before income taxes                                                                    |                                                       |                          | 16,848  
|Income tax provision                                                                                 |                                                       |                          | (2,563  
|                                                                                                     |                                                       |                          |         
|Net income (loss)                                                                                    |                                                       |                          | 14,285  
|Preferred stock dividends                                                                            |                                                       |                          |        
|                                                                                                     |                                                       |                          |         
|Income (loss) applicable to common stockholders                                                      |                                                       | $                        | 14,285  
|                                                                                                     |                                                       |                          |         
|Basic and diluted income (loss) applicable to common stockholders                                    |                                                       | $                        | 0.24    
|                                                                                                     |                                                       |                          |         
|Weighted-average shares used in computing basic income (loss) applicable to common stockholders(7)   |                                                       |                          | 58,860  
|                                                                                                     |                                                       |                          |         
|Weighted-average shares used in computing diluted income (loss) applicable to common stockholders(7) |                                                       |                          | 60,583  
|                                                                                                     |                                                       |                          |         
|Balance Sheet Data:                                                                                  |                                                       |                          |         
|Cash, cash equivalents, and available-for-sale securities                                            |                                                       | $                        | 459,883 
|Working capital                                                                                      |                                                       |                          | 192,778 
|Total assets                                                                                         |                                                       |                          | 700,164 
|Long-term obligations(6)                                                                             |                                                       |                          | 166,586 
|Accumulated deficit                                                                                  |                                                       |                          | (198,659
|Total stockholders' equity                                                                           |                                                       |                          | 165,055 

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34

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35

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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
MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including "Item 1: Business"; "Item 6: Selected Financial Data";
and "Item 8: Financial Statements and Supplementary Data." The various sections of this MD&A 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.

Our Industry

Our industry is affected by a number of factors that influence its size and development. These factors include 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 funding for basic and disease-related research, the amount of capital and ongoing expenditures allocated to research and development spending by
biotechnology and pharmaceutical and diagnostic companies, the application of genomics to new areas including clinical
diagnostics, agriculture, human identity and consumer goods, and the availability of genetic markers and signatures of diagnostic value.

Our Business and Financial Results

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, Europe and Japan. We also sell our products through life science supply specialists acting as authorized distributors in the Middle East, India and
Asia Pacific regions.

Prior
to the year ended December 31, 2003, we incurred losses each year since our inception, and as a result have an accumulated deficit of approximately $198.7 million at
December 31, 2003. Our losses have resulted principally from costs incurred in research and development, manufacturing and from selling, general and administrative costs associated with our
operations, including the costs of patent related litigation. These costs have historically exceeded our revenues and interest income, which to date have been generated principally from product sales,
product related revenue, technology access and other license fees, royalties, collaborative research and development agreements, and from interest earned on cash and investment balances.

Our
financial results are substantially dependent on our ability to generate significant revenues and maintain profitability. Revenues are impacted principally by our ability to expand
our customer base and increase sales of our products to new and existing customers, and by the price of product sales, royalties, design and license fees. To maintain or gain market acceptance of our
products in the face of the introduction of new products by our competitors, we may have to reduce or discount the price of

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our
products resulting in an adverse impact on revenues and gross margins. In addition to the above, our ability to enter into additional supply, license and collaborative arrangements and our ability
and that of our collaborative partners to successfully manufacture and commercialize products incorporating our technologies in new applications and in new markets will also impact our revenue and
profitability.

Our
expenses are impacted principally by the cost of goods for products; the magnitude and duration of research and development; sales and marketing costs; and general and administrative
expenses.
General and administrative expenses are particularly subject to variation as a result of fluctuations in the intensity of legal activities. Our operating results may also fluctuate significantly
depending on other factors which include: the outcome of ongoing or future litigation; the need for additional royalty bearing licenses; adoption of new technologies; the cost, quality and
availability of reagents and components; regulatory actions; and third-party reimbursement policies.

Company Outlook

In general, as management looks ahead to 2004, the outlook for our Company continues to be favorable for a number of reasons. We anticipate that continued
improvements in access to capital markets will favorably influence sales in the biotech arena, that the current regulatory market appears poised to leverage genetic information tools to improve the
approval process for new drugs, and that we will see continued standardization on our technology platform for both existing and new applications. Although it is difficult to predict product demand in
2004, we expect continued growth in the total number of probe array and related supply sales as the number of experiments on GeneChip® technology continues to grow. Additionally, due to
the strong adoption of our new line of DNA analysis products in the second half of 2003, we anticipate that these products will make a meaningful contribution to our array growth in 2004. Management
also expects that we will continue to demonstrate strong operational leverage as we grow into our infrastructure.

Going
forward, management is focused on growing the business and increasing its profitability. A key driver will be increasing the breadth of scientific and clinical applications of our
technology, while also industrializing, automating and standardizing our technology to open new markets and drive revenue growth. The aim of our automation efforts is to reduce the cost per
experiment, minimize operator variability and dramatically improve experimental throughput. We believe that our automation solutions will enjoy the same success in the high-throughput
markets as our bench-top systems have in the research markets. In addition, we are industrializing our processes through collaborations with industry leaders such as Beckman Coulter,
Caliper Life Sciences and others.

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 accounting principles generally accepted in the United States. 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.

37

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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 price should be allocated
among the deliverable elements, when to recognize revenue for each element, and the period over which revenue should be recognized. We recognize revenue for delivered elements only when the fair
values of undelivered elements are known and there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between deliverable elements might impact the timing
of revenue recognition, but would not change the total revenue recognized on the contract.

ACCOUNTS RECEIVABLE

We evaluate the collectibility 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 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 reserves to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves 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.

38

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ACCOUNTING FOR ACQUIRED TECHNOLOGY RIGHTS

Our intangible assets are comprised principally of technology rights. We apply judgment in determining the useful lives of our intangible assets and whether such
assets are impaired. Factors we consider include the life of the underlying patent, the existence of competing technology and potential obsolescence, which can all adversely impact the expected period
of benefit from the use of the technology. To date, we have not experienced any impairment on our intangible assets.

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 SFAS 5, "Accounting for Contingencies." Any reserves recorded may change in the future due to new developments in each matter.

RESULTS OF OPERATIONS

F. Hoffmann-La Roche Ltd.

In January 2003, we expanded our collaboration with Roche by granting Roche access to our GeneChip® technologies to develop and commercialize
GeneChip® laboratory tests for DNA analysis, genotyping and resequencing applications, as well as for RNA expression analysis, in a broad range of human disease areas. Using our
GeneChip® technologies, Roche is seeking to develop and market tests for diseases such as cancer, osteoporosis, cardiovascular, metabolic, infectious and inflammatory diseases. Under the
terms of the collaborative agreement, Roche paid us an up-front, nonrefundable license fee of $70.0 million. We are recognizing this amount as a component of product related revenue
over the research and product development phase which is expected to approximate five years. The agreement, which is subject to Roche's option to terminate on December 31, 2007 or any time on
or after June 2, 2013, with one year's prior notice, includes a broad range of other compensation payable by Roche to us throughout the life of the agreement based on minimum annual royalties
on sales of diagnostic kits, milestone payments for technical and commercial achievements, a manufacturing and supply agreement, and related license installments.

Perlegen Sciences, Inc.

On January 9, 2003, we entered into an agreement with Perlegen to license certain Perlegen technologies that are expected to accelerate our plan to design
and commercialize microarrays for whole genome and candidate region DNA analysis. In addition to broadening our access to Perlegen technologies, this licensing agreement advances by approximately
three years our prior commercialization rights to the Perlegen single nucleotide polymorphism (SNP) database for development of chip-based products. Under the terms of the licensing
agreement, we paid Perlegen a total of $15.0 million in cash and granted Perlegen a $3.0 million credit which will be applied against the margin on our future sales of chips to Perlegen.
The credit can only be used against the margin on chips that are utilized by Perlegen for revenue generating activities. As of December 31, 2003, Perlegen has used approximately
$2.0 million of the credit. This credit expires in three years. This new agreement also eliminates any future royalty obligations for array products that we commercialize based on information
contained in Perlegen's SNP database. We engaged an independent third party to conduct a valuation analysis of the licenses acquired. Based upon that independent valuation, we recorded a charge of
approximately $10.1 million related to in-process research and development in the

39

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first
quarter of 2003. The remaining $4.9 million has been recorded as an intangible asset and will be amortized over the useful lives of the various components of the asset ranging from six to
ten years.

On
January 27, 2003, Perlegen announced that it completed the first closing of a private financing round raising an aggregate of approximately $30.2 million. As a result of
this financing, our collective equity ownership in Perlegen (including that of our affiliates) was reduced to less than 45%, and a previously existing voting trust applicable to a portion of our
shares was terminated. In December 2003, we sold 950,000 shares of Perlegen reducing our collective equity ownership in Perlegen (including that of our affiliates). We continue to account for
our ownership in Perlegen under the equity method (see Note 10 of the Notes to the Consolidated Financial Statements included in this report).

The
following discussion compares the historical results of operations for the years ended December 31, 2003, 2002 and 2001.

REVENUE

Certain amounts in 2002 and 2001 have been reclassified to conform to the 2003 presentation, exclusive of revenue from Perlegen.

PRODUCT SALES

The components of product sales are as follows (in thousands):

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Probe arrays and related supplies

$
160,010

$
155,380

$
101,518

$
4,630

$
53,862Instruments


62,738


46,214


46,048


16,524


166Total product sales

$
222,748

$
201,594

$
147,566

$
21,154

$
54,028


Total
product sales increased to $222.7 million for the year ended December 31, 2003 compared to $201.6 million for the year ended December 31, 2002. The
increase was primarily due to growth in instrument revenue. The new GeneChip® Scanner 3000 and GeneChip® Fluidics Station 450 were launched in the first half of fiscal year
2003, resulting in an increasing number of customer instrument upgrades throughout the year. Unit sales of GeneChip® related supplies also increased during the year as a result of an
expanded product offering in the third quarter and overall increased product acceptance. These increases were partially offset by a decrease in unit sales of our full GeneChip® instrument
systems for the year ended December 31, 2003 compared to the year ended December 31, 2002. Overall, both the average selling price and the number of units of our GeneChip®
probe arrays remained relatively consistent with those in 2002, with the inclusion of the transition of our flagship Human chip product from a two chip set to one chip.

40

---

Total product sales increased to $201.6 million in 2002, from $147.6 million in 2001. The increase was primarily due to growth in unit sales and an increase in the average
sales price of GeneChip® probe arrays and related supplies. Revenue from sales of probe arrays and related supplies increased to $155.4 million in 2002, up $53.9 million from
$101.5 million in 2001. Revenue from the sale of instruments remained relatively consistent increasing from $46.0 million in 2001 to $46.2 million in 2002.

PRODUCT RELATED REVENUE

The
components of product related revenue are as follows (in thousands):

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Subscription fees

$
26,208

$
32,125

$
34,987

$
(5,917
)
$
(2,862
)Service and other


18,451


14,819


12,383


3,632


2,436License fees and milestone revenue


13,373








13,373


Total product related revenue

$
58,032

$
46,944

$
47,370

$
11,088

$
(426
)


Total
product related revenue increased to $58.0 million for the year ended December 31, 2003 compared to $46.9 million for the year ended December 30, 2002.
The increase in product related revenue for the year ended December 31, 2003 was primarily due to an increase in license fees of $13.1 million earned in connection with the Roche
agreement signed in January 2003, an increase in service revenue associated with the continued growth in our installed base of equipment and the inclusion of custom probe array design fees of
$3.9 million in 2003 as a result of the full commercialization of our custom product offering. These increases were partially offset by a decrease in software revenue and a decrease in
subscription fees earned under our EasyAccess agreements as we transition customers to volume-based discounting on product sales. Revenues from custom probe array design fees of
$5.5 million are reported in royalties and other revenue in 2002.

For
the year ended December 31, 2002, product and product related revenue decreased to $46.9 million from $47.4 million for the year ended December 31, 2001.
The decrease was due to a decline in subscription fees earned under our EasyAccess agreements and due to fewer new software agreements being signed during the year. This was offset to
some extent by an increase in service revenue, primarily due to the continued growth in our installed base of equipment.

ROYALTY AND OTHER REVENUE (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Royalties and other revenue

$
10,556

$
19,777

$
18,447

$
(9,221
)
$
1,330


Royalty
and other revenue decreased to $10.6 million for the year ended December 31, 2003 from $19.8 million for the year ended December 31, 2002. The decline
was primarily due to the reporting of custom probe array design fees as product related revenue beginning in January 2003, as a result of the full commercialization of our custom product
offering and due to the decline in new license agreements and royalties, as customers moved from licensing our non-core spotting technology to purchasing our GeneChip® probe arrays. In
addition, in the second quarter of 2002, we recognized approximately $1.8 million of deferred revenue related to the early completion of a long-term contractual arrangement under
which we had no further obligations. The decrease was partially offset by increased research activity related to an existing grant. Royalty and other revenue increased from $18.4 million for
the year ended December 31, 2001 to $19.8 million for the year ended December 31, 2002. The

41

---

increase
was due to higher design fees earned during fiscal 2002 partially offset by a decrease in royalty fees as companies began to purchase our GeneChip® probe arrays rather than
manufacturing their own arrays.

REVENUE FROM PERLEGEN SCIENCES, INC. (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Revenue from Perlegen Sciences

$
9,460

$
21,559

$
11,491

$
(12,099
)
$
10,068


Revenue
from the sale of wafers to Perlegen, a related party, decreased to $9.5 million for the year ended December 31, 2003, compared to $21.6 million for the year
ended December 31, 2002. The decline was consistent with the decrease in Perlegen's contractual obligations to the Company.

Revenue
from the sale of wafers to Perlegen, a related party, increased to $21.6 million for the year ended December 31, 2002 from $11.5 million for the year ended
December 31, 2001. The increase was due to a number of factors. First, there were additional sales of wafers to Perlegen during 2002. Second, Perlegen was our wholly owned subsidiary until
March 30, 2001 and therefore, its activities in the first quarter of 2001 were consolidated into our financial results. Lastly, when Perlegen uses the wafers or arrays supplied by us in
commercial activities for the benefit of third parties, then Perlegen is obligated to make additional payments for such wafers so that we receive commercial margins on these wafers. We recognized a
gross margin of $0.6 million in 2002 related to payments for such wafers. The revenue associated with the margin on third party activities represented approximately 2.8% of the total revenue
received from Perlegen.

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

For the years ended
December 31,

Dollar /
Percentage
change from2003

2002

2001

2002

2001Total gross margin on product sales

$
142,590

$
118,997

$
78,245

$
23,593

$
40,752Total gross margin on product related revenue


48,375


41,226


44,169


7,149


(2,943
)Total gross margin on product and product related revenue

$
190,965

$
160,223

$
122,414

$
30,742

$
37,809Product gross margin as a percentage of product sales


64.0%


59.0%


53.0%


5.0%


6.0%Product related gross margin as a percentage of product related revenue


83.4%


87.8%


93.2%


(4.4%
)

(5.4%
)


Total
gross margin on product sales improved to 64.0% in 2003 from 59.0% in 2002. The increase was primarily due to higher gross margins on instruments resulting from higher average
selling prices and a lower cost of production associated with the internal manufacturing of the GeneChip® scanner 3000, as the Company transitioned from the GeneArray® scanner
2500 which was manufactured for us under a supply agreement. The transition to internal manufacturing resulted in increased production volume in our Bedford facility. Gross margins on probe arrays
were also slightly higher in fiscal 2003 compared to fiscal 2002 as a result of lower production costs per unit due to increased manufacturing efficiencies. Gross margin on product related revenue
decreased by 4.4% to 83.4% for the year ended December 31, 2003 due to the inclusion of costs associated with our custom probe array design fees beginning in January 2003 as a result of
the full commercialization of our custom product offering, as

42

---

well
as a decrease in software revenue and subscription fees. The impact on margins from the decrease in software revenue and subscription fees were partially offset by an increase in license revenue
from the Roche agreement signed in January 2003.

Total
gross margins on product sales improved to 59.0% in 2002, up from 53.0% in 2001. Principal factors that favorably impacted gross margins included: favorable changes in product
sales mix, increased production volumes of 33% for probe arrays resulting in improved overhead absorption, and improved probe array manufacturing yields. Total gross margins on product related revenue
decreased by 5.4% from 93.2% to 87.8% for the year ended December 31, 2002 and 2003, respectively. The decrease was due to a decline in our subscription fees in 2002.

COST OF PERLEGEN REVENUES (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Cost of revenue from Perlegen Sciences

$
9,460

$
21,000

$
11,491

$
(11,540
)
$
9,509


Pursuant
to a supply agreement with Perlegen, we sell whole wafers to Perlegen for use in Perlegen's research and development activities at our fully burdened cost of manufacturing. Cost
of Perlegen revenue decreased to approximately $9.5 million in 2003 from $21.0 million in 2002. The decrease in the cost of Perlegen revenue is related to the reduction in Perlegen
revenue, both of which are declining as Perlegen's contractual obligations to purchase wafers decreases. Cost of Perlegen revenue increased to $21.0 million in 2002 from $11.5 million in
2001. The increase was due to increased sales of wafers to Perlegen during fiscal 2002. In addition, Perlegen was a wholly owned subsidiary of Affymetrix until March 30, 2001 and therefore, its
activities in the first quarter of 2001 were consolidated into our financial results.

RESEARCH AND DEVELOPMENT EXPENSES (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Research and development

$
65,909

$
69,520

$
68,197

$
(3,611
)
$
1,323


Research
and development expenses, which primarily consist of basic research, product research and development and manufacturing process and development, decreased to
$65.9 million for the year ended December 31, 2003, compared to $69.5 million for the year ended December 31, 2002. The decrease in research and development expenses for
the year ended December 31, 2003 was primarily due to the reporting of costs associated with custom probe array design fees as cost of product related revenue starting in January 2003 as
a result of the full commercialization of our custom product offering and the decrease in product development costs associated with the release of two GeneChip® instrument systems. These
decreases were partially offset by an increase in R&D consulting fees. In 2002 and in prior years, costs of custom probe array design fees were reported as research and development expense. Costs of
custom probe array design fees were $3.8 million for the year ended December 31, 2002.

Research
and development expenses, increased to $69.5 million in 2002, up from $68.2 million in 2001. In 2001, research and development expenses included
$4.5 million of expenses associated with Perlegen that are not included in 2002. Excluding the expenses related to Perlegen in fiscal 2001, the increase in 2002 was primarily due to expanded
investments in basic research as well as in the development costs associated with our new GeneChip® Scanner 3000.

