**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON,D.C. 20549

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**FORM 10-K/A**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**FORTHE FISCAL YEAR ENDED DECEMBER 31, 2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 (NO FEE REQUIRED)

**FORTHE TRANSITION PERIOD FROM ***            * TO          

**COMMISSIONFILE NUMBER 0-28218**

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**AFFYMETRIX, INC.**

(Exact name of registrantas specified in its charter)
| **DELAWARE**                                                     | ** ** | **77-0319159**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification Number) |
|                                                             |       |                                  |
| **3420  CENTRAL EXPRESSWAY  SANTA CLARA, CALIFORNIA**            | ** ** | **95051**                             |
| (Address of  principal executive offices)                        |       | (Zip Code)                            |

 

**(408) 731-5000**(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act:**None**

Securities registeredpursuant to Section 12(g) of the Act:**Common Stock, $0.01Preferred Stock Purchase Rights**

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 orSection 15(d) of the Act.Yes o  No x

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes oNo x

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K/A or any amendment to this Form 10-K/A. x

Indicate by checkmark if the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b(2) of the Exchange Act.(Check one). 

Large acceleratedfiler x                    Acceleratedfiler o                    Non-acceleratedfiler o

 

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

The aggregate market value of the registrant’s commonstock held by non-affiliates of the registrant at June 30, 2005, based onthe closing price of such stock on the Nasdaq National Market on such date, wasapproximately $1.44 billion. The number of shares of the registrant’s CommonStock, $0.01 par value, outstanding on March 2, 2006, was 67,398,440.

**DOCUMENTSINCORPORATED BY REFERENCE**

Certain sections of the Proxy Statement to be filed inconnection with the 2006 Annual Meeting of Stockholders are incorporated byreference into Part III of this Form 10-K/A where indicated.

 

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**Explanatory NoteRestatement of Consolidated Financial Statements**

We are amendingour Annual Report on Form 10-K (the “Original Filing”) for the year endedDecember 31, 2005 to restate our consolidated financial statements for theyears ended December 31, 2005, 2004 and 2003 and the related disclosures.  This Form 10-K/A also includes therestatement of selected financial data as of and for the years ended December31, 2005, 2004, 2003, 2002 and 2001, which is included in Item 6.

On August 9,2006, we concluded that our consolidated financial statements for the yearsended December 31, 2005, 2004 and 2003 as well as the selected financialdata for the years ended December 31, 2002 and 2001 should be restated torecord additional non-cash stock-based compensation expense, and the relatedincome tax impact, resulting from stock options granted during fiscal years1997 to 1999 that were incorrectly accounted for under U.S. generally acceptedaccounting principles. Our decision to restate our consolidated financialstatements was based on the results of an internal review of our historicalstock option granting practices from January 1, 1997 through May 31, 2006performed under the direction of the Audit Committee of the Board of Directors. The review did not find any pattern or practice of inappropriatelyidentifying grant dates with hindsight in order to provide “discounted” or “in-the-money”grants.

We have notamended and do not anticipate amending our Annual Reports on Form 10-K for anyof the years prior to December 31, 2005, nor will we be amending ourQuarterly Reports on Form 10-Q that were originally filed, with the exceptionof our Form 10-Q for the quarter ended March 31, 2006. The information that hasbeen previously filed or otherwise reported for these periods is superseded bythe information in this Annual Report on Form 10-K/A. Accordingly, theconsolidated financial statements and related financial information containedin those previously filed reports should no longer be relied upon.

Allthe information in this Form 10-K/A is as of December 31, 2005 and doesnot reflect any subsequent information or events other than the restatement andrelated matters discussed in Note 3 and 20 to the consolidated financialstatements appearing in this Form 10-K/A. Only the following items havebeen amended as a result of, and to reflect, the restatement, and no otherinformation in the Original Filing is amended as a result of the restatement:

Part I – Item 1– Risk Factors;

Part II –Item 6 – Selected Financial Data;

Part II –Item 7 – Management’s Discussion and Analysis of Financial Condition andResults of Operations;

Part II –Item 8 – Financial Statements and Supplementary Data;

Part II – Item 9A –Controls and Procedures

Part IV –Item 15 – Exhibits and Financial Statement Schedules

Otherthan as discussed above, this Form 10-K/A does not reflect events occurringafter the filing of the Original Filing or modify or update disclosures(including, except as otherwise provided herein, the exhibits to the OriginalFiling), affected by subsequent events. Accordingly, this Form 10-K/A should beread in conjunction with our periodic filings made with the Securities andExchange Commission subsequent to the date of the Original Filing, includingany amendments to those filings. In addition, this Form 10-K/A includes updatedcertifications from our Chief Executive Officer and Chief Financial Officer asExhibits 31.1, 31.2, 32.1 and 32.2.

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**AFFYMETRIX, INC.**

**FORM 10-K/ADECEMBER 31, 2005**

**TABLE OF CONTENTS**
| Item No. | ** ** | ** **                                                                                                            | ** ** | **Page** |
|----------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|----------|
|     |       | PART I                                                                                                           |       |     |
| 1.       |       | Business                                                                                                              |       | 4        |
| 1A.      |       | Risk  Factors                                                                                                         |       | 25       |
| 1B.      |       | Unresolved  Staff Comments                                                                                            |       | 34       |
| 2.       |       | Properties                                                                                                            |       | 35       |
| 3.       |       | Legal  Proceedings                                                                                                    |       | 35       |
| 4.       |       | Submission  of Matters to a Vote of Security Holders                                                                  |       | 37       |
|     |       | PART II                                                                                                          |       |     |
| 5.       |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Repurchases of Equity Securities |       | 38       |
| 6.       |       | Selected  Financial Data                                                                                              |       | 38       |
| 7.       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |       | 40       |
| 7A.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                           |       | 58       |
| 8.       |       | Financial  Statements and Supplementary Data                                                                          |       | 60       |
| 9.       |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                 |       | 104      |
| 9A.      |       | Controls  and Procedures                                                                                              |       | 104      |
| 9B.      |       | Other  Information                                                                                                    |       | 108      |
|     |       | PART III                                                                                                         |       |     |
| 10.      |       | Directors  and Executive Officers of the Registrant                                                                   |       | 108      |
| 11.      |       | Executive  Compensation                                                                                               |       | 108      |
| 12.      |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                      |       | 108      |
| 13.      |       | Certain  Relationships and Related Transactions                                                                       |       | 108      |
| 14.      |       | Principal  Accounting Fees and Services                                                                               |       | 108      |
|     |       | PART IV                                                                                                          |       |     |
| 15.      |       | Exhibits  and Financial Statement Schedules                                                                           |       | 109      |
|     |       | Signatures                                                                                                            |       | 113      |

 

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**PART I**

**ITEM1.**                    BUSINESS

**Forward-LookingStatements**

All statements inthis Annual Report on Form 10-K/A that are not historical are “forward-lookingstatements” within the meaning of the federal securities laws, includingstatements regarding our “expectations,” “beliefs,” “hopes,” “intentions,” “strategies”or the like. Such statements are based on our current expectations and aresubject to a number of factors and uncertainties that could cause actualresults to differ materially from those described in the forward-lookingstatements. We caution investors that there can be no assurance that actualresults or business conditions will not differ materially from those projectedor suggested in such forward-looking statements as a result of variousfactors, including, but not limited to, the risk factors discussed in “RiskFactors” contained in Item 1A of this report and elsewhere in thisreport. We expressly disclaim any obligation or undertaking to release publiclyany updates or revisions to any forward-looking statements containedherein to reflect any change in our expectations with regard thereto or anychange in events, conditions, or circumstances on which any such statements arebased.

**NarrativeDescription of Business**

***Overview***

We are engaged inthe development, manufacture, sale and service of consumables and systems forgenetic analysis in the life sciences and clinical healthcare and arerecognized as a market leader in creating breakthrough tools that are advancingour understanding of the molecular basis of life. The markets for our productscurrently include all aspects of molecular biology research in the lifesciences, including basic human disease research, genetic analysis,pharmaceutical drug discovery and development, pharmacogenomics (researchrelating to how a person’s genes affect the body’s response to drugtreatments), toxicogenomics (research relating to the measurement of geneexpression as a predictor of toxicity) and molecular diagnostics. Additionalmarkets are emerging in agricultural research, plant breeding, food testing,pathogen identification and consumer genetics. Our integrated GeneChip®microarray platform includes: disposable DNA probe arrays (chips) consisting ofnucleic acid sequences set out in an ordered, high density pattern, certainreagents for use with the probe arrays, a scanner and other instruments used toprocess the probe arrays, and software to analyze and manage genomic or geneticinformation obtained from the probe arrays. Related microarray technology alsooffered by us includes licenses for fabricating, scanning, collecting andanalyzing results from complementary technologies.

Our businessstrategy is to capitalize on our leadership position in the DNA microarrayfield by marketing our GeneChip® technologies to customers based on two centralapplications: gene expression monitoring and DNA variation detection. Due tothe novel, massively parallel approach to studying biological systems thatGeneChip® technology enables, numerous discoveries across many disciplines havealready been made, as evidenced by the over 4,000 peer-reviewed publicationsreleased that have cited GeneChip® technology. The molecular diagnosticapplication of GeneChip® technologies for diagnosing and guiding treatment ofdisease is an emerging market opportunity in health management that seeks toimprove the effectiveness of health care by collecting information about DNAvariation and RNA expression in patients at various times from screening anddiagnosis through prognosis and throughout therapeutic monitoring. We currentlysell our products directly to pharmaceutical, biotechnology, agrichemical,diagnostics and consumer products companies as well as academic researchcenters, government research laboratories, private foundation laboratories andclinical reference laboratories in North America and Europe. We also sell ourproducts through life science supply specialists acting as authorizeddistributors in Latin America, India, the Middle East and Asia Pacific regions,including China.

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InMarch 1992, Affymetrix, Inc. was incorporated in California as awholly-owned subsidiary of Affymax N.V. (Affymax) and we have continuedour business and operations as Affymetrix. We completed our initial publicoffering in June 1996 and in September 1998 we reincorporated as aDelaware corporation. Our headquarters and principal research and developmentfacilities are located in Santa Clara, California, and we maintain facilitiesin West Sacramento, California (probe array manufacturing), Sunnyvale,California (sales, marketing, administration, and array research anddevelopment), Emeryville, California (bioinformatics and software development),South San Francisco, California (manufacturing and research and development),Bedford, Massachusetts (instrument development and manufacturing), andadditional sales offices in the United Kingdom, Singapore and Japan.

*Acquisition*

OnOctober 21, 2005, Affymetrix acquired 100% of the outstanding shares ofParAllele BioScience, Inc. (“ParAllele”), a provider of comprehensivegenetic discovery solutions to the life science research, pharmaceutical anddiagnostic sectors. ParAllele’s products and services utilize a unique approachthat leverages novel biochemical processes rather than complex instrumentationto discover and analyze minute variations in the human genome. Affymetrixexpects the acquisition to accelerate the development and commercialization ofnew products and create greater opportunities for market penetration andrevenue generation as well as increase Affymetrix’ core assay developmentcapabilities.

**ScientificBackground and Technology**

*Introduction tothe Genome and its Opportunity*

The geneticcontent of an organism is known as its “genome.” All known genomes are composedof either deoxyribonucleic acid (DNA) or ribonucleic acid (RNA). Theinstructions required for every living cell to develop its characteristic formand function are believed to be represented within discrete regions of the DNAor RNA known as genes. The instructions contained within genes are embodied inthe 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 chemicalbuilding blocks of DNA and RNA. In protein coding genes, the sequence of thesebuilding 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 thesequence code of the gene. These proteins are an example of a “hard copy”output of the genetic code and contribute to the structure, biochemicalfunctions and communication mechanisms of the cell in which they are formed.

The DNA moleculepossesses a chemical structure which consists of a combination of twoDNA strands with hydrogen bonds between nucleotide bases on one strand tocomplementary nucleotide bases on the other strand. Only certain pairs of thebases 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 canform a bond with a DNA strand containing bases in the sequence GCATGCCTA.Such paired DNA strands are said to be “complementary” and can form adouble helix structure in a process called “hybridization.” Our GeneChip®technology uses the principle of hybridization to recognize the presence ofspecific gene sequences and to analyze genetic information.

Genes are segmentsof DNA that serve as information packets of the genome. In general, a gene’sfunctional information is made available to a cell through the process oftranscription or “gene expression,” whereby the sequence is copied into an RNAmolecule. Protein coding genes may span thousands to hundreds of thousands, oreven millions, of nucleotide bases since the non-coding regions of a gene(called “introns”) and the coding regions of a gene (called “exons”) areusually distributed within neighboring genomic sequences that are nottranslated into proteins or used, or to the extent currently understood, as afunctional part of the gene. The number of distinct protein coding genes in thehuman genome is estimated to be between 25,000 to 30,000. The number offunctional non-coding sequences is the focus of current research interest.Though currently unknown, the number of functional non-coding sequences isestimated to be significantly larger than the number of protein coding genes inthe human genome.

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A primary goal inlife sciences research and modern molecular medicine is to unravel thecomplexities of the genome. This has generated a worldwide effort to identifyand sequence the genomes of many organisms. In the human genome, this effortincludes more than three billion nucleotide pairs. In recent years, the effortled by the Human Genome Project and related academic, government and industryresearch projects resulted in a first near complete draft of the human genomesequence. It is anticipated that many years of research will be required togain a better understanding of the complexities of the genome, and itscharacteristics in normal and diseased conditions. We believe that this willlead to a new healthcare paradigm where disease is understood at the molecularlevel, allowing patients to be diagnosed according to genetic information andthen treated with drugs designed to work on specific molecular targets.Ultimately, in addition to diagnosis and treatment, prevention and cure ofdisease might also be possible based on genetic information.

While scientistsare 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 scienceto understand the complexities of gene expression, the interaction of geneswith our environment and the role of genes in disease and health will continueto provide growth opportunities for our existing gene expression and DNAanalysis products, and will continue to create new opportunities in clinicalmedicine. Toward this end we have partnered with the National Cancer Instituteto assemble the first complete map of the human transcriptome (a catalog of allof the RNA transcripts made by the genome). This ongoing effort has already ledto the discovery of many novel protein coding and non-protein coding sequencesthat we expect to include in future products. This effort is also promptingcontinued development of our sample preparation, array, instrumentation and dataanalysis technologies.

*GeneticVariability and Disease*

For the most part,each cell in a complex organism contains a complete copy of the genome. In apopulation of organisms, individuals vary from one another because ofdifferences in gene sequences which are inherited from each parent andsometimes through the introduction of sequence changes due to environmentaldamage or biological errors in processes like gene replication. In some casesthese variations, or polymorphisms, have little detectable effect on thebiology of the organism, while in other cases they may result in an alteredbiological response to the environment which could thereby lead to disease. Byscreening for these polymorphisms, researchers seek to identify those thatmight be implicated in specific diseases. Sometimes it is not a singlevariation, but the combination of these sequence differences that leads to adiseased state. For this reason, researchers look at the patterns of thesepolymorphisms in a large number of healthy and affected organisms in order tocorrelate specific gene polymorphisms with specific diseases.

Another majormechanism by which the fate and function of cells is regulated is the timingand level of gene expression, which can reflect the interface between genes andthe environment. Although most cells contain an organism’s full set of genes,each cell expresses only a fraction of this set of genes in differentquantities and at different times. The expression patterns of genes can becorrelated with many human diseases such as cancer, as well as with theeffectiveness of treatment in specific patient populations for which newtherapies can be developed. By identifying genes that are differentiallyexpressed in particular diseases or patient populations, novel moleculartargets and treatments may be identified and validated. In addition, geneexpression signatures may be identified that allow the selection of optimaltreatment for a single individual.

In order tounderstand the impact of genomics on health, disease and other aspects of thehuman condition, scientists must compare both the sequence variation and thegene expression patterns of healthy and diseased individuals, tissues andcells. We believe that our GeneChip® platform not only enables scientists to attainambitious goals, from identifying genetic variations associated with disease todiscovering new drug targets, but also simplifies, accelerates and reduces thecost of understanding this genetic information.

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*GeneChip® ProbeArray Technology*

Our GeneChip®technology leverages semiconductor-based photolithographic fabricationtechniques, which enables us to synthesize a large variety of predetermined DNAsequences simultaneously in predetermined locations on a small glass chipcalled a “probe array.” Photolithography is a technique which uses light tocreate exposure patterns on the glass chip and direct chemical reactions. Theprocess begins by coating the chip with light-sensitive chemicalcompounds that prevent chemical coupling. These light-sensitive compoundsare called “protecting groups.” Lithographic masks, which consist ofpredetermined transparent patterns etched into a glass plate that either blockor transmit light, are used to selectively illuminate the glass surface of thechip. Only those areas exposed to light are deprotected, and thus activated forchemical coupling through removal of the light-sensitive protectinggroups. The entire surface is then flooded with a solution containing the firstin a series of DNA building blocks (A, C, G or T). Couplingonly occurs in those regions that have been deprotected through illumination.The new DNA building block also bears a light-sensitive protectinggroup so that the cycle can be repeated.

This process ofexposure to light and subsequent chemical coupling can be repeated many timeson the same chip in order to generate a complex array of DNA sequences ofdefined length. The intricate illumination patterns allow us to buildhigh-density arrays of many diverse DNA sequences in a small area. Unlikeconventional synthesis techniques, which generally use a linear process tocreate compounds, our synthesis technique is combinatorial, in that the numberof different compounds synthesized grows exponentially with the number ofcycles in the synthesis. Currently available commercial arrays contain over 6.0million unique sequences. Each unique sequence is 25 nucleotides in length andis represented millions of times within a specified area of the probe array.Just as in the semiconductor industry, we manufacture probe arrays in a waferformat. Each wafer is approximately five inches square and can contain over300 million unique probe sequences based on current technology. Wholewafers have been used by a related party of Affymetrix, Perlegen Sciences, Inc.,in its work to resequence multiple samples of the human genome. For ourcommercial array products, we can manufacture a large number of identical ordifferent DNA probe arrays on a glass wafer, which is then diced intoindividual chips. Given the large amount of unique sequences represented in ourprobe arrays, our technology enables the efficient analysis of a multitude ofDNA probes to analyze DNA or RNA sequences in a test sample.

In thesemiconductor industry, the principle that the number of transistors in asemiconductor chip doubles every 18 months based on feature shrink, orincreased resolution, is known as Moore’s Law. Because we leveragephotolithographic manufacturing processes adapted from the semiconductorindustry, we have also been able to continually “shrink” the size of features,or oligonucleotide probes of a given sequence, on our GeneChip® arrays. Ourfirst commercial GeneChip® products, which we shipped in 1994, had afeature size of 100 microns and by 2005, we introduced our Human Exon Arrayproduct with a 5 micron feature size. We have thus been able to increase theamount of genetic information packaged onto our GeneChip® arrays by nearly 400times since the introduction of our first products.

Because wemanufacture our chips in wafer format, we can vary the number of chipsmanufactured per wafer. We can therefore manufacture thousands of chips perwafer with low information content and lower cost of goods sold or decrease thenumber of chips per wafer and increase the information content. We expect thatwe will continue to benefit from this manufacturing leverage as our technologydevelopment activities enable further feature shrink. We believe that ourunique manufacturing process is a significant competitive advantage.

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***Products***

*Overview*

Our products forman integral part of our GeneChip® system that is designed for use bypharmaceutical, biotechnology, agrichemical, diagnostics and consumer productscompanies, as well as academic research centers, private government researchfoundations and clinical reference laboratories. The GeneChip® system consistsof several integrated components: disposable probe arrays containing geneticinformation on a chip, reagents for extracting, amplifying and labeling targetnucleic acids, a fluidics station for introducing the test sample to the probearrays, a hybridization oven for optimizing the binding of samples to the probearrays, a scanner to read the fluorescent image from the probe arrays, andsoftware to analyze and manage the resulting genetic information. The functionof each single-stranded sequence on the GeneChip® probe array is to bindto its complementary single strand of DNA or RNA from a biological sample.Each unique sequence feature on the GeneChip® probe array contains multiple copiesof the same single strand of DNA. The nucleic acid (DNA or RNA) to be tested isisolated from a sample, such as blood or biopsy tissue, amplified andfluorescently labeled by one of several standard biochemical methods. The testsample is then washed over the probe array, where the now labeled individualnucleic acid sequences that represent the genetic content or expressed genes ofthe sample hybridize to their complementary sequences bound on the array. Whenscanned by a laser, which is part of the scanner instrument, the test samplegenerates a fluorescent signal. The locations where a fluorescent signal isdetected by an optical detection system on the scanner instrument correspond tosequences complementary to the test sample. Sequence variation, or thequantification of specific sequences of nucleic acids in the sample, can bedetermined by detecting the relative strength of these signals since thesequence and position of each complementary DNA probe on the probe array isknown. The combination of a particular GeneChip® probe array, together with anoptimized set of reagents and a user protocol describing how to carry out theprocedure, is referred to as an “assay.”