We
believe a substantial investment in research and development is essential to a long-term sustainable competitive advantage and critical to expansion into additional high
throughput markets

43

---

such
as toxicogenomics, pharmacogenomics and clinical applications. We expect research and development spending to increase as basic research and product research and development efforts continue to
expand.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Selling, general and administrative

$
104,797

$
96,260

$
94,374

$
8,537

$
1,886


Selling,
general and administrative expenses increased to $104.8 million compared to $96.3 million for the years ended December 31, 2003 and 2002, respectively. The
increase in selling, general and administrative expenses in 2003 was primarily due to an increased investment in our sales and support infrastructure in Japan and Europe, and an increase in general
legal expenses related to our current litigation. These increases were partially offset by the recovery of a $1.3 million account receivable that was reserved for in the second half of 2002.

For
the year ended December 31, 2002, selling, general and administrative expenses increased to $96.3 million up from $94.4 in the year ended December 31, 2001. The
increase in selling, general and administrative expenses was primarily due to an increase of $15.0 million related to increased investments in the worldwide sales, marketing, technical support,
and administrative infrastructures. Specifically in 2002, we significantly expanded our European operations and began to establish our sales and support infrastructure in Japan. This growth in
spending was partially offset by a decrease of $13.1 million in legal expense as the result of settlement of litigation.

Selling,
general and administrative expenses are expected to continue to increase as we expand sales, marketing, and technical support functions, management and administrative functions,
prosecute and defend our intellectual property position and defend against claims made by third parties in ongoing litigation. We expect legal costs to vary substantially as the intensity of legal
activity changes. There can be no assurance that we have adequately estimated our exposure for potential damages associated with pending or future litigation.

AMORTIZATION OF DEFERRED STOCK COMPENSATION (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Amortization of deferred stock compensation

$
2,238

$
8,388

$
12,663

$
(6,150
)
$
(4,275
)


Upon
the acquisition of Neomorphic in October 2000, the fair value of unvested common stock subject to restricted stock agreements and the intrinsic value of the unvested options
held by employees were deducted from the purchase price and allocated to deferred stock compensation. Deferred stock compensation of $30.0 million is being amortized to compensation expense
over the remaining vesting term, generally two to four years. The fair value of unvested options held by non-employees was also deducted from the purchase price and will be periodically
revalued as they vest in accordance with applicable accounting guidance. Stock compensation expense has continued to decrease from $12.7 million in 2001, to $8.4 million in 2002, to
$2.2 million for the year ended December 31, 2003, and will continue to decrease as a result of the completed amortization of deferred stock compensation related to many of the
Neomorphic employees. In addition, during fiscal 2003, $0.6 million in deferred compensation was removed in connection with the termination of employment of a former Neomorphic employee. The
expense for fiscal 2002 and 2003 is also impacted by the fact that the Company ceased amortizing approximately $4.4 million of deferred stock compensation related to an executive level
Neomorphic employee who commenced a leave of absence during the latter part of fiscal 2001. The

44

---

remaining
$4.4 million balance will be amortized if and when the employee resumes active status with the Company.

AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLES (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Amortization of goodwill and purchased intangibles

$
937

$
1,125

$
6,223

$
(188
)
$
(5,098
)


For
fiscal 2003 and 2002, the amortization of goodwill and purchased intangibles represents the amortization of intangibles related to the acquisition of Neomorphic, Inc. The
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") on January 1, 2002. In accordance with SFAS 142, we
reclassified $0.8 million of assembled workforce to goodwill and ceased the amortization of goodwill. Prior to January 1, 2002, the amortization of goodwill and purchased intangibles
includes the amortization of goodwill in addition to the amortization of intangibles.

We
completed our review for potential impairment of goodwill as of June 30, 2003, and concluded there was no impairment of goodwill. In addition, there were no indicators of
potential impairment at December 31, 2003.

CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Charge for acquired in-process technology

$
10,096





$
10,096




During
the year ended December 31, 2003, we recorded a charge of approximately $10.1 million related to acquired in-process technology. The charge associated
with licensing the Perlegen SNP database was included in acquired in-process technology in the consolidated statement of operations as the database has no alternative future use to us.
Specifically, the database contains over one million SNPs and will be used in our research and development program to develop high quality, high content DNA analysis microarray products. The value of
the SNP database license was determined by estimating the net present value of future cash flows expected from the sale of DNA analysis products developed from this database using a present value
discount rate of 30%, which is based on our weighted cost of capital adjusted for the risks associated with the in-process research project in which the SNP database content will be used.
Upon entering into this license agreement in January 2003, our DNA analysis development program was approximately 33% complete.

The
estimates used by us in valuing the licensed 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.

INTEREST INCOME AND OTHER, NET (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Interest income and other, net

$
16,662

$
13,535

$
27,655

$
3,127

$
(14,120
)


Interest
income and other, net increased by approximately $3.2 million, from $13.5 million in 2002 to $16.7 million in 2003. The increase in interest income and
other, net was primarily due to the

45

---

$1.4 million
gain realized on the sale of some of our Perlegen stock, along with the acquisition by a publicly traded entity in April 2003 of a privately-held biotechnology
company in which we owned an equity investment. Consistent with Emerging Issues Task Force 91-5, "Nonmonetary Exchange of Cost Method Investments", we realized a $2.6 million gain
on the acquisition date and recognized an additional gain of $1.8 million upon the subsequent sale of a portion of these securities. This was partially offset by a decrease in interest income
as a result of a lower average balance in our marketable securities account, lower returns on our cash and marketable securities portfolio and by a $0.9 million realized loss related to an
other-than-temporary write down of our investment in a venture capital limited partnership.

In
2002, we recorded a $4.0 million write down related to an other-than-temporary decline in the value of our investment in Orchid Biosciences, Inc.
and had a $0.8 million realized loss related to related to an other-than-temporary write down of our investment in a venture capital limited partnership.

Interest
income and other, net decreased to $13.5 million in 2002, down from $27.7 million in 2001. The decrease in interest income and other, net was primarily due to a
decrease in interest income because
we experienced lower returns on our cash and marketable securities portfolio and also due to the other than temporary write down of our investment discussed in the preceding paragraph. In addition, we
recognized fewer gains on the repurchase of our convertible subordinated notes. In 2001, gains from the repurchase of our convertible subordinated notes were reported as extraordinary income. The
gains were reclassified during fiscal 2002 from extraordinary income in accordance with Financial Accounting Standard ("FAS") 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" to interest and other income, net.

INTEREST EXPENSE (in thousands)

For the years ended
December 31,

Dollar change
from2003

2002

2001

2002

2001Interest expense

$
(17,358
)
$
(19,730
)
$
(19,880
)
$
2,372

$
150


Interest
expense relates primarily to interest paid on our 5% and 4.75% convertible subordinated notes due in 2006 and 2007. Interest expense decreased to $17.4 million in 2003
from $19.7 million in 2002 because in the second quarter of fiscal 2003 we repurchased $53.4 million principal amount of our 4.75% convertible subordinated notes due in 2007, and
$48.0 million principal amount of our 5.0% convertible subordinated notes due in 2006. As a result of the repurchases, interest expense decreased by $2.9 million. This was partially
offset by interest expense and foreign exchange losses relating to certain in-licensing payments. Interest expense remained relatively consistent from 2001 to 2002. We expect to see
interest expense decrease in future years with the issuance of the 0.75% senior convertible notes, and as a result of the redemptions of the 5% convertible subordinated notes in January 2004
and the 4.75% convertible subordinated notes in February 2004. The savings will be offset in fiscal 2004 however, by the write off of approximately $8.0 million in issuance costs and the
redemption fees related to both the 5% and 4.75% convertible subordinated notes.

INCOME TAX PROVISION

The
provision for income tax was approximately $2.6 million in 2003, up from $0.7 million in 2002. In 2003, the provision consists of current taxes accrued on the profits
attributable to our foreign operations, federal alternative minimum tax, and state taxes. In 2002, the provision consists of current taxes accrued on the profits attributable to our foreign operations
and state taxes.

Statement
of Financial Accounting Standards 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. Based upon the weight of available evidence, which includes the historical operating

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performance
and the reported cumulative net losses in all prior years, at December 31, 2003, we provided a full valuation allowance against our net deferred tax assets.

As
of December 31, 2003, we had federal net operating loss carryforwards for income tax purposes of approximately $162.0 million, which will expire at various dates in 2008
through 2021, if not utilized. In addition, we have federal research and development credit carryforwards of approximately $7.1 million, which expire at various dates beginning in 2008 through
2023, if not utilized. Utilization of the net operating loss and tax credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the
Internal Revenue Code. We believe the effect of such limitations will not result in the expiration of the net operating loss and tax credit carryforwards before utilization.

The
provision for income tax was approximately $0.7 million in 2002, up from $0.3 million in 2001. Consistent with fiscal 2002, the 2001 provision consists of current taxes
accrued on the profits attributable to our foreign operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cashflow (in thousands)

For the years ended
December 31,2003

2002

2001Net cash provided by (used in) operating activities

$
89,858

$
31,279

$
(26,942
)Net cash provided by (used in) investing activities


86,396


(25,147
)

73,250Net cash provided by financing activities


32,140


3,605


5,224Effect of foreign currency translation on cash and cash equivalents


(354
)

(644
)

Net increase in cash and cash equivalents

$
208,040

$
9,093

$
51,532


Net
cash provided by operating activities was $89.9 million in 2003 compared to $31.3 million in 2002. The improvement in net cash flow from operating activities was
primarily due to the increase in sales experienced during the year ended December 31, 2003, reduced inventory levels as a result of those sales, and an increase in deferred revenue resulting
from cash received in January 2003 pursuant to the Roche transaction. Cash flows from operating activities also increased from $26.9 million used in operating activities in fiscal 2001
to $31.3 million provided by operating activities in fiscal 2002. The improvement in net cash flow from operating activities in 2002 was primarily due to an increase in sales, an increase in
our accounts payable and accrued liability balances, and a reduction in our
inventory balance as we focused on reducing our inventory levels. This was partially offset by an increase in our accounts receivable. In 2002 and 2001, the net cash used for operations was primarily
to fund our operating losses as well as our working capital requirements. In addition, operating lease commitments increased during 2002 by $41.4 million due to the signing of four lease
extensions for some of our facilities in California and the addition of a lease associated with our office in Japan.

During
2003, our investing activities, other than purchases, sales and maturities of available-for-sale securities, primarily consisted of capital expenditures,
which totaled $12.4 million in 2003. In addition, $7.5 million in cash was utilized to fund strategic investments and $6.3 million was used to purchase an option to license
technology and technology rights. For the year ended December 31, 2002, net cash used in investing activities was attributable to $24.4 million in 2002 used on capital expenditures,
$4.0 million which was invested in non-marketable equity securities and another $7.3 million used to purchase technology rights. In fiscal 2001, $33.4 million was used
for capital expenditures. In addition, we provided a loan of $4.0 million to Nuvelo. The loan bears interest at 7.5%, matures in 2006 and is

47

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repayable
by Nuvelo at any time. The loan balance plus accrued interest was $4.6 million as of December 31, 2003. At December 31, 2003, Nuvelo was in compliance with its financial
covenants under the loan agreement. Capital expenditures for 2001 through 2003 included investments in facilities and production and laboratory equipment.

Net
cash provided by financing activities was $32.1 million in 2003. During 2003, we repurchased $53.4 million principal amount of our 4.75% convertible subordinated notes
due in 2007 and $48.0 million principal amount of our 5.0% convertible subordinated notes due in 2006. Additionally, in December 2003 we raised $120.0 million from the sale of
0.75% senior convertible notes due 2033. Interest on the 0.75% senior convertible notes is due June 15th and December 15th of each year, beginning on
June 15, 2004 and will be paid using cash from operations. The proceeds from the sale of our 0.75% senior convertible notes along with our cash generated from operating activities were used to
fund the redemption of our 5.0% notes in January 2004 and the redemption of our 4.75% convertible subordinated notes in February 2004. As a result of the redemptions, we expect our cash
from operating activities to increase in years subsequent to 2004 given that we will now be paying at a lower interest rate on a lower outstanding balance. We also received proceeds of
$12.5 million during the year from the issuance of our common stock through our stock option plans. Net cash from operating activities decreased to $3.6 million in 2002 from
$5.2 million in 2001. In 2002, we repurchased $1.1 million face value of the convertible subordinated notes that bear interest at 4.75% per annum for cash consideration of
$0.9 million. In addition, proceeds of $4.5 million resulted from the exercise of stock options. During 2001, we repurchased $5.0 million face value of the convertible
subordinated notes that bear interest at 4.75% per annum for cash consideration of $3.3 million, which was offset by proceeds of $7.8 million resulting from the issuance of stock
options.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As of December 31, 2003, we are not involved in any SPE transactions.

The
impact that our contractual obligations as of December 31, 2003 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):

Total

2004

2005-2006

2007-2008

After 2008Convertible subordinated notes (1)

$
267,460

$
267,460

$


$


$
Senior convertible notes (2)


120,000








120,000


Operating leases


61,981


6,792


14,055


14,434


26,700Purchase commitments (3)


8,900


8,900








Other commitments (4)


6,580


4,070


1,010


1,000


500Total contractual obligations

$
464,921

$
287,222

$
15,065

$
135,434

$
27,200


---

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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, 2003, we had cash, cash equivalents, and available-for-sale securities of approximately $459.9 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 and planned capital expenditures (estimated to be between $23.0 million and
$27.0 million for the year ending December 31, 2004), for the foreseeable future. However, this expectation is based on our current operating, financing and capital expenditure plans,
which are subject to change, and therefore we could require additional funding. We also expect that our capital requirements will increase over the next several years as we expand our worldwide
commercial operations, expand our manufacturing capabilities, increase our investments in third parties and expand our research and development efforts. Our long-term capital expenditure
requirements will depend on numerous factors, including: the expansion of commercial scale manufacturing capabilities; our ability to maintain existing collaborative and customer arrangements and
establish and maintain new collaborative 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, 2003, 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.

FORWARD-LOOKING INFORMATION AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

This Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially from
any forward-looking statements made by or on behalf of Affymetrix, this section includes a discussion of important factors that could affect our actual future results.

We have a history of operating losses and may incur future losses.

We have experienced significant operating losses since inception. We incurred net losses of $1.6 million in 2002 and $33.1 million in 2001. Although
we had net income of $14.3 million for the

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year
ended December 31, 2003 we had an accumulated deficit of approximately $198.7 million as of such date. We expect to continue experiencing fluctuations in our operating results and
cannot assure sustained profitability. Our losses have resulted principally from costs incurred in research and development, manufacturing and from selling, general and administrative costs associated
with our operations, including the costs of patent related litigation.

Our
ability to generate significant revenues and maintain profitability is dependent in large part on our ability to expand our customer base, increase sales of our current products to
existing customers, manage our expense growth, and enter into additional supply, license and collaborative arrangements as well as on our ability and that of our collaborative partners to successfully
manufacture and commercialize products incorporating our technologies in new applications and in new markets.

Our quarterly results have historically fluctuated significantly and may continue to fluctuate unpredictably, which could cause our stock price to decrease.

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. However, we have historically 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. 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. In particular, our revenue growth and
profitability depend on sales of our GeneChip® products. Factors that could cause sales for these products to fluctuate include:



Some
additional factors that could cause our operating results to fluctuate include:



Many
of these factors have impacted, and may in the future impact, the demand for our products and our quarterly operating results. Although we are expanding our customer base, our
revenues are generated from a relatively small number of pharmaceutical and biotechnology companies and academic research centers. We expect that these customers will in the aggregate continue to
account for a substantial portion of revenues for the foreseeable future. In the event that we continue to experience cautious capital spending by academic and biotech customers and general economic
weakness in the biotechnology sector as we did in the first quarter of 2003, revenue expectations from these customer segments may continue to fluctuate.

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Our business depends on research and development spending levels for pharmaceutical and biotechnology companies and academic and governmental research institutions.

We expect that our revenues in the foreseeable future will be derived primarily from products and services provided to pharmaceutical and biotechnology companies
and academic, governmental and other research institutions. Our success will depend upon their demand for and use of our products and services. Our operating results may fluctuate substantially due to
reductions and delays in research and development expenditures by these customers. For example, reductions in capital expenditures by these customers may result in lower than expected instrumentation
sales and similarly, reductions in operating expenditures by these customers could result in lower than expected GeneChip® array sales. These reductions and delays may result from factors
that are not within our control, such as:



We may lose customers if we are unable to manufacture our products and 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 cannot
be sure we fully understand all of the factors that affect our manufacturing processes or product performance. Manufacturing and product quality issues may arise as we increase production rates at our
manufacturing facility and launch new products. As a result, we may experience difficulties in meeting customer, collaborator and internal demand, in which case we could lose customers or be required
to delay new product introductions, and demand for our products could decline. Although we rely on internal quality control procedures to verify our manufacturing process, due to the complexity of our
products and manufacturing process, 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
GeneChip® arrays and GeneChip® instruments. 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 genetic sequence 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. 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,

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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.

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 vendors 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, such as the hybridization oven, certain reagent kits and lithographic masks as well as certain raw materials used in the
synthesis of probe arrays, are currently available only from a single source or limited sources. For example, we have relied on Enzo Life Sciences, Inc. to manufacture various labeling kits
recommended for the processing of samples for use with probe arrays in expression analysis applications. In connection with Enzo's lawsuit against us, effective November 12, 2003, Enzo
terminated its agreement under which Affymetrix served as a non-exclusive distributor of certain reagent labeling kits supplied by Enzo. (See Part II, Item 1, Legal Proceedings.)
Although we intend to meet the demands of our customers' needs by selling our own GeneChip® brand labeling kits, our inability to do so either as a result of Enzo's legal proceedings
against us or our inability to obtain a supply of components from other vendors that meet our customers' performance and quality demands, could result in lost revenue and harm our business, financial
condition and results of operations.

In
addition, components of our manufacturing equipment and certain raw materials used in the synthesis of probe arrays are available from one of only a few suppliers. 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 or under acceptable terms.

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 competitive advantage. 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 there can be
no assurance 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 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 investors that any such patent applications will not have priority over our patent
applications. 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. In addition, we have incurred and may in future periods incur substantial costs in litigation to defend against patent suits brought by third parties and when we initiate such suits. We
currently are engaged in litigation regarding intellectual property rights with Multilyte Ltd and Enzo Life Sciences, Inc. For additional information concerning intellectual property
litigation and administrative proceedings, see the section of this Form 10-K entitled "Legal Proceedings."

In
addition to patent protection, we also rely upon copyright and trade secret protection for our confidential and proprietary information. There can be no assurance, however, that such
measures will

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provide
adequate protection for our copyrights, trade secrets or other proprietary information. In addition, there can be no assurance that trade secrets and other proprietary information will not be
disclosed, 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 be no assurance that we can effectively protect our copyrights, trade secrets or other proprietary information. If we cannot obtain, maintain or enforce intellectual property
rights, competitors can design probe array systems similar to our GeneChip® technology.

Our
success 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, including reagents used in probe array synthesis and in probe array assays, probe array scanners, synthesis techniques,
polynucleotide amplification techniques,
assays, and probe arrays. 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.

We expect to face increasing competition.

The market for clinical applications products is currently limited and highly competitive, with several large companies already having significant market share.
Companies such as Abbott Laboratories, Becton Dickinson, Bayer AG, Celera Diagnostics, Roche Diagnostics, Johnson & Johnson, bioMérieux and Beckman Coulter 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 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.

Future
competition will likely come from existing competitors as well as other companies seeking to develop new technologies for analyzing genetic information. For example companies such
as Applied Biosystems and Agilent Technologies have recently introduced new products for gene expression research and analysis. 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. In the clinical applications 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 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.

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. Currently, our significant collaborative partners include Qiagen GmBH for the sample preparation and purification systems, Invitrogen Corporation
for reagents and Ingenuity Systems Inc for analytical software. We collaborate with both Beckman Coulter Inc. and Caliper Life Sciences in the development of automation for
GeneChip® technology applications for use in drug discovery and development. Roche and bioMérieux are collaborative partners in the development of chip products for

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medical
diagnostic and applied testing markets. Relying on these or other collaborative relationships is risky to our future success because:



Our success depends on the continuous development of new products.

We compete in markets that are new, intensely competitive, highly fragmented and rapidly changing, and many of our current and potential competitors have
significantly greater financial, technical, marketing and other resources. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access
to proprietary genetic content. The continued success of our GeneChip® products will depend on our ability to produce products with smaller feature sizes, our ability to dice the wafer,
and create greater information capacity at our current or lower costs. If we fail to keep pace with emerging technologies our products will become uncompetitive, our pricing and margins will decline
and our business will suffer.

Our success in penetrating emerging market opportunities in health management depends on the ability of our GeneChip® technologies to be used in clinical applications for
diagnosing and informing the treatment of disease.

The clinical applications of GeneChip® technologies for diagnosing and informing the treatment of disease is an emerging market opportunity in health
management that seeks to improve the effectiveness of health care by collecting information about DNA variation and RNA expression in patients at various times from prognosis, through diagnosis and on
to the end of therapy. Our success depends on our ability to continue to explore and develop market opportunities in health management for clinical applications of our GeneChip®
technologies. These markets, however, are new and emerging and there can be no assurances that they will develop as quickly as we expect or that they will reach their full potential. In addition,
although we believe that there will be clinical applications of our GeneChip® technologies that will be utilized for diagnosing and informing the treatment of disease, there can be no
assurance that the application of our GeneChip® technologies in health management will achieve technical or commercial success.

Risks associated with technological obsolescence and emergence of standardized systems for genetic analysis.

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 a similar or higher density to our microarray technology. Other companies may begin to

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offer
products that are directly competitive with, or are technologically superior to our products. Although we know of no such technology at the present time, there can be no guarantee that we will
be able to maintain our technological advantages over emerging technologies in the future. Over time, we will need to respond to technological innovation in a rapidly changing industry. In addition,
although we believe that we are recognized as a market leader in creating systems for genetic analysis in the life sciences, standardization of tools and systems for genetic research is still ongoing
and there can be no assurance that our products will emerge as the standard for genetic research. The emergence of competing technologies and systems as market standards for genetic research may
result in our products becoming uncompetitive and could cause our business to suffer.

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

To assist our sales and support activities, we have entered into distribution agreements through certain distributors, principally in markets outside of North
America, Europe and Japan. 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. Although we have invested significant other resources to expand our direct sales force and our technical and support staff, including
the opening of a Tokyo office in January 2003 to provide direct sales in that region, we may not be able to establish a sufficiently sized global sales, marketing or technical support
organization to sell, market or support our products globally.

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

A significant amount of the Company's revenue is currently generated from sales outside the United States. Though such transactions are denominated in both U.S.
dollars and foreign currencies, the Company's 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.

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.

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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 clinical applications products, which could have a
material adverse effect on our business, financial condition and results of operations.

Healthcare reform and restrictions on reimbursements may limit our returns on 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 governing reimbursement for clinical testing services by
government authorities, private health insurers and other organizations. In the U.S., third-party payor 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.

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

The United States Food and Drug Administration 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 before the product can be sold outside the U.S. Commercialization of
in-vitro diagnostic products outside of the research environment that we or our collaborators may develop, may depend upon successful completion of clinical trials. Clinical development is
a long, expensive and an 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 of testing.
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.

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Because our business depends on key executives and scientists, our inability to recruit and retain these people could hinder our business expansion plans.

We are highly dependent on our officers and our senior scientists and engineers, including scientific advisors. Our product development and marketing efforts
could be delayed or curtailed if we are unable to attract or retain key talent.

We
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. Some of them also consult for companies that may be our competitors. A scientific advisor's other obligations
may prevent him or her from assisting us in developing our technical and business strategies.

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. We will not be able to
expand our business if we are unable to hire, train and retain a sufficient number of qualified employees. There can be no assurance that we will be successful in hiring or retaining qualified
personnel and our failure to do so could have a material adverse impact on our business, financial condition and results of operations.

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
fluctuations in the market price and valuations of the securities that we hold in other companies will 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.

Future acquisitions may disrupt our business and distract our management.

We have previously engaged in acquisitions and may do so in the future in order to exploit technology or market opportunities. If we acquire another company, we
may not be able to successfully integrate the acquired business into our existing business in a timely and non-disruptive manner or at all. Furthermore, an acquisition may not produce the
revenues, earnings or business synergies that we anticipate. If we fail to integrate the acquired business effectively or if key employees of that business leave, the anticipated benefits of the
acquisition would be jeopardized. The time, capital management and other resources spent on an acquisition that fails to meet our expectations could cause our business and financial condition to be
materially and adversely affected. In addition, acquisitions can involve substantial charges and amortization of significant amounts of deferred stock compensation that could adversely affect our
results of operations.

The market price of our common stock has been extremely volatile.

The market price of our common stock is extremely volatile. To demonstrate the volatility of our stock price, during the twelve-month period ending on
March 1, 2004, the volume of our common stock traded on any given day has ranged from 286,700 to 19,405,300 shares. Moreover, during that period, our common stock has traded as low as $16.25
per share and as high as $35.30 per share.

Furthermore,
volatility in the stock price of other companies has often led to securities class action litigation against those companies. For example, purported securities class action
lawsuits were filed against us in the United States District Court for the Northern District of California after a drop in our stock price following our April 3, 2003 announcement updating our
financial guidance for the first

57

---

quarter
of 2003. For additional information concerning these purported securities class action lawsuits, see the section of this Form 10-K entitled "Legal Proceedings." 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our exposure to interest rate risk relates primarily to our investment portfolio and our convertible subordinated notes. Fixed rate securities and borrowings 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 and floating rate
borrowings may lead to additional interest expense if interest rates increase. 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 minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of less than three years.

The
table below presents principal amounts and related weighted interest rates by year of maturity for our assets and debt obligations and the fair value of each as of
December 31, 2003 and 2002.

Periods of MaturityFair Value
at December 31,
20032004

2005

2006

Thereafter

TotalASSETS:Available-for-sale securities

$
336,121

$
57,087

$
10,151

$


$
403,359

$
404,294Average interest rate


1.3%


3.1%


4.2%Loan receivable

$


$


$
4,640

$


$
4,640

$
4,640Average interest rate








7.5%LIABILITIES:5% convertible subordinated notes due 2006

$
102,000

$


$


$


$
102,000

$
104,068Average interest rate


5.00%4.75% convertible subordinated notes due 2007

$
165,460

$


$


$


$
165,460

$
160,645Average interest rate


4.75%0.75% senior convertible notes due 2033

$


$


$


$
120,000

$
120,000

$
120,000Average interest rate











0.75%


Periods of MaturityFair Value
at December 31,
20022003

2004

2005

Thereafter

TotalASSETS:Available-for-sale securities

$
127,368

$
202,053

$
2,100

$


$
331,521

$
333,109Average interest rate


3.2%


4.2%


5.1%Loan receivable

$


$


$


$
4,300

$
4,300

$
4,300Average interest rate











7.5%LIABILITIES:5% convertible subordinated notes due 2006

$


$


$


$
150,000

$
150,000

$
133,500Average interest rate











5.00%4.75% convertible subordinated notes due 2007

$


$


$


$
218,900

$
218,900

$
180,877Average interest rate











4.75%


58

---

We derive a portion of our revenues in foreign currencies, predominantly in Europe and Japan. Historically, we have not hedged our foreign
currency exposures and have not had significant foreign currency differences. However, in 2002 we established a Foreign Exchange Risk Management Committee ("FXRMC") which has been chartered to review
and manage foreign currency exposures. In early 2003, the FXRMC began hedging activities by using currency forward contracts to manage a portion of the currency exposures created from our activities
denominated in foreign currencies. (See Note 1 of the notes to the Consolidated Financial Statements included in this report.) Our hedging program reduces, but does not entirely eliminate, the
impact of currency exchange rate movements.

We
hedge 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 is designed to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements. At December 31, 2003, total outstanding
contracts included the notional equivalent of $18.9 million in foreign currency forward exchange contracts with a fair market value of $(1.0) million. As of December 31, 2003, all
contracts were set to expire at various times through December 2004. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However,
to mitigate that risk we only contract with reputable institutions.

A
sensitivity analysis was performed on all of our foreign exchange derivatives as of December 31, 2003. This sensitivity analysis was based on a modeling technique that measures
the hypothetical market value resulting from a 10% shift in the value of exchange rates relative to the U.S. dollar. For our forward contracts, we used a hypothetical change made to the spot rates of
the currency. A 10% increase in the value of the U.S. dollar would lead to an increase in the fair value of our financial hedging instruments by $1.9 million. Conversely, a 10% decrease in the
value of the U.S. dollar would result in a decrease in the fair value of these financial instruments by $2.1 million.

We
are also exposed to foreign currency exchange rate risk inherent in our assets and liabilities predominately denominated in euros, yen and GBP. For most of these currencies we are a
net receiver of foreign currencies and therefore benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to those foreign currencies. We have performed a
sensitivity analysis as of December 31, 2003 and 2002, using a modeling technique that measures the change in the fair values
arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar with all other variables held constant. The foreign currency exchange
rates used were based on market rates in effect at December 31, 2003 and 2002. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates
would result in a loss of $0.4 million at December 31, 2003 and $0.3 million at December 31, 2002.

59

---



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  AFFYMETRIX, INC.

|                                                  |  | Page No.
|------------------------------------------------- |  | --------
|Report of Ernst & Young LLP, Independent Auditors |  | 61      
|Consolidated Balance Sheets                       |  | 62      
|Consolidated Statements of Operations             |  | 63      
|Consolidated Statements of Stockholders' Equity   |  | 64      
|Consolidated Statements of Cash Flows             |  | 65      
|Notes to Consolidated Financial Statements        |  | 66      

60

---



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To
the Board of Directors and Stockholders
Affymetrix, Inc.

We
have audited the consolidated balance sheets of Affymetrix, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2003. 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 auditing standards generally accepted in the 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,
2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States. 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.

As
discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets.

| |  | /s/ERNST & YOUNG LLP
| |  | --------------------

Palo
Alto, California,
January 23, 2004,
except for Note 19,
as to which the date is March 8, 2004.

61

---



AFFYMETRIX, INC.        CONSOLIDATED BALANCE SHEETS        (In thousands, except per share amounts)

|                                              |                                                                                                                                                       | December 31,               |         
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------
|
|ASSETS:                                       |                                                                                                                                                       |                            |         
|Current assets:                               |                                                                                                                                                       |                            |         
|                                              | Cash and cash equivalents (Note 19)                                                                                                                   |                            | $       
|                                              | Available-for-sale securities                                                                                                                         |                            |         
|                                              | Accounts receivable, net of allowances for doubtful accounts of $761 in 2003 and $2,835 in 2002                                                       |                            |         
|                                              | Inventories                                                                                                                                           |                            |         
|                                              | Prepaid expenses and other current assets                                                                                                             |                            |         
|                                              |                                                                                                                                                       |                            |         
|                                              |                                                                                                                                                       | Total current assets       |         
|Property and equipment, net                   |                                                                                                                                                       |                            | 62,611  
|Acquired technology rights, net               |                                                                                                                                                       |                            | 27,818  
|Goodwill                                      |                                                                                                                                                       |                            | 18,601  
|Notes receivable from employees               |                                                                                                                                                       |                            | 1,500   
|Other assets                                  |                                                                                                                                                       |                            | 28,333  
|                                              |                                                                                                                                                       |                            |         
|Total assets                                  |                                                                                                                                                       | $                          | 700,164 
|                                              |                                                                                                                                                       |                            |         
|LIABILITIES AND STOCKHOLDERS' EQUITY:         |                                                                                                                                                       |                            |         
|Current liabilities:                          |                                                                                                                                                       |                            |         
|                                              | Accounts payable and accrued liabilities                                                                                                              |                            | $       
|                                              | Deferred revenue  current portion                                                                                                                    |                            |         
|                                              | Convertible subordinated notes  short-term (Note 19)                                                                                                 |                            |         
|                                              | Other current liabilities                                                                                                                             |                            |         
|                                              |                                                                                                                                                       |                            |         
|                                              |                                                                                                                                                       | Total current liabilities  |         
|Deferred revenue  long-term portion          |                                                                                                                                                       |                            | 43,346  
|Other long-term liabilities                   |                                                                                                                                                       |                            | 3,240   
|Convertible notes                             |                                                                                                                                                       |                            | 120,000 
|Commitments and contingencies (Note 11)       |                                                                                                                                                       |                            |         
|Common stock purchase rights                  |                                                                                                                                                       |                            |        
|Stockholders' equity:                         |                                                                                                                                                       |                            |         
|                                              | Convertible redeemable preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued and outstanding at December 31, 2003 and 2002      |                            |         
|                                              | Common stock, $0.01 par value; 200,000 shares authorized; 59,454 and 58,504 shares issued and outstanding at December 31, 2003 and 2002, respectively |                            |         
|Additional paid-in capital                    |                                                                                                                                                       |                            | 370,304 
|Notes receivable from stockholders            |                                                                                                                                                       |                            | (428    
|Deferred stock compensation                   |                                                                                                                                                       |                            | (5,185  
|Accumulated other comprehensive (loss) income |                                                                                                                                                       |                            | (1,572  
|Accumulated deficit                           |                                                                                                                                                       |                            | (198,659
|                                              |                                                                                                                                                       |                            |         
|                                              |                                                                                                                                                       | Total stockholders' equity |         
|                                              |                                                                                                                                                       |                            |         
|                                              |                                                                                                                                                       | $                          | 700,164 
|                                              |                                                                                                                                                       |                            |         

See
Accompanying Notes

62

---



AFFYMETRIX, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share amounts)

|                                                                              |                                                    | Year Ended December 31,                   |        
|----------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------------------- | -------
|
|REVENUE:                                                                      |                                                    |                                           |        
|                                                                              | Product sales                                      |                                           | $      
|                                                                              | Product related revenue                            |                                           |        
|                                                                              |                                                    |                                           |        
|                                                                              |                                                    | Total product and product related revenue |        
|                                                                              | Royalties and other revenue                        |                                           |        
|                                                                              | Revenue from Perlegen Sciences                     |                                           |        
|                                                                              |                                                    |                                           |        
|                                                                              |                                                    | Total revenue                             |        
|                                                                              |                                                    |                                           |        
|COSTS AND EXPENSES:                                                           |                                                    |                                           |        
|                                                                              | Cost of product sales                              |                                           |        
|                                                                              | Cost of product related revenue                    |                                           |        
|                                                                              | Cost of revenue from Perlegen Sciences             |                                           |        
|                                                                              | Research and development                           |                                           |        
|                                                                              | Selling, general and administrative                |                                           |        
|                                                                              | Amortization of deferred stock compensation        |                                           |        
|                                                                              | Amortization of goodwill and purchased intangibles |                                           |        
|                                                                              | Charge for acquired in-process technology          |                                           |        
|                                                                              |                                                    |                                           |        
|                                                                              |                                                    | Total costs and expenses                  |        
|                                                                              |                                                    |                                           |        
|Income (loss) from operations                                                 |                                                    |                                           | 17,544 
|Interest income and other, net                                                |                                                    |                                           | 16,662 
|Interest expense                                                              |                                                    |                                           | (17,358
|                                                                              |                                                    |                                           |        
|Income (loss) before income taxes                                             |                                                    |                                           | 16,848 
|Income tax provision                                                          |                                                    |                                           | (2,563 
|                                                                              |                                                    |                                           |        
|Net income (loss)                                                             |                                                    | $                                         | 14,285 
|                                                                              |                                                    |                                           |        
|Basic and diluted net income (loss) per common share                          |                                                    | $                                         | 0.24   
|                                                                              |                                                    |                                           |        
|Weighted-average shares used in computing basic net income (loss) per share   |                                                    |                                           | 58,860 
|                                                                              |                                                    |                                           |        
|Weighted-average shares used in computing diluted net income (loss) per share |                                                    |                                           | 60,583 
|                                                                              |                                                    |                                           |        