We currentlymarket products for two principal applications: monitoring of gene expressionlevels and investigation of genetic variation (DNA analysis including singlenucleotide polymorphism (SNP) genotype analysis and resequencing). OurGeneChip® expression monitoring arrays enable our customers to qualitativelyand quantitatively measure gene expression levels in a number of biologicallyrelevant organisms. Our catalog GeneChip® expression arrays are available forthe study of human, rat, mouse and a broad range of other mammalian and modelorganisms. Additionally, we market CustomExpressTM, CustomSeqTM andNimbleExpressTM products which enable our customers to design their own customGeneChip® expression arrays or sequence arrays for organisms of interest tothem. Our GeneChip® DNA analysis arrays and variant detection systems areavailable to enable researchers to perform high throughput polymorphismanalysis and to carry out large scale resequencing (comparing the DNA sequenceof multiple samples against a known reference sequence, e.g. the publishedhuman genome sequence). With its unique, parallel analysis capability,GeneChip® technology enables our customers to perform accurate andcost-effective genetic analysis, using minute amounts of sample DNA, in theirown laboratories on a scale that was previously only possible in specialist highthroughput centers.

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In addition, webelieve that genetic analysis and testing products will be a core component inthe area of clinical research and molecular diagnostic applications and we aredeveloping our GeneChip® system for clinical research and diagnostic analysisof both gene expression and DNA analysis. Together with our collaborativepartners, we are focusing on the development and commercialization ofdiagnostic products in cancer, osteoporosis, cardiovascular, inflammatory,metabolic, infectious and other diseases, and believe that our GeneChip® assayswill facilitate more efficient and effective disease detection, prognosis andtreatment selection, leading to overall improved patient management. To furtherour clinical research and molecular diagnostics strategy, we have establishedpartnerships and customer relationships with leading academic researchers,pharmaceutical and biotechnology companies, including F. Hoffmann-LaRoche Ltd. (“Roche”), bioMérieux, Inc. (“bioMérieux”), and Veridex,LLC, a Johnson & Johnson company (“Veridex”). We believe that therapid growth of the clinical research and the diagnostic devices markets holdsthe potential for GeneChip® technology applications ranging from basic researchto clinical trials and, ultimately, diagnostic devices. As a result we areworking with leaders in molecular diagnostics to provide custom made GeneChip®probe arrays to their specifications. Our partners subsequently package thechips into kits, seek regulatory approval for their diagnostic use, and sellthem into the diagnostic markets using their sales channels. We are leveragingour partners’ strengths in research, development, regulatory practices anddistribution while leveraging our strengths in array technology. These productsare marketed as being Powered by AffymetrixTM.

*Gene ExpressionMonitoring Arrays*

Gene expressionmonitoring is a valuable tool for identifying correlations between genes,determining their biological functions and identifying patterns that might beuseful in classifying diseases. To monitor gene expression, we design andmanufacture probe arrays with single-stranded DNA molecules that arecomplementary to sequences within genes of interest. By synthesizing specificprobes for multiple genes on a single probe array, we enable researchers toquickly, quantitatively and simultaneously monitor the expression of a largenumber of genes of interest. By monitoring the expression of such genes underdifferent conditions and at different times, researchers can use the probearrays to understand the dynamic relationship between gene expression andbiological activity. We believe such information will be an important tool inunderstanding gene function and for the development of new drugs and diagnostictools. Increasingly, clinical research is showing that gene expression patternsin tissue samples, particularly those from cancerous tissues, can be used tocharacterize disease sub-types and hopefully to predict therapeutic responsesand likely outcomes.

The range of GeneChip® Expression products isdescribed below:

·       *Standard Expression Monitoring Arrays*.   We arecurrently selling a portfolio of standard expression monitoring GeneChip®arrays. Our current offering of standard arrays includes products that monitorthe expression of the majority of full-length and partial gene sequencescontained in publicly available sequence databases, which correspond withhuman, mouse, rat, canine, Drosophila melanogaster (fruit fly), Caenorhabditiselegans (nematode), Xenopus laevis (frog), Danio rario (zebrafish),Saccharomyces cerevisiae (yeast), Escherichia coli (bacteria), Pseudomonasaeruginosa (bacteria), Plasmodium falciparum (malarial parasite), Anopheles(mosquito vector of malaria), Arabidopsis thaliana (mustard plant, a common modelorganism for plants), bovine (cow), chicken, maize (corn), medicago (alfalfa),poplar (tree), porcine (pig), Rhesus macaque (monkey), rice, soy, sugar cane,tomato, Vitis vinifera (wine grapes) and citrus arrays.

·       *GeneChip®Exon Arrays*.   We are now offering exon arrays that interrogatethe expression of individual exons, the building blocks that make up atranscript. It is well known that alternative utilization of different exonsfrom the same gene (known as alternative splicing) leads to the generation ofvarious protein products, leading to diverse functional consequences. Inaddition, mis-regulation of splicing has been associated with many differentdiseases including cancer and diabetes. The exon array is the firstexperimental tool to discover new splicing events on a genome-wide scale tohelp researchers better understand disease mechanisms which can lead to thedesign of novel therapies for treatment and more informative diagnosticsignatures.

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·       *Whole Genome Tiling Arrays.*   We offer tiling arrays forthe genomes of a number of major organisms including human, mouse, drosophila,C.elegans and yeast. These designs use evenly spaced probes across thenon-repetitive portion of the genome and rely only on genomic DNA sequenceand not functional annotation for their design. The arrays are used for mappingthe entire collection of transcribed elements (including non-coding RNAs thatare used for structural and regulatory purposes), identifying protein bindingand methylation sites and identification of genomic origins of replication.

·       *Custom Express Arrays*.   We have established a GeneChip®CustomExpressTM Array Program enabling customers to design affordable arraystailored to their specific research needs. Our CustomExpressTM arrays enablecustomers to select probes from any of our probe sequences on our catalogarrays and/or to incorporate probes from their own proprietary gene sequences.These arrays are then produced utilizing the same manufacturing technologies asour other GeneChip® whole genome expression arrays.

·       *Made-to-Order Arrays*.   We offer the GeneChip®Made-to-Order Array Program to enable our customers to use arrays from selectedcustom designs and previous-generation GeneChip® arrays which are nolonger available as catalog products.

*DNA AnalysisArrays*

As genes andregulatory regions in the human genome are mapped, identified, and sequenced,the value of understanding the variability of sequences among individualsincreases. Researchers seek to determine the normal sequence of the gene, whichmutations or polymorphisms exist in a population, and whether these variationscorrelate with a disease or other aspect of the human condition. Studies of thegenetics of complex diseases have historically been challenging due to highcosts of sequencing or genotyping of large numbers of affected and unaffectedindividuals. Genetic variation also impacts how individuals respond totherapeutics. The study of these effects is known as pharmacogenetics. This ispart of the broader field of pharmacogenomics, which seeks to understand howthe overall composition and expression of the genome affects therapeuticresponse, drug efficacy and the incidence of adverse side effects to therapy.We believe pharmacogenomics will become increasingly important both in clinicaldrug trials and patient care. By using our resequencing and genotypingtechnologies, we believe that our GeneChip® probe arrays could significantlyreduce the cost and time required for high-volume polymorphism analysis, whichis currently performed through more labor-intensive techniques.

We have initiated product research and developmentefforts on several genetic analysis probe arrays and variant detection analysissystems and formed collaborations to accelerate the development of ourgenotyping products. For additional information concerning these efforts andcollaborations see the sections of this Form 10-K/A entitled “Research andDevelopment” and “Our Collaborative Partners.” We currently market thefollowing DNA analysis products:

·       *GeneChip®Human Mapping 500K Set.  *The Mapping 500K Set is our newestwhole genome genotyping product and the third in a family of products for largescale genome-wide genotyping using a simple, scalable, one-primer assay. The500K Set genotypes over 500,000 SNPs on a two array set. The 500K Set is enablingnovel genetic experiments (called genome-wide association studies) tounderstand the genes involved in complex disease and drug response usingreal-world disease populations. Researchers have for many years sought to studymajor diseases in unrelated populations, but the information density (hundredsof thousands of markers) and experiment size (hundreds or thousands of samples)made these experiments unaffordable. The 500K Set is the first and marketleading product in making large scale whole genome analysis cost effective.

·       *GeneChip**® Human Mapping 100K Set and 10K Array*.   Weoffer two other products based on the same scalable one primer assay as our500K product: the 100K Set and the 10K Array. The 100K Set genotypes over100,000 SNPs on a two array set and the 10K Array genotypes over10,000 SNPs on a single array. The 100K Set was the first product toenable genome-wide association studies and is also used for chromosomal copynumber analysis. The 10K Array is used primarily for linkage analysis, thestudy of the inheritance of disease in families.

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·       *TargetedGenotyping Products.  *We offer a variety of targeted genotypingproducts for the analysis of between 1,500 and 20,000 SNPs per sample, using ahighly multiplexed assay for use with GeneChip® Universal Tag Arrays. Thisinnovative assay enables customers to genotype selected SNPs in a single assaywith only one primer per SNP. We offer the widest variety of standard panels ofpre-selected SNPs for major diseases (e.g., inflammatory disease), modelorganisms (e.g., mouse), and specific applications (e.g., drug metabolizingenzymes), as well as custom capabilities that offer customers the highestconversion rates to genotype more of the SNPs they want.

The assay described aboveand the products offered through this product line represent the technology andproducts acquired through the ParAllele acquisition described elsewhere in thisreport.

·       *GeneChip**® CustomSeqTM Resequencing Arrays*.   Version2 of this product line was released in 2005, increasing sequence content perarray by tenfold. The CustomSeqTM sequence variation product line now enablescustomers to sequence up to 300,000 bases on one array in just two days withhigh accuracy. CustomSeqTM arrays offer researchers a powerful complementarytool to our whole genome genotyping and whole genome expression products on thesame industry-standard GeneChip® platform, and are currently being usedin a wide variety of applications ranging from infectious disease research todetailed sequence analysis following up association studies to fullmitochondrial genome sequencing.

*DNA Analysis ProductsPowered by AffymetrixTM*

·       *Roche AmpliChipTM CYP450*.   The Powered by AffymetrixTMprogram and collaboration with Roche announced in January 2003 resulted inthe June 2003 release of the Roche AmpliChipTM CYP450 microarray. TheAmpliChip CYP450 microarray allows for complex sequence information to beanalyzed for the purpose of genotyping the CYP2D6 and CYP2C19 genes. Sequencevariation in these genes can result in marked differences in the wayindividuals metabolize, and hence respond to, an estimated 25% of all drugs. Inlate 2004, Roche obtained in-vitro diagnostic status for the product in theUnited States and Europe.

*Access Programsfor Our GeneChip® Arrays*

We offer a varietyof sales programs for our gene expression monitoring and DNA analysis arrays,tailored to the needs of industrial, biotech and academic/government customers.These programs are tied to volume usage and customers can select a program thatbest meets their needs to receive favorable pricing per array.

*Reagents for OurGeneChip*® Systems

Our GeneChip®reagent kits contain validated reagents critical for the success of expressionmonitoring and DNA analysis experiments. The 2005 additions to the AffymetrixGeneChip® reagent family are listed below:

*WholeTranscript Reagents.**  *Withthe launch of the GeneChip® Whole Transcript (WT) Sense Target Labeling Assay,we introduced: GeneChip® WT Terminal Labeling Kit and GeneChip® WT cDNASynthesis and Amplification Kit, each available in 10 or 30 reactions.

*ArrayStation Reagents.  **We***introduced twonew GeneChip® reagent kits developed and optimized specifically for targetpreparation on the GeneChip® Array Station: GeneChip® HT One-CyclecDNA synthesis Kit and GeneChip® HT IVT Labeling Kit in 96 reactions.

*Mapping500K Reagents.**  *With thelaunch of the GeneChip® Human Mapping 500K Array Set, we introduced theGeneChip® Mapping 250K Sty Assay Kit and the GeneChip® Mapping 250K Nsp AssayKit, each available in 30 or 100 reactions.

*HybridizationWash and Stain Reagents.**  *InDecember 2005 we introduced the GeneChip® Hybridization Wash and Stain Kitwhich contains reagents formulated into the fewest number of individualcomponents possible.

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For our expressionprobe arrays, we offer the following reagents: One-Cycle cDNA Synthesis Kit,Two-Cycle cDNA Synthesis Kit, GeneChip® Expression 3’-AmplificationReagents for IVT Labeling, GeneChip® Sample Cleanup Module, GeneChip® IVT cRNAClean up Kit, T7-Oligo(dT) Promoter Primer Kit, Eukaryotic Poly-A RNAControl Kit and Eukaryotic Hybridization Control Kit, GeneChip® WT TerminalLabeling Kit, GeneChip® WT cDNA Synthesis and Amplification Kit, GeneChip® HTOne-Cycle cDNA synthesis Kit, GeneChip® HT IVT Labeling Kit, and the GeneChip®Hybridization Wash and Stain Kit.

For our DNAanalysis arrays, we offer the following reagents: GeneChip® Resequencing AssayKit, GeneChip® Mapping 10K Xba Assay Kit, GeneChip® Mapping 50K Xba Assay Kit,GeneChip® Mapping 50K Hind Assay Kit, GeneChip® Mapping 250K Sty Assay Kit andthe GeneChip® Mapping 250K Nsp Assay Kit.

*Instruments forOur GeneChip*® Systems

Our GeneChip®instruments provide a fully integrated system for conducting research usingGeneChip® probe arrays. The instrument system consists of four hardwaredevices, each providing for robust preparation and analysis of samples usingGeneChip® arrays. The first device is a hybridization oven to control thetiming and temperature required for hybridization of the test sample to theprobe array. The second device is a fluidics station that controls exposure ofthe probe array to solutions containing prepared sample and labeled detectionreagents across the probe array. The fluidics station can process four probearrays simultaneously. The fluidics station protocols conclude with a reagentwash that leaves the labeled, hybridized test sample bound to the probe array.

The third device,a laser scanner, is used after completion of protocols on the fluidics andhybridization stations, at which time the cartridge containing the probe arrayis placed in the scanner and read. The scanner consists of a laser,high-resolution optics, robotics to position and scan the probe array, afluorescence detector and an interface to a computer workstation. The labeledmaterial that is bound to the hybridized test sample emits fluorescent signalswhen exposed to the light from the laser. The locations and intensities of thefluorescent signals are recorded by the scanner and stored in the computer foranalysis. The fourth device is an autoloader, which is a 48-arraycarousel that interfaces with the scanner to allow walk-away automation of thescanning steps, while maintaining the loaded arrays at the optimum storagetemperature.

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

·       *GeneChip**® Hybridization Oven 640*.   TheGeneChip® Hybridization Oven 640 is used to control the timing and temperaturerequired for hybridization of the test sample to the probe array. The GeneChip®Hybridization Oven 640 holds up to eight probe array cartridge carriers (eachwith eight cartridge slots) that rotate for controlled hybridization of up to64 probe arrays. This unit delivers temperature control for consistentperformance across all probe array applications.

·       *Fluidics Station 450*.   The Fluidics Station 450 is usedto control exposure of the probe array to solutions containing prepared sampleand labeled detection reagents across the probe array and can independentlyprocess four probe arrays simultaneously. The fluidics station protocolsconclude with a reagent wash that leaves the labeled, hybridized test samplebound to the probe array. Multiple fluidics stations can be connected to thesame computer workstation in order to expedite array processing in highthroughput laboratories.

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·       *GeneChip**® Scanner 3000*.   TheGeneChip® Scanner 3000 uses proprietary laser scanning technology and highresolution optics to read the fluorescent signal from GeneChip® arrays. TheGeneChip® Scanner 3000, developed and manufactured by Affymetrix, representsthe next generation in scanner technology. The Flying ObjectiveTM scanningtechnology incorporated into this scanner has been adapted to provide fasterscanning of GeneChip® probe arrays with a high degree of image uniformity andaccuracy. The current version of the GeneChip® Scanner 3000 has been validatedto allow imaging of GeneChip® arrays with feature sizes as small as 5 micronsand can support multicolor assays. The GeneChip® Scanner 3000 is purchased witha computer workstation loaded with Affymetrix GeneChip® Operating Software (“GCOS”)(discussed below under “Software for Our GeneChip® Systems and Analysis Tools”).

·       *GeneChip**® AutoLoader*.   The GeneChip®AutoLoader, developed and manufactured by Affymetrix, is a 48-arraycarousel that automatically loads and unloads arrays from the scanner, helpingresearchers automate their array processing and providing walk-away use in thelab. The GeneChip® Scanner with AutoLoader can load and scan 48 current catalogarrays in 28 hours or less, depending on the feature size and array formatthat is scanned. Thermostatic control allows the stored arrays to be held in acooled environment and then warmed to optimum temperature for scanning. TheAutoLoader attaches to the top of the scanner, saving valuable bench space, anddoes not require any additional power source.

·       *Workstations*.   We offer workstations to accommodatevaried research needs. The Type I GeneChip® Workstation (Windows NT) isconfigured with system software enabling it to operate the GeneChip® Scanner3000 and multiple Fluidics Stations. Our Type II GeneChip® Workstation (WindowsNT and Windows 2000) can operate independently of the scanner and fluidicsstation instruments.

·       *GeneChip®Array Station*.   Through our collaboration with Caliper LifeSciences, Inc., we launched the Affymetrix GeneChip® Array Station that has thecapacity to process hundreds of biological samples per week with minimal humansupervision, reducing operating costs and variability in target preparation in2005. The GeneChip® Array Station is designed to perform target preparation forboth cartridges and array plates as well as perform the wash and stain functionfor the array plates. The GeneChip® Array Station adapts the same industry-standardGeneChip® technology to a standard 96-well microtiter plate, and runs onan automated system built with off-the-shelf robotic components. In addition,we launched the GeneChip® HT Scanner that utilizes CCD based technology forimaging of the new array plates. The GeneChip® Array Station automates the mostlabor intensive steps in GeneChip® probe array processing, dramaticallyreducing the cost per assay. The decrease in cost and increase in throughputmakes the GeneChip® Array Station well suited for downstream developmentapplications such as compound profiling, molecular toxicology and clinicaltrials.

*Software for OurGeneChip*® Systems and Analysis Tools

Our “GCOS”software is supplied as part of an integrated system and runs on an industrystandard PC platform. The fluorescence intensity data captured from the scannerare used in conjunction with computer files containing the probe sequence andlocation of all the probes on the probe array to determine the expression levelof a particular gene or to identify particular DNA sequence variations of thetest sample.

Our Data MiningTool® and GeneChip® Operating Software Server (“GCOS Server”) software productsallow for sophisticated analyses of gene expression results and provide a meansof linking and integrating this information with other databases.

Customers maychoose operating or other software products provided by third party vendorsthat have been developed through our OpenSystemsTM program, which includes theprovision of a Software Developer’s Kit to interested commercial and academicparties. Through this program we intend to stimulate a wide range ofindependent groups to develop tools for use with our platform, further enhancingour customers’ capability to generate unique biological insights from the highquality data provided by the GeneChip® platform.

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Finally, ourNetAffxTM Analysis Center (www.affymetrix.com/analysis/) is our exclusive onlineinformatics resource for our customers and provides streamlined, open access todesign information and biological annotations associated with our GeneChip®arrays. It was created to assist genomic researchers with the design andanalysis of DNA array based experiments. NetAffxTM offers researchers asearchable catalog of Affymetrix GeneChip® probe array content, a range ofpublicly available and Affymetrix generated databases, and links to importantthird party resources.

*Instruments forUse in Molecular Diagnostics*

The GeneChip®System 3000Dx (GCS3000Dx) is configured especially for the molecular diagnosticmarket. In September 2004, the GCS3000Dx received Conformite Europeene(CE) certification, clearing it for use as an in-vitro diagnostic (IVD) productin the European Union. In December 2004, the GCS3000Dx was also cleared bythe United States Food and Drug Administration (FDA) as an IVD to be used inconjunction with the Roche Diagnostics AmpliChipTM CYP450 Test. The AmpliChipTMCYP450 Test also received CE certification and FDA clearance in 2004 making itthe first Powered by AffymetrixTM IVD test. This test, which utilizes anAffymetrix microarray produced specifically for Roche Diagnostics, analyzes apatient’s Cytochrome P450 2D6 and 2C19 genotypes to look for variations thatcan influence drug metabolism. The GCS3000Dx will support all Powered byAffymetrixTM molecular diagnostic tests. The system includes the GCS3000DxScanner with Autoloader Dx, FS450Dx Fluidics Station, and Workstation with GCOSDx software.

We believe thatour GeneChip® technology can be effectively applied to complex moleculardiagnostic testing. We have formed collaborations and intend to further partnerwith, or license technology to, established diagnostic and medical devicecompanies to develop, obtain regulatory approval for, and commercialize probearrays and instrumentation. We anticipate broader use of probe arrays ascomponents of diagnostic products and clinical research applications. Webelieve that to support large central laboratories, additional instrumentationand automation will need to be developed to allow for handling the large volumetesting of the clinical diagnostic setting. To further our moleculardiagnostics strategy, we have established a number of collaborations withleading academic researchers, diagnostic companies, pharmaceutical andbiotechnology companies.

For example, weare non-exclusively collaborating with Roche to develop and commercializeGeneChip® diagnostic tests for DNA analysis, genotyping and resequencingapplications, as well as for RNA expression analysis, in a broad range of humandisease areas. Using our GeneChip®technologies, Roche intends to develop andmarket diagnostic tests for diseases such as cancer and osteoporosis andcardiovascular, metabolic, infectious and inflammatory diseases.