See
Accompanying Notes

63

---



AFFYMETRIX, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands, except share amounts)

|                                                                 |                                                                                                                                            | Common Stock |   |   |     | Notes
Receivable
from
Stockholders |   |         |   | Accumulated
Other
Comprehensive
Income (Loss) |      |   |   |         |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------ | - | - | --- | ---------------------------------- | - | ------- | - | --------------------------------------------- | ---- | - | - | ------- | -
|
|
|Balance, December 31, 2000                                       |                                                                                                                                            | 57,143       |   | $ | 571 |                                    | $ | 341,541 |   | $                                             | (994 | ) | $ | (27,875 | )
|Comprehensive loss:                                              |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|                                                                 | Unrealized loss on available-for-sale securities of $375, net of reclassification adjustments for gains included in net loss of $5,829     |              |  |   |     |                                   |   |         |  |                                               |      |  |   |         | 
|Net loss                                                         |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               |     |   |   |        |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Comprehensive loss                                               |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Issuance of common stock upon exercise of stock options          |                                                                                                                                            | 864          |   |   | 9   |                                    |   | 7,834   |   |                                               |     |   |   |        |  
|Amortization of deferred stock compensation                      |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               |     |   |   | 13,002  |  
|Repayment of notes receivable from stockholders                  |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               | 765  |   |   |        |  
|Accretion of interest on notes receivable from stockholders      |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               | (405 | ) |   |        |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Balance, December 31, 2001                                       |                                                                                                                                            | 58,007       |   |   | 580 |                                    |   | 349,375 |   |                                               | (634 | ) |   | (14,873 | )
|Comprehensive loss:                                              |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|                                                                 | Unrealized loss on available-for-sale securities of $3,333, net of reclassification adjustments for gains included in net loss of $1,384   |              |  |   |     |                                   |   |         |  |                                               |      |  |   |         | 
|                                                                 | Foreign currency translation adjustment                                                                                                    |              |  |   |     |                                   |   |         |  |                                               |      |  |   |         | 
|Net loss                                                         |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               |     |   |   |        |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Comprehensive loss                                               |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Issuance of common stock upon exercise of stock options          |                                                                                                                                            | 497          |   |   | 5   |                                    |   | 4,535   |   |                                               |     |   |   |        |  
|Amortization of deferred stock compensation                      |                                                                                                                                            |             |   |   |    |                                    |   | 1,605   |   |                                               |     |   |   | 6,858   |  
|Accretion of interest on notes receivable from stockholders      |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               | (86  | ) |   |        |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Balance, December 31, 2002                                       |                                                                                                                                            | 58,504       |   |   | 585 |                                    |   | 355,515 |   |                                               | (720 | ) |   | (8,015  | )
|Comprehensive loss:                                              |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|                                                                 | Unrealized loss on available-for-sale securities of $6,827, net of reclassification adjustments for gains included in net income of $6,057 |              |  |   |     |                                   |   |         |  |                                               |      |  |   |         | 
|                                                                 | Unrealized loss on hedging contracts                                                                                                       |              |  |   |     |                                   |   |         |  |                                               |      |  |   |         | 
|                                                                 | Foreign currency translation adjustment                                                                                                    |              |  |   |     |                                   |   |         |  |                                               |      |  |   |         | 
|Net income                                                       |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               |     |   |   |        |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Comprehensive income                                             |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Issuance of common stock upon exercise of stock options          |                                                                                                                                            | 823          |   |   | 10  |                                    |   | 12,487  |   |                                               |     |   |   |        |  
|Issuance of common stock upon exercise of stock purchase right   |                                                                                                                                            | 127          |   |   |    |                                    |   | 3,000   |   |                                               |     |   |   |        |  
|Cancellation of common stock                                     |                                                                                                                                            |             |   |   |    |                                    |   | (106    | ) |                                               | 106  |   |   |        |  
|Repayment of notes receivable from stockholders                  |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               | 344  |   |   |        |  
|Reduction of deferred stock compensation for terminated employee |                                                                                                                                            |             |   |   |    |                                    |   | (592    | ) |                                               |     |   |   | 592     |  
|Amortization of deferred stock compensation                      |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               |     |   |   | 2,238   |  
|Accretion of interest on notes receivable from stockholders      |                                                                                                                                            |             |   |   |    |                                    |   |        |   |                                               | (158 | ) |   |        |  
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  
|Balance, December 31, 2003                                       |                                                                                                                                            | 59,454       |   | $ | 595 |                                    | $ | 370,304 |   | $                                             | (428 | ) | $ | (5,185  | )
|                                                                 |                                                                                                                                            |              |   |   |     |                                    |   |         |   |                                               |      |   |   |         |  

See Accompanying Notes

64

---



AFFYMETRIX, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

|                                                                       |                                                                        | Year Ended December 31,                                                                            |                                                            
|---------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -----------------------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                  |                                                                        |                                                                                                    |                                                            
|                                                                       | Net income (loss)                                                      |                                                                                                    | $                                                          
|                                                                       |                                                                        | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                            
|                                                                       |                                                                        |                                                                                                    | Depreciation and amortization                              
|                                                                       |                                                                        |                                                                                                    | Amortization of intangible assets                          
|                                                                       |                                                                        |                                                                                                    | Gain from repurchase of convertible notes                  
|                                                                       |                                                                        |                                                                                                    | Amortization of investment premiums, net                   
|                                                                       |                                                                        |                                                                                                    | Stock-based compensation                                   
|                                                                       |                                                                        |                                                                                                    | Write down of equity investments                           
|                                                                       |                                                                        |                                                                                                    | Realized gain on the sales of investments                  
|                                                                       |                                                                        |                                                                                                    | Gain on sale of technology rights                          
|                                                                       |                                                                        |                                                                                                    | Amortization of debt offering costs                        
|                                                                       |                                                                        |                                                                                                    | Accretion of interest on notes receivable from stockholders
|                                                                       |                                                                        |                                                                                                    | Loss on disposal of equipment                              
|                                                                       |                                                                        |                                                                                                    | Changes in operating assets and liabilities:               
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                  |                                                                        |                                                                                                    |                                                            
|                                                                       | Capital expenditures                                                   |                                                                                                    |                                                            
|                                                                       | Purchases of available-for-sale securities                             |                                                                                                    |                                                            
|                                                                       | Proceeds from sales and maturities of available-for-sale securities    |                                                                                                    |                                                            
|                                                                       | Purchase of non-marketable equity investments                          |                                                                                                    |                                                            
|                                                                       | Loans receivable                                                       |                                                                                                    |                                                            
|                                                                       | Collection of notes receivable from employees                          |                                                                                                    |                                                            
|                                                                       | Increase in notes receivable from employees                            |                                                                                                    |                                                            
|                                                                       | Proceeds from the sale of equipment                                    |                                                                                                    |                                                            
|                                                                       | Proceeds from the sale of technology rights                            |                                                                                                    |                                                            
|                                                                       | Purchases of technology rights                                         |                                                                                                    |                                                            
|                                                                       | Purchase of option to license technology                               |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                  |                                                                        |                                                                                                    |                                                            
|                                                                       | Issuance of common stock                                               |                                                                                                    |                                                            
|                                                                       | Repayment of notes receivable from stockholders                        |                                                                                                    |                                                            
|                                                                       | Issuance of senior convertible notes                                   |                                                                                                    |                                                            
|                                                                       | Repurchase of convertible subordinated notes                           |                                                                                                    |                                                            
|                                                                       | Payments on capital lease obligation                                   |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       |                                                                        |                                                                                                    |                                                            
|Cash and cash equivalents at beginning of year                         |                                                                        |                                                                                                    | 67,888                                                     
|                                                                       |                                                                        |                                                                                                    |                                                            
|Cash and cash equivalents at end of year                               |                                                                        | $                                                                                                  | 275,928                                                    
|                                                                       |                                                                        |                                                                                                    |                                                            
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |                                                                        |                                                                                                    |                                                            
|                                                                       | Acquisition of technology rights                                       |                                                                                                    | $                                                          
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       | Issuance of common stock upon exercise of common stock purchase rights |                                                                                                    | $                                                          
|                                                                       |                                                                        |                                                                                                    |                                                            
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                      |                                                                        |                                                                                                    |                                                            
|                                                                       | Interest paid                                                          |                                                                                                    | $                                                          
|                                                                       |                                                                        |                                                                                                    |                                                            
|                                                                       | Taxes paid                                                             |                                                                                                    | $                                                          
|                                                                       |                                                                        |                                                                                                    |                                                            

See Accompanying Notes

65

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AFFYMETRIX, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2003

NOTE 1NATURE OF OPERATIONS

Affymetrix is engaged in the development, manufacture, sale and service of systems for genetic analysis for use in the life sciences. 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® 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. Related microarray technology also offered by
Affymetrix includes instrumentation, software and licenses for fabricating, scanning, collecting and analyzing results from low density microarrays. The Company commenced the first commercial sale for
research use in August 1994, with broader commercial sales beginning in April 1996. 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, Europe and Japan. The Company also sells some of its products through life science supply specialists acting as authorized distributors in the Middle East, India and Asia Pacific regions.

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. (See Note 10).

Certain
amounts presented in the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. Revenue and cost of sales
amounts for the years ended December 31, 2002 and 2001, exclusive of revenue and cost of revenue related to Perlegen, have been reclassified to conform to the 2003 presentation.

USE OF ESTIMATES

The preparation of the 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

Historically, the functional currency of Affymetrix' European subsidiaries ("European subsidiaries") was the U.S. dollar. Effective January 1, 2002, the
Company changed the functional currency of its European subsidiaries to their respective local currencies due to the European subsidiaries' operations becoming more self-contained and
integrated within Europe. As a result, the financial statements of the Company's European subsidiaries and its Japanese subsidiary (which commenced operations in January 2003), have been
translated into U.S. dollars using the appropriate exchange rates with the resulting translation adjustments recorded directly to accumulated comprehensive income (loss).

66

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Currency
transaction gains and losses are recognized in interest income and other, net and were comprised of a $3.6 million net gain for 2003, a $2.7 million net gain for
2002 and a $1.2 million net loss for 2001.

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. During the quarter ended March 31, 2003, the Company began entering into foreign currency forward contracts to manage a
portion of the volatility of 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 year, and are accounted for as cashflow hedges. The effect
of exchange rate changes on foreign currency forward contracts is expected to offset the effect of exchange rate changes on the underlying hedged items. For these contracts, unrealized gains or losses
from the effective portion of the hedge is reported as a component of other comprehensive income (loss) in stockholders' equity and is reclassified using the specific identification method into
earnings in the same period or periods in which the hedged transaction affects earnings, and within the same consolidated statement of operations line item. The gain or loss from the ineffective
portion of the hedge in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in interest income and other, net during the period of
change. During the year ended December 31, 2003, all of the Company's hedges were deemed effective. The net realized foreign currency gains and losses related to the foreign currency forward
contracts was $1.2 million for the year ended December 31, 2003.

REVENUE RECOGNITION



Product sales as well as revenues from Perlegen Sciences, include sales of GeneChip® probe arrays and related instrumentation. Probe array 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.



Product related revenue includes subscription fees earned under EasyAccess agreements; license fees, milestones and royalties earned from
collaborative product development and supply agreements; service revenue; revenue from custom probe array design fees; and software revenue.

67

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Revenue
from subscription fees earned under EasyAccess agreements is recorded ratably over the related supply term.

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.
The Company accounts for multiple element arrangements under Emerging Issues Task Force Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple
Deliverables." 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. The
provisions of EITF 00-21 were adopted prospectively for revenue arrangements with multiple elements signed subsequent to June 30, 2003. The adoption of EITF 00-21 did
not have a material impact on our results of operations or financial condition.

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 only when undelivered elements are not essential to the functionality of delivered elements and the fair value for all undelivered elements is
known. 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.

Any
up-front, nonrefundable payments from collaborative product development agreements are recognized 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
related to extended warranty arrangements is deferred and recognized 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. In 2002, custom probe array design fees were included in
research revenue based on the fact that we had not fully commercialized this product offering.



Royalties and other revenue include royalties earned from third party license agreements and research revenue which mainly consists of amounts earned under
government grants. Additionally, other revenue includes fees earned through the license of the Company's intellectual property. In 2002, research revenue also included custom probe array design fees.

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

68

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payments
are recognized under the terms of the related agreement, generally upon notification of manufacture or shipment of a product by a licensee.

Research
revenue is mainly comprised of amounts earned under government grants. Research revenue is recorded in the period in which the associated costs are incurred. The costs
associated with these grants are reported as research and development expense.

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.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist of costs incurred for internal, contract 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

Statement of Financial Accounting Standards 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 be technologically feasible at the point a
working model of the software product is developed. Through December 31, 2003, for products developed by the Company, the period from attainment of technological feasibility to general release
has been brief and qualifying costs were not significant. Accordingly, the Company has not capitalized any qualifying software development costs in the accompanying consolidated financial statements.
The costs of developing routine enhancements are expensed as research and development costs as incurred because of the short time between the determination of technological feasibility and the date of
general release of the related products.

The
Company applies Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Historically,
internal use software costs were insignificant. During fiscal 2001 and 2002, the Company capitalized certain costs incurred to acquire internal use software, principally related to software coding,
designing system interfaces, installation and testing of the software. The Company also capitalized certain website development costs during fiscal 2001. For the years ended December 31 2002
and 2001, the Company capitalized approximately $2.0 million and $4.8 million, respectively, in development costs for internal use software primarily associated with the implementation
of our Enterprise Resource Planning system ("ERP") and our website. The Company began amortizing the costs associated with our website and our ERP system during the years ended December 31,
2001 and 2002 respectively, at the time when the software was ready for its intended use.

69

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ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs were $1.5 million for 2003, $1.1 million for 2002, and $1.4 million for
2001.

STOCK-BASED COMPENSATION

At December 31, 2003, the Company has six stock-based employee and non-employee director compensation plans, which are described more fully in
Note 15. The Company has elected to continue to follow the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees"("APB 25") and related Interpretations for these plans. During 2002, employee-based stock compensation relates to the modification of certain
previously granted awards. No stock-based employee compensation cost is reflected in reported results of operation for 2003 and 2001, as all options granted in those years had an exercise price equal
to the market value of the underlying common stock on the date of grant in accordance with APB 25.

The
following table illustrates the effect on reported net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, as amended by SFAS 148, to stock-based employee compensation (in thousands, except per share amounts):

Year Ended December 31,2003

2002

2001Net income (loss)as reported

$
14,285

$
(1,630
)
$
(33,121
)Add: Stock-based employee compensation expense included in reported net loss





1,605


Deduct: Total stock-based employee compensation expense determined under fair value method for all awards


(26,982
)

(40,676
)

(61,022
)Pro forma net loss

$
(12,697
)
$
(40,701
)
$
(94,143
)Net income (loss) per share:Basic and diluted net income (loss) per share  as reported

$
0.24

$
(0.03
)
$
(0.58
)Basic and diluted net loss per share  pro forma

$
(0.22
)
$
(0.70
)
$
(1.64
)


The
pro forma information above may not be representative of the effects on potential pro forma effects on results for future years.

The
fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 2003, 2002 and 2001 risk free interest rate of
2.0%, 1.9%, and 3.6%, respectively; a dividend yield of zero; volatility of 0.72, 0.81, and 0.79, respectively; and a weighted average expected option term of 3 years.

The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock volatility. Because the Company's employee stock options have characteristics significantly
different

70

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from
those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock options.

Based
on this calculation, the weighted average fair value of options granted during 2003, 2002 and 2001 was $10.72, $11.48 and $17.52, respectively. For purposes of pro forma
disclosures pursuant to SFAS 123, as amended by SFAS 148, the estimated fair value of the options in excess of the expense recognized in conjunction with the amortization of deferred
compensation is amortized to expense over the options' vesting period, generally four years.

COMPREHENSIVE INCOME (LOSS)

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

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

Year Ended
December 31,2003

2002Foreign currency translation adjustment

$
(998
)
$
(644
)Unrealized gain on available-for-sale securities


389


1,159Unrealized loss on hedging contracts


(963
)

Accumulated other comprehensive (loss) income

$
(1,572
)
$
515


NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is calculated using the weighted-average number of common shares outstanding during the period less the weighted-average shares
subject to repurchase. Diluted income (loss) per share, gives effect to the dilutive effect of 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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---

For
fiscal 2002 and 2001 diluted net loss is the same as basic net loss per share because the Company was in a net loss position.

|                                                                               |                                                                     | Year Ended December 31,           |       
|------------------------------------------------------------------------------ | ------------------------------------------------------------------- | --------------------------------- | ------
|
|
|Numerator:                                                                     |                                                                     |                                   |       
|                                                                               | Net income (loss)as reported                                       |                                   | $     
|Denominator:                                                                   |                                                                     |                                   |       
|                                                                               | Basic weighted-average shares outstanding                           |                                   |       
|                                                                               | Less: weighted-average shares of common stock subject to repurchase |                                   |       
|                                                                               |                                                                     |                                   |       
|Weighted-averaged shares used in computing basic net income (loss) per share   |                                                                     |                                   | 58,860
|                                                                               | Add effect of dilutive securities:                                  |                                   |       
|                                                                               |                                                                     | Employee stock options            |       
|                                                                               |                                                                     | Warrants to purchase common stock |       
|                                                                               |                                                                     |                                   |       
|Weighted-averaged shares used in computing diluted net income (loss) per share |                                                                     |                                   | 60,583
|                                                                               |                                                                     |                                   |       
|Basic and diluted net income (loss) per share                                  |                                                                     | $                                 | 0.24  
|                                                                               |                                                                     |                                   |       

For
fiscal 2003, diluted earnings per share include common share equivalents from outstanding stock options (on the treasury stock method) and outstanding warrants to purchase common
stock. The impact of the Company's convertible notes (on an if-converted basis) has not been included in the table above since there is no dilutive effect. For the years ended
December 31, 2002 and 2001, all of these securities have been excluded since the Company is in a net loss position, and they had an antidilutive effect. The excluded securities, on an actual
outstanding basis, were as follows (in thousands):

|                                   |  | Year Ended December 31,
|---------------------------------- |  | -----------------------
|
|
|Options and warrants               |  |                       
|Convertible subordinated notes     |  | 2,689                  
|Common stock subject to repurchase |  |                       
|                                   |  |                        
|Total                              |  | 2,689                  
|                                   |  |                        

CASH EQUIVALENTS, AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS

Affymetrix 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, 2003 and 2002, Affymetrix' investments in debt securities are classified as
available-for-sale and are carried at fair value with unrealized gains and losses reported in accumulated

72

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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. Realized gains and losses on available-for-sale securities are also included in interest income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale are included in interest income. The fair values of securities are based on quoted market prices.
All of the Company's available-for-sale securities are included in current assets as management considers the securities readily available to fund current operations.

LOSSES ON INVESTMENTS

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. Fair values for investments in privately-held companies are estimated based upon one or more of the following:
current market rates; liquidation values; the values of recent rounds of financing; and quoted market prices of comparable public companies. 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 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 fair value.

The
declines in value of certain investments were determined to be other-than-temporary. Accordingly, the Company recorded net investment losses, including
impairments, on its investments in both publicly-traded and privately-held emerging technology companies of $0.9 million in fiscal 2003 and $4.8 million in fiscal 2002. No
net investment losses were recorded in fiscal 2001. Net investment losses are included in interest and other income, net on the Consolidated Statement of Operations. Depending on market conditions,
the Company may incur additional charges on this investment portfolio in the future.

ACCOUNTS AND NOTES RECEIVABLE

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

INVENTORIES

Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. Provisions for slow
moving, excess and obsolete inventories are provided based on demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality
issues.

73

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AFFYMETRIX, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2003

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated for financial reporting purposes 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 ranging from 3 to 7 years, company-owned buildings are depreciated
over 25 years and leasehold improvements are depreciated over lease terms ranging from 5 to 10 years. Maintenance and repair costs are expensed as incurred.

ACQUIRED TECHNOLOGY RIGHTS

Acquired technology rights are comprised of licenses to technology covered by patents from third parties and are amortized over the expected useful life of the
underlying patents, which range from one to fifteen years. Accumulated amortization of these rights amounted to $8.0 million and $5.3 million at December 31, 2003 and 2002,
respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the difference between the purchase price and the fair value of the net assets acquired arising from the acquisition of Neomorphic in October,
2000. Prior to 2002, goodwill was amortized using the straight-line method over five years. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In accordance with SFAS 142, the Company reclassified $0.8 million of assembled workforce to goodwill and has
ceased amortization of goodwill.

The
following table presents reported net loss and adjusted net loss for the impact of SFAS 142 (in thousands, except per share amounts):

Year Ended December 31,2003

2002

2001Reported net income (loss)

$
14,285

$
(1,630
)
$
(33,121
)Add back: Goodwill amortization








4,684Amortization of assembled workforce








430Adjusted net income (loss)

$
14,285

$
(1,630
)
$
(28,007
)Basic and diluted net income(loss) per share:As reported

$
0.24

$
(0.03
)
$
(0.58
)Add back: Goodwill amortization








0.08Amortization of assembled workforce








0.01Adjusted basic net income (loss) per share

$
0.24

$
(0.03
)
$
(0.49
)


The
Company completed its review for potential impairment of its goodwill as of June 30, 2003, and concluded there was no impairment of goodwill. All remaining and future acquired
goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach.

74

---

The
expected future annual amortization expense of our acquired technology rights and other intangible assets is as follows (in thousands):

For the Year Ending December 31,

Amortization
Expense2004

$
3,7762005


3,5592006


3,4762007


3,4762008


3,461Thereafter


10,070Total expected future annual amortization

$
27,818


IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangible assets to be held and used 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. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

INCOME TAXES

Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
the statement of operations in the period of enactment.

CONTINGENCIES

The Company is subject to legal proceedings principally related to intellectual property matters. Based on the information available at the balance sheet dates,
the Company assesses 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, 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.

75

---

NOTE 3PRODUCT SALES AND PRODUCT RELATED REVENUE

The components of product sales are as follows (in thousands):

For the years ended
December 31,2003

2002

2001Probe arrays and related supplies

$
160,010

$
155,380

$
101,518Instruments


62,738


46,214


46,048Total product sales

$
222,748

$
201,594

$
147,566


The
components of product related revenue are as follows (in thousands):

For the years ended
December 31,2003

2002

2001Subscription fees

$
26,208

$
32,125

$
34,987Service and other


18,451


14,819


12,383License fees and milestone revenue


13,373





Total product related revenue

$
58,032

$
46,944

$
47,370


NOTE 4COLLABORATIVE AND RESEARCH AGREEMENTS

The Company has agreements with many 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.

COLLABORATIVE AGREEMENTS

BECKMAN COULTER, INC. ("Beckman")

In July 1998, the Company entered into an arrangement with Beckman that involved the execution of a series of agreements including an Asset Purchase
Agreement (the "APA"). Pursuant to the APA, which was implemented and became effective in June 1999, the Company purchased Beckman's array business. Under the APA, the Company agreed to grant
Beckman licenses to commercialize probe arrays manufactured using certain Affymetrix technologies other than light-directed synthesis, and an OEM supply agreement for products that use the Company's
GeneChip® array technology. Under the arrangement, Beckman would pay Affymetrix transfer prices and royalties on sales of these products.

Under
the agreements, Affymetrix made a $5.9 million payment to Beckman in 1998 and agreed to provide a credit of $5.0 million to be applied against research and
development services to be performed by the Company. Affymetrix had the option of performing or agreeing to perform such services by July 2003, or paying the amount of the unapplied credit in
cash or stock to Beckman. In addition, under the agreement Affymetrix contracted to establish a joint venture with Beckman. The $5.0 million obligation is classified as a
non-current liability in the accompanying consolidated balance sheet as of December 31, 2002. The payments and credit obligation to Beckman were accounted for as the purchase of an
intangible asset which is being amortized on a straight-line basis over its estimated

76

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useful
life of 15 years. At December 31, 2003 and 2002, accumulated amortization amounted to $3.7 million and $3.0 million, respectively. During the year ended
December 31, 2003, the Company paid to Beckman $5.0 million in settlement of the obligation to perform research and development activities and established a joint venture with Beckman
called Array Automation, LLC. (See Note 10 Related Parties).

BIOMÉRIEUX, INC. ("bioMérieux")

In September 1996, bioMérieux and Affymetrix entered into a collaborative development agreement and associated supply agreement to develop
and commercialize DNA probe arrays using the Affymetrix GeneChip® technology for clinical diagnostic kits for bacterial identification and
antibiotic resistance analysis. On March 31, 2003, Affymetrix signed a Multi-Agreement Amendment with bioMérieux modifying the existing collaboration agreement to reinstate
bioMérieux's license and to extend the contract terms through January 1, 2020. The agreement provides for certain research funding, license and milestone payments.
bioMérieux is also funding certain research activities at Affymetrix. Research revenue under this contract was approximately $0.2 million, $0.7 million, and
$0.9 million, for the years ended December 31, 2003, 2002 and 2001, respectively. The associated research costs incurred approximated revenue for each of the years presented.
Additionally, a manufacturing agreement was signed under which Affymetrix will manufacture GeneChip® probe arrays for sale to bioMérieux. The agreement provides for
royalties to Affymetrix on bioMérieux's sales of GeneChip® probe arrays.

F. HOFFMANN-LA ROCHE LTD. ("Roche")

In February 1998, Affymetrix entered into a non-exclusive collaborative development agreement with Roche to initially develop probe array-based
diagnostic products. Under the terms of the agreement the parties were collaborating to develop mutually agreed upon arrays directed to selected genes, as well as associated instrumentation and
reagents. In January 2003, the Company expanded its collaboration with Roche by granting Roche access to its GeneChip® technologies to develop and commercialize
GeneChip® laboratory tests for DNA analysis, genotyping and resequencing applications, as well as for RNA expression analysis, in a broad range of human disease areas. Using Affymetrix'
GeneChip® technologies, Roche is seeking to develop and market tests for diseases such as cancer, osteoporosis, cardiovascular, metabolic, infectious and inflammatory diseases. Affymetrix
and Roche believe that developing targeted microarray expression profiles for cancer and genotyping and resequencing profiles for other diseases will enable the creation and commercialization of novel
standardized diagnostic solutions. These solutions ultimately may allow physicians to better diagnose and treat human disease. Under the terms of the expanded collaborative agreement, Roche paid
Affymetrix an access fee of $70 million, which we are recognizing as a component of product related revenue over the estimated research and development period of approximately five years. The
expanded collaboration agreement, which is subject to Roche's option to terminate on December 31, 2007 or any time on or after June 2, 2013, with one year's prior notice, includes a
broad range of other compensation payable by Roche to Affymetrix throughout the life of the agreement based on annual royalties on sales of diagnostic kits, milestone payments for technical and
commercial achievements, a manufacturing and supply agreement, and related license installments.

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NUVELO, INC. (formerly Hyseq Pharmaceuticals, Inc.) ("Nuvelo")

In October 2001, Nuvelo created a new majority owned subsidiary, Callida Genomics, Inc. ("Callida"), which will focus on the development and
commercialization of Nuvelo's
sequencing-by-hybridization ("SBH") technology. Nuvelo contributed all of its SBH patents to Callida. Affymetrix has an initial 10% equity interest in Callida. Callida has
entered into a collaboration arrangement with Affymetrix, through Callida's wholly owned subsidiary, N-Mer, Inc. ("N-Mer"), for the development and commercialization of
a high speed DNA sequencing chip. Affymetrix, Nuvelo, Callida and N-Mer also have entered into various cross-licensing arrangements. In October 2001, Affymetrix paid Nuvelo a
one-time license fee for the non-exclusive license described above, and loaned Nuvelo $4.0 million, all of which will be used to fund Callida and N-Mer. The
loan bears interest at the rate of 7.5% and matures in 2006. The loan is repayable by Nuvelo at any time and, subject to specified conditions, exchangeable for common stock of Nuvelo. The loan is
secured by all of Nuvelo's equity interest in Callida and is recorded in other assets. The license fee has been capitalized in acquired technology rights and is being amortized over the remaining
patent lives. Affymetrix and Nuvelo have agreed to each make additional investments, which will be conditioned on N-Mer's attainment of a specified technical milestone and the procurement
of third-party financing. To date, the technical milestone and the procurement of third-party financing for N-Mer have not been attained. As part of the agreement, Callida granted
Affymetrix an option to purchase a majority interest in N-Mer, which can be exercisable at any time through October 2006.

ORCHID BIOSCIENCES, INC. ("Orchid")

In December 1999, Affymetrix and Orchid entered into an agreement to develop and commercialize single nucleotide polymorphism (SNP) genotyping assays that
combine Orchid's proprietary GBA® primer extension technology with Affymetrix' new GenFlex® Tag array product offering.

As
part of the agreement, Affymetrix loaned $2.3 million to Orchid under a promissory note. In January 2000, the promissory note was converted into shares of Orchid
Series E Convertible Preferred Stock and Affymetrix purchased an additional $2.2 million of Series E Convertible Preferred Stock of Orchid. All shares of Orchid Preferred Stock
converted into Orchid Common Stock upon the close of Orchid's initial public offering in May 2000.

In
2002, Affymetrix recorded a $4.0 million write down related to an other-than-temporary decline in the value of the investment in Orchid. At
December 31, 2002, the Company held 855,897 shares of Orchid common stock. In May 2003, the Company sold all of its shares of Orchid. In connection with the sale, a gain of
$0.3 million was recorded to interest income and other, net.

RESEARCH AGREEMENTS

WHITEHEAD INSTITUTE

In September 2002, the Company extended its previous collaborative relationship with the Whitehead Institute and announced a research collaboration to use
its GeneChip® brand technology to conduct cancer clinical studies. The collaboration is designed to standardize experimental procedures and further validate numerous studies demonstrating
the power of expression data for cancer

78

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classification.
The Whitehead Institute is initiating a research program to study sample collection from tissue biopsies, amplification, data collection and analysis in order to accelerate the use of
DNA array technology in clinical settings. The Company provided funding to the Whitehead Institute of approximately $0.8 million, $0.8 million and $1.0 million in cash each of
2003, 2002 and 2001, respectively.

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

The
Company has not experienced significant credit losses from its accounts receivable, grants or collaborative research agreements. 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 collectibility of
accounts receivable.

Key
parts of the GeneChip® product line, such as certain reagent kits and lithographic masks as well as certain raw materials used in the synthesis of probe arrays, are
currently available only from a single source or limited sources. No assurance can be given that reagents, lithographic masks 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.

Approximately
47% of the Company's revenue is generated from sales outside the United States. Though such transactions are denominated in both U.S. dollars and foreign currencies, the
Company's results are still 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AVAILABLE-FOR-SALE SECURITIES AND OTHER FINANCIAL INSTRUMENTS

INVESTMENTS IN DEBT AND EQUITY SECURITIES

The fair values of all securities are based on quoted market prices. All of the Company's available-for-sale securities are included in
current assets as management considers the securities readily available to fund current operations.

79

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The
following is a summary of available-for-sale securities as of December 31, 2003 (in thousands):

Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueU.S. Government obligations and U.S. Government agency securities

$
214,041

$
29

$
(137
)
$
213,933U.S. corporate debt securities


190,237


355


(231
)

190,361Total debt securities


404,278


384


(368
)

404,294Equity securities


349


374





723Total securities

$
404,627

$
758

$
(368
)
$
405,017Amounts included in:Cash equivalents

$
221,060

$
2

$


$
221,062Available-for-sale securities


183,567


756


(368
)

183,955Total securities

$
404,627

$
758

$
(368
)
$
405,017


The
following is a summary of available-for-sale securities as of December 31, 2002 (in thousands):

Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueU.S. Government obligations and U.S. Government agency securities

$
115,353

$
610

$


$
115,963U.S. corporate debt securities


216,596


572


(22
)

217,146Total debt securities


331,949


1,182


(22
)

333,109Equity securities


428








428Total securities

$
332,377

$
1,182

$
(22
)
$
333,537Amounts included in:Cash equivalents

$
39,966

$
1

$


$
39,967Available-for-sale securities


292,411


1,181


(22
)

293,570Total securities

$
332,377

$
1,182

$
(22
)
$
333,537


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Realized
gains and losses for the year ended December 31, 2003 were $6.0 million and $0.4 million, respectively. The realized gains and losses for the year ended
December 31, 2002 were $5.2 million and $4.0 million, respectively. Realized gains for 2001 were $5.8 million and losses were not material. The realized gains and losses
are included as part of interest income and other, net in the accompanying consolidated statements of operations.

The
following is a summary of the cost and estimated fair value of available-for-sale debt securities at December 31, 2003 by contractual maturity (in
thousands):

2003Amortized
Cost

Fair ValueMature in less than one year

$
336,612

$
336,722Mature in one to three years


67,666


67,572Total

$
404,278

$
404,294


DERIVATIVE FINANCIAL INSTRUMENTS

The
Company is exposed to foreign currency exchange rate fluctuations in the normal course of its business. As part of its risk management strategy, the Company uses derivative
instruments to hedge certain foreign currency exposures. The Company hedges 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. The Company does not use derivative contracts for speculative purposes. At December 31, 2003, total outstanding contracts included the notional equivalent of $18.9 million in
foreign currency forward exchange contracts with a fair value of $(1.0) million. As of December 31, 2003, all contracts were set to expire at various times through December 2004. The
Company applies hedge accounting based upon the criteria established by Statement of Financial Accounting Standards No. 133, whereby the Company designates its derivatives as cash flow hedges.

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OTHER FINANCIAL INSTRUMENTS

The
carrying amounts and fair values of financial instruments, other than those accounted for in accordance with Statement of Financial Accounting Standards No. 115, were as
follows at December 31, 2003 and 2002 (in thousands):

2003

2002Carrying
Amount

Fair Value

Carrying
Amount

Fair ValueAssets:Non-marketable equity investments (accounted for under the cost method)

$
14,530

$
14,530

$
5,250

$
5,250Note receivable from Nuvelo


4,640


4,640


4,300


4,300Employee loans receivable


1,500


1,500


1,674


1,674Notes receivable from shareholders


428


428


720


720Liability:Convertible notes


387,460


384,713


368,900


314,377


The
fair value estimates provided above for the Company's convertible notes were based on quoted market prices available at December 31, 2003 and 2002. All other fair values were
based on current market rates, liquidation and net realizable values.

NOTE 7INVENTORIES

Inventories consist of the following at December 31, 2003 and 2002 (in thousands):

2003

2002Raw materials

$
9,129

$
8,023Work-in-process


4,226


2,597Finished goods


9,277


16,119Total

$
22,632

$
26,739


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NOTE 8PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of December 31, 2003 and 2002 (in thousands):

2003

2002Property and equipment:Construction-in-progress

$
9,314

$
12,947Land


1,310


1,310Equipment and furniture


101,207


78,214Building and leasehold improvements


29,828


38,718141,659


131,189Less accumulated depreciation and amortization


(79,048
)

(58,353
)Net property and equipment

$
62,611

$
72,836


Construction-in-progress
includes construction costs for new and upgraded facilities as well as related purchased equipment not yet placed in service.

Depreciation
expense was $22.2 million in 2003, $22.0 million in 2002 and $16.8 million in 2001.

NOTE 9ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities as of December 31, 2003 and 2002 consist of the following (in thousands):

2003

2002Accounts payable

$
15,130

$
15,174Accrued compensation and related liabilities


18,767


16,687Accrued interest on convertible subordinated notes


4,260


5,789Accrued sales and use tax


3,394


3,135Accrued legal


3,261


2,897Accrued royalties


15,465


15,645Other


9,369


7,537Total

$
69,646

$
66,864


NOTE 10RELATED PARTY TRANSACTIONS

PERLEGEN

In
October 2000, Affymetrix formed Perlegen as a wholly-owned subsidiary. In connection with the formation of Perlegen, the Company contributed to Perlegen the rights to use
certain intellectual property with no cost basis and has the rights to use and commercialize certain data generated by Perlegen in the array field. From Perlegen's inception through March 30,
2001 the operating results of Perlegen were consolidated into the Company's financial statements. On March 30, 2001, Perlegen completed a private financing with outside investors raising
approximately $100.0 million, which reduced our ownership position in Perlegen to approximately 53%. Two of the outside investors in this financing included trusts of which two of the Company's
current directors are trustees. The investments

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by
these trusts represented less than $0.6 million of the total financing for Perlegen. In connection with Perlegen's March 30, 2001 financing, the Company, and certain of its
affiliates, including its chief executive officer Stephen P.A. Fodor, placed a portion of their collective holdings (approximately 8%) into an irrevocable voting trust, relinquishing certain voting
rights and, in doing so, the Company relinquished control of Perlegen. Under the terms of the voting trust, the trustee, U.S. Bank Corp. (formerly State Street Bank and Trust Company of California),
was required to vote the shares held in the trust on all matters subject to shareholder vote in proportion to the votes of all non-Affymetrix and affiliated shareholders.

On
January 9, 2003, the Company entered into an agreement with Perlegen to license certain Perlegen technologies that are expected to accelerate the Company's plan to design and
commercialize microarrays for whole genome and candidate region DNA analysis. In addition to broadening the Company's access to Perlegen technologies, this licensing agreement advances by
approximately three years the Company's prior commercialization rights to the Perlegen single nucleotide polymorphism (SNP) database for development of chip-based products. Under the terms
of the licensing agreement, the Company paid Perlegen a total of $15.0 million in cash and granted Perlegen a $3.0 million credit which will be applied against the margin on the
Company's future sales of chips to Perlegen. The credit can only be used against the margin on chips that are utilized by Perlegen for revenue generating activities. As of December 31, 2003,
Perlegen has used approximately $2.0 million of the credit. This credit expires three years from the effective date of the agreement. This new agreement also eliminates any future royalty
obligations for array products that the Company commercializes based on information contained in Perlegen's SNP database. Affymetrix engaged an independent third party to conduct a valuation analysis
of the licenses acquired. Based upon that independent valuation, Affymetrix recorded a charge of approximately $10.1 million related to acquired in-process research and development
in the first quarter of 2003. The remaining $4.9 million was recorded as intangible assets which are being amortized over their useful lives of six to ten years.

The
charge associated with licensing the Perlegen SNP database was included in acquired in-process research and development in the consolidated statement of operations as the
database has no alternative future use to Affymetrix. Specifically, the database contains over one million SNPs and will be used in the Company's research and development program to develop high
quality, high density DNA analysis microarray products. The value of the SNP database license was determined by estimating the net present value of future cash flows expected from the sale of DNA
analysis products developed in partial reliance on this database using a present value discount rate of 30%, which is based on Affymetrix' weighted average cost of capital adjusted for the risks
associated with the in-process research project in which the SNP database content will be used.

The
estimates used by the Company in valuing the licensed 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.