In oncology, weare non-exclusively collaborating with Veridex, a Johnson & Johnsoncompany, to develop and commercialize GeneChip® diagnostic tests for oncology.Using our GeneChip® technologies, Veridex intends to develop and market testsfor cancer.

We have anon-exclusive collaborative development agreement and an associated supplyagreement for probe arrays with bioMérieux, Inc. in breast cancer and inbacteriology to identify the species and drug resistance profiles of thosebacteria causing human infection. The agreements also allow for non-exclusivedevelopment of DNA probe arrays for certain diagnostic viral tests and for thefields of food and industrial testing.

We have alsoentered into non-exclusive collaborative development and associated supplyagreement with a number of other smaller companies in focused areas of cancerand certain other diseases.

We and our Poweredby AffymetrixTM partners believe that developing diagnostic products for cancerand other human diseases will establish new standards for molecular diagnostictesting. Ultimately, these products will allow physicians to better diagnoseand treat human disease.

We have alsoentered into a series of agreements with Beckman Coulter that give it the rightto develop probe array-based diagnostic products using some elements ofour GeneChip® technology. Under these agreements, we have also agreed to grantBeckman Coulter licenses to commercialize probe arrays manufactured usingcertain of our technologies other than light-directed synthesis. Underthe arrangement, Beckman Coulter would pay us transfer prices and royalties onsales of these products.

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For additionalinformation concerning our collaborations, see the section of thisForm 10-K/A entitled “Our Collaborative Partners.”

**Our CollaborativePartners**

Our strategy is toestablish the GeneChip® system as the platform of choice for analyzing complexgenetic information, to expand the applications of our technology and toacquire access to complementary technologies and resources. Accordingly, wehave entered into and intend to enter into additional collaborative agreementsto further this strategy. The information below is a selected listing ofcollaborators with whom we have current agreements, together with the relatedproducts and programs and the commencement dates of the most recent agreementwith each. The section is organized by reference to the product area thatrepresents the most significant portion of the collaboration; however, thecollaboration may also involve other areas of our business and product line.

*Gene ExpressionMonitoring*

*Qiagen,GmbH.*   InFebruary 2002, we entered into a three-year supply agreement with Qiagen,GmbH (“Qiagen”) for Qiagen to supply us with certain nucleic acid purificationproducts for use with our GeneChip® arrays for target labeling in expressionanalysis and have collaboration and co-marketing agreements in place thatsupport the complementary use of Qiagen’s sample prep instrumentation andreagents with Affymetrix GeneChip® arrays. The term of this supply agreementhas been extended for an additional two-year period.

*PreAnalytiXGmbH.*   InOctober 2003, we entered into a collaborative agreement with PreAnalytiXGmbH, 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 useof PreAnalytiX technology with GeneChip® expression analysis arrays. Bycombining PreAnalytiX and Affymetrix technologies, our goal is to develop acomplete, standardized process for expression profiling starting from wholeblood samples.

*InvitrogenCorporation.**   In November 2003 we signed a collaboration and supplyagreement to develop and market a new line of GeneChip® brand expressionreagents including two new cDNA Synthesis Kits. Both of the new cDNA SynthesisKits were developed in collaboration with Invitrogen and contain Invitrogen’sindustry-leading SuperScriptTM reverse transcriptase (RT). These reagentshave been optimized for use with Affymetrix GeneChip® technology, offering acomplete, standardized sample preparation system that is easier to use and willhelp customers produce more robust and consistent array results. The One-CyclecDNA 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. Thenew Two-Cycle cDNA Synthesis Kit offers customers a streamlined procedure forpreparing samples using a small amount of material, such as biopsy or lasercapture dissected samples**.*

*DNA Analysis*

*PerlegenSciences, Inc.**  *InMarch 2001, we contributed to Perlegen the rights to use certainintellectual property with no cost basis and received from Perlegen the rightsto use and commercialize certain data generated by Perlegen in the array field.Using access to whole-wafer technology developed by Affymetrix, Perlegenfocuses on identifying the millions of genetic variations (known as singlenucleotide polymorphisms or “SNPs”) among individuals, and finding patterns inthose variations that might be predictive of disease susceptibility or drugresponse. In January 2003, we obtained accelerated access to Perlegen’sSNP database which was used to help develop our Mapping 500K Array Set and willalso be used in future products. In addition, our collaborative arrangementwith Perlegen provides us with access and commercialization rights to certainwhole genome technologies, including 248,000 chip-optimized assays covering thegenome that we intend to make available to our customers for use inresequencing and genotyping. For additional information concerning ourrelationship with Perlegen, including our ownership interest in Perlegen, ourcollaborative relationship with Perlegen and existing relationships betweencertain of our directors and officers and Perlegen, see the section of thisForm 10-K/A entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and Note 11 to our ConsolidatedFinancial Statements.

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*MolecularDiagnostics*

*bioMérieux, Inc.**  *In September 1996, we enteredinto a collaborative development agreement and associated supply agreement forprobe arrays with bioMérieux, Inc. (“bioMérieux”) to identify the speciesand drug resistance profiles of bacteria causing human infection. As part ofthe collaboration, bioMérieux is developing instrumentation for the use ofthese probe arrays in a molecular diagnostic setting. Under the terms of theagreements, bioMérieux provides research and development support and makespayments to us upon achievement of certain milestones. In addition, bioMérieuxpays specified prices for the supply of probe arrays and royalties on anyresulting product sales. In December 1997 and January 1998, weexpanded the collaboration with bioMérieux to include the non-exclusivedevelopment of DNA probe arrays for molecular diagnostic tests in the fields ofvirology and food and industrial testing. In March 2003, the collaborationagreement was amended in order to reinstate bioMérieux’s licenses and in March2005, the collaboration was further expanded to include breast cancer.bioMérieux has launched the FoodExpertID array under this collaboration. Foradditional information, see the section of this 10-K/A entitled “DNA AnalysisProducts Powered by AffymetrixTM.”

*F.Hoffmann-La Roche Ltd.**  *In February 1998, we entered into anon-exclusive collaborative development agreement with F. Hoffmann-LaRoche Ltd. (“Roche”) to initially develop human probe array-baseddiagnostic products. Under the terms of the agreement the parties arecollaborating to develop mutually agreed upon arrays, as well as associatedinstrumentation and reagents. In January 2003, we expanded ourcollaboration with Roche by granting Roche access to our GeneChip*®* technologies to develop and commercialize GeneChip®diagnostic laboratory tests for DNA analysis, genotyping and resequencingapplications, as well as for RNA expression analysis, in a broad range of humandisease areas. Using our GeneChip® technologies, Roche intends to develop andmarket diagnostic tests for diseases such as cancer and osteoporosis andcardiovascular, metabolic, infectious and inflammatory diseases. Affymetrix andRoche believe that developing targeted microarray expression profiles forcancer, plus genotyping and resequencing profiles for other diseases willenable the creation and commercialization of novel standardized diagnosticsolutions. These solutions ultimately will allow physicians to better diagnoseand treat human disease. Under the terms of the collaborative agreement, Rochepaid us an access fee of $70 million relating to the first five years ofthe arrangement. The agreement, which is subject to Roche’s option to terminateon December 31, 2007, or any time on or after June 2, 2013 with oneyear’s prior notice, includes a broad range of other compensation payable byRoche to Affymetrix throughout the life of the agreement based on royalties onsales of diagnostic kits, milestone payments for technical and commercialachievements, a manufacturing and supply agreement, and related licenseinstallments. As part of the agreement, Affymetrix will manufacture and supplyRoche with microarrays and related instrumentation based on Affymetrix’GeneChip® platform. In 2003, Roche launched the AmpliChip® CYP450 array productinitially for research use only, but in late 2004 obtained CE marking and FDAregulatory approvals of the product for in-vitro diagnostic use.

*Veridex,LLC.**  *InDecember 2004, we entered into a non-exclusive collaboration agreementwith Veridex LLC, a Johnson & Johnson company, to develop andcommercialize GeneChip® based diagnostic products for use in the field ofoncology. Veridex was granted long-term and comprehensive access to ourGeneChip® technology to create and market in-vitro diagnostics for cancer. Theagreement, made under the Powered by AffymetrixTM program, gives Veridexnon-exclusive rights to Affymetrix’ patented arrays, instrumentation systemsand planned improvements to these technologies.

*OtherCollaborations*

*TheBroad Institute.**  *InSeptember 2004, we entered into a supply and research collaborationagreement with the Broad Institute and Massachusetts Institute of Technology.The agreement provides Affymetrix technology on preferential terms to the BroadInstitute for applications development in return for the option to makecommercial products available from the resulting research. The collaboration isfocused on whole genome SNP analysis, resequencing and high throughputexpression analysis.

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* *

*NationalCancer Institute.**  *InJanuary 2001, we entered into a collaboration agreement with the NationalCancer Institute on a human transcriptome initiative which seeks to constructmaps locating the sites of RNA transcription across the entire human genomeusing high-density whole-genome arrays interrogating at resolutions andthroughput rates never before attempted. The transcriptome is defined as thecomplete collection of transcribed elements of the genome. In addition tomRNAs, it also represents non-coding RNAs that are used for structural and generegulation purposes. Alterations in the structure or levels of expression ofany one of these RNAs or their proteins could contribute to disease. Anunderstanding of the transcriptome may provide valuable insights in theresearch for novel drugs. We have made the data from this initiative freelyavailable to the public via the Web through a version of the data integrationand analysis software platform developed by Biotique Systems, Inc., acompany that provides decision support tools and services for the emergingfield of pharmacogenomics. We are using the Biotique Local Integration Systemto house this transcriptome data and to provide an interface for researchers toaccess, query and use this information. This collaboration was extended duringfiscal 2003 to address the identification of transcriptional binding sites,methylation sites, origins of replication and other genomic features.

*CaliperLife Sciences, Inc.**  *In January 2004, we signed a collaboration andsupply agreement to develop and provide automated target preparationinstruments for the GeneChip® Probe Array system. These new automation systemsare expected to cut array processing, reduce variability and labor costs, andenable researchers to industrialize their genomic research. The two companieswill develop products that leverage Caliper’s expertise in high-throughputautomation and microfluidics with our expertise in microarray technology andapplications. The first products were launched in 2004 and automate GeneChip® microarraytarget preparation steps including hybridization, washing and staining forexpression and DNA analysis. The automated system enables a single operator torun up to 96 RNA samples at a time, compared to the manual rate of 20 to 24samples. In 2005 we launched the Affymetrix GeneChip® Array Station thathas the capacity to process hundreds of biological samples per week withminimal human supervision, reducing operating costs and variability in targetpreparation. The GeneChip® Array Station is designed to perform targetpreparation for both cartridges and array plates as well as perform the washand stain function for the array plates. The GeneChip® Array Station adapts thesame industry-standard GeneChip® technology to a standard 96-wellmicrotiter plate, and runs on an automated system built with off-the-shelfrobotic components.

**Marketing andDistribution**

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

·       the availability of genomicsequence and sequence variation data for the human population and for otherorganisms;

·       technological innovationthat increases throughput and lowers the cost of genomic and genetic analysis;

·       the development of new computationaltechniques to handle and analyze large amounts of genomic data;

·       the availability ofgovernment funding for basic and disease-related research;

·       the amount of capital andongoing expenditures allocated to research and development and outsourcedspending by biotechnology, pharmaceutical and diagnostic companies for productsand services;

·       the application of genomicsto new areas including molecular diagnostics, agriculture, human identity andconsumer goods; and

·       the availability of geneticmarkers and signatures of diagnostic value.

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In North Americaand major European markets, our GeneChip® products are marketed principallythrough our own sales and distribution organizations. We own or lease sales andservice offices in the United States, Europe, Japan and Singapore. We arefinalizing plans to open offices in China in 2006, although our primary routeto market in China will continue to be through distributors. In markets outsideof North America and Europe, we sell our GeneChip® products principally throughthird party distributors, primarily in Mexico, India, the Middle East and AsiaPacific. These distributors are life science supply specialists within theirown countries and operate as our sole distributors within a defined country orother geographic area.

For moleculardiagnostic and industrial applications market opportunities, we supply ourpartners with arrays and instruments, which they incorporate into diagnosticproducts and take on the primary commercialization responsibilities. Currentcollaborative partners include Roche, bioMérieux, and Veridex, aJohnson & Johnson company. For additional information concerning ourcollaborative partners, see the section of this Form 10-K/A entitled “OurCollaborative Partners.”

**Manufacturing andRaw Materials**

We manufacture ourGeneChip® probe arrays, GCS 3000 scanner, fluidics stations, instrument controlsoftware and certain reagents in-house and contract with third-partysuppliers to manufacture our hybridization oven, GCAS and HT Scanner andcertain reagents for our GeneChip® system. Additionally, through ourGeneChip-compatibleTM application program, a number of third-partysoftware suppliers develop, market and sell genomic data analysis software thatinterfaces with data files generated by our GeneChip® system.

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Our probe arraymanufacturing process involves wafer preparation, probe synthesis, dicing ofsynthesized wafers into chips, assembly of chips and quality control. We havedeveloped software programs that extensively automate the design ofphotolithographic masks used in probe array manufacturing and that control theprobe array manufacturing lines. Glass wafers are prepared for synthesisthrough the application of chemical coatings. GeneChip® probe arrays aresynthesized on the wafers using our proprietary, combinatorialphotolithographic process. The completed wafers can then be diced to yieldindividual probe arrays, which are assembled and packaged for shipment.

We are currentlymanufacturing GeneChip® probe arrays for sale to customers as well as forinternal and collaborative purposes. Probe arrays are manufactured at ourdedicated manufacturing facility located in West Sacramento, California. Wealso maintain a manufacturing process engineering and development facility inSanta Clara, California, and a manufacturing and development facility inBedford, Massachusetts to support our instrumentation products. All of ourinstrument and array manufacturing facilities comply with Good ManufacturingPractices as a subset of the Quality System Regulation (21 CFR 820).

Currently, we havephysical capacity under optimal conditions to produce approximately 27,000wafers annually. The actual number of probe arrays we are able to manufacturedepends on the available equipment capacity, the yield of probe arrays thatpass quality control testing and the number of probe arrays manufactured oneach wafer. For instance, in 2005, we announced that due to lowinitial-production yields of our commercial Mapping 500K Array Set, shipmentvolumes had been constrained and, as a result, we were unable to manufactureenough product to meet our revenue targets for the third and fourth quarters of2005. We are taking steps to increase our manufacturing capacity, including anexpansion of our existing West Sacramento, California probe array manufacturingfacility and are scheduled to begin commercial probe array production at ourSingapore facility in the second half of 2006. We will continue to invest inadditional capital equipment for our West Sacramento facility and our newfacility in Singapore to both increase production capacity and increase theflexibility of this capacity to produce a broader range of products. See Item7. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations forfurther information.

We perform qualitytests on selected probe arrays from each wafer and selected probes on suchprobe arrays. We largely rely on in-process and internal quality controlprocedures, including controls on the manufacturing process and sample testing,to verify the correct completion of the manufacturing process. In addition, weand our customers rely on the accuracy of genetic sequence informationcontained in the public databases upon which our products are based. Our probearray manufacturing process is designed to allow us to meet our performancespecifications before arrays are shipped. We have a customer inquiry andcomplaint process in place and we rely on this process to identify and resolveproduct performance issues that may arise from time to time.

We perform qualitytests on in-house and third party reagents to verify performance of reagentcomponents and assembled reagent kits. We have qualified second source vendorsfor labeling reagents and oligonucleotides.

Key parts of theGeneChip® product line, such as hybridization ovens are available from singlesources. We take such steps as we believe are appropriate to ensure thatsupplies from these vendors are not materially delayed or interrupted, sinceany such delays or interruptions could in turn delay our ability to deliverthese products to our customers. Likewise, certain raw materials or componentsused in the synthesis of probe arrays or the assembly of instrumentation arecurrently available only from a single source or limited sources. We take suchsteps as we believe are appropriate to ensure that materials and componentsfrom these vendors are not materially delayed or interrupted, since any suchdelays or interruptions could in turn delay our ability to produce probe arraysor other components for our GeneChip® system in a timely fashion, in sufficientquantities or under acceptable terms. Alternative sources of supply may be timeconsuming and expensive to qualify. In addition, we are dependent on ourvendors to provide components of appropriate quality and reliability, and tomeet applicable regulatory requirements. Accordingly, we also take what webelieve are appropriate measures to prevent the delay or interruption ofsupplies from these vendors and to ensure the appropriate quality for ourcustomers.

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**Research andDevelopment**

We believe asubstantial investment in research and development is essential to a long-termsustainable competitive advantage and critical to expansion into high-valuemarkets such as toxicogenomics, pharmacogenomics, and molecular diagnostic andapplied testing applications. Our research and development effort is dividedinto the major areas of basic research, product research and development, andmanufacturing process development. Our research and development expenses forthe years ended December 31, 2005, 2004 and 2003, were $77.4 million, $73.4 millionand $65.9 million, respectively. In addition, on October 21, 2005, werecorded a charge of approximately $8.3 million to acquired in-processtechnology related to our acquisition of ParAllele BioScience, Inc. (“ParAllele”),a provider of comprehensive genetic discovery solutions to the lifescience research, pharmaceutical and diagnostic sectors.

*Basic Research*

Basic researchefforts are carried out through our Affymetrix Research Laboratories to furtheradvance our GeneChip® platform, develop new concepts that can be rapidlyproductized, and create innovations that will influence our business model inthe future. Our initial focus is on basic technology research including highthroughput systems, high resolution chip fabrication and detection, genotyping,and gene expression and analysis of the human transcriptome and of other modelorganism genomes. We are focusing our genotyping research efforts on thedevelopment of new assays principally designed to perform whole genome analysisat various resolutions. We believe that products based on this research willultimately help researchers understand the molecular biology of genomes, todevelop more effective therapeutics and help identify the diagnostic markersand tests useful in molecular diagnostic applications.

*Product Researchand Development*

Our productresearch and development efforts are focused primarily on expanding theapplications of the GeneChip® technology including development of new probearray products, improving the overall performance of GeneChip® assays,increasing the information capacity per probe array and simplifying highlycomplex assays. Our research and development efforts are intended to continueto develop new products based on information from the human and other model organismgenomes as well as new genotyping and DNA analysis products. In addition, weintend to continue developing custom product lines for both expression and DNAanalysis so that customers can analyze gene expression or DNA variability forany organism. We plan continued software and instrumentation developmentefforts to enhance the performance and level of automation of our entireGeneChip® system solution.

*ManufacturingProcess and Development*

We are conductingresearch aimed at enhancing the manufacturing process currently employed in theproduction of our GeneChip® probe arrays. This process, which leveragessemiconductor photolithographic fabrication techniques, is combinatorial inthat the number of different compounds synthesized grows exponentially with thenumber of cycles in the synthesis. The objective of this research is to allowus to produce arrays with higher information density in the same unit area,similar to advances achieved in the semiconductor industry, which has producedsilicon chip capacity closely following Moore’s Law. Moore’s Law is theobservation that the number of transistors per square inch on a silicon chiphad doubled every 18 months since the silicon chip was invented. To date,we have also been able to achieve rapid advances in genetic informationcontent, reducing commercial product feature size from 100 microns in 1994 to 5microns in 2005 with the introduction of our Human Exon Array product. We arecontinuing research aimed at using smaller feature technology in commercialproducts and implementing novel, cost-effective packaging approaches for thesmall array formats including packaging these into the standard industrymicrotiter plate format.

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**IntellectualProperty**

We rely on a combination of patent,copyright, and trade secret laws, know-how and licensing opportunities toestablish and protect our proprietary technologies and products. Our successdepends in part on our ability to obtain patent protection for our products andprocesses, to preserve our copyrights and trade secrets, to operate withoutinfringing the proprietary rights of third parties and to acquire licensesrelated to enabling technology or products used with our GeneChip® technology.

We are pursuing a patent strategy designedto facilitate our research and development program and the commercialization ofour current and future products. We have been issued 335 patents in the UnitedStates and we hold approximately 537 pending United States patentapplications. Many of these patents and applications have been filed and/orissued in one or more foreign countries. While no one patent is consideredessential to our success, we aggressively seek to protect our patent rights asour patent portfolio as a whole is material to the success of the business.

There are a significant number of UnitedStates and foreign patents and patent applications in our areas of interest,and we believe that there will continue to be significant litigation in theindustry regarding patent and other intellectual property rights. Others havefiled, and in the future are likely to file, patent applications that aresimilar or identical to ours or those of our licensors. It may be necessary forus 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 byus 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 toparticipate in interference proceedings declared by the United States Patentand Trademark Office. Litigation or interference proceedings could result insubstantial costs to and distraction from our core business and our efforts inrespect to such proceedings may not be successful. For further information seeItem 3, Legal Proceedings.

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

We are party to various option, supply andlicense agreements with third parties which grant us rights to use certainaspects of our technologies. We take such measures as we believe areappropriate to maintain rights to such technology under these agreements. Inaddition, our academic collaborators have certain rights to publish data andinformation in which we have rights. There is considerable pressure on academicinstitutions to publish discoveries in the genetics and genomics fields. Wetake such steps as we believe are appropriate to ensure that such publicationwill not adversely affect our ability to obtain patent protection forinformation in which we may have a commercial interest.