On
January 27, 2003, Perlegen announced that it completed the first closing of a private financing round, raising an aggregate of approximately $30.2 million. The terms of
the voting trust allow it to be terminated once Affymetrix' and its affiliates cease to own 45% or more of the voting securities of

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Perlegen.
As a result of this financing, the Company's collective equity ownership in Perlegen (including that of its affiliates) was reduced to below 45%. Accordingly, following Perlegen's
January 27, 2003 financing, the voting trust was terminated. In connection with Perlegen's January 27, 2003 financing, the Company was granted the right to designate two members of
Perlegen's Board of Directors which shall consist of not more than seven members. Previously, the Company had the right to designate three of the seven members of Perlegen's Board. The Company's two
current designees to Perlegen's Board are also members of the Company's Board of Directors.

In
December 2003, the Company sold 950,000 shares of Perlegen common stock for $1.4 million, further reducing its collective equity ownership in Perlegen (including that of
its affiliates). As the Company has no cost basis in its Perlegen investment, the Company recorded the cash proceeds of $1.4 million as a gain which is included in interest and other income,
net.

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. 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. Given that the Company's investment in Perlegen has no cost basis for accounting purposes under generally accepted accounting principles, the Company has not
recorded any proportionate share of Perlegen's operating losses in its financial statements since the completion of Perlegen's initial financing.

In
January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51." Based on the
application of FIN 46, as amended, the Company concluded that Perlegen is a Variable Interest Entity (VIE) in which it holds a variable interest, and that the Company is not the primary beneficiary.
Accordingly, no change in accounting is appropriate and the Company will continue to account for its ownership interest in Perlegen under the equity method as described in the preceding paragraph.

At
December 31, 2003 and December 31, 2002, the amounts due from Perlegen were $2.9 million and $8.8 million, respectively, and have been included in accounts
receivable in the accompanying consolidated balance sheets. Amounts due from Perlegen are payable to the Company on its normal commercial terms.

ARRAY AUTOMATION, LLC

The
Company is currently a partner in Array Automation, LLC ("AAL"), a joint venture with Beckman Coulter, Inc. ("Beckman"). In July 1998, the Company
entered into an asset purchase agreement with Beckman. As part of the asset purchase agreement, the Company agreed to establish a joint venture with Beckman. AAL was incorporated in July 2003,
with the primary purpose of product research and development in the field of non-photolithographic arrays of polynucleotide sequences and instruments. In accordance with the agreement
between the Company and Beckman, 100% of the losses generated by AAL are allocated to Beckman. Future net income generated by AAL, if any, is allocated 51% to the Company and 49% to Beckman, after
Beckman has recovered all of the cumulative losses it has recorded.

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Based
on the application of FIN 46, the Company has concluded that AAL is a VIE and the Company is not the primary beneficiary. Accordingly, the Company will account for its investment
in AAL using the equity method. Since the cost basis of the Company's assets contributed to AAL were of zero value, the Company's investment in AAL is also recorded at zero value. As a result, the
Company will not record any impact of AAL's operating results in its consolidated statements of operations until, and only if, Beckman has recovered all of the losses that it will
absorb pursuant to the terms of the joint venture agreement. If AAL is terminated with a cumulative deficit, the Company is not obligated to fund any such losses. In addition, the Company does not
have any obligation to provide funding to AAL, guarantee or otherwise have any obligations related to the liabilities of AAL or its investors.

GLAXOSMITHKLINE PLC ("Glaxo")

At December 31, 2002, Glaxo had an ownership interest in the Company of approximate 8%. In March 2003, Glaxo sold all of its remaining shares of
Affymetrix. The Company has entered into research and supply agreements with Glaxo, resulting in revenue of $7.6 million in 2003, $7.3 million in 2002, and $1.6 million in 2001.
At December 31, 2003, amounts due from Glaxo amounted to $0.7 million.

EOS BIOTECHNOLOGY, INC. ("Eos")

In April 1998, the Company entered into a series of agreements with Eos under which Eos became an EasyAccess customer of the Company. In
return for granting Eos access to certain technology and licenses, the Company received 3,750,000 shares of Eos Series C preferred stock and the right to name one director to the Eos board.
During fiscal 1999 and 2000, the Company purchased and additional $0.2 million of Eos preferred stock. For the year ended December 31, 2003, the Company did not record significant
revenue from Eos under the EasyAccess supply agreement. For the years ended December 31, 2002 and 2001, the Company recorded revenue of $1.2 million, and
$0.3 million, respectively under the EasyAccess supply agreement.

In
April 2003, Eos was acquired by Protein Design Labs, Inc. ("PDL"). As a result of the acquisition, Affymetrix' shares of Eos preferred stocks were
converted into a total of 322,312 shares of PDL common stock. This resulted in an immediate gain of $2.6 million. During 2003, the Company sold a total of 282,023 shares of PDL stock for an
additional gain of approximately $1.8 million. The gains are recorded in interest income and other, net. As of December 31, 2003, Affymetrix owned less than one percent of PDL.

NOTE 11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 was approximately $6.9 million in 2003, $7.0 million in 2002, and
$5.9 million in 2001. In connection with some of these facility leases, the Company has $2.5 million in cash held as security deposits, which is included in other assets in the
consolidated balance sheets.

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Future
minimum lease obligations at December 31, 2003 under all non-cancelable operating leases are as follows (in thousands):

Year Ending December 31,2004

$
6,7922005


7,2942006


6,7612007


7,1222008


7,312Thereafter


26,700Total minimum lease payments

$
61,981


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. Information regarding the changes in the Company's product warranty liability for the years ended December 31, 2002 and
December 31, 2003 was as follows (in thousands):

Balance at December 31, 2001

$
955New warranties issued


5,356Repairs and replacements


(4,387
)Balance at December 31, 2002

$
1,924New warranties issued


4,190Repairs and replacements


(3,164
)Balance at December 31, 2003

$
2,950


EXTENSION OF CREDIT

In July 2001, the Company entered into a credit arrangement with an executive of the Company who is also an officer for an amount not to exceed
$1.2 million. Amounts under the arrangement may be drawn in one lump-sum or in periodic draws. As of December 31, 2003, no amounts under the extension of credit were drawn.
In January 2004, the executive withdrew the entire $1.2 million available under the arrangement. Repayment of the $1.2 million is due on the earlier date of i) four years
from the date of withdrawal or ii) the date the executive leaves the Company. Interest will accrue at the IRS imputed rate of interest and is payable after two years.

FUNDING COMMITMENTS

The Company has invested $6.2 million and is committed to invest up to additional $3.8 million in a venture capital limited partnership. The Company
accounts for the investment using the cost method of accounting, given that its ownership percentage is so minor that the Company has no influence over partnership operating and financial policies.
The investment is included on the consolidated balance sheet as a component of other assets.

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In
October 2001, Affymetrix and Millennium entered into a four-year supply and research and development agreement to co-develop GeneChip®
technology applications for use in drug discovery and development. Under the agreement, Affymetrix and Millennium are jointly developing gene expression array processes and applications to enhance the
productivity of genome-based drug discovery and development. Over the course of the four-year term of this agreement, Affymetrix is committed to spend an aggregate of approximately
$1.9 million in research funding. Affymetrix has the right to commercialize certain technologies developed under the collaboration. As of December 31, 2003, approximately
$0.6 million of the $1.9 million aggregate amount remained outstanding, to be paid evenly over the next two years.

In
connection with the Company's settlement agreement in December 2002 with the Board of Trustees of the Leland Stanford Junior University ("Stanford"), Affymetrix and Stanford
agreed to mutual releases of claims from one another. In addition, Affymetrix agreed to provide funding to support two fellowships under the Bio-X Program at Stanford. As of
December 31, 2003, and 2002, $2.2 million and $2.7 respectively, remained to be paid to Stanford in connection with the fellowships. The amounts are classified as long-term
liabilities on the Consolidated Balance Sheets.

LEGAL PROCEEDINGS

GENERAL

Affymetrix has been in the past and continues to be a party to litigation which has consumed and may in the future continue to consume substantial financial and
managerial resources and which could
adversely affect its business, financial condition and results of operations. If in any pending or future intellectual property litigation involving the Company or its collaborative partners, the
Company is found to have infringed the valid intellectual property rights of third parties, the Company, or its collaborative partners, could be subject to significant liability for damages, could be
required to obtain a license from a third party, which may not be available on reasonable terms or at all, or could be prevented from manufacturing and selling its products. In addition, if the
Company is unable to enforce its patents and other intellectual property rights against others, or if its patents are found to be invalid or unenforceable, third parties may more easily be able to
introduce and sell DNA array technologies that compete with the Company's GeneChip® brand technology, and the Company's competitive position could suffer. The Company expects to devote
substantial financial and managerial resources to protect its intellectual property rights and to defend against the claims described below as well as any future claims asserted against it. Further,
because of the substantial amount of discovery required in connection with any litigation, there is a risk that confidential information could be compromised by disclosure.

88

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Applera Corporation Litigation

On July 5, 2000, Applera Corporation and related corporate plaintiffs ("Applera") filed a lawsuit in the United States District Court for the District of
Delaware alleging that certain of the Company's products infringe five Applera patents related to processes for making oligonucleotides and reagents that it purchased from Applera licensed vendors.
Applera served the Company with the complaint on October 16, 2000. On January 30, 2001, the Company filed a motion to dismiss Applera's lawsuit pending in Delaware for lack of subject
matter jurisdiction. On January 25, 2001, the Company filed a declaratory judgment action against Applera in the United States District Court for the Southern District of New York seeking,
among other things, a declaration that it has not infringed any of Applera's subject patents, which lawsuit was stayed by the Court in New York pending the Delaware Court's ruling on the
aforementioned motion to dismiss. On September 27, 2001, the District Court for the District of Delaware granted the Company's motion to dismiss for lack of subject matter jurisdiction. On
October 3, 2001, the New York Court restored the New York case to active status.

On
April 17, 2002, the New York Court heard oral arguments on Applera's motions to bifurcate or dismiss certain of the Company's claims, including claims of breach of contract and
antitrust violations by Applera. On May 24, 2002, the Court rejected Applera's motion to dismiss the Company's breach of contract and antitrust claims and agreed to bifurcate and stay discovery
on antitrust issues as well as on all damages issues. Following the Court's order, on June 6, 2002, Applera filed its counterclaim in the New York case alleging infringement of four of the five
patents originally asserted in the Delaware action. The Company filed a motion seeking summary judgment that the last to expire of Applera's subject patents had, in fact, expired as a matter of law in
2001 in accordance with a terminal disclaimer that had been filed in the Patent Office during prosecution of that patent. On December 24, 2002, the court granted the Company's motion. As a
result of the Court's ruling, it is now clear that all of the patents asserted by Applera have expired. On December 16, 2003, the Court heard argument on Affymetrix's three motions for summary
judgment that the Applera patents are unenforceable due to inequitable conduct before the U.S.P.T.O. and that certain of the Applera patent claims are invalid for anticipation and inoperability. On
January 27, 2004, the Court granted the Company's motion for summary judgment on anticipation and invalidated many of the claims in the '066 and '418 patents. The Court denied the Company's
motion for summary judgment on the issue of the inoperability of the '679 patent. The Court denied the Company's motion for summary judgment on inequitable conduct, but ordered a bench trial on that
issue. Following the Court's summary judgment rulings, on February 23,
2004 the parties announced to the Court that they had reached a settlement agreement. On March 12, 2004, the Company completed the settlement with Applera. Under the terms of the settlement, we
are not required to pay any sums to Applera or license any of Applera's patents and, as such, the settlement is not expected to result in a material adverse effect on our business, financial condition
and results of operations.

Purported Shareholder Class Action Lawsuits

On April 10, 2003, two individuals filed a purported shareholder class action lawsuit under the federal securities laws in the United States District Court
for the Northern District of California. The defendants in this case include the Company, three of its executive officers and one outside director. The lawsuit relates to the Company's
January 29, 2003 announcement of the its financial expectations for 2003 and subsequent announcement on April 3, 2003, updating its financial guidance for the first

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quarter
of 2003. The lawsuit alleges, among other things, that the Company's January 29, 2003 financial guidance was misleading and GlaxoSmithKline plc sold Affymetrix shares during the first
quarter of 2003 while in possession of material nonpublic information. On June 10, 2003, the plaintiffs in this action filed a notice of voluntary dismissal of the lawsuit without prejudice,
and the Court granted the dismissal by order dated June 12, 2003.

On
May 20, 2003, two other individuals filed a second purported shareholder class action lawsuit in the United States District Court for the Northern District of California that
is substantively identical to the one filed on April 10, 2003. The second lawsuit alleges the same claims against the same defendants on behalf of the same purported class of shareholders
(those who purchased securities of Affymetrix between January 29, 2003 and April 3, 2003) as the earlier-filed lawsuit. This case is still in the pleading stage. On September 5,
2003, the Court granted the plaintiffs' unopposed motion for appointment of themselves as lead plaintiffs and approved their selection of lead counsel for the purported class. The plaintiffs filed an
amended complaint on November 7, 2003. Affymetrix and the individual defendants filed a motion to dismiss the amended complaint on December 22, 2003 and on March 11, 2004, the
Court granted the motion to dismiss without prejudice in order to allow the plaintiffs the opportunity to attempt to remedy the pleading defects in their amended complaint if they choose to do so.

The
Company believes that the claims set forth in the purported class action lawsuit are without merit. However, it cannot be sure that it will prevail in these matters. The Company's
failure to successfully defend against these allegations could result in a material adverse effect on its business, financial condition and results of operations.

Multilyte Litigation

Multilyte Ltd., a British corporation, and Affymetrix have commenced legal proceedings in the United States, United Kingdom and German courts to address
allegations made by Multilyte that the Company infringes certain patents owned by Multilyte (the "Multilyte patents") by making and selling the GeneChip® DNA microarray products.

In
the actions pending in Germany, on July 18, 2003, Multilyte filed proceedings in the state court of Dusseldorf, alleging infringement of the Multilyte patents. On
October 16, 2003, the Dusseldorf court held its first hearing in the case and ruled that the case be divided into two formally separate cases (one dealing with European patent EP 0 134 215 and
the other with European patent EP 0 304 202). The trial date for the actions pending in the Dusseldorf court are scheduled for August 10, 2004. In a separate action in Germany, on
October 15, 2003, the Company commenced nullity proceedings in German Federal Patent Court in Munich alleging that the German part of Multilyte's two European patents are invalid. Trial date
for the action pending in the German Federal Patent Court in Munich is scheduled for June 28 and 29, 2004.

In
the action pending in the U.K., on August 14, 2003, the Company commenced proceedings in the English High Court seeking a declaratory judgment that the Multilyte patents are
not infringed and are invalid. On September 25, 2003, Multilyte counterclaimed in the U.K. proceedings, alleging that the Company infringed the Multilyte patents in the U.K. and claiming
damages, an injunction and legal costs. The English High Court has directed that the issues of whether the Multilyte patents are valid and whether they have been infringed by the Company are to be
heard together. The trial of the action

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in
the English High Court is set to begin on October 11, 2004. Multilyte sought a stay of the UK proceedings. The English High Court denied Multilyte's motion.

In
the action pending in the U.S., on August 13, 2003, the Company commenced proceedings in the United States District Court for the Northern District of California seeking a
declaratory judgment that eight Multilyte patents are not infringed and are invalid. Multilyte has agreed that the Company does not infringe five of the eight named patents. On October 24,
2003, the Company filed an amended complaint seeking a declaratory judgment as to three of the original eight named patentsU.S. Patents 5,432,099, 5,599,720 and 5,807,755. On
November 12, 2003, Multilyte filed an answer to the Company's complaint for declaratory judgment and asserted counterclaims against the Company alleging infringement of the three patents named
by the Company in its complaint. Multilyte has voluntary submitted the three patents in suit to the United States Patent and Trademark Office for voluntary re-examination. Typically,
re-examination proceedings take at least 12 months. A Markman hearing in which the Court will construe the scope of the claims of the Multilyte patents in this action is scheduled
for May 24, 2004, and a trial date is scheduled for January 2005.

The
Company believes that Multilyte's claims are without merit and has filed the declaratory judgment and nullity actions to protect its interests. However, the Company cannot be sure
that it will prevail in these matters. The Company's failure to successfully defend against these allegations could result in a material adverse effect on its business, financial condition and results
of operations.

Enzo Litigation

On October 28, 2003, Enzo Life Sciences, Inc., a wholly-owned subsidiary of Enzo Biochem, Inc. (collectively "Enzo") filed a complaint
against the Company in the United States District Court for the Eastern 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 the Company 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 the Company 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 Affymetrix patents to Enzo. In connection with its complaint, Enzo provided the Company with a notice of termination of the 1998 agreement effective on
November 12, 2003.

On
November 10, 2003, the Company 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 its complaint, the Company alleges that Enzo has engaged in a pattern of wrongful conduct against it 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 the Company's proprietary technology. The Company seeks declarations that
it has not breached the 1998 agreement, that it is entitled to sell its remaining inventory of Enzo reagent labeling kits, and that nine Enzo patents that are identified in the 1998 agreement are
invalid and/or not infringed by it. The Company also seeks damages and injunctive relief to redress Enzo's alleged breaches of the 1998 agreement, its alleged tortuous interference with the Company's
business relationships and prospective economic

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advantage,
and Enzo's alleged unfair competition. The Company filed a notice of related case stating that its complaint against Enzo is related to the complaints already pending in the Southern
District of New York against eight other former Enzo distributors. The Southern District of New York has related the Company's case. The Company has also filed a motion to transfer Enzo's Eastern
District of New York complaint to the Southern District of New York which was heard on January 30, 2004. The Eastern District of New York granted the Company's motion and transferred the case
to the Southern District of New York. There is no trial date in this action.

The
Company believes 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, the
Company cannot be sure that it will prevail in these matters. The Company's failure to successfully defend against these allegations could result in a material adverse effect on its business,
financial condition and results of operation.

Administrative Litigation and Proceedings

The Company's intellectual property is expected to be subject to significant additional administrative and litigation actions. For example, in Europe and Japan,
third parties are expected to oppose significant patents that the Company owns or controls. Currently, Multilyte Ltd. and ProtoGene Laboratories, Inc. are parties that have filed
oppositions against the Company's EP 0-619-321 patent in the European Patent Office, and PamGene B.V. has filed an opposition against the Company's EP
0-728-520. Also, Abbott Laboratories, Applera, Clondiag and CombiMatrix are parties in opposition against the Company's EP 0-834-575. Abbott
Laboratories, CombiMatrix, PamGene B.V., Applera and Dr. Peter Schneider have filed oppositions against the Company's EP 0-834-576. CombiMatrix has filed an opposition
against EP 0-695-941. These procedures will result in the patents being either upheld in their entireties, allowed to issue in amended form in designated European countries, or
revoked.

Further,
in the United States, the Company expects that third parties will continue to "copy" the claims of its patents in order to provoke interferences in the United States
Patent & Trademark Office, and it may copy the claims of others. These proceedings could result in the Company's patent protection being significantly modified or reduced, and could result in
significant costs and consume substantial managerial resources.

At
this time, the Company cannot determine the outcome of any of the matters described above.

NOTE 12CONVERTIBLE SUBORDINATED NOTES

On September 22, 1999, the Company completed the sale of $150 million principal amount of 5% convertible subordinated notes due 2006 (the "5%
Notes"). The 5% Notes mature on October 1, 2006 and bear interest at a rate of 5% per annum, which is payable semi-annually on April 1 and October 1. The 5% Notes are
convertible, at the option of the holder at any time prior to maturity or redemption, into shares of the Company's common stock at a conversion price of $61.50 per share, subject to adjustment. The
Company can redeem some or all of the 5% Notes at any time after October 7, 2002, and the debt holder has a right to require the Company to purchase all or a portion of the 5% Notes upon a
change in control. The 5% Notes are subordinated to all of the Company's existing and future senior indebtedness. Total offering expenses related to the 5% notes were $5.4 million and have been
included in other assets. These expenses will be amortized to interest expense over the life of the notes.

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On
February 14, 2000, the Company completed the sale of $225 million principal amount of 4.75% convertible subordinated notes due 2007 (the "4.75% Notes"). The 4.75% Notes
mature on February 15, 2007 and bear interest at a rate of 4.75% per annum, which is payable semi-annually on February 15 and August 15. The 4.75% Notes are
convertible, at the option of the holder at any time prior to maturity or redemption, into shares of the Company's common stock at a conversion price of $160.50 per share, subject to adjustment. The
Company can redeem some or all of the 4.75% Notes at any time after February 20, 2003 and the debt holders have a right to require the Company to purchase all or a portion of the 4.75% Notes
upon a change in control. The 4.75% Notes are subordinated to all of the Company's existing and future senior indebtedness. Total offering expenses related to these notes were $7.2 million and
have been included in other assets. These expenses will be amortized to interest expense over the life of the notes.

In
August 2001 and December 2002, the Company repurchased $5.0 million and $1.1 million principal amounts, respectively, of the 4.75% Notes for total
consideration of $3.3 million and $0.9 million. In connection with the August 2001 transaction, the Company recorded an extraordinary gain of approximately $1.7 million
which was reclassified during fiscal 2002 from extraordinary income to interest and other income, net in accordance with Financial Accounting Standard ("FAS") 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." In connection with the December 2002 transaction, the Company recorded a gain of approximately
$0.2 million in interest and other income, net.

In
May and June 2003, the Company repurchased a total of $53.4 million principal amount of its 4.75% convertible subordinated notes due in 2007. In June 2003, the
Company also repurchased $48.0 million principal amount of its 5.0% convertible subordinated notes due in 2006. In connection with these repurchases, the Company recorded a loss of
$0.9 million.

The
fair value of the 5% Notes at December 31, 2003 was $104.1 million, based on the market value in the PORTAL market where the 5% Notes are traded. The fair value of the
4.75% Notes at December 31, 2003 was $160.1 million, based on the market value in the PORTAL market where the 4.75% Notes are traded.

NOTE 13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 (which will be amortized over 5 years, the earliest term for redemption outside of the Company's control), from the 0.75% Notes offering were
$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 0.75% Notes are convertible into 32.2431 shares of Affymetrix common stock per $1,000 principal amount of notes, (or $31.01 per share of common stock subject to
adjustment, 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

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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 security holders have the option to deliver the 0.75% Notes to Affymetrix and require the Company to repurchase all outstanding 0.75% Notes for $1,000 in
cash each up to a maximum of $120.0 million for all outstanding 0.75% Notes. Additionally, security holders also have the option to require the Company to repurchase the 0.75% Notes payable in
cash along with any accrued but unpaid interest on December 15, 2013, 2018, 2023, and 2028. The Company intends to use the net proceeds of the offering to repurchase its 4.75% Notes (see
note 19). Additionally, Affymetrix has the option of redeeming all or part of the 0.75% Notes plus accrued but unpaid interest on or after December 15, 2008 for cash.

NOTE 14COMMON STOCK PURCHASE RIGHT

Under the terms of an agreement with a distributor, the Company provided to the distributor a common stock purchase right ("purchase right") to acquire shares of
the Company's common stock through an advance payment of $3.0 million. This purchase right was included in the consolidated balance sheet for the year ended December 31, 2002. Upon
exercise of the purchase right, the distributor will receive $3.0 million worth of shares of common stock of the Company based on the fair market value of the Company's Common Stock on
August 19, 2003.

In
the fourth quarter of 2003, the Company issued approximately 127,000 shares to the distributor in settlement of the common stock purchase right.

NOTE 15STOCKHOLDERS' EQUITY

COMMON STOCK WARRANTS

As of December 31, 2003, there were warrants to purchase 27,970 shares of common stock at $3.58 per share and 38,150 shares of common stock at $15.20 per
share outstanding. The warrants expire in 2008 and 2009, respectively.

STOCK OPTION EXCHANGE OFFERING

On March 7, 2002, the Company filed a Schedule Tender Offer, as subsequently amended on April 4, 2002, with the Securities and Exchange Commission
relating to an offer (the "Offer") to current employees (excluding officers as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) of the Company or its
wholly owned subsidiaries, to exchange all of the options outstanding under the Affymetrix, Inc. Amended and Restated 1993 Stock Plan, Affymetrix, Inc. 1998 Stock Incentive Plan,
Affymetrix/Genetic MicroSystems 1998 Stock Option Plan, Affymetrix/Neomorphic 1998 Stock Option Plan, and Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan (collectively, the
"Plans") to purchase shares of the Company's common stock ("Common Stock"), for new options (the "New Options") to purchase shares of the Common Stock to be granted under the Plans, upon the terms and
subject to the conditions described in an Offer to Exchange and related Letter of Transmittal. Following the expiration of the Offer on April 12, 2002,

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the
Company accepted for exchange options to purchase 2,272,984 shares of its common stock (the "Tendered Options"), representing approximately 27.5% of the 8,269,774 options that were eligible to be
tendered in the Offer. After a period of more than six months and a day from the expiration date of the Offer, on October 16, 2002 the Company granted New Options to purchase an aggregate of
1,276,234 shares of its common stock in exchange for the Tendered Options. The New Options were granted with exercise prices equal to $23.185 which was the fair market value of the Company's common
stock on October 16, 2002. Executive officers of the Company were not permitted to participate in the offer.

The
number of shares of common stock subject to the New Options was equal to the number of shares of common stock subject to the Tendered Options that were accepted for exchange and
canceled in accordance with the following exchange ratios:

Exercise Price of Option Tendered

Exchange Ratio$44.99 or less

1 for 1$45.00$59.99

0.67 for 1$60.00$99.99

0.50 for 1$100.00 or more

0.33 for 1


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 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

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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 OPTION AND BENEFIT PLANS

In 1993, the Board of Directors adopted the Affymetrix 1993 Stock Plan (the "1993 Stock Plan"), which was amended and restated in 1995, under which incentive
stock options, nonqualified stock options and purchase rights may be granted to employees and outside consultants. Options granted under the 1993 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 but not to exceed five years from the date of grant. A total of 10,400,000 shares of common stock are authorized for issuance
under the 1993 Stock Plan and no shares are subject to repurchase by the Company. As of December 31, 2003, a total of 659,952 options to purchase shares expired under this plan.

In
1996, the Board of Directors adopted the Affymetrix 1996 Non-Employee Directors Stock Option Plan (the "1996 Stock Plan"), which was amended and restated in 2001, under
which only nonqualified stock options may be granted to non-employee directors of the Company. Options granted under the 1996 Stock Plan expire no later than ten years and two days 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 granted under the 1996 Stock Plan are subject to the vesting provisions set forth in that plan. A total of 600,000 shares of common stock are authorized for issuance under the 1996
Stock Plan and the shares are subject to repurchase by the Company under the terms of the grant. All options granted under the 1996 Stock Plan are exercisable in full six months after the date of
grant and are subject to repurchase at the original exercise price by the Company over the remaining vesting period which is generally five years for initial grants and one year for annual grants. At
December 31, 2003, there were no shares subject to repurchase under this plan.

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 and no shares are subject to repurchase by the Company.

On
February 9, 2000, Affymetrix completed the acquisition of Genetic MicroSystems and assumed all options outstanding under a Genetic MicroSystems stock option plan, now the
Affymetrix/GMS 1998

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Stock
Plan ("GMS Stock Plan"), which if fully vested and exercised, would amount to 144,776 shares of Affymetrix' common stock. No additional options are authorized for grant. Options granted under
the GMS Stock Plan expire no later than ten years from the date of grant.

On
October 30, 2000, Affymetrix completed the acquisition of Neomorphic and assumed all options outstanding under a Neomorphic stock option plan, now the Affymetrix/Neomorphic
1998 Stock Plan ("Neomorphic Stock Plan"), which if fully vested and exercised, would amount to 122,757 shares of Affymetrix' common stock. No additional options are authorized for grant. Options
granted under the Neomorphic Plan expire no later than ten years from the date of grant.

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. A total of 5,000,000 shares of common stock are authorized for issuance under the 2000 Stock Plan and no
shares are subject to repurchase by the Company.

Activity
under the stock plans through December 31, 2003 is as follows:

|                             |                   | Options Available for Grant |            | Number of Shares |            | Weighted Averaged Exercise Price Per Share
|---------------------------- | ----------------- | --------------------------- | ---------- | ---------------- | ---------- | ------------------------------------------
|Balance at December 31, 2000 |                   | 3,680,060                   |            | 10,885,847       |            | $                                         
|                             | Options granted   |                             | (2,500,182 | )                | 2,500,182  |                                           
|                             | Options exercised |                             |           |                  | (861,429   | )                                         
|                             | Options canceled  |                             | 806,776    |                  | (806,776   | )                                         
|                             |                   |                             |            |                  |            |                                           
|Balance at December 31, 2001 |                   | 1,986,654                   |            | 11,717,824       |            | $                                         
|                             | Options granted   |                             | (3,336,284 | )                | 3,336,284  |                                           
|                             | Options exercised |                             |           |                  | (496,569   | )                                         
|                             | Options canceled  |                             | 3,431,698  |                  | (3,431,698 | )                                         
|                             |                   |                             |            |                  |            |                                           
|Balance at December 31, 2002 |                   | 2,082,067                   |            | 11,125,841       |            | $                                         
|                             | Options granted   |                             | (436,350   | )                | 436,350    |                                           
|                             | Options exercised |                             |           |                  | (834,325   | )                                         
|                             | Options canceled  |                             | 652,623    |                  | (652,623   | )                                         
|                             | Options expired   |                             | (659,952   | )                |           |                                           
|                             |                   |                             |            |                  |            |                                           
|Balance at December 31, 2003 |                   | 1,638,388                   |            | 10,075,243       |            | $                                         
|                             |                   |                             |            |                  |            |                                           

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|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$0.1510.64   |  | 1,015,881           |  | 2.40               
|$10.7520.86  |  | 2,163,592           |  | 6.04               
|$21.1724.44  |  | 3,192,513           |  | 6.45               
|$24.4846.16  |  | 2,353,342           |  | 6.82               
|$47.85148.75 |  | 1,349,915           |  | 6.74               
|              |  |                     |  |                    
|$0.15148.75  |  | 10,075,243          |  | 6.08               
|              |  |                     |  |                    

There
were 5,836,929 options exercisable with a weighted-average exercise price of $22.80 and 4,701,770 options exercisable with a weighted-average exercise price of $28.26 in 2002 and
2001, respectively.

Upon
the acquisition of Neomorphic, the fair value of unvested common stock subject to restricted stock agreements and the intrinsic value of the unvested options held by employees was
deducted from the purchase price and allocated to deferred stock compensation. Deferred stock compensation is being amortized on a straight-line basis to compensation expense over the
remaining vesting term, generally two to four years. The fair value of unvested options held by non-employees was also deducted from the purchase price. These options will be periodically
revalued as they vest in accordance with applicable accounting guidance.

RESERVED SHARES

At December 31, 2003, shares reserved for future issuance are as follows:

Options outstanding

10,075,243Options available for future grants

1,638,388Convertible subordinated notes

6,559,159Warrants

66,11718,338,907


NOTE 16INCOME TAXES

The Company recorded an income tax provision of $2.6 million, $0.7 million and $0.3 million for the years ended December 31, 2003,
2002 and 2001, respectively. Pretax income (losses) from foreign operations were approximately $2.0 million, $(0.8) million, and $0.4 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

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

Year Ended December 31,2003

2002

2001Tax at federal statutory rate

$
5,896

$
(818
)
$
(11,592
)Loss for which no tax benefit is currently recognizable








5,521Previously unbenefitted losses


(6,506
)

(2,609
)

State credits


(2,846
)




State taxes, net


2,971


65


Non-deductible stock compensation


783


3,362


4,432Non-deductible goodwill amortization








1,639Foreign taxes


748


602


300Alternative minimum taxes


1,500





Other


17


99


$
2,563

$
701

$
300


Significant
components of the Company's deferred tax assets as of December 31, 2003 and 2002 are as follows (in thousands):

2003

2002Deferred tax assets:Net operating loss carryforwards

$
57,500

$
84,800Tax credit carryforwards


13,600


11,700Accrued legal


1,300


1,100Deferred revenue


25,500


4,700Capitalized research and development costs


5,100


9,100Property and equipment


2,000


3,100Other-net


15,800


9,800Total deferred tax assets


120,800


124,300Valuation allowance for deferred tax assets


(120,800
)

(124,300
)Net deferred tax assets

$


$



Realization of deferred tax assets is dependant upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The valuation allowance (decreased)/increased by $(3.5) million, $18.0 million, and $24.0 million during 2003,
2002, and 2001 respectively. Included in the valuation allowance balance is $64.0 million related to the exercise of stock options which are not reflected as an expense for financial reporting
purposes. Accordingly, any future reduction in the valuation allowance relating to this amount will be credited directly to equity and not reflected as an income tax benefit in the statement of
operations.

As
of December 31, 2003, the Company had net operating loss carryforwards for federal income tax purposes of approximately $162.0 million, which expire in the years 2008
through 2021, and federal research and development tax credits of approximately $7.1 million, which expire in the years 2008

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---

through
2023, if not utilized. Because of the change in ownership provisions of the Internal Revenue Code, a portion of the Company's net operating loss and tax credit carryforwards may be subject to
annual limitation. The annual limitation may result in the expiration of net operating loss and tax credit carryforwards before utilization.

NOTE 17PRODUCT SALES, GEOGRAPHIC SALES, AND SIGNIFICANT CUSTOMERS

The Company has determined that, in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" it operates in one segment as it only reports operating results on an aggregate basis to chief operating decision makers of the Company. The Company had product sales by type and
by region as follows for the years ended December 31, 2003, 2002 and 2001 (in thousands):

2003

2002

2001Total product and product related revenue:Probe arrays and related supplies

$
160,010

$
155,380

$
101,520Instruments


62,738


46,213


45,759Subscription fees


26,208


32,125


34,987Service and other


18,451


14,820


12,670License fee and milestone revenue


13,373





Total product and product related revenue

$
280,780

$
248,538

$
194,936Customer location:United States

$
152,937

$
160,573

$
132,032Europe(1)


82,850


58,802


37,531Japan(2)


35,409





Other


9,584


29,163


25,373Total

$
280,780

$
248,538

$
194,936


---

There
were no customers representing 10% or more of total revenue in 2003, 2002 and 2001.

NOTE 18401(K) PLAN

The Company maintains a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all
full-time U.S. employees. Participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company's expense for
matching contributions totaled $1.7 million in 2003, $2.5 million in 2002 and $1.9 million in 2001. Company contributions vest to employees ratably over four years.

100

---

NOTE 19SUBSEQUENT EVENTS

On January 9, 2004, the Company completed the redemption of its 5.0% notes ($102.0 million face value) due October 1, 2006. In connection
with the redemption, the Company recorded a charge of $3.1 million to interest expense in the first quarter of 2004, related to the unamortized issuance costs and redemption fee associated with
the repurchased notes. On February 19, 2004, the Company also completed the redemption of its 4.75% notes ($165.5 million face value) due February 15, 2007. In connection with the
redemption, the Company recorded a charge of $4.9 million to interest expense related to the unamortized issuance costs and redemption fee associated with the repurchased notes.

NOTE 20UNAUDITED QUARTERLY FINANCIAL INFORMATION

|                                              |  | 2003 |        | 2002 |  
|--------------------------------------------- |  | ---- | ------ | ---- | -
|
|
|Total revenue (excluding Perlegen)            |  | $    | 87,709 |      | $
|Perlegen revenue                              |  | $    | 1,455  |      | $
|Total cost of goods sold (excluding Perlegen) |  | $    | 26,800 |      | $
|Perlegen cost of goods sold                   |  | $    | 1,455  |      | $
|Net income (loss)                             |  | $    | 16,010 |      | $
|Basic net income (loss) per share             |  | $    | 0.27   |      | $
|Diluted net income (loss) per share           |  | $    | 0.26   |      | $

---

101

---



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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

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

As
required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15, Affymetrix management, including the Chief Executive Officer and Chief Financial Officer,
also conducted an evaluation of Affymetrix' internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, Affymetrix' internal control over financial reporting. Based on that evaluation, there were no changes in our internal control over financial reporting that
occurred during Affymetrix' last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, a control system,
no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in
assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system,
misstatements due to error or fraud may occur and may not be detected.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to the sections of the Company's proxy statement for the 2003 Annual Meeting of Stockholders entitled "Election of Directors."

CODE OF ETHICS

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

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to the sections of the Company's proxy statement for the 2004 Annual Meeting of Stockholders entitled "Executive Compensation,"
"Compensation Committee Report," "Certain Transactions" and "Compensation of Directors."

102

---

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

Incorporated by reference to the section of the Company's proxy statement for the 2004 Annual Meeting of Stockholders entitled "Stock Ownership of Principal
Shareholders and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the section of the Company's proxy statement for the 2004 Annual Meeting of Shareholders entitled "Certain Transactions."