**Competition**

Competition ingene expression monitoring, DNA analysis and molecular diagnostics is intenseand is expected to increase. Further, the technologies for monitoring geneexpression, discovering and analyzing polymorphisms associated with significantdiseases, and approaches for commercializing those discoveries are new andrapidly evolving. Currently, our principal competition comes from existingtechnologies and other DNA array technologies that are used to perform many ofthe same functions for which we market our GeneChip® systems.

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In the geneexpression monitoring and DNA analysis fields, existing competitivetechnologies include gel-based sequencing using instruments provided bycompanies such as Applied Biosystems, Inc. (an Applera company), BeckmanCoulter, Inc. and General Electric (GE) Healthcare. Other companiesdeveloping or marketing potentially competitive DNA array technology include:Agilent Technologies, Inc., Applied Biosystems, Inc., BD Biosciences,Clontech, CombiMatrix Corporation, Digital Gene Technologies, Inc., GEHealthcare, Illumina, Inc., Invitrogen Corporation (formerlyXeotron, Inc.), Molecular Devices, Inc. (formerly AxonInstruments, Inc.), Nanogen, Inc., NimbleGen Systems, Inc.,Sequenom, Inc., Solexa, Inc. (formerly Lynx Therapeutics, Inc.),and Visible Genetics Inc. (recently acquired by Bayer). For example,companies such as Agilent Technologies, Inc., AppliedBiosystems, Inc., GE Healthcare and Illumina, Inc. have products forDNA analysis which are directly competitive with our GeneChip® Mapping Arrayproducts. In order to compete against existing and emerging technologies, wewill need to be successful in demonstrating to customers that the GeneChip®system provides a competitive advantage.

In Japan, theformer Amersham Biosciences K.K. (acquired by GE Healthcare), from which wetransitioned to our own sales operation during 2003, is a competitor, as wellas a licensee of certain of our technology. In addition, we have several otherthird party licensees that could offer products that compete with our productoffering.

The market formolecular diagnostic products derived from gene discovery is currently limitedand highly competitive, with several large corporations already havingsignificant market share. Established diagnostic companies could compete withus by developing new products. Companies such as Abbott Laboratories, Bayer AG,Beckman Coulter, Becton Dickinson, bioMérieux, Johnson & Johnson andRoche have the strategic commitment to diagnostics, the financial and otherresources to invest in new technologies, substantial intellectual propertyportfolios, substantial experience in new product development, regulatoryexpertise, manufacturing capabilities and the distribution channels to deliverproducts to customers. Established diagnostic companies also have an installedbase of instruments in several markets, including clinical and reference laboratories,which are not compatible with the GeneChip® system and could slow acceptance ofour products. In addition, these companies have formed alliances with genomicscompanies which provide them access to genetic information that may beincorporated into their diagnostic tests.

Future competitionin existing and potential markets will likely come from existing competitors aswell as other companies seeking to develop new technologies for sequencing andanalyzing genetic information. In addition, pharmaceutical and biotechnologycompanies have significant needs for genomic information and may choose todevelop or acquire competing technologies to meet these needs. Through 2005 wehave significantly expanded our network of approved service providers in America,Japan and Europe. While these companies expand the reach of Affymetrixtechnology and make its analytical power available to a wider base of usersthey may act as a substitute for outright purchase of instruments and arrays bythose end users. In the molecular diagnostic field, competition will likelycome from established diagnostic companies, companies developing and marketingDNA probe tests for genetic and other diseases, and other companies conductingresearch on new technologies to ascertain and analyze genetic information.

**GovernmentRegulation**

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

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Commercially available diagnostic testsare regulated as medical devices and are generally subject to rigorous testingand other approval procedures by the United States Food and Drug Administration(FDA). The FDA’s Quality System Regulations also apply in connection with ourmanufacture of arrays and systems as components for use in diagnostic productsdeveloped by our partners. Obtaining these clearances or approvals and thecompliance with these regulations require the expenditure of substantial resourcesover a significant period of time, and there can be no assurance that anyclearances or approvals will be granted on a timely basis, if at all. Oncegranted, a clearance or approval may place substantial restrictions on how thedevice is marketed or labeled or to whom it may be sold. In addition, variousfederal and state statutes and regulations govern or influence themanufacturing, safety, storage of our products and components of our productsand our record keeping.

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

Our diagnostic clinicallaboratory will be subject to extensive federal and state regulationincluding the requirements of the Clinical Laboratory Improvement Act of 1988(CLIA). CLIA is intended to ensure the quality and reliability of clinicallaboratories in the United States by requiring all laboratories to meetspecified standards in the areas of personnel qualification, administration,participation in proficiency testing, patient test management, quality control,quality assurance and inspections. There can be no assurance that regulationsunder and future administrative interpretations of CLIA will not have anadverse impact on the potential market for our diagnostic clinical laboratory.

**Reimbursement**

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

Third-party payors may denyreimbursement if they determine that a prescribed health care product orservice has not received appropriate FDA or other governmental regulatoryclearances, is not used in accordance with cost-effective treatment methods asdetermined by the payor, or is deemed by the third-party payor to beexperimental, unnecessary or inappropriate. Furthermore, third-partypayors are increasingly challenging the prices charged for health care productsand services.

Currently, sales of our products andservices are not subject to third-party reimbursement. However, we arecurrently developing diagnostic and therapeutic products with our collaborativepartners which may be subject to reimbursement issues. The ability of ourcollaborators to commercialize such products may depend, in part, on the extentto which reimbursement for the cost of these products will be available underU.S. and foreign regulations governing reimbursement for clinical testingservices by government authorities, private health insurers and otherorganizations. In addition, we areestablishing a diagnostic clinical laboratory which will provide subcontractservices to primary clinical laboratories. Our diagnostic clinicallaboratory may be subject to reimbursement issues and the abilityof primary clinical laboratories to utilize our laboratory servicesmay depend, in part, on the extent to which reimbursement for the costof clinical services will be available.

In the United States, third-partypayor price resistance, the trend towards managed health care and legislativeproposals to reform health care or reduce government insurance programs couldreduce prices for health care products and services, adversely affect theprofits of our customers and collaborative partners and reduce our futureroyalties and product sales.

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**EnvironmentalMatters**

We are dedicatedto compliance and protection of the environment and individuals. Our operationsrequire the use of hazardous materials (including biological materials) whichsubject us to a variety of federal, state and local environmental and safetylaws and regulations. We believe we are in material compliance with current andapplicable laws and regulations. However, some of the regulations under thecurrent regulatory structure allow for “strict liability,” holding a partypotentially liable without regard to fault or negligence. We could be heldliable for damages and fines as a result of our, or others’, businessoperations should contamination of the environment or individual exposure tohazardous substances occur. We cannot predict how changes in these laws ordevelopment of new regulations will affect our business operations or the costof compliance.

**Employees**

As ofMarch 2, 2006, we had 1,101 full-time employees. The employee groupincludes chemists, engineers, computer scientists, mathematicians and molecularbiologists with experience in the diagnostic products, medical products,semiconductor, computer software and electronics industries. None of ouremployees are represented by a collective bargaining agreement, nor have weexperienced work stoppages. We believe that we maintain good relationships withour employees. Our success depends in large part on our ability to attract andretain skilled and experienced employees.

**Seasonality**

Customer demandfor probe arrays and instrumentation systems is typically highest in the fourthquarter of the calendar year as customers spend unused budget allocationsbefore the end of the financial year.

**Backlog**

Because most customer orders are shippedin the quarter in which they are received, we believe that backlog atquarter end is typically not a material indicator of future sales. Inaddition, backlog may not result in sales because of cancellation of orders orother factors. On a few occasions we have experienced, and made publicannouncements about, short-term increases in backlog as a result of factorssuch as new product introductions or supply constraints. For example, dueto low initial production yields on our new Mapping 500K Array product weannounced that probe array shipments were constrained during the third andfourth quarters of fiscal 2005. Although these capacity constraints mayhave increased our backlog with respect to our Mapping 500K Arrayproduct, we continue to believe that backlog information is not materialto an understanding of our business taken as a whole.

**FinancialInformation About Industry Segments**

We operate in onebusiness segment, for the development, manufacture, and commercialization ofsystems for genetic analysis in the life sciences and diagnostic industry. Ouroperations are treated as one segment as we only report operating informationon a total enterprise level to our chief operating decision-makers.Further, resource allocations are also made at the enterprise level by ourchief operating decision-makers.

**FinancialInformation About Geographic Areas**

Our consolidatedproduct and product related revenue from customers outside of the United Statesfor fiscal years 2005, 2004 and 2003 was $176.7 million, $159.2 million and$127.8 million, or 50.5%, 48.1% and 45.5%, respectively, of ourconsolidated product and product related revenue. A summary of revenues fromexternal customers attributed to each of our geographic areas for the fiscalyears ended December 31, 2005, 2004 and 2003, is included in Note 17of our Consolidated Financial Statements included in this report.

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**AvailableInformation**

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

**ITEM1A.   RISK FACTORS**

This Form 10-K/Acontains forward-looking information based on our current expectations. Becauseour actual results may differ materially from any forward-looking statementsmade by or on behalf of Affymetrix, this section includes a discussion ofimportant risk factors that could affect our actual future results.

**We may notmaintain profitability.**

We incurred losseseach year from our inception through the year ended December 31, 2003, andas a result we had an accumulated deficit of approximately $106.7 millionat December 31, 2005. We expect to continue experiencing fluctuations inour operating results and cannot assure sustained profitability. Our losseshave resulted principally from costs incurred in research and development,manufacturing and from selling, general and administrative costs associatedwith our operations.

Our ability togenerate significant revenues and maintain profitability is dependent in largepart on our ability to expand our customer base, increase sales of our currentproducts to existing customers, manage our expense growth, and enter intoadditional supply, license and collaborative arrangements as well as on our abilityand that of our collaborative partners to successfully manufacture andcommercialize products incorporating our technologies in new applications andin new markets. If our revenues grow more slowly than we anticipate, or if ouroperating expenses increase more than we expect or cannot be reduced in theevent of lower revenues, our business will be materially and adverselyaffected.

**Our quarterlyresults have historically fluctuated significantly and may continue tofluctuate unpredictably and any failure to meet financial expectations maydisappoint securities analysts or investors and result in a decline in ourstock price.**

Our revenues and operating results may fluctuatesignificantly due in part to factors that are beyond our control and which wecannot predict. The timing of our customers’ orders may fluctuate from quarterto quarter. However, we have historically experienced customer orderingpatterns for GeneChip® instrumentation and GeneChip® arrays where the majorityof the shipments occur in the last month of the quarter. These orderingpatterns may limit management’s ability to accurately forecast our futurerevenues. Because our expenses are largely fixed in the short to medium term,any material shortfall in revenues will materially reduce our profitability andmay cause us to experience losses. In particular, our revenue growth andprofitability depend on sales of our GeneChip® products. Factors that couldcause sales for these products to fluctuate include:

·       ourinability to produce products in sufficient quantities and with appropriatequality;

·       theloss of or reduction in orders from key customers;

·       thefrequency of experiments conducted by our customers;

·       ourcustomers’ inventory of GeneChip® products;

·       thereceipt of relatively large orders with short lead times; and

·       ourcustomers’ expectations as to how long it takes us to fill future orders.

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Some additional factors that could cause our operatingresults to fluctuate include:

·       weaknessin the global economy and changing market conditions;

·       generaleconomic conditions affecting our target customers;

·       changesin the amounts or timing of government funding to companies and researchinstitutions;

·       changesin the attitude of the pharmaceutical industry towards the use of genetic informationand genetic testing as a methodology for drug discovery and development; and

·       changesin the competitive landscape.

We cannot forecastwith any certainty the impact of these and other factors on our sales andoperating results in any future period. Results of operations in any period,therefore, should not be considered indicative of the results to be expectedfor any future period. Because of this difficulty in predicting futureperformance, our operating results may fall below the expectations of securitiesanalysts or investors in some future quarter or quarters. Our failure in thepast to meet these expectations has adversely affected the market price of ourcommon stock and may continue to do so.

**We may losecustomers or experience lost sales if we are unable to manufacture our productsand ensure their proper performance and quality.**

We produce ourGeneChip® products in an innovative and complicated manufacturing process whichhas the potential for significant variability in manufacturing yields. We haveencountered and may in the future encounter difficulties in manufacturing ourproducts and, due to the complexity of our products and our manufacturingprocess, we may not fully understand all of the factors that affect ourmanufacturing processes or product performance. For example, in 2005, weannounced that due to low initial-production yields of our commercial Mapping500K Array Set, shipment volumes had been constrained and, as a result, we wereunable to manufacture enough product to meet our revenue targets for the thirdand fourth quarters of 2005.

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Although we aretaking steps to increase our manufacturing capacity, including the expansion ofour existing West Sacramento, California probe array manufacturing facility andthe development of a new probe array manufacturing facility in Singapore, thereare uncertainties inherent in the expansion of our manufacturing capabilitiesand there can be no assurance as to when any additional capacity may beavailable to us. For example, manufacturing and product quality issues mayarise as we begin our manufacturing operations at the new Singapore facility oras we increase production rates at our West Sacramento facility and launch newproducts. In addition, we base our manufacturing capabilities on our forecastedproduct mix for the quarter. If the actual product mix varies significantlyfrom our forecast, we may not be able to fill some orders during that quarter,which could adversely impact our financial results. Difficulties in meetingcustomer, collaborator and internal demand could also cause us to losecustomers or require us to delay new product introductions, which could in turnresult in reduced demand for our products.

We rely oninternal quality control procedures to verify our manufacturing processes. Dueto the complexity of our products and manufacturing process, however, it ispossible that probe arrays that do not meet all of our performancespecifications may not be identified before they are shipped. If our productsdo not consistently meet our customers’ performance expectations, demand forour products will decline. In addition, we do not maintain any backupmanufacturing capabilities for the production of our GeneChip® instruments. Anyinterruption in our ability to continue operations at our existingmanufacturing facilities could delay our ability to develop or sell ourproducts, which could result in lost revenue and seriously harm our business,financial condition and results of operations.

**We may not be ableto deliver acceptable products to our customers due to the rapidly evolvingnature of genetic sequence information upon which our products are based.**

The geneticsequence information upon which we rely to develop and manufacture our productsis contained in a variety of public databases throughout the world. Thesedatabases are rapidly expanding and evolving. In addition, the accuracy of suchdatabases and resulting genetic research is dependent on various scientificinterpretations and it is not expected that global genetic research effortswill result in standardized genetic sequence databases for particular genomesin the near future. Although we have implemented ongoing internal qualitycontrol efforts to help ensure the quality and accuracy of our products, thefundamental nature of our products requires us to rely on genetic sequencedatabases and scientific interpretations which are continuously evolving. As aresult, these variables may cause us to develop and manufacture products thatincorporate sequence errors or ambiguities. The magnitude and importance ofthese errors depends on multiple and complex factors that would be consideredin determining the appropriate actions required to remedy any inaccuracies. Ourinability to timely deliver acceptable products as a result of these factorswould likely adversely affect our relationship with customers, and could have amaterial adverse effect on our business, financial condition and results ofoperations.

**We face risksassociated with technological obsolescence and emergence of standardizedsystems for genetic analysis.**

The RNA/DNA probearray field is undergoing rapid technological changes. New technologies,techniques or products could emerge which might allow the packaging andanalysis of genomic information at densities similar to or higher than ourmicroarray technology. Other companies may begin to offer products that aredirectly competitive with, or are technologically superior, to our products.There can be no guarantee that we will be able to maintain our technologicaladvantages over emerging technologies in the future. Over time, we will need torespond to technological innovation in a rapidly changing industry. Inaddition, although we believe that we are recognized as a market leader increating systems for genetic analysis in the life sciences, standardization oftools and systems for genetic research is still ongoing and there can be noassurance that our products will emerge as the standard for genetic research.The emergence of competing technologies and systems as market standards forgenetic research may result in our products becoming uncompetitive and couldcause our business to suffer.

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**Our successdepends on the continuous development of new products and our ability to managethe transition from our older products to new products.**

We compete in markets that are new,intensely competitive, highly fragmented and rapidly changing, and many of ourcurrent and potential competitors have significantly greater financial,technical, marketing and other resources than we do. In addition, many currentand potential competitors have greater name recognition, more extensivecustomer bases and access to proprietary genetic content. The continued successof our GeneChip® products will depend on our ability to produce products withsmaller feature sizes, our ability to dice the wafer, and create greaterinformation capacity at our current or lower costs. The successful development,manufacture and introduction of our new products is a complicated process anddepends on our ability to manufacture enough products in sufficient quantityand at acceptable cost in order to meet customer demand. If we fail to keeppace with emerging technologies or are unable to develop, manufacture andintroduce new products, we will become uncompetitive, our pricing and marginswill decline and our business will suffer.

Our failure tosuccessfully manage the transition between our older products and our newproducts may adversely affect our financial results. As we introduce new orenhanced products, we must successfully manage the transition from olderproducts to minimize disruption in customers’ ordering patterns, avoidexcessive levels of older product inventories and provide sufficient suppliesof new products to meet customer demands. When we introduce new or enhancedproducts, we face numerous risks relating to product transitions, including theinability to accurately forecast demand and difficulties in managing differentsales and support requirements due to the type or complexity of the newproducts. For instance, many of our existing customers are currently scaling upproduction on the Mapping 500K Array Set and some of these customers areexperiencing challenges in the scale up which may affect the timing of future500K Set product reorders.

**We expect to faceincreasing competition.**

Future competitionwill likely come from existing competitors as well as other companies seekingto develop new technologies for analyzing genetic information. For example,companies such as Agilent Technologies, Applied Biosystems, GE Healthcare(through its acquisition of Amersham Biosciences) and Illumina have productsfor gene expression research and analysis which are directly competitive withour GeneChip® Mapping array products. In addition, pharmaceutical andbiotechnology companies have significant needs for genomic information and maychoose to develop or acquire competing technologies to meet these needs. In themolecular diagnostics field, competition will likely come from establisheddiagnostic companies, companies developing and marketing DNA probe tests forgenetic and other diseases and other companies conducting research on newtechnologies to ascertain and analyze genetic information. Further, in theevent that we develop new technology and products that compete with existingtechnology and products of well established companies, there can be noguarantee that the marketplace will readily adopt any such new technology andproducts that we may introduce in the future.

The market formolecular diagnostics products is currently limited and highly competitive,with several large companies already having significant market share. Companiessuch as Abbott Laboratories, Bayer AG, Beckman Coulter, Becton Dickinson,bioMérieux, Celera Diagnostics, Johnson & Johnson and RocheDiagnostics have made strategic commitments to diagnostics, have financial andother resources to invest in new technologies, and have substantialintellectual property portfolios, substantial experience in new product development,regulatory expertise, manufacturing capabilities and the distribution channelsto deliver products to customers. Established diagnostic companies also have aninstalled base of instruments in several markets, including clinical andreference laboratories, which are not compatible with the GeneChip® system andcould deter acceptance of our products. In addition, these companies haveformed alliances with genomics companies which provide them access to geneticinformation that may be incorporated into their diagnostic tests.

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**Recent accountingpronouncements may impact our future financial position and results ofoperations.**

There have beennew accounting pronouncements or regulatory rulings that will have an impact onour future financial position and results of operations. For instance, onDecember 16, 2004, the Financial Accounting Standards Board (FASB) issuedFASB Statement No. 123 (revised 2004), “Share-Based Payment”, which is arevision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. SFAS123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASBStatement No. 95, “Statement ofCash Flows”. Generally, the approach in SFAS 123(R) is similar tothe approach described in Statement 123. However, SFAS 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran alternative. We expect to adopt SFAS 123(R) effective January 1, 2006under the modified-prospective method. The adoption of SFAS 123(R)’s fair valuemethod will have a significant impact on our result of operations, although itwill have no impact on our overall financial position. With the adoption ofSFAS 123(R), we expect to record stock-based compensation of approximately$11.0 million, net of tax, or $0.15 per diluted share in 2006. Our estimate ofstock-based compensation expense is affected by our stock price, the number ofstock-based awards we may grant in 2006, as well as a number of complex andsubjective valuation assumptions and the related tax effect. These valuationassumptions include, but are not limited to, the volatility of our stock price,the estimated forfeiture rates and employee stock option exercise behaviors.

**Our effective taxrate may vary significantly.**

Our futureeffective tax rates could be adversely affected by various internal andexternal factors. These factors include, but are not limited to, earnings beinglower than anticipated in countries where we have lower statutory rates andhigher than anticipated in countries where we have higher statutory rates;changes in the valuation of our deferred tax assets and liabilities; or changesin tax laws or interpretations thereof; changes in tax rates, future levels ofresearch and development spending, and changes in overall levels of pretaxearnings. Any new interpretative accounting guidance related to accounting foruncertain tax positions could adversely affect our tax provision.

**Our businessdepends on research and development spending levels for pharmaceutical andbiotechnology companies and academic and governmental research institutions.**

We expect that our revenues in the foreseeable futurewill be derived primarily from products and services provided to a relativelysmall number of pharmaceutical and biotechnology companies and academic,governmental and other research institutions. Our success will depend upontheir demand for and use of our products and services. Our operating resultsmay fluctuate substantially due to reductions and delays in research anddevelopment expenditures by these customers. For example, reductions in capitalexpenditures by these customers may result in lower than expectedinstrumentation sales and similarly, reductions in operating expenditures bythese customers could result in lower than expected GeneChip® array and reagentsales. These reductions and delays may result from factors that are not withinour control, such as:

·       changes in economicconditions;

·       changes in governmentprograms that provide funding to companies and research institutions;

·       changes in the regulatoryenvironment affecting life sciences companies and life sciences research;

·       market-driven pressures oncompanies to consolidate and reduce costs; and

·       other factors affectingresearch and development spending.

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**Our success inpenetrating emerging market opportunities in molecular diagnostics depends onthe efforts of our partners and the ability of our GeneChip® technologies to beused in clinical applications for diagnosing and informing the treatment ofdisease.**

The clinicalapplications of GeneChip® technologies for diagnosing and informing thetreatment of disease is an emerging market opportunity in molecular diagnosticsthat seeks to improve the effectiveness of health care by collectinginformation about DNA variation and RNA expression in patients at various timesfrom diagnosis through prognosis and on to the end of therapy. However, therecan be no assurances that molecular diagnostic markets will develop as quicklyas we expect or reach what we believe is their full potential. Although webelieve that there will be clinical applications of our GeneChip® technologiesthat will be utilized for diagnosing and informing the treatment of disease,there can be no certainty of the technical or commercial success ourtechnologies will achieve in such markets.

The moleculardiagnostics market is relatively new for us and presents us with new risks anduncertainties. Our success in this area depends to a large extent on ourcollaborative relationships and the ability of our collaborative partners tosuccessfully market and sell products using our GeneChip® technologies. As aresult, we are also dependent on the ability of our collaborative partners toachieve regulatory approval for such products in the United States and inoverseas markets. Although Roche received FDA approval of the first diagnosticgenotyping test for use with our GeneChip® System 3000Dx in late 2004, therecan be no assurance that other products using our GeneChip® technologies willachieve needed approvals.

**We may notsuccessfully obtain regulatory approval of any diagnostic or other product orservice that we or our collaborative partners develop.**

The FDA mustapprove certain in-vitro diagnostic products before they can be marketed in theU.S. Certain in-vitro diagnostic products must also be approved by theregulatory agencies of foreign governments or jurisdictions before the productcan be sold outside the U.S. Commercialization of our and our collaborativepartners’ in-vitro diagnostic products outside of the research environment thatmay depend upon successful completion of clinical trials. Clinical developmentis a long, expensive and uncertain process and we do not know whether we, orany of our collaborative partners, will be permitted to undertake clinicaltrials of any potential in-vitro diagnostic products. It may take us or ourcollaborative partners many years to complete any such testing, and failure canoccur at any stage. Delays or rejections of potential products may beencountered based on changes in regulatory policy for product approval duringthe period of product development and regulatory agency review. Moreover, ifand when our projects reach clinical trials, we or our collaborative partnersmay decide to discontinue development of any or all of these projects at anytime for commercial, scientific or other reasons. Any of the foregoing matterscould have a material adverse effect on our business, financial condition andresults of operations.

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

Medical devicelaws and regulations are also in effect in many countries, ranging fromcomprehensive device approval requirements to requests for product data orcertifications. The number and scope of these requirements are increasing. Wemay not be able to obtain regulatory approvals in such countries or may incursignificant costs in obtaining or maintaining our foreign regulatory approvals.In addition, the export by us of certain of our products which have not yetbeen cleared for domestic commercial distribution may be subject to FDA orother export restrictions.

Our diagnosticclinical laboratory will be subject to extensive federal and stateregulation including the requirements of the Clinical Laboratory ImprovementAct of 1988 (CLIA). CLIA is intended to ensure the quality and reliability ofclinical laboratories in the United States by requiring all laboratories tomeet specified standards in the areas of personnel qualification, administration,participation in proficiency testing, patient test management, quality control,quality assurance and inspections. There can be no assurance that regulationsunder and future administrative interpretations of CLIA will not have anadverse impact on the potential market for our diagnostic clinical laboratory.

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**Healthcare reform andrestrictions on reimbursements may limit our returns on molecular diagnosticproducts that we may develop with our collaborators.**

We are currentlydeveloping diagnostic and therapeutic products with our collaborators. Theability of our collaborators to commercialize such products may depend, inpart, on the extent to which reimbursement for the cost of these products willbe available under U.S. and foreign regulations that govern reimbursement forclinical testing services by government authorities, private health insurersand other organizations. In the U.S., third-party payor price resistance, thetrend towards managed health care and legislative proposals to reform healthcare or reduce government insurance programs could reduce prices for healthcare products and services, adversely affect the profits of our customers andcollaborative partners and reduce our future royalties.

**We depend on a limitednumber of suppliers and we will be unable to manufacture our products ifshipments from these suppliers are delayed or interrupted.**

We depend on our vendorsto provide components of our products in required volumes, at appropriatequality and reliability levels, and in compliance with regulatory requirements.Key parts of the GeneChip® product line are currently available only from asingle source or limited sources. In addition, components of our manufacturingequipment and certain raw materials used in the synthesis of probe arrays areavailable from limited sources. If supplies from these vendors were delayed orinterrupted for any reason, we would not be able to get manufacturingequipment, produce probe arrays, or sell scanners or other components for ourGeneChip® products in a timely fashion or in sufficient quantities or under acceptableterms. Furthermore, our business is dependent on our ability to forecast theneeds for components and products in the GeneChip® product line and oursuppliers’ ability to deliver such components and products in time to meetcritical manufacturing and product release schedules. Our business could beadversely affected, for example, if suppliers fail to meet product releaseschedules, if we experience supply constraints, if we fail to negotiatefavorable pricing or if we experience any other interruption or delay in thesupply chain which interferes with our ability to manufacture our products ormanage our inventory levels.

**Our success will requirethat we establish a strong intellectual property position and that we candefend ourselves against intellectual property claims from others.**

Maintaining a strongpatent position is critical to our business. Litigation on these matters hasbeen prevalent in our industry and we expect that this will continue. Patentlaw relating to the scope of claims in the technology fields in which weoperate is still evolving and the extent of future protection is highlyuncertain, so there can be no assurance that the patent rights that we have ormay obtain will be valuable. Others have filed, and in the future are likely tofile, patent applications that are similar or identical to ours or those of ourlicensors. To determine the priority of inventions, we will have to participatein interference proceedings declared by the United States Patent and TrademarkOffice that could result in substantial costs in legal fees and couldsubstantially affect the scope of our patent protection. We cannot assureinvestors that any such patent applications will not have priority over ourpatent applications. Also, our intellectual property may be subject tosignificant administrative and litigation proceedings such as oppositionproceedings against our patents in Europe, Japan and other jurisdictions. Inaddition, we have incurred and may in future periods incur substantial costs inlitigation to defend against patent suits brought by third parties or initiatedby us. For example, we currently are engaged in litigation regardingintellectual property rights with Multilyte Ltd. and Enzo LifeSciences, Inc. For additional information concerning intellectual propertylitigation and administrative proceedings, see Part I, Item 3, LegalProceedings, of this Form 10-K/A.

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In addition to patentprotection, we also rely upon copyright and trade secret protection for ourconfidential and proprietary information. There can be no assurance, however,that such measures will provide adequate protection for our copyrights, tradesecrets or other proprietary information. In addition, there can be noassurance that trade secrets and other proprietary information will not bedisclosed, or that others will not independently develop substantiallyequivalent proprietary information and techniques or otherwise gain access toor disclose our trade secrets and other proprietary information. There can alsobe no assurance that we will be able to effectively protect our copyrights,trade secrets or other proprietary information. If we cannot obtain, maintainor enforce intellectual property rights, our competitors may be able to offerprobe array systems similar to our GeneChip® technology.

Our success also dependsin part on us neither infringing patents or other proprietary rights of thirdparties nor breaching any licenses that may relate to our technologies andproducts. We are aware of third-party patents that may relate to ourtechnology, including reagents used in probe array synthesis and in probe arrayassays, probe array scanners, synthesis techniques, polynucleotideamplification techniques, assays, and probe arrays. We routinely receivenotices claiming infringement from third parties as well as invitations to takelicenses under third party patents. There can be no assurance that we will notinfringe on these patents or other patents or proprietary rights or that wewould be able to obtain a license to such patents or proprietary rights oncommercially acceptable terms, if at all.

**If we are unable tomaintain our relationships with collaborative partners, we may have difficultydeveloping and selling our products and services.**

We believe that oursuccess in penetrating our target markets depends in part on our ability todevelop and maintain collaborative relationships with key companies as well aswith key academic researchers. Currently, our significant collaborativepartners include Qiagen GmBH for sample preparation and purification systems,Invitrogen Corporation for reagents, and Ingenuity Systems, Inc. foranalytical software. We collaborate with both Beckman Coulter Inc. andCaliper Life Sciences in the development of automation for GeneChip® technologyapplications for use in drug discovery, drug development and clinical research.Roche, bioMérieux and Veridex are collaborative partners in the development ofchip products for medical diagnostic and applied testing markets. Relying onthese or other collaborative relationships is risky to our future successbecause:

·       our partners may developtechnologies or components competitive with our GeneChip® products;

·       our existing collaborationsmay preclude us from entering into additional future arrangements;

·       our partners may not obtainregulatory approvals necessary to continue the collaborations in a timelymanner;

·       some of our agreements mayterminate prematurely due to disagreements between us and our partners;

·       our partners may not devotesufficient resources to the development and sale of our products;

·       our partners may be unableto provide the resources required for us to progress in the collaboration on atimely basis;

·       our collaborations may beunsuccessful; or

·       we may not be able tonegotiate future collaborative arrangements on acceptable terms.

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**The size and structure ofour current sales, marketing and technical support organizations may limit ourability to sell our products.**

Although we have investedsignificant other resources to expand our direct sales force and our technicaland support staff, we may not be able to establish a sufficiently sized globalsales, marketing or technical support organization to sell, market or supportour products globally. To assist our sales and support activities, we haveentered into distribution agreements through certain distributors, principallyin markets outside of North America and Europe. These and other third partieson whom we rely for sales, marketing and technical support in these geographicareas may decide to develop and sell competitive products or otherwise becomeour competitors, which could harm our business.

**Due to the internationalnature of our business, political or economic changes or other factors couldharm our business.**

A significant amount ofour revenue is currently generated from sales outside the United States. Thoughsuch transactions are denominated in both U.S. dollars and foreign currencies,our future revenue, gross margin, expenses and financial condition are stillaffected by such factors as changes in foreign currency exchange rates;unexpected changes in, or impositions of, legislative or regulatoryrequirements, including export and trade barriers and taxes; longer paymentcycles and greater difficulty in accounts receivable collection. We are alsosubject to general geopolitical risks in connection with internationaloperations, such as political, social and economic instability, potentialhostilities and changes in diplomatic and trade relationships. We cannot assureinvestors that one or more of the foregoing factors will not have a materialadverse effect on our business, financial condition and operating results orrequire us to modify our current business practices.

**We may be exposed toliability due to product defects.**

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

**Ethical, legal and socialconcerns surrounding the use of genetic information could reduce demand for ourproducts.**

Genetic testing hasraised ethical issues regarding privacy and the appropriate uses of theresulting information. For these reasons, governmental authorities may call forlimits on or regulation of the use of genetic testing or prohibit testing forgenetic predisposition to certain conditions, particularly for those that haveno known cure. Similarly, such concerns may lead individuals to refuse to usegenetics tests even if permissible. Any of these scenarios could reduce thepotential markets for our molecular diagnostic products, which could have amaterial adverse effect on our business, financial condition and results ofoperations.

**Because our businessdepends on key executives and scientists, our inability to recruit and retainthese people could hinder our business expansion plans.**

We are highly dependenton our officers and our senior scientists and engineers, including scientificadvisors. Our product development and marketing efforts could be delayed orcurtailed if we are unable to attract or retain key talent.

We rely on our scientificadvisors and consultants to assist us in formulating our research, developmentand commercialization strategy. All of these individuals are engaged by otheremployers and have commitments to other entities that may limit theiravailability to us. A scientific advisor’s other obligations may prevent him orher from assisting us in developing our technical and business strategies.

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To expand our research,product development and sales efforts we need additional people skilled inareas 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 ourbusiness if we are unable to hire, train and retain a sufficient number ofqualified employees. There can be no assurance that we will be successful inhiring or retaining qualified personnel and our failure to do so could have amaterial adverse impact on our business, financial condition and results ofoperations.

**Our strategic equityinvestments may result in losses.**

We periodically makestrategic equity investments in various publicly traded and non-publicly tradedcompanies with businesses or technologies that may complement our business. Themarket values of these strategic equity investments may fluctuate due to marketconditions and other conditions over which we have no control. Other thantemporary declines in the market price and valuations of the securities that wehold in other companies will require us to record losses relative to ourownership interest. This could result in future charges on our earnings and asa result, it is uncertain whether or not we will realize any long term benefitsassociated with these strategic investments.

**Future acquisitions maydisrupt our business and distract our management.**

We have previouslyengaged in acquisitions and may do so in the future in order to exploittechnology or market opportunities. If we acquire another company, we may notbe able to successfully integrate the acquired business into our existingbusiness in a timely and non-disruptive manner, or at all. Furthermore, anacquisition may not produce the revenues, earnings or business synergies thatwe anticipate. If we fail to integrate the acquired business effectively or ifkey employees of that business leave, the anticipated benefits of theacquisition would be jeopardized. The time, capital management and otherresources spent on an acquisition that fails to meet our expectations couldcause our business and financial condition to be materially and adverselyaffected. For example, on October 21, 2005, we completed the acquisitionof ParAllele BioScience, Inc. We may not realize the anticipated benefitsof the acquisition because of integration and other challenges which include,among others, unanticipated incompatibility of corporate and administrativeinfrastructures, the ability to retain key employees, including key scientists,the diversion of management’s attention from ongoing business concerns, and thepotential adverse reaction of customers to the merger or resulting changes tothe combined company’s product and services offerings. In addition,acquisitions can involve substantial charges and amortization of significantamounts of deferred stock compensation that could adversely affect our resultsof operations.

**The market price of ourcommon stock has been volatile.**

The market price of ourcommon stock is volatile. To demonstrate this volatility, during thetwelve-month period ending on December 31, 2005, the volume of our commonstock traded on any given day ranged from 215,200 to 11,118,700 shares.Moreover, during that period, our common stock traded as low as $33.94 pershare and as high as $59.73 per share.

Furthermore, volatilityin the stock price of other companies has often led to securities class actionlitigation against those companies. Any future securities litigation against uscould result in substantial costs and divert management’s attention andresources, which could seriously harm our business, financial condition andresults of operations.

**ITEM 1B.   UNRESOLVEDSTAFF COMMENTS**

None.

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**ITEM 2.   PROPERTIES**

The following chartindicates the facilities that we own or lease, the location and size of eachsuch facility and their designated use. We expect our facilities needs toincrease over the next several years as we continue to expand our worldwidecommercial operations and our manufacturing capabilities.
|                         | ** ** | **Approximate** | ** ** | ** **                             | ** ** | ** **                     | ** ** |
|-------------------------|------------|-----------------|------------|----------------------------------------|------------|--------------------------------|------------|
| **Location**            | ** ** | **Square Feet** | ** ** | **Operation**                          | ** ** | **Own or Lease  (Expiration)** | ** ** |
| Bedford, MA             |       | 80,000 sq. ft.  |       | R&D, Manufacturing, Administrative |       | Lease expires 2013             |       |
| Emeryville, CA          |       | 11,000 sq. ft.  |       | Software Development                   |       | Lease expires 2010             |       |
| Osaka, Japan            |       | 710 sq. ft.     |       | Administrative                         |       | Lease expires 2007             |       |
| Santa Clara, CA         |       | 200,000 sq. ft. |       | R&D, Administrative                |       | Lease expires 2013             |       |
| Singapore               |       | 1,700 sq. ft.   |       | Administrative                         |       | Lease expires 2007             |       |
|                         |       | 147,000 sq. ft  |       | Manufacturing                          |       | Lease expires 2008             |       |
| Sunnyvale, CA           |       | 31,000 sq. ft.  |       | R&D                                |       | Lease expires 2008             |       |
|                    |       | 57,000 sq. ft.  |       | Administrative                         |       | Lease expires 2010             |       |
| Tokyo, Japan            |       | 11,000 sq. ft.  |       | Administrative                         |       | Lease expires 2007             |       |
| Wooburn Green, UK       |       | 10,000 sq. ft.  |       | Administrative                         |       | Lease expires 2016             |       |
| West Sacramento, CA     |       | 52,000 sq. ft.  |       | Manufacturing                          |       | Own (facility and land)        |       |
|                         |       | 3,800 sq. ft.   |       | Warehouse                              |       | Lease expires 2006             |       |
| Shanghai, China         |       | 4,000 sq. ft.   |       | Administrative                         |       | Lease expires 2009             |       |
| South San Francisco, CA |       | 35,000 sq.ft.   |       | R&D, Manufacturing, Administrative |       | Lease expires 2007             |       |

 

**ITEM 3.   LEGALPROCEEDINGS**

**GENERAL**

We have been in the pastand continue to be a party to litigation which has consumed and may in thefuture continue to consume substantial financial and managerial resources whichcould adversely affect our business, financial condition and results ofoperations. If in any pending or future intellectual property litigationinvolving us or our collaborative partners, we are found to have infringed thevalid intellectual property rights of third parties, we, or our collaborative partners,could be subject to significant liability for damages, could be required toobtain a license from a third party, which may not be available on reasonableterms or at all, or could be prevented from manufacturing and selling ourproducts. In addition, if we are unable to enforce our patents and otherintellectual property rights against others, or if our patents are found to beinvalid or unenforceable, third parties may more easily be able to introduceand sell DNA array technologies that compete with our GeneChip® brandtechnology, and our competitive position could suffer. We expect to devotesubstantial financial and managerial resources to protect our intellectualproperty rights and to defend against the claims described below as well as anyfuture claims asserted against us. Further, because of the substantial amountof discovery required in connection with any litigation, there is a risk thatconfidential information could be compromised by disclosure.

*Multilyte Litigation*

Multilyte Ltd., aBritish corporation, and Affymetrix are engaged in legal proceedings in Germanyand the United States to address allegations made by Multilyte that we infringecertain patents owned by Multilyte (the “Multilyte patents”) by making andselling our GeneChip® DNA microarray products.

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*Germany*

In the actions pending inGermany, on July 18, 2003, Multilyte filed proceedings in the state courtof Düsseldorf, alleging infringement of the Multilyte patents. In a separateaction in Germany, on October 15, 2003, we commenced nullity proceedingsin German Federal Patent Court in Munich alleging that the German part ofMultilyte’s two European patents (EPs 0 134 215 and0 304 202) are invalid. On June 29 and 30, 2004, the GermanFederal Patent Court in Munich held that both Multilyte European patents areinvalid in Germany. Following that ruling, on July 12, 2004, theDüsseldorf court stayed both sets of infringement proceedings before it,pending Multilyte’s appeal of the decisions of the German Federal Patent Courtin Munich nullifying both Multilyte patents. We were notified on April 5,2005 that Multilyte has abandoned its appeal of the decision nullifying theEuropean Patent 0 134 215.

*United States*

In the U.S. action, onAugust 13, 2003, we commenced proceedings in the United States DistrictCourt for the Northern District of California seeking a declaratory judgmentthat eight Multilyte patents are not infringed and are invalid. Multilyte hasagreed that we do not infringe five of the eight named patents. On October 24,2003, we filed an amended complaint seeking a declaratory judgment as to threeof the original eight named patents—U.S. Patents 5,432,099, 5,599,720 and5,807,755. Multilyte answered our complaint for declaratory judgment andasserted counterclaims against us alleging infringement of the three patentsnamed by us in our complaint. Multilyte has submitted the three patents-in-suitto the United States Patent and Trademark Office for voluntary re-examination.These patents remain in re-examination in the USPTO. On April 28, 2005,the Court granted our motions for summary judgment of non-infringement andentered a final judgment in the action in favor of us against Multilyte. OnMay 5, 2005, Multilyte filed a notice of motion to amend the judgmentasserting that the Court’s entry of final judgment was premature because it didnot give Multilyte the opportunity to present evidence showing infringementunder the Court’s most recent claim construction. On June 23, 2005, theCourt again granted summary judgment of non-infringement in favor of us.Multilyte has appealed the Court’s decision to the United States Court ofAppeals for the Federal Circuit which held oral argument on the appeal onMarch 7, 2006.

We believe that Multilyte’sremaining claims against us are without merit and have filed the declaratoryjudgment and nullity actions to protect our interests. However, we cannot besure that we will prevail in these matters. Our failure to successfully defendagainst these allegations could result in a material adverse effect on ourbusiness, financial condition and results of operations.

*Enzo Litigation*

On October 28, 2003,Enzo Life Sciences, Inc., a wholly-owned subsidiary of EnzoBiochem, Inc. (collectively “Enzo”) filed a complaint against us that isnow pending in the United States District Court for the Southern District ofNew York for breach of contract, injunctive relief and declaratory judgment.The Enzo complaint relates to a 1998 distributorship agreement with Enzo underwhich we served as a non-exclusive distributor of certain reagent labeling kitssupplied by Enzo. In its complaint, Enzo seeks monetary damages and aninjunction against us from using, manufacturing or selling Enzo products andfrom inducing collaborators and customers to use Enzo products in violation ofthe 1998 agreement. Enzo also seeks the transfer of certain Affymetrix patentsto Enzo. In connection with its complaint, Enzo provided us with a notice oftermination of the 1998 agreement effective on November 12, 2003.

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On November 10,2003, we filed a complaint against Enzo in the United States District Court forthe Southern District of New York for declaratory judgment, breach of contractand injunctive relief relating to the 1998 agreement. In our complaint, weallege that Enzo has engaged in a pattern of wrongful conduct against us andother Enzo labeling reagent customers by, among other things, assertingimproperly broad rights in its patent portfolio, improperly using the 1998agreement and distributorship agreements with others in order to corner themarket for non-radioactive labeling reagents, and improperly using the 1998agreement to claim ownership rights to our proprietary technology. We seekdeclarations that we have not breached the 1998 agreement, that we are entitledto sell our remaining inventory of Enzo reagent labeling kits, and that nineEnzo patents that are identified in the 1998 agreement are invalid and/or notinfringed by us. We also seek damages and injunctive relief to redress Enzo’salleged breaches of the 1998 agreement, its alleged tortious interference withthe Company’s business relationships and prospective economic advantage, andEnzo’s alleged unfair competition. We filed a notice of related case statingthat our complaint against Enzo is related to the complaints already pending inthe Southern District of New York against eight other former Enzo distributors.The U.S. District Court for the Southern District of New York has related ourcase. There is no trial date in the actions between Enzo and us***.***

We believe that theclaims set forth in Enzo’s complaint are without merit and have filed theaction 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 tosuccessfully defend against these allegations could result in a materialadverse effect on our business, financial condition and results of operation.

*Administrative Litigationand Proceedings*

Our intellectual propertyis subject to a number of significant administrative and litigation actions.For example, in Europe and Japan, we expect third parties to oppose significantpatents that we own or control. Currently, Multilyte Ltd. and ProtoGeneLaboratories, Inc. have filed oppositions against our EP 0 619 321patent in the European Patent Office. PamGene B.V. filed an opposition againstour EP 0 728 520 patent and it was revoked at oral proceedings onJanuary 14, 2004. Affymetrix has appealed this ruling. Also, AbbottLaboratories, Applera, Clondiag and CombiMatrix are parties in oppositionagainst our EP 0 834 575. An oral hearing was conducted by the OppositionDivision which upheld the patent on December 4, 2004, and this decisionhas been appealed. Abbott Laboratories, CombiMatrix, PamGene B.V., Applera andDr. Peter Schneider filed an opposition against our EP 0 834 576 patent.The Opposition Division revoked the patent during an oral hearing onFebruary 23, 2005 and we have appealed this ruling. CombiMatrix has filedan opposition against EP 0 695 941, Agilent, CombiMatrix, Clondiag and Applerahave filed an opposition against EP 0 853 679, Applera has opposed EP 0 972 564and Degussa AG has filed an opposition against EP 1 086 742. These procedureswill result in the respective patents being either upheld in their entirety,allowed to issue in amended form in designated European countries, or revoked.

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

At this time, we cannotdetermine the outcome of any of the matters described above.

**ITEM4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters were submittedduring the fourth quarter of the year ended December 31, 2005.

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**PART II**

**ITEM 5.**                 MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OFEQUITY SECURITIES

Our common stock istraded on the Nasdaq National Market System under the symbol of AFFX. Thefollowing table sets forth, for the periods indicated, the low and high bidprices per share for our common stock as reported by the Nasdaq NationalMarket.
|                | ** ** | **Low** | ** ** | **High** | ** ** |
|----------------|------------|---------|------------|----------|------------|
| **2004**       |       |    |       |     |       |
| First Quarter  |       | $       | 23.18      |     | $          | 36.30 |   |
| Second Quarter |       | $       | 26.56      |     | $          | 38.20 |   |
| Third Quarter  |       | $       | 24.48      |     | $          | 32.52 |   |
| Fourth Quarter |       | $       | 28.89      |     | $          | 37.48 |   |
| **2005**       |       |    |       |     |       |
| First Quarter  |       | $       | 33.94      |     | $          | 45.47 |   |
| Second Quarter |       | $       | 42.18      |     | $          | 55.10 |   |
| Third Quarter  |       | $       | 40.03      |     | $          | 59.73 |   |
| Fourth Quarter |       | $       | 42.19      |     | $          | 52.44 |   |

 

Asof March 8, 2006, there were approximately 475 holders of record of our commonstock, one of which is Cede & Co., a nominee for Depository Trust Company (“DTC”).  All of the shares of common stock held bybrokerage firms, banks and other financial institutions as nominees forbeneficial owners are deposited into participant accounts at DTC, andtherefore, are considered to be held of record by Cede & Co. as oneshareholder.

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

**ITEM 6.**                    SELECTEDFINANCIAL DATA

The following selected historical consolidatedfinancial information has been derived from our audited consolidated financialstatements. The balance sheet data as of December 31, 2005 and 2004 andstatements of operations data for each of the three years in the period endedDecember 31, 2005 are derived from audited consolidated financialstatements included in this Form 10-K/A. The statement of operationsdata set forth below for the years ended December 31, 2005 and 2003 andthe balance sheet data set forth below at December 31, 2005, 2004 and 2003has been restated to conform to the restated consolidated financial statementsincluded in this Form 10-K/A and is presented herein on an unaudited basis.

As announced in our Current Report on Form 8-K filedon August 9, 2006, after we filed our Original 10-K, we concluded that ourpreviously filed consolidated financial statements should no longer be reliedupon due to certain errors in the stock-based compensation expense, and therelated income tax impact.

Referto the “Restatement of Consolidated Financial Statements” explanatory notepresented in this Annual Report on Form 10-K/A and Note 3 to our consolidatedfinancial statements for more detailed information regarding the restatement ofour consolidated financial statements for the years ended December 31,2005, 2004 and 2003 and at December 31, 2005 and 2004. You should readthis table in conjunction with Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and Item 8, “FinancialStatements and Supplementary Data.”

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| ** **                                                 | ** ** | **Year Ended December 31,**                            | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                 | ** ** | **(In thousands, except per share amounts)** | ** ** |
| ** **                                                 | ** ** | **(as previously reported)**                                | ** ** |
| **Consolidated Statement of Operations Data:**             |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenue:                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Product and product related revenue                        |       | $                                                                     | 350,190    |   | $ | 330,885 |   | $ | 280,780 |   | $ | 248,538 |   | $ | 194,936 |   |
| Royalties and other revenue                                |       | 8,339                                                                 |       | 9,832 |   | 10,556 |   | 19,777 |   | 18,447 |   |
| Revenue from Perlegen Sciences                             |       | 9,073                                                                 |       | 5,245 |   | 9,460 |   | 21,559 |   | 11,491 |   |
| Total revenue                                              |       | 367,602                                                               |       | 345,962 |   | 300,796 |   | 289,874 |   | 224,874 |   |
| Income (loss) from operations                              |       | 57,413                                                                |       | 59,719 |   | 17,544 |   | 5,266 |   | (40,596 | ) |
| Net income (loss)                                          |       | $                                                                     | 57,516     |   | $ | 47,608 |   | $ | 14,285 |   | $ | (1,630 | ) | $ | (33,121 | ) |
| Basic net income (loss) per common share                   |       | $                                                                     | 0.90       |   | $ | 0.79 |   | $ | 0.24 |   | $ | (0.03 | ) | $ | (0.58 | ) |
| Diluted net income (loss) per common share                 |       | $                                                                     | 0.84       |   | $ | 0.74 |   | $ | 0.24 |   | $ | (0.03 | ) | $ | (0.58 | ) |
|                                                       |       |                                                                  |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data:**                       |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents, and available-for-sale  securities |       | $                                                                     | 284,932    |   | $ | 205,715 |   | $ | 459,883 |   | $ | 361,458 |   | $ | 368,823 |   |
| Working capital                                            |       | 345,566                                                               |       | 226,211 |   | 192,778 |   | 371,708 |   | 372,718 |   |
| Total assets(2)                                            |       | 766,823                                                               |       | 499,771 |   | 700,164 |   | 601,403 |   | 580,015 |   |
| Long-term obligations(1)                                   |       | 139,790                                                               |       | 153,845 |   | 166,586 |   | 380,222 |   | 378,000 |   |

 
| ** **                                                 | ** ** | **Year Ended December 31,**                            | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                 | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                 | ** ** | **(In thousands, except per share amounts)** | ** ** |
| ** **                                                 | ** ** | **(restatement)**                                                     | ** ** |
| **Consolidated Statement of  Operations Data:**            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenue:                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Product and product  related revenue                       |       | $                                                                     | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Royalties and other  revenue                               |       | —                                                                |       | — |   | — |   | — |   | — |   |
| Revenue from Perlegen  Sciences                            |       | —                                                                |       | — |   | — |   | — |   | — |   |
| Total revenue                                              |       | —                                                                |       | — |   | — |   | — |   | — |   |
| Income (loss) from  operations(3)                          |       | —                                                                |       | — |   | (1,724 | ) | (4,075 | ) | (4,995 | ) |
| Net income (loss)(3)                                       |       | $                                                                     | 8,271      |   | $ | — |   | $ | (1,724 | ) | $ | (4,075 | ) | $ | (4,995 | ) |
| Basic net income (loss)  per common share                  |       | $                                                                     | 0.13       |   | $ | — |   | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.08 | ) |
| Diluted net income  (loss) per common share                |       | $                                                                     | 0.12       |   | $ | — |   | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.08 | ) |
|                                                       |       |                                                                  |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet  Data:**                      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents,  and available-for-sale securities |       | $                                                                     | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Working capital                                            |       | 4,113                                                                 |       | — |   | — |   | — |   | — |   |
| Total assets                                               |       | 8,271                                                                 |       | — |   | — |   | — |   | — |   |
| Long-term obligations                                      |       | —                                                                |       | — |   | — |   | — |   | — |   |

 
| ** **                                                 | ** ** | **Year Ended December 31,**                            | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                 | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                 | ** ** | **(In thousands, except per share amounts)** | ** ** |
| ** **                                                 | ** ** | **(as restated)**                                                | ** ** |
| **Consolidated Statement of  Operations Data:**            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenue:                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Product and product  related revenue                       |       | $                                                                     | 350,190    |   | $ | 330,885 |   | $ | 280,780 |   | $ | 248,538 |   | $ | 194,936 |   |
| Royalties and other  revenue                               |       | 8,339                                                                 |       | 9,832 |   | 10,556 |   | 19,777 |   | 18,447 |   |
| Revenue from Perlegen  Sciences                            |       | 9,073                                                                 |       | 5,245 |   | 9,460 |   | 21,559 |   | 11,491 |   |
| Total revenue                                              |       | $                                                                     | 367,602    |   | $ | 345,962 |   | $ | 300,796 |   | $ | 289,874 |   | $ | 224,874 |   |
| Income (loss) from  operations                             |       | 57,413                                                                |       | 59,719 |   | 15,820 |   | 1,191 |   | (45,591 | ) |
| Net income (loss)                                          |       | $                                                                     | 65,787     |   | $ | 47,608 |   | $ | 12,561 |   | $ | (5,705 | ) | $ | (38,116 | ) |
| Basic net income (loss)  per common share                  |       | $                                                                     | 1.03       |   | $ | 0.79 |   | $ | 0.21 |   | $ | (0.10 | ) | $ | (0.66 | ) |
| Diluted net income  (loss) per common share                |       | $                                                                     | 0.96       |   | $ | 0.74 |   | $ | 0.21 |   | $ | (0.10 | ) | $ | (0.66 | ) |
|                                                       |       |                                                                  |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet  Data:**                      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents,  and available-for-sale securities |       | $                                                                     | 284,932    |   | $ | 205,715 |   | $ | 459,883 |   | $ | 361,458 |   | $ | 368,823 |   |
| Working capital                                            |       | 349,679                                                               |       | 226,211 |   | 192,778 |   | 371,708 |   | 372,718 |   |
| Total assets(2)                                            |       | 775,094                                                               |       | 499,771 |   | 700,164 |   | 601,403 |   | 580,015 |   |
| Long-term obligations(1)                                   |       | 139,790                                                               |       | 153,845 |   | 166,586 |   | 380,222 |   | 378,000 |   |

 

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(1)             In September 1999, we issued$150.0 million principal amount of 5% convertible subordinated notes. InFebruary 2000, we issued $225.0 million principal amount of 4.75%convertible subordinated notes. In August 2001, we repurchased$5.0 million principal amount of the 4.75% notes for total considerationof $3.3 million. In connection with the transaction, we recorded anextraordinary gain of approximately $1.7 million in fiscal 2001 which wasreclassified during fiscal 2002 to interest income and other, net in accordancewith Financial Accounting Standard (“FAS”) 145, “Rescission of FASB StatementsNo. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.” In December 2002, we repurchased $1.1 million principalamount of the 4.75% notes for total consideration of approximately$0.9 million. In connection with the transaction we recorded a gain of$0.2 million which is included in interest income and other, net. In thesecond quarter of 2003, we repurchased $53.4 million principal amount ofour 4.75% convertible subordinated notes due in 2007 and $48.0 millionprincipal amount of our 5.0% convertible subordinated notes due in 2006. Inconnection with these transactions, we recognized a net loss of approximately$1.0 million which is included in interest income and other, net. InDecember 2003, we issued $120.0 million principal amount of 0.75%senior convertible notes. In January 2004, we completed the redemption ofour 5.0% notes ($102.0 million face value). In connection with theredemption, we recorded a charge of $3.2 million to interest expense inthe first quarter of 2004, related to the unamortized issuance costs andredemption fee associated with the repurchased 5.0% notes. InFebruary 2004, we also completed the redemption of our 4.75% notes($165.5 million face value). In connection with the redemption, werecorded a charge of $4.9 million to interest expense related to theunamortized issuance costs and redemption fee associated with the repurchased4.75% notes.

Includedin long-term obligations in 2003 through 2005 is the long term portion ofdeferred revenue relating primarily to our collaboration agreement with Roche.In January 2003, we expanded our collaboration with Roche. Under the termsof the collaborative agreement, Roche paid us an up-front, nonrefundablelicense fee of $70.0 million. We are recognizing this amount as acomponent of product related revenue over the research and product developmentphase which is expected to approximate five years.

(2)             On October 21, 2005, we completed the$122.4 million acquisition of ParAllele BioScience, Inc. (“ParAllele”), aprovider of comprehensive genetic discovery solutions to the life scienceresearch, pharmaceutical and diagnostic sectors.

(3)             For the years ended December 31, 2003,2002 and 2001, the restatement amounts represent additional stock optionexpense resulting from stock options granted during fiscal years 1997 to 1999that were incorrectly accounted for under U.S. generally accepted accountingprinciples.  For the year endedDecember 31, 2005, the restatement amount represents the income taxbenefit associated with the additional stock option expense which was recordedin the year in which we reduced our valuation allowance for certain deferredtax assets.

**ITEM 7.**                    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion should be read in conjunctionwith the consolidated financial statements and the related notes that appearelsewhere in this document.*

This discussion should beread in conjunction with the other sections of this Annual Report onForm 10-K/A, including “Item 1: Business”; “Item 1A: RiskFactors”; “Item 6: Selected Financial Data”; and “Item 8: Financial Statementsand Supplementary Data.” The various sections of this discussion contain anumber of forward-looking statements, all of which are based on ourcurrent expectations and could be affected by the uncertainties and riskfactors described throughout this filing. Our actual results may differmaterially.

As announced in our Current Report on Form 8-K filedon August 9, 2006, after we filed our Original 10-K, we concluded that ourpreviously filed consolidated financial statements should no longer be reliedupon due to certain errors in the stock-based compensation expense, and therelated income tax impact.

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All statements in thisAnnual Report on Form 10-K/A that are not historical are “forward-lookingstatements” within the meaning of Section 21E of the Securities ExchangeAct of 1934 as amended, including statements regarding our “expectations,” “beliefs,”“hopes,” “intentions,” “strategies” or the like. Such statements are based onour current expectations and are subject to a number of factors anduncertainties that could cause actual results to differ materially from thosedescribed in the forward-looking statements. We caution investors thatthere can be no assurance that actual results or business conditions will notdiffer materially from those projected or suggested in such forward-lookingstatements as a result of various factors, including, but not limited to, therisk factors discussed in this Annual Report on Form 10-K/A in Item1A. We expressly disclaim any obligation or undertaking to release publicly anyupdates or revisions to any forward-looking statements contained hereinto reflect any change in our expectations with regard thereto or any change inevents, conditions, or circumstances on which any such statements are based.

*Restatement of ConsolidatedFinancial Statements*

On August 9, 2006, we concluded that our consolidatedfinancial statements for the years ended December 31, 2005, 2004 and 2003should be restated to record additional non-cash stock-based compensationexpense, and the related income tax impact, resulting from stock optionsgranted during fiscal years 1997 to 1999 that were incorrectly accounted forunder U.S. generally accepted accounting principles. Our decision to restateour financial statements was based on the results of an internal review of ourhistorical stock option granting practices from January 1, 1997 through May 31,2006 performed under the direction of the Audit Committee of the Board ofDirectors.  The internal reviewidentified certain errors and documentation lapses but did not find any patternor practice of inappropriately identifying grant dates with hindsight in orderto provide “discounted” or “in-the-money” grants.

We have concluded that there was a material accountingerror as a result of a documentation lapse in July 1999, in which the optiongrant for an aggregate of 1.99 million shares should have been measured foraccounting purposes as of a later date. In light of the restatement required by this matter, we have alsoincluded in this restatement corrections relating to certain other errors anddocumentation lapses in the fiscal years 1997 and 1998.  Approximately 97% of the charges relating tothe restatement arose from the documentation lapse in July 1999.

We have determined that the cumulative, pre-tax,non-cash, stock-based compensation expense resulting from revised measurementdates for options granted between 1997 and 1999 was approximately$21.5 million. Accordingly, we recorded stock-based compensation expenseof $0, $0, and $1.7 million for the years ended December 31, 2005, 2004and 2003, respectively, and $19.8 million for the five years preceding 2003,based on the vesting periods of the respective grants.  In addition, we recorded an income taxbenefit of $8.3 million in 2005. Principally as a result of cumulative losses incurred through 2004, werecorded a full valuation allowance against all deferred tax assets for theyears ended December 31, 2004 and 2003 and consequently, there is no income taxeffect of the additional stock-based compensation expense recorded in thoseyears.  The cumulative effect of therestatement adjustments on our consolidated balance sheet at December 31, 2005was an increase in additional paid-in capital of $21.5 million offset by anincrease in the accumulated deficit of $13.2 million, which results in a neteffect on stockholders’ equity of $8.3 million. The adjustments increased previously reported basic and diluted netincome per common share by $0.13 and $0.12, respectively, for the year endedDecember 31, 2005 and decreased basic and diluted net income per common shareby $0.03 for the year ended December 31, 2003.

As part of our review, we assessed generally whetherthere were other matters that should have been corrected in our previouslyissued consolidated financial statements. Apart from the errors underlying therestatement described above, no other matters have come to our attention thatshould be adjusted in our previously issued consolidated financial statements.

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*Overview*

We are engaged in thedevelopment, manufacture, sale and service of consumables and systems forgenetic analysis for use in the life sciences and in clinical diagnostics, andemerging markets outside of healthcare including agricultural markets,environmental testing and bio-defense applications. Our industry is affected bya number of factors that influence its size and development. These factorsinclude the availability of genomic sequence data for human and otherorganisms, technological innovation that increases throughput and lowers thecost of genomic and genetic analysis, the development of new computationaltechniques to handle and analyze large amounts of genomic data, theavailability of government and private funding for basic and disease-relatedresearch, the amount of capital and ongoing expenditures allocated to researchand development spending by biotechnology, pharmaceutical and diagnosticcompanies, the application of genomics to new areas including moleculardiagnostics, agriculture, human identity and consumer goods, and theavailability of genetic markers and signatures of diagnostic value.

We have established ourGeneChip® system as the platform of choice for acquiring, analyzing andmanaging complex genetic information. Our integrated GeneChip® platformincludes disposable DNA probe arrays (chips) consisting of gene sequencesset out in an ordered, high density pattern; certain reagents for use with theprobe arrays; a scanner and other instruments used to process the probe arrays;and software to analyze and manage genomic information obtained from the probearrays. We currently sell our products directly to pharmaceutical,biotechnology, agrichemical, diagnostics and consumer products companies aswell as academic research centers, government research laboratories, privatefoundation laboratories and clinical reference laboratories in North America,Europe and Japan. We also sell our products through life science supplyspecialists acting as authorized distributors in Latin America, India, theMiddle East, and Asia Pacific regions, including China. We have incurred netlosses and negative cash flows from operations in the past, but have nowachieved profitability for three consecutive fiscal years. The followingoverview describes key elements of our business strategy and our goals forfiscal 2006:

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* *

*Continueto develop and expand sales of our GeneChip® system.**  *We intend to continue to enhanceour GeneChip® technology through substantial investments in research anddevelopment and collaborations. As we continue to enhance the functionality anddecrease the unit costs of our GeneChip® products, we aim to encourage ourcustomers to expand their research uses for our GeneChip® system, which willcreate new market opportunities for us.

*Leverageour technologies into new markets.*   A key driverwill be increasing the breadth of scientific and diagnostic applications of ourtechnology, while also industrializing, automating and standardizing ourtechnology to open new markets which will assist us in driving revenue growth.The aim of our automation efforts is to reduce the cost per experiment,minimize operator variability and improve experimental throughput. We believethat our automation solutions will enjoy commercial success in industrialapplications and high-volume markets just as our bench-top systems have in theresearch markets. We have several active collaborations aimed at extending ourexisting technologies and products into diagnostic applications and we continueto look for new applications for our technology, new collaborativeopportunities and new markets.

*Increasesales related to our consumables:*   Our goal in2006 is to continue to grow our product and product related revenue. We expectto achieve this goal through continued growth in sales of our consumable probearrays and reagents as well as related services as we expand our product lines,applications and add new customers. We anticipate that our continued growth inconsumables will offset an expected decline in instrument sales as we finishour instrument upgrade cycle.

*Maintainour operating margins.**  *Managementis focused on growing the business and increasing its operating profitability.In addition to the revenue growth opportunities described above, we willcontinue to closely manage our manufacturing costs and operating expenses. Weexpect a slight decline in gross margins for 2006 as we continue to expand ourmanufacturing capacity to support our anticipated sales growth in consumables.In addition, we will see increased operating costs and expenses related to ouradoption of SFAS 123(R) and our integration of the ParAllele acquisition.

*Acquisition*

On October 21, 2005,Affymetrix acquired 100% of the outstanding shares of ParAlleleBioScience, Inc. (“ParAllele”), a provider of comprehensive geneticdiscovery solutions to the life science research, pharmaceutical and diagnosticsectors. ParAllele’s products and services utilize a unique approach thatleverages novel biochemical processes rather than complex instrumentation todiscover and analyze minute variations in the human genome. We expect theacquisition to accelerate the development and commercialization of new productsand create greater opportunities for market penetration and revenue generationas well as increase our core assay development capabilities.

The total purchase priceof the ParAllele acquisition was $122.4 million and includes the followingcomponents (in thousands):

| Fair value of Affymetrix  common stock issued |   | $      | 99,446  |   |
|-----------------------------------------------|--------|--------|---------|--------|
| Merger  consideration paid in cash            |   | 11,723 |    |
| Fair value of  stock options assumed          |   | 7,666  |    |
| Direct  transaction costs                     |   | 3,582  |    |
| Total purchase  price                         |   | $      | 122,417 |   |

 

The results of operationsof ParAllele have been included in the accompanying consolidated financialstatements from the date of acquisition. See Note 4 for further informationregarding this acquisition.

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**CRITICAL ACCOUNTINGPOLICIES & ESTIMATES**

*General*

The following section ofManagement’s Discussion and Analysis of Financial Condition and Results ofOperations is based upon our consolidated financial statements, which have beenprepared in accordance with U.S. generally accepted accounting principles. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenue and expenses, and related disclosure of contingent assets andliabilities. Management bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

Our significantaccounting policies are fully described in Note 2 to our consolidatedfinancial statements. However, certain accounting policies are particularlyimportant to the reporting of our financial position and results of operationsand require the application of significant judgment by our management. Anaccounting policy is deemed to be critical if it requires an accountingestimate to be made based on assumptions about matters that are highlyuncertain at the time the estimate is made, and if different estimates thatreasonably could have been used, or changes in the accounting estimates that arereasonably likely to occur periodically, could materially impact the financialstatements. Management believes the following critical accounting policiesreflect its more significant estimates and assumptions used in the preparationof the Consolidated Financial Statements.

***REVENUE RECOGNITION***

We enter into contractsto sell our products and, while the majority of our sales agreements containstandard terms and conditions, there are agreements that contain multipleelements or non-standard terms and conditions. As a result, significantcontract interpretation is sometimes required to determine the appropriateaccounting, including whether the deliverables specified in a multiple elementarrangement should be treated as separate units of accounting for revenuerecognition purposes, and if so, how the value of the arrangement should beallocated among the deliverable elements, when and how to recognize revenue foreach element, and the period over which revenue should be recognized. We recognizerevenue for delivered elements only when the fair values of undeliveredelements are known and customer acceptance has occurred. Changes in theallocation of the sales price between delivered to undelivered elements mightimpact the timing of revenue recognition, but would not change the totalrevenue recognized on any arrangement.

***ACCOUNTS RECEIVABLE***

We evaluate thecollectibility of our trade receivables based on a combination of factors. Weregularly analyze our significant customer accounts, and, when we become awareof 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’soperating results or financial position, we record specific bad debt allowancesto reduce the related receivable to the amount we reasonably believe iscollectible. We also record allowances for bad debt on a small portion of allother customer balances based on a variety of factors including the length oftime the receivables are past due, the financial health of the customer,macroeconomic considerations and historical experience. If circumstancesrelated to specific customers change, our estimates of the recoverability ofreceivables could be further adjusted.

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***INVENTORIES***

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

***NONMARKETABLE EQUITY SECURITIES***

As part of our strategicefforts to gain access to potential new products and technologies, we invest inequity securities of certain private biotechnology companies. Our nonmarketableequity securities are carried at cost unless we determine that an impairmentthat is other than temporary has occurred, in which case we write theinvestment down to its impaired value. We periodically review our investmentsfor impairment; however, the impairment analysis requires significant judgmentin identifying events or circumstances that would likely have significantadverse effect on the fair value of the investment. The analysis may includeassessment of the investee’s (i) revenue and earnings trend,(ii) business outlook for its products and technologies,(iii) liquidity position and the rate at which it is using its cash, and(iv) likelihood of obtaining subsequent rounds of financing. If an investeeobtains additional funding at a valuation lower than our carrying value, wepresume that the investment is other than temporarily impaired. We haveexperienced impairments in our portfolio due to the decline in equity marketsover the past few years. However, we are not able to determine at the presenttime which specific investments are likely to be impaired in the future, or theextent or timing of the individual impairments.

***DEFERRED TAXES***

Income tax expense isbased on pretax financial accounting income under the liability method.Deferred tax assets and liabilities are determined based on the differencebetween the financial statement and tax basis of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expectedto reverse. We must then assess the likelihood that the resulting deferred taxassets will be realized. To the extent we believe that realization is not morelikely than not, we establish a valuation allowance. Significant estimates arerequired in determining our provision for income taxes, our deferred tax assetsand liabilities, and any valuation allowance to be recorded against our netdeferred tax asset. Some of these estimates are based on interpretations ofexisting tax laws or regulations. We believe that our estimates are reasonableand that our reserves for income tax related uncertainties are adequate.Various internal and external factors may have favorable or unfavorable effectson our future effective tax rate. These factors include, but are not limitedto, changes in tax laws, regulations and/or rates, changing interpretations ofexisting tax laws or regulations, changes in the valuation of our deferred taxassets or liabilities, future levels of research and development spending, andchanges in overall levels and mix of pretax earnings.

***CONTINGENCIES***

We are subject to legalproceedings principally related to intellectual property matters. Based on theinformation available at the balance sheet dates, we assess the likelihood ofany adverse judgments or outcomes to these matters, as well as potential rangesof probable losses. If losses are probable and reasonably estimable, we willrecord a reserve in accordance with SFAS 5, “Accounting for Contingencies.” Anyreserves recorded may change in the future due to new developments in eachmatter.

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***RECENT ACCOUNTING PRONOUNCEMENTS***

On December 16,2004, the Financial Accounting Standards Board (FASB) issued FASB StatementNo. 123 (revised 2004), “Share-Based Payment”, which is arevision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. SFAS 123(R)supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees”, and amends FASB StatementNo. 95, “Statement ofCash Flows”. Generally, the approach in SFAS 123(R) is similar tothe approach described in Statement 123. However, SFAS 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thestatement of operations based on their estimated fair values.SFAS 123(R) also requires the benefits of tax deductions in excess ofrecognized compensation cost to be reported as a financing cash flow, ratherthan as an operating cash flow as required under current accounting standards.This requirement will reduce net operating cash flows and increase netfinancing cash flows in periods after adoption. Pro forma disclosure in ournotes to our consolidated financial statements will no longer be analternative. We will adopt SFAS 123(R) effective January 1, 2006under the modified-prospective method. As permitted by Statement 123, wecurrently account for share-based payments to employees using Opinion 25’sintrinsic value method and, as such, generally recognize no compensation costfor employee stock options. Accordingly, the adoption of SFAS 123(R)’sfair value method will have a significant impact on our results of operations,although it will have no impact on our overall financial position. With theadoption of SFAS 123(R), we expect to record stock-based compensationof approximately $11.0 million, net of tax, or $0.15 per diluted share in 2006.Our estimate of stock-based compensation expense is affected by our stockprice, the number of stock-based awards it may grant in 2006, as well as anumber of complex and subjective valuation assumptions and the related taxeffect. These valuation assumptions include, but are not limited to, thevolatility of our stock price, the estimated forfeiture rates and employeestock option exercise behaviors.

**RESULTS OF OPERATIONS**

The following discussioncompares the historical results of operations for the years endedDecember 31, 2005, 2004 and 2003.

**PRODUCT SALES**

The components of productsales are as follows (in thousands,****except percentage amounts):
| ** **          | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|---------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Probe arrays        |       | $                                          | 197,949    |                         | $          | 168,243                          |       | $ | 139,591 |   | $ | 29,706 |   | $ | 28,652 |   | 18 | % | 21 | % |
| Reagents            |       | 42,428                                     |       | 31,744                       |       | 20,419                           |       | 10,684 |   | 11,325 |   | 34 |   | 55 |   |
| Instruments         |       | 62,636                                     |       | 77,269                       |       | 62,738                           |       | (14,633 | ) | 14,531 |   | (19 | ) | 23 |   |
| Total product sales |       | $                                          | 303,013    |                         | $          | 277,256                          |       | $ | 222,748 |   | $ | 25,757 |   | $ | 54,508 |   | 9 |   | 24 |   |

 

Total product salesincreased in 2005 as compared to 2004. Probe array sales increased primarilydue to an increase of $69.3 million in revenue related to growth in unit salesof our GeneChip® probe arrays. This increase was partially offset by a decreaseof $39.6 million in revenue related to a decline in the average sellingprice of our arrays due to a change in product mix. Reagent sales increasedprimarily due to an increase in the average selling price of our reagentsrelated to a change in product mix and growth in reagent unit sales associatedwith increased probe array unit sales. Instrument sales decreased primarily dueto a decrease of $16.4 million in revenue related to a decline in unit sales ofour GeneChip® Scanner 3000 upgrades as we end our GeneArray® Scanner 2500upgrade cycle as well as a decrease of $4.4 million in revenue related to adecline in unit sales and in the average selling price of our Fluidics Station450. These decreases were partially offset by growth of $4.4 million in revenuerelated to increased unit sales of our new automation equipment and growth of$4.1 million in revenue related to increased unit sales of our GeneChip®Scanner 3000 high-resolution upgrades.

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Total product salesincreased in 2004 as compared to 2003. Probe array sales increased primarilydue to an increase of $32.4 million in revenue related to growth in unitsales of our GeneChip® probe arrays. This increase was partially offset by adecrease of $4.6 million in revenue related to a decline in the averageselling price of our probe arrays due to a change in product mix. The increasein unit sales of our probe arrays was primarily the result of new productintroductions. Reagent sales increased primarily due to increased probe arraysales and continued market acceptance of our new internally manufacturedreagents. Instrument sales increased primarily due to growth of$2.5 million in revenue related to increased unit sales of our GeneChip®Scanner 3000 instruments and upgrades, growth of $6.9 million in revenuerelated to increased unit sales of full GeneChip® instrumentation systemsincluding our new GCS 3000Dx system, and growth of $3.8 million in revenuerelated to an increase in the average selling price of our instruments due to achange in product mix.

**PRODUCT RELATED REVENUE**

The components of productrelated revenue are as follows (in thousands,****except percentage amounts):
| ** **                         | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Subscription fees                  |       | $                                          | 12,448     |                         | $          | 20,669                           |       | $ | 26,208 |   | $ | (8,221 | ) | $ | (5,539 | ) | (40 | )% | (21 | )% |
| Service and other                  |       | 20,172                                     |       | 15,526                       |       | 18,451                           |       | 4,646 |   | (2,925 | ) | 30 |   | (16 | ) |
| License fees and milestone revenue |       | 14,557                                     |       | 17,434                       |       | 13,373                           |       | (2,877 | ) | 4,061 |   | (17 | ) | 30 |   |
| Total product related revenue      |       | $                                          | 47,177     |                         | $          | 53,629                           |       | $ | 58,032 |   | $ | (6,452 | ) | $ | (4,403 | ) | (12 | ) | (8 | ) |

 

Total product relatedrevenue decreased in 2005 as compared to 2004. The decrease was primarily dueto the decline in subscription fees earned under our GeneChip® array accessprograms as we continue to transition customers to volume-based pricing onarray sales. Additionally, the recognition of $2.2 million in milestone revenuedue to the achievement of substantive goals as defined by our collaborativeagreements in 2004 contributed to the decrease. Service and other revenueincreased in 2005 primarily due to an increase of approximately $3.2 million inother revenue related to DNA analysis services pertaining to the completion ofcertain contracts assumed by us upon the acquisition of ParAllele in the fourthquarter of 2005 and due to increased sales of service contracts for ourGeneChip® Scanner 3000.

 

Total product relatedrevenue decreased in 2004 as compared to 2003. The decrease was primarily dueto a decline in subscription fees earned under GeneChip® array access programsas we continue to transition customers to volume-based pricing on arraysales. In addition, service and other revenue declined primarily due to a$1.8 million decline in service contract revenue due to a decrease in thenumber of contracts as pre-existing scanner customers upgraded to our GeneChip®Scanner 3000 which is covered by a one year warranty. These decreases werepartially offset by an additional $1.1 million of license fees earned froma full year of amortization of the Roche agreement and the recognition of$2.2 million in milestone revenue due to the achievement of substantive atrisk goals as defined by our collaborative agreements.

**ROYALTY AND OTHER REVENUE(in thousands, except percentage amounts)**
| ** **                   | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Royalties and  other revenue |       | $                                          | 8,339      |                         | $          | 9,832                            |       | $ | 10,556 |   | $ | (1,493 | ) | $ | (724 | ) | (15 | )% | (7 | )% |
|                              |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Royalties and otherrevenue decreased in 2005 as compared to 2004. The decrease was primarily dueto a decline in the number of our non-core license agreements and therecognition of one monetary and one non-monetary license agreement with nocontinuing performance obligations in 2004 partially offset by the recognitionof a $1.5 million license agreement with no continuing performance obligationsin the fourth quarter of 2005.

 

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Royalties and otherrevenue decreased in 2004 as compared to 2003. The decrease was primarily dueto a decline in the number and average value of our remaining non-core licenseagreements.

**REVENUEFROM PERLEGEN SCIENCES, INC. (in thousands, except percentage amounts)**
| ** **                      | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue from  Perlegen Sciences |       | $                                          | 9,073      |                         | $          | 5,245                            |       | $ | 9,460 |   | $ | 3,828 |   | $ | (4,215 | ) | 73 | % | (45 | )% |
|                                 |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Revenue from PerlegenSciences, a related party, increased in 2005 as compared to 2004. Theseincreases were primarily due to increased demand by Perlegen for our probearrays and whole wafers. Probe arrays and wafers used by Perlegen for use intheir research and development activities are sold at our fully burdened costof manufacturing. We also earn a royalty on certain of these wafers if theseproducts are used by Perlegen for certain revenue activities. Royaltiesrecognized were $2.8 million and $1.4 million in 2005 and 2004. Beginning inthe fourth quarter of 2005, we also began selling probe arrays and reagents toPerlegen for use in certain new applications, with 2005 revenues totaling $1.0million.

Revenue from PerlegenSciences, a related party, decreased in 2004 as compared to 2003. The declinewas primarily due to decreased demand by Perlegen for our whole wafers. We sellwhole wafers to Perlegen for use in Perlegen’s research and developmentactivities at our fully burdened cost of manufacturing. Starting in the secondquarter of 2004, we began recognizing royalties on the sale of probe arraysthat were utilized by Perlegen for revenue generating activities. Theroyalities earned on the sale of these probe arrays was $1.4 million in2004.

48

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**PRODUCT AND PRODUCTRELATED GROSS MARGINS (in thousands, except percentage amounts)**
| ** **                                                               | ** ** | **Year ended December 31,** | ** ** | **Dollar /Point  change from** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gross margin on  product sales                                           |       | $                                          | 218,305    |                                     | $          | 195,556 |   | $ | 142,590 |   | $ | 22,749 |   | $ | 52,966 |   |
| Gross margin on  product related revenue                                 |       | 35,627                                     |       | 43,995                                   |       | 48,375 |   | (8,368 | ) | (4,380 | ) |
| Gross margin on  product and product related revenue                     |       | $                                          | 253,932    |                                     | $          | 239,551 |   | $ | 190,965 |   | $ | 14,381 |   | $ | 48,586 |   |
| Product gross  margin as a percentage of product sales                   |       | 72.0                                       | %          | 70.5                                     | %          | 64.0 | % | 1.5 |   | 6.5 |   |
| Product related gross  margin as a percentage of product related revenue |       | 75.5                                       | %          | 82.0                                     | %          | 83.4 | % | (6.5 | ) | (1.4 | ) |

 

The gross marginpercentage on product sales increased in 2005 as compared to 2004. Of the 1.5point increase in product gross margins, approximately 1.0 point of theincrease can be attributed to an increase in probe array gross margins due tothe conversion of a royalty bearing technology license from Oxford GeneTechnology (OGT) to a fully paid-up non-royalty bearing license in the secondhalf of 2004. The remainder of the gross margin increase can be attributed todecreased unit costs associated with the increased utilization of our probearray manufacturing facility due to increased sales volume and a change in ouroverall product mix towards our higher margin products such as probe arrays andreagents. The increase was partially offset by a decrease in gross margin ofapproximately 1.0 point which can be attributed to a $2.0 million warrantyadjustment and related yield issues associated with the release of our Mapping500K Array product in the third quarter of 2005.

The gross marginpercentage on product related revenue decreased in 2005 as compared to 2004.The margin decreases were primarily due to a decline in sales of our accessagreements as we continue to transition customers to volume-based pricing onarray sales and the recognition of $2.2 million in milestone revenue due to theachievement of substantive goals as defined by our collaborative agreements in2004. We also incurred costs related to the completion of contracts enteredinto by ParAllele prior to the closing of the acquisition in the fourth quarterof 2005.

The gross marginpercentage on product sales increased from in 2004 as compared to 2003. Of the6.5 point increase in product gross margins, approximately 2.1 points ofthe increase can be attributed to an increase in probe array gross margins dueto the conversion of a royalty bearing technology license from OGT to a fullypaid-up non-royalty bearing license in the second half of 2004. The remainderof the gross margin increase can be attributed to increased utilization of ourchip and instrument manufacturing facilities due to increased sales volume aswell as a change in our overall product mix.

The gross marginpercentage on product related revenue decreased in 2004 as compared to 2003.The 1.4 point decrease was primarily due to a decline in sales of our accessagreements as we continue to transition customers to volume-baseddiscounting on product sales and due to an increase in expenses related tocertain of our service agreements. These margin decreases were partially offsetby the recognition of $2.2 million in milestone revenue due to theachievement of substantive at risk goals as defined by our collaborativeagreements.

**COST OF PERLEGEN REVENUES(in thousands, except percentage amounts)**
| ** **                              | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cost of revenue  from Perlegen Sciences |       | $                                          | 5,154      |                         | $          | 3,611                            |       | $ | 9,460 |   | $ | 1,543 |   | $ | (5,849 | ) | 43 | % | (62 | )% |
|                                         |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of Perlegen revenueincreased in 2005 and increased as compared to 2004 primarily due to increaseddemand by Perlegen for our probe arrays and whole wafers.

Cost of Perlegen revenuedecreased in 2004 as compared to 2003 primarily due to the reduction in waferpurchases made by Perlegen. This decrease was partially offset by costsassociated with Perlegen’s purchase of GeneChip® instruments in the first halfof 2004.

49

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**RESEARCH AND DEVELOPMENTEXPENSES (in thousands, except percentage amounts)**
| ** **                | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Research and  development |       | $                                          | 77,404     |                         | $          | 73,405                           |       | $ | 65,909 |   | $ | 3,999 |   | $ | 7,496 |   | 5 | % | 11 | % |
|                           |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research and developmentexpenses increased in 2005 as compared to 2004. These increases were primarilydue to an increase in the consumption of development supply materials of $2.1million and an increase of $1.9 million in co-development costs. Theseincreases are as a result of our preparation for new product introductions andapplications expected to be introduced in the next twelve months. Theseincreases were partially offset by a decrease of $2.5 million in performancebased compensation.

Research and developmentexpenses, which primarily consist of basic research, product research anddevelopment and manufacturing process and development increased in 2004 ascompared to 2003. The growth was primarily due to $4.2 million inincreased costs associated with the expanded use of our pilot operationsfacility in Sunnyvale for new product development. We also increased ourspending on basic research and product research and development.

We believe a substantialinvestment in research and development is essential to a long-term sustainablecompetitive advantage and critical to expansion into additional markets andexpect our expenses to increase as we integrate our ParAllele acquisition,develop new products and incorporate ourstock-based compensation charges related to our adoption of SFAS 123(R).

**SELLING, GENERAL AND ADMINISTRATIVEEXPENSES (in thousands, except percentage amounts)**
| ** **                           | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Selling, general  and administrative |       | $                                          | 121,952    |                         | $          | 116,973                          |       | $ | 104,797 |   | $ | 4,979 |   | $ | 12,176 |   | 4 | % | 12 | % |
|                                      |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Selling, general andadministrative expenses increased in 2005 as compared to 2004. These increaseswere primarily due to higher headcount-related costs from hiring new employeesand normal salary increases for existing employees of $6.3 million and anincrease of $2.5 million in consulting costs. Our increased headcount expensesand consulting costs were primarily due to our continued internationalexpansion, investments in new strategic initiatives, and in anticipation of ournew product introductions. These increases were partially offset by a decreaseof $6.2 million in performance based compensation.

Selling, general andadministrative expenses increased in 2004 as compared to 2003. The growth waspartially due to an increase of $5.2 million in sales and marketingexpenses which was comprised of $8.0 million related to new productintroductions and increased sales volume in our American and European regions,partially offset by a decrease in sales and support costs of $2.8 millionin Japan as our Japanese operations completed their obligations associated witha prior distribution agreement. In addition, general and administrativeexpenses increased by $7.0 million related to on-going regulatorycompliance efforts and other general administrative costs. This increase is netof $3.7 million in lower legal expenses and the receipt of a cashsettlement in 2004 of approximately $1.0 million in connection with theresolution of an intellectual property dispute.

Selling, general andadministrative expenses are expected to continue to increase as we expandsales, marketing, and technical support functions, management andadministrative functions, prosecute and defend our intellectual propertyposition, defend against claims made by third parties in ongoing litigation,and incorporate our stock-based compensation charges related to our adoption ofSFAS 123(R). We expect legal costs to vary substantially as the intensity oflegal activity changes. There can be no assurance that we have adequatelyestimated our exposure for potential damages associated with pending or futurelitigation.

50

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**STOCK-BASEDCOMPENSATION (in thousands, except percentage amounts)**
| ** **                | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(as previously reported)**     | ** ** |
|                      |       |                                       |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Stock-based  compensation |       | $                                          | 1,106      |                         | $          | 920                              |       | $ | 2,238 |   | $ | 186 |   | $ | (1,318 | ) | 20 | % | (59 | )% |
|                           |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(restatement)**                          | ** ** |
|                      |       |                                       |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Stock-based  compensation |       | $                                          | —     |                         | $          | —                           |       | $ | 1,724 |   | $ | — |   | $ | 1,724 |   | — | % | (100 | )% |
|                           |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(as restated)**                     | ** ** |
|                      |       |                                       |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Stock-based  compensation |       | $                                          | 1,106      |                         | $          | 920                              |       | $ | 3,962 |   | $ | 186 |   | $ | (3,042 | ) | 20 | % | (77 | )% |
|                           |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Stock-based compensationincreased in 2005 as compared to 2004. In 2005, we recorded stock-basedcompensation expense related to restricted stock awards granted to certainemployees and one fully vested restricted stock award granted to anon-employee. Also in 2005, stock-based compensation included the amortizationof deferred stock compensation generated upon the acquisition of ParAllele inOctober 2005. The amortization ofdeferred stock-based compensation is principally attributable to researchand development and selling, general and administrative employees. In2004, stock-based compensation related to the amortization of deferred stockcompensation generated upon the acquisition of Neomorphic in October 2000,this was fully amortized as of December 31, 2004, except for approximately $4.3 million related to an executive levelNeomorphic employee.

Stock-basedcompensation, which primarily includes the amortization of deferred stockcompensation in fiscal 2004 and 2003, decreased $3.0 million in 2004 ascompared to 2003. Upon the acquisition of Neomorphic in October 2000, thefair value of unvested common stock subject to restricted stock agreements andthe intrinsic value of the unvested options held by employees were deductedfrom the purchase price and allocated to deferred stock compensation. Stock-basedcompensation expenses relates principally to research and development andselling, general and administrative employees. As of December 31, 2004,all of the remaining deferred stock compensation related to the Neomorphicacquisition has been amortized except for approximately $4.3 million ofdeferred stock compensation. Further, as a result of our restatement, werecorded additional deferred stock-based compensation over the vesting period,which is primarily four years, for certain stock options granted during fiscalyears 1997 through 1999 where the fair market value of our common stock on thegrant date was higher than the fair market value on the measurement date foraccounting purposes.  The deferredcompensation related to these grants was fully amortized at the end of fiscal2003.

We ceased amortizing $4.3million of deferred stock compensation related to an executive level Neomorphicemployee who commenced a leave of absence during the latter part of fiscal2001. The terms of this restricted stock arrangement permit an extended leaveof absence under certain circumstances and as such, any remaining deferredcompensation will be amortized if and when the employee resumes active employeestatus with us. We expect to continue to grant restricted stock awards tocertain employees. Accordingly, since these awards will be amortized to theappropriate cost and expense lines consistent with the vesting terms, thetiming or size of these restricted stock awards upon the adoption of SFAS123(R) could have a significant impact on our future results of operations.

51

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With our adoption of SFAS123(R), we expect to record stock-based compensation of approximately $11.0million, net of tax, or $0.15 per diluted share in 2006. However, our estimateof future stock-based compensation expense is affected by our stock price, thenumber of stock-based awards we may grant in 2006, as well as a number ofcomplex and subjective valuation assumptions and the related tax effect. Thesevaluation assumptions include, but are not limited to, the volatility of ourstock price, the estimated forfeiture rates and employee stock option exercisebehaviors. The costs associated with stock-based compensation will be includedin the appropriate cost and expense lines on our Consolidated Statement ofOperations for our results in 2006.

**AMORTIZATION OF PURCHASEDINTANGIBLES (in thousands, except percentage amounts)**
| ** **                             | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Amortization of  purchased intangibles |       | $                                          | —     |                         | $          | —                           |       | $ | 937 |   | $ | — |   | $ | (937 | ) | — | % | (100 | )% |
|                                        |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We incurred no chargesrelated to the amortization of purchased intangibles in 2004 or 2005 as wefully amortized all of our purchased intangibles during the fiscal year ended2003.

For fiscal 2003, theamortization of purchased intangibles represents the amortization ofintangibles related to the acquisition of Neomorphic, Inc. We adoptedStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”) on January 1, 2002. In accordancewith SFAS 142, we reclassified $0.8 million of assembled workforce togoodwill and ceased the amortization of goodwill.

We completed our reviewfor potential impairment of goodwill as of June 30, 2005, and concludedthere was no impairment of goodwill. In addition, there have been no indicatorsof potential impairment through December 31, 2005.

**ACQUIRED IN-PROCESSTECHNOLOGY (in thousands, except percentage amounts)**
| ** **                      | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Acquired in-process  technology |       | $                                          | 8,315      |                         | $          | —                           |       | $ | 10,096 |   | $ | 8,315 |   | $ | (10,096 | ) | — | % | (100 | )% |
|                                 |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the year endedDecember 31, 2005, we recorded a charge of approximately $8.3 millionto acquired in-process technology upon the October 21, 2005 completion ofour acquisition of ParAllele BioScience, Inc. (“ParAllele”), a providerof comprehensive genetic discovery solutions to the life science research,pharmaceutical and diagnostic sectors. We utilized the assistance of a thirdparty valuation specialist to help us determine the estimated fair value ofcertain research and development programs in-process at the acquisition datethat had not yet reached technological feasibility and had no alternativefuture use. These projects primarily included the development of a DNAgenotyping product and to a lesser extent certain RNA and other expressionproducts. The fair values of these projects were determined using the IncomeApproach whereby we estimated each project’s related future net cash flowsbetween 2005 and 2015 and discounted them to their present value using a riskadjusted discount rate of 28%. This discount rate is based on our estimatedweighted average cost of capital adjusted upward for the risks associated withthe projects acquired. The projected cash flows from the acquired projects werebased on estimates of revenues and operating profits related to the projectsconsidering the stage of development of each potential product acquired, thetime and resources needed to complete the development and approval of eachproduct, the life of each potential commercialized product and the inherentdifficulties and uncertainties in developing products and services based oncomplex genetic technologies and biochemical processes. As of October 21,2005 and December 31, 2005, the DNA genotyping project was 33% completeand the RNA & other projects were 40% complete. We expect to incurcosts of approximately $5.6 million to complete the DNA genotyping project andcosts of $1.5 million to complete the RNA & other projects. We expectsignificant cash flows from these projects to begin in 2006 and do notanticipate any material changes to historical pricing, expense levels or grossmargins related to these products.

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During the year endedDecember 31, 2003, we recorded a charge of approximately$10.1 million to acquired in-process technology. The associated charge wasfor advanced access to the Perlegen SNP database and was recorded as thedatabase has no alternative future use to us beyond our developing a limitednumber of closely related DNA analysis products. We did not acquire anyin-process research projects from Perlegen. Therefore, as of the license date,we did not forecast any material changes from our historical gross margins forany of our DNA analysis products.

We engaged an independentthird party valuation professional to assist us in determining the relativefair values of each intangible asset licensed and the allocation of theconsideration paid. While we considered the work of the independent third partyvaluation professional, we took primary responsibility for allocating theconsideration paid for the intangible assets acquired. We determined the valueof the SNP database license by using the Income Approach. In applying thisapproach, we estimated the net present value of future cash flows expected fromthe sale of DNA analysis products to be developed in reliance on the contentfrom the Perlegen SNP database. The analysis included forecasted future cashflows that were expected from the progress made on our DNA microarraydevelopment projects prior to the date of the Perlegen SNP database license.These cash flows were first estimated by forecasting total revenue associatedwith sales of certain of our future DNA analysis products. A portion of thisrevenue was then removed to account for the contribution provided by ourexisting core technology that was considered to benefit the DNA products underdevelopment. Appropriate operating expenses, cash flow adjustments, andcontributory asset returns were deducted from the estimated cash flows to establisha forecast of net cash flows. Finally, these net cash flows were converted to apresent value using a discount rate of 30%, which was based on our weightedaverage cost of capital adjusted for the technical and market risks associatedwith our ongoing research project in which the SNP database content would beused. Significant cash inflows from the associated DNA products were forecastedto continue through 2008.

The estimates used by usin valuing the licensed technologies and acquired in process technologies werebased upon assumptions we believe to be reasonable but which are inherentlyuncertain and unpredictable. Our assumptions may be incomplete or inaccurate,and no assurance can be given that unanticipated events and circumstances willnot occur. Accordingly, actual results may vary from the projected results.

**INTEREST INCOME ANDOTHER, NET (in thousands, except percentage amounts)**

The components ofinterest income and other, net, are as follows:
| ** **                                 | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income                            |       | $                                          | 8,118      |                         | $          | 4,189                            |       | $ | 7,382 |   | $ | 3,929 |   | $ | (3,193 | ) | 94 | % | (43 | )% |
| Realized loss in  Perlegen                 |       | (2,000                                     | )          | —                       |       | —                           |       | (2,000 | ) | — |   | (100 | ) | — |   |
| Write (down) up  of equity investment, net |       | (171                                       | )          | (2,283                       | )          | 4,876                            |       | 2,112 |   | (7,159 | ) | 93 |   | (147 | ) |
| Currency gains  (losses), net              |       | 470                                        |       | (458                         | )          | 3,574                            |       | 928 |   | (4,032 | ) | 203 |   | (113 | ) |
| Other                                      |       | 323                                        |       | 869                          |       | 830                              |       | (546 | ) | 39 |   | (63 | ) | 5 |   |
| Interest income and  other, net            |       | $                                          | 6,740      |                         | $          | 2,317                            |       | $ | 16,662 |   | $ | 4,423 |   | $ | (14,345 | ) | 191 |   | (86 | ) |

 

Interest income andother, net, increased in 2005 as compared to 2004. The increase was primarilydue to an increase in our cash and marketable securities balances as wecontinue to generate positive cashflows from operations and financing activities.However, these increases were partially offset by a realized loss related tothe recognition of our proportionate share of Perlegen’s net loss. The carryingvalue of our investment in Perlegen has now been written down to zero atDecember 31, 2005; therefore, to the extent we do not make any additionalfuture investments in Perlegen, we do not expect further charges related tothis investment.

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Interest income andother, net decreased in 2004 as compared to 2003. The decrease in interestincome and other, net was primarily due to the recognition of a$4.4 million gain in 2003 on an equity investment in a privately-heldbiotechnology company following its acquisition by a publicly traded entity anda $1.4 million gain realized in 2003 on the sale of some of our Perlegenstock. In 2003, we also realized currency gains of $3.5 million prior tothe date we began hedging a percentage of our assets in 2004 that are held invarious foreign currencies of our subsidiaries with forward contracts, with thegains or losses on these contracts largely offsetting gains and losses on thechange in value of the underlying assets. Interest income declined in 2004 dueto lower cash and marketable securities balances following the$271.8 million of bond redemptions completed in the first quarter of 2004and a $41.9 million license payment to OGT in the second quarter of 2004.Finally, we realized impairment charges of $2.3 million in 2004 due toother-than-temporary declines in the carrying values of certainnon-marketable equity securities.

**INTEREST EXPENSE (inthousands, except percentage amounts)**
| ** **       | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **       | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest expense |       | $                                          | 1,545      |                         | $          | 11,102                           |       | $ | 17,358 |   | $ | (9,557 | ) | $ | (6,256 | ) | (86 | )% | (36 | )% |
|                  |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest expensedecreased in 2005 as compared to 2004. Interest expense in 2005 primarilyconsists of interest and amortization of the debt issuance costs associatedwith our $120.0 million 0.75% senior convertible notes issued in December 2003.Interest expense was higher in 2004 primarily due to the write off ofapproximately $3.8 million in issuance costs plus $4.3 million in redemptionpremiums incurred by us in connection with the redemption of our 5% and 4.75%convertible subordinated notes in January 2004.

Interest expensedecreased in 2004 as compared to 2003. The decrease was primarily due to lowerinterest charges following the $271.8 million of bond redemptionscompleted in the first quarter of 2004 of our 5% and 4.75% convertiblesubordinated notes. This decrease was primarily due to the write off ofapproximately $3.8 million in issuance costs plus $4.3 million in redemptionpremiums incurred by us in connection with the redemption of our 5% and 4.75%convertible subordinated notes. In addition, the decrease was also offset by$1.7 million in interest expense and the amortization of debt issuance costs associated with the$120.0 million of 0.75% senior convertible notes issued inDecember 2003.

**INCOME TAX PROVISION(BENEFIT) (in thousands, except percentage amounts)**
| ** **           | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|----------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **           | ** ** | **(as previously reported)**     | ** ** |
|                 |       |                                       |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Income tax provision |       | $                                          | 5,092      |                         | $          | 3,326                            |       | $ | 2,563 |   | $ | 1,766 |   | $ | 763 |   | 53 | % | 30 | % |
|                      |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **         | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|--------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **         | ** ** | **(restatement)**                          | ** ** |
|               |       |                                       |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Income tax benefit |       | $                                          | (8,271     | )                            | $          | —                           |       | $ | — |   | $ | (8,271 | ) | $ | — |   | (100 | )% | — | % |
|                    |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                      | ** ** | **Year ended December 31,** | ** ** | **Dollar  change from** | ** ** | **Percentage  change from** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(as restated)**                     | ** ** |
|                            |       |                                       |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Income tax (benefit)  provision |       | $                                          | (3,179     | )                            | $          | 3,326                            |       | $ | 2,563 |   | $ | (6,505 | ) | $ | 763 |   | (196 | )% | 30 | % |
|                                 |            |                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

54

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We recorded an income taxbenefit of approximately $3.2 million in 2005, versus an income tax provisionof $3.3 million in 2004. In 2005, the income tax benefit consists ofa current provision for federal, state, and foreign income taxes, more thanoffset by a benefit resulting from a reduction in our valuation allowance forcertain federal and state deferred tax assets. The provision for income taxeswas approximately $3.3 million in 2004, up from $2.6 million in 2003.In 2004 and 2003, the provision consists of current taxes payable on theprofits attributable to our foreign operations, state taxes and federalalternative minimum tax.

Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”)provides for the recognition of deferred tax assets if realization of suchassets is more likely than not. Based upon the weight of available evidence,which included an analysis of projected future book and taxable income, as ofDecember 31, 2005, we provided for a valuation allowance of $76.6 million.

During fiscal 2005, wereduced our deferred tax asset valuation allowance by approximately $45.7million. In assessing the realizability of deferred tax assets, we consideredwhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. We considered historical book income, thescheduled reversal of deferred tax assets, and projected future book andtaxable income in making this assessment. Based upon a detailed analysis ofhistorical and projected book and taxable income, we determined that therealization of certain deferred tax assets for which a valuation allowance hadbeen recorded is considered more likely than not for purposes of reversing thevaluation allowance.

As of December 31,2005, we had total net operating loss carryforwards of $180.6 million,comprised of $141.1 million for U.S. federal and $39.5 million for state. Thenet operating loss carryforwards expire in the years 2018 through 2023.Additionally, we have federal and state research and development tax creditcarryforwards and other various tax credit carryforwards of approximately $35.6million, which expire in the years 2007 through 2025. Utilization of our netoperating loss and tax credit carryforwards may be subject to substantialannual limitations due to the ownership change limitations provided by theInternal Revenue Code and similar state provisions. Such an annual limitationcould result in the expiration of the net operating loss before utilization.

55

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**LIQUIDITY AND CAPITALRESOURCES**

*Cashflow (in thousands)*
|                                                                      | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net cash  provided by operating activities                           |       | $                                          | 64,613     |   | $ | 48,932 |   | $ | 89,858 |   |
| Net cash (used  in) provided by investing activities                 |       | (82,304                                    | )          | (46,785 | ) | 86,396 |   |
| Net cash  provided by (used in) financing activities                 |       | 74,846                                     |       | (235,083 | ) | 32,140 |   |
| Effect of  foreign currency translation on cash and cash equivalents |       | 486                                        |       | (397 | ) | (354 | ) |
| Net increase (decrease)  in cash and cash equivalents                |       | $                                          | 57,641     |   | $ | (233,333 | ) | $ | 208,040 |   |

 

**Net Cash Provided byOperating Activities**

Cash provided byoperating activities is primarily driven by increases in our net income.However, operating cash flows differ from net income as a result of non-cashcharges or differences in the timing of cash flows and earnings recognition.Significant components of the change in cash provided by operating activitiesare as follows:

Net cash used to purchaseinventories totaled $15.1 million during 2005. This was related to our decisionto stock finished goods instrument inventory at year-end as this is generallyour largest sales period.

Deferred revenuesdeclined $13.2 million during 2005 compared to a decrease of$10.1 million in 2004. The decrease in 2005 was primarily due to theamortization of the Roche collaboration fee.

**Net Cash Provided by(Used in) Investing Activities**

Our investing activities,other than purchases, sales and maturities of available-for-sale securities,primarily consist of capital expenditures, strategic investments and purchasedtechnology rights. Cash used for capital expenditures was $40.2 million,$21.9 million and $12.4 million for the years ended 2005, 2004 and2003, respectively. Capital expenditures in 2003 through 2005 related tocontinued expansion in our operating facilities, investments in informationmanagement systems, and purchases of production and lab equipment. In 2005, inaddition to the common stock we issued, we also used $10.9 million in cash, netof cash assumed, for our acquisition of ParAllele in October 2005. Cashused for the purchase of technology rights was $0.8 million, $43.1 millionand $3.3 million in the years ended 2005, 2004 and 2003, respectively. In2004, the primary component of purchased technology rights related to a $41.9 millionlicense payment to OGT in the second quarter of 2004.

**Net Cash Provided by(Used in) Financing Activities**

Our financing activitiesprimarily consist of activity under our employee stock plan or funds used inthe redemption of or provided by the issuance of our convertible notes. Cashprovided by the issuance of stock under our employee stock plan was $74.7million, $36.2 million and $12.5 million for the years ended 2005, 2004 and2003, respectively. Net cash used in financing activities in 2004 was primarilyattributable to the $271.8 million cash outflow for the redemption of our 5%and 4.75% convertible subordinated notes. In2003, we repurchased $53.4 million principal amount of our 4.75%convertible subordinated notes due in 2007 and $48.0 million principal amountof our 5.0% convertible subordinated notes due in 2006. Additionally, inDecember 2003 we raised $120.0 million from the sale of 0.75% seniorconvertible notes due 2033.

56

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*Off-Balance SheetArrangements and Aggregate Contractual Obligations*

As part of our ongoingbusiness, we do not participate in transactions that generate relationshipswith unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities (“SPEs”), whichwould have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. As ofDecember 31, 2005, we are not involved in any SPE transactions.

The impact that ourcontractual obligations as of December 31, 2005 are expected