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

|(a)(1) |  | Financial Statements. The financial statements as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference.                                                          
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)(2) |  | Financial Statement ScheduleSchedule IIValuation and Qualifying Accounts. All other schedules have been omitted as they are not required, not applicable or the information is otherwise included.
|(a)(3) |  | Exhibits:                                                                                                                                                                                           

|EXHIBIT
NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(1)         |  | Restated Certificate of Incorporation                                                                                                                   
|3.2(2)         |  | Bylaws                                                                                                                                                  
|3.3(3)         |  | Amendment No. 1 to the Bylaws dated as of April 25, 2001.                                                                                               
|3.5(4)         |  | Summary of Rights to Purchase Shares of Preferred Stock pursuant to the Rights Agreement dated as of October 15, 1998                                   
|4.1(5)         |  | Rights Agreement, dated October 15, 1998, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent                         
|4.2(6)         |  | Indenture dated as of September 22, 1999, between Affymetrix, Inc. and The Bank of New York, as Trustee                                                 
|4.3(7)         |  | Amendment No. 1 to Rights Agreement, dated as of February 7, 2000, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent
|4.4(8)         |  | Indenture, dated as of February 14, 2000, between Affymetrix, Inc. and The Bank of New York, as Trustee                                                 
|4.6(26)        |  | Indenture dated as of December 15, 2003, between Affymetrix, Inc. and The Bank of New York, as Trustee                                                  
|               |  |                                                                                                                                                         

103

---

|4.7(26)    |  | Affymetrix, Inc. 0.75% Senior Convertible Notes due 2033 Registration Rights Agreement dated December 15, 2003    
|---------- |  | ------------------------------------------------------------------------------------------------------------------
|10.1(9)   |  | 1993 Stock Plan, as amended                                                                                       
|10.2(9)   |  | 1996 Nonemployee Directors Stock Option Plan                                                                      
|10.20(9)* |  | Form of Director and Officer Indemnification Agreement                                                            
|10.22(9)   |  | Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994                                           
|10.23(10)  |  | Lease between Sobrato Interests and Affymetrix, Inc. dated May 31, 1996 (3380 Central Expressway, Santa Clara, CA)
|10.24(10)  |  | Lease between Sobrato Interests and Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA)
|10.25(11)* |  | Collaboration Agreement between bioMérieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996     
|10.26(11)* |  | Manufacturing Agreement between bioMérieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996     
|10.30(12)* |  | License Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated November 28, 1997                   
|10.32(13)* |  | Agreement between Affymetrix, Inc. and Roche Molecular Systems, Inc. effective as of April 23, 1998               
|10.33(13)* |  | Agreement between Affymetrix, Inc. and Enzo Diagnostics, Inc. effective as of April 24, 1998.                     
|10.34(14)* |  | Consortium Agreement between Beckman Coulter, Inc. and the Company dated July 31, 1998.                           
|10.35(14)* |  | Letter Agreement between Beckman Coulter, Inc. and the Company dated July 29, 1998                                
|10.36(15) |  | 1998 Stock Incentive Plan                                                                                         
|10.37(15) |  | Form of Officer and Director Indemnification Agreement                                                            
|10.42(16)  |  | Lease Agreement by and between the Company and Aetna Life Insurance Company dated as of July 30, 1999             
|10.44(17)  |  | Amendment to Lease by and between Affymetrix, Inc. and Harry Locklin dated as of May 12, 1999                     
|10.46(18)  |  | First Addendum to Lease by and between Solar Oakmead Joint Venture and Affymetrix, Inc.                           
|10.47(19)  |  | Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of Affymetrix, Inc.                           
|10.48(20)  |  | Affymetrix, Inc. 2000 Equity Incentive Plan                                                                       
|10.50(21)  |  | Amended and Restated 1996 Non-Employee Directors Stock Plan.                                                      
|10.51(22)  |  | Amended and Restated 2000 Equity Incentive Plan.                                                                  
|10.52(23) |  | Employment Agreement between Edward M. Hurwitz and the Company dated October 30, 2001                             
|10.53(24) |  | Letter Agreement dated March 27, 2002 between Ronald D. Verdoorn and Affymetrix, Inc.                             
|           |  |                                                                                                                   

104

---

|10.55(25) |  | Secured Promissory Note in the principal amount of $400,000 executed by Trevor J. Nicholls, Ph.D. dated January 8, 2003 pursuant to an extension of credit made to Dr. Nicholls by the Company on June 21, 2002.
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.56(25) |  | Secured Promissory Note in the principal amount of $600,000 executed by Trevor J. Nicholls, Ph.D. dated January 8, 2003 pursuant to an extension of credit made to Dr. Nicholls by the Company on June 21, 2002.
|10.57(25)* |  | Common Terms Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                                           
|10.58(25)* |  | License Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003                                                                                                                 
|10.59(25)* |  | Affymetrix Instrument and Chip Supply Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                  
|10.60(25)* |  | Research & Development Collaboration Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                   
|10.61(25)* |  | Diagnostic Product and Instrument Agency Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                               
|10.62(25)* |  | Affymetrix Instrument Agency Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                           
|10.63      |  | Lease between Sobrato Interests and Affymetrix dated July 3, 2002 (3420 Central Expressway, Santa Clara, CA)                                                                                                    
|10.64      |  | First Amendment to Lease between Sobrato Interests and Affymetrix dated September 30, 2003 (3420 Central Expressway, Santa Clara, CA)                                                                           
|10.65     |  | Loan Agreement in principal amount of $1.2 million executed by Barbara A. Caulfield dated January 7, 2004 pursuant to an extension of credit made to Ms. Caulfield by the Company on July 16, 2001.             
|12.1(26)   |  | Ratio of Earnings to Fixed Charges                                                                                                                                                                              
|21         |  | List of Subsidiaries                                                                                                                                                                                            
|23         |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                              
|31.1       |  | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                  
|31.2       |  | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                  
|32.1       |  | Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                  
|32.2       |  | Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                  

---

105

---

106

---

On
October 22, 2003, the Company filed a Report on Form 8-K to report under Item 9 (Regulation FD Disclosure) as Information Furnished under Item 12 (Results of
Operations and Financial Condition) that the Company issued a press release announcing the Company's operating results for the quarter ended September 30, 2003.

On
December 10, 2003, the Company filed a Report on Form 8-K to report under Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma Financial
Information and Exhibits) that the Company issued a press release announcing the Company's intention to commence, and on December 10, 2003 announced the pricing of, an offering of
$100 million in aggregate principal amount of 0.75% senior convertible notes due 2033 to be issued pursuant to Rule 144A. The Company also granted the initial purchasers an option to
purchase an additional $20 million of 0.75% senior convertible notes. In addition, on December 10, 2003, Affymetrix, Inc. announced that it will redeem its 5% convertible
subordinated notes due 2006. For additional information concerning the 0.75% senior convertible notes offering and the repurchase of the 5% convertible subordinated notes, refer to the exhibit index
contained in this report.

On
January 15, 2004, the Company filed a Report on Form 8-K pursuant to Item 9 (Regulation FD Disclosure) as Information Furnished under Item 12 (Results of
Operations and Financial Condition). Under the Form 8-K, Affymetrix furnished that it reaffirmed its previous revenue guidance for fiscal year 2003 which was issued in its
October 23, 2003 earnings press release.

On
January 28, 2004, the Company filed a Report on Form 8-K to report under Item 9 (Regulation FD Disclosure) as Information Furnished under Item 12 (Results of
Operations and Financial Condition) that the Company issued a press release announcing the Company's operating results for the year ended December 31, 2003.

107

---



AFFYMETRIX, INC.    Schedule IIValuation and Qualifying Accounts  (in thousands)

|                                |  | Balance at
Beginning of
Period |       | Charged to
Costs and
Expenses |   | Charged to
Other
Accounts |  | Deductions |       | Balance at
End of Period
|------------------------------- |  | ------------------------------ | ----- | ----------------------------- | - | ------------------------- |  | ---------- | ----- | ------------------------
|Year Ended December 31, 2003:   |  |                                |       |                               |   |                           |  |            |       |                         
|Allowance for doubtful accounts |  | $                              | 2,835 |                               | $ | 161                       |  | $          | 1,385 | (1)                     
|Year Ended December 31, 2002:   |  |                                |       |                               |   |                           |  |            |       |                         
|Allowance for doubtful accounts |  | $                              | 1,847 |                               | $ | 1,351                     |  | $          |      |                         
|Year Ended December 31, 2001:   |  |                                |       |                               |   |                           |  |            |       |                         
|Allowance for doubtful accounts |  | $                              | 1,584 |                               | $ | 320                       |  | $          |      |                         

---

108

---



SIGNATURES

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

|               |  | AFFYMETRIX, INC.(Registrant)
|-------------- |  | ----------------------------
|March 15, 2004 |  | By:                         

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

|    |  | Name                                                  |  | Title                                                                           |  | Date          
|--- |  | ----------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | --------------
|    |  |                                                       |  |                                                                                 |  |               
|By: |  | /s/STEPHEN P.A. FODOR, PH.D.Stephen P.A. Fodor, Ph.D. |  | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |  | March 15, 2004
|By: |  | /s/GREGORY T. SCHIFFMANGregory T. Schiffman           |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer) |  | March 15, 2004
|By: |  | /s/JOHN D. DIEKMAN, PH.D.John D. Diekman, Ph.D.       |  | Director                                                                        |  | March 15, 2004
|By: |  | /s/PAUL BERG, PH.D.Paul Berg, Ph.D.                   |  | Director                                                                        |  | March 15, 2004
|By: |  | /s/VERNON R. LOUCKS, JR.Vernon R. Loucks, Jr.         |  | Director                                                                        |  | March 15, 2004
|By: |  | /s/SUSAN E. SIEGELSusan E. Siegel                     |  | Director                                                                        |  | March 15, 2004
|By: |  | /s/DAVID B. SINGERDavid B. Singer                     |  | Director                                                                        |  | March 15, 2004
|By: |  | /s/JOHN A. YOUNGJohn A. Young                         |  | Director                                                                        |  | March 15, 2004

109

---

INDEX TO EXHIBITS

|EXHIBIT
NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(1)         |  | Restated Certificate of Incorporation                                                                                                                   
|3.2(2)         |  | Bylaws                                                                                                                                                  
|3.3(3)         |  | Amendment No. 1 to the Bylaws dated as of April 25, 2001.                                                                                               
|3.5(4)         |  | Summary of Rights to Purchase Shares of Preferred Stock pursuant to the Rights Agreement dated as of October 15, 1998                                   
|4.1(5)         |  | Rights Agreement, dated October 15, 1998, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent                         
|4.2(6)         |  | Indenture dated as of September 22, 1999, between Affymetrix, Inc. and The Bank of New York, as Trustee                                                 
|4.3(7)         |  | Amendment No. 1 to Rights Agreement, dated as of February 7, 2000, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent
|4.4(8)         |  | Indenture, dated as of February 14, 2000, between Affymetrix, Inc. and The Bank of New York, as Trustee                                                 
|4.6(26)        |  | Indenture dated as of December 15, 2003, between Affymetrix, Inc. and The Bank of New York, as Trustee                                                  
|4.7(26)        |  | Affymetrix, Inc. 0.75% Senior Convertible Notes due 2033 Registration Rights Agreement dated December 15, 2003                                          
|10.1(9)       |  | 1993 Stock Plan, as amended                                                                                                                             
|10.2(9)       |  | 1996 Nonemployee Directors Stock Option Plan                                                                                                            
|10.20(9)*     |  | Form of Director and Officer Indemnification Agreement                                                                                                  
|10.22(9)       |  | Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994                                                                                 
|10.23(10)      |  | Lease between Sobrato Interests and Affymetrix, Inc. dated May 31, 1996 (3380 Central Expressway, Santa Clara, CA)                                      
|10.24(10)      |  | Lease between Sobrato Interests and Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA)                                      
|10.25(11)*     |  | Collaboration Agreement between bioMérieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996                                           
|10.26(11)*     |  | Manufacturing Agreement between bioMérieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996                                           
|10.30(12)*     |  | License Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated November 28, 1997                                                         
|10.32(13)*     |  | Agreement between Affymetrix, Inc. and Roche Molecular Systems, Inc. effective as of April 23, 1998                                                     
|10.33(13)*     |  | Agreement between Affymetrix, Inc. and Enzo Diagnostics, Inc. effective as of April 24, 1998.                                                           
|10.34(14)*     |  | Consortium Agreement between Beckman Coulter, Inc. and the Company dated July 31, 1998.                                                                 
|10.35(14)*     |  | Letter Agreement between Beckman Coulter, Inc. and the Company dated July 29, 1998                                                                      
|               |  |                                                                                                                                                         

---

|10.36(15) |  | 1998 Stock Incentive Plan                                                                                                                                                                                       
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.37(15) |  | Form of Officer and Director Indemnification Agreement                                                                                                                                                          
|10.42(16)  |  | Lease Agreement by and between the Company and Aetna Life Insurance Company dated as of July 30, 1999                                                                                                           
|10.44(17)  |  | Amendment to Lease by and between Affymetrix, Inc. and Harry Locklin dated as of May 12, 1999                                                                                                                   
|10.46(18)  |  | First Addendum to Lease by and between Solar Oakmead Joint Venture and Affymetrix, Inc.                                                                                                                         
|10.47(19)  |  | Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of Affymetrix, Inc.                                                                                                                         
|10.48(20)  |  | Affymetrix, Inc. 2000 Equity Incentive Plan                                                                                                                                                                     
|10.50(21)  |  | Amended and Restated 1996 Non-Employee Directors Stock Plan.                                                                                                                                                    
|10.51(22)  |  | Amended and Restated 2000 Equity Incentive Plan.                                                                                                                                                                
|10.52(23) |  | Employment Agreement between Edward M. Hurwitz and the Company dated October 30, 2001                                                                                                                           
|10.53(24) |  | Letter Agreement dated March 27, 2002 between Ronald D. Verdoorn and Affymetrix, Inc.                                                                                                                           
|10.55(25) |  | Secured Promissory Note in the principal amount of $400,000 executed by Trevor J. Nicholls, Ph.D. dated January 8, 2003 pursuant to an extension of credit made to Dr. Nicholls by the Company on June 21, 2002.
|10.56(25) |  | Secured Promissory Note in the principal amount of $600,000 executed by Trevor J. Nicholls, Ph.D. dated January 8, 2003 pursuant to an extension of credit made to Dr. Nicholls by the Company on June 21, 2002.
|10.57(25)* |  | Common Terms Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                                           
|10.58(25)* |  | License Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003                                                                                                                 
|10.59(25)* |  | Affymetrix Instrument and Chip Supply Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                  
|10.60(25)* |  | Research & Development Collaboration Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                   
|10.61(25)* |  | Diagnostic Product and Instrument Agency Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                               
|10.62(25)* |  | Affymetrix Instrument Agency Agreement between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                           
|10.63      |  | Lease between Sobrato Interests and Affymetrix dated July 3, 2002 (3420 Central Expressway, Santa Clara, CA)                                                                                                    
|10.64      |  | First Amendment to Lease between Sobrato Interests and Affymetrix dated September 30, 2003 (3420 Central Expressway, Santa Clara, CA)                                                                           
|10.65     |  | Loan Agreement in principal amount of $1.2 million executed by Barbara A. Caulfield dated January 7, 2004 pursuant to an extension of credit made to Ms. Caulfield by the Company on July 16, 2001.             
|           |  |                                                                                                                                                                                                                 

---

|12.1(26) |  | Ratio of Earnings to Fixed Charges                                                            
|-------- |  | ----------------------------------------------------------------------------------------------
|21       |  | List of Subsidiaries                                                                          
|23       |  | Consent of Ernst & Young LLP, Independent Auditors                                            
|31.1     |  | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
|31.2     |  | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
|32.1     |  | Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|32.2     |  | Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

---

|(1)  |  | Incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K as filed on June 13, 2000 (File No. 000-28218).                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2)  |  | Incorporated by reference to Appendix C of the Registrant's Definitive Proxy Statement on Schedule 14A as filed on April 29, 1998 (File No. 000-28218).                                   
|(3)  |  | Incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-Q as filed on May 15, 2001 (File No. 000-28218).                                                                     
|(4)  |  | Incorporated by reference to Exhibit 3.3 filed with Registrant's Form 8-K as filed on October 16, 1998 (File No. 000-28218).                                                              
|(5)  |  | Incorporated by reference to Exhibit 1 of the Registrant's Form 8-A as filed on October 16, 1998 (File No. 000-28218).                                                                    
|(6)  |  | Incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-4 as filed on October 14, 1999 (File No. 333-88987).                                        
|(7)  |  | Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-A/A as filed on March 29, 2000 (File No. 000-28218).                                                                  
|(8)  |  | Incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form S-3 as filed on May 11, 2000 (File No. 333-36790).                                            
|(9)  |  | Incorporated by reference to the same number exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended.                                          
|(10) |  | Incorporated by reference to the same number exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 000-28218).                     
|(11) |  | Incorporated by reference to the same number exhibit filed with the Company's Report on Form 10-K for the year ended December 31, 1996 (File No. 000-28218).                              
|(12) |  | Incorporated by reference to the same number exhibit filed with the Registrant's Report on Form 10-K for the year ended December 31, 1997 as filed on March 31, 1998 (File No. 000-28218).
|(13) |  | Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on August 14, 1998 (File No. 000-28218).                                                  
|(14) |  | Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on November 16, 1998 (File No. 000-28218).                                                
|     |  |                                                                                                                                                                                           

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|(15) |  | Incorporated by reference to the same number exhibit filed with the Registrant's Report on Form 10-K for the year ended December 31, 1998 as filed on March 31, 1999 (File No. 000-28218).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(16) |  | Incorporated by reference to the same number exhibit filed with Registrant's Form 10-Q as filed on August 16, 1999 (File No. 000-28218).                                                  
|(17) |  | Incorporated by reference to Exhibit 10.11 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685).                                                               
|(18) |  | Incorporated by reference to Exhibit 10.12 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685).                                                               
|(19) |  | Incorporated by reference to Exhibit 10.13 filed with Registrant's Registration Statement on Form S-3 (File No. 333-82685).                                                               
|(20) |  | Incorporated by reference to Appendix B of the Registrant's Definitive Proxy Statement on Schedule 14A as filed on May 2, 2000 (File No. 000-28218).                                      
|(21) |  | Incorporated by reference to Exhibit 10.50 of the Registrant's Form 10-Q as filed on May 15, 2001 (File No. 000-28218).                                                                   
|(22) |  | Incorporated by reference to Exhibit 10.51 of the Registrant's Form 10-Q as filed on August 13, 2001 (File No. 000-28218).                                                                
|(23) |  | Incorporated by reference to Exhibit 10.52 of the Registrant's Form 10-K as filed on March 29, 2002 (File No. 000-28218).                                                                 
|(24) |  | Incorporated by reference to the same number exhibit filed with the Registrant's Form 10-Q as filed on May 15, 2002 (File No. 000-28218).                                                 
|(25) |  | Incorporated by reference to the same number exhibit filed with the Registrant's Form 10-Q as filed on May 15, 2003 (File No. 000-0-28218).                                               
|(26) |  | Incorporated by reference to the same number exhibit filed with the Registrant's Form S-3 as filed on January 29, 2004 (File No. 333-112311).                                             
|*    |  | Confidential treatment granted                                                                                                                                                            
|    |  | Management contract, compensatory plan or arrangement                                                                                                                                     

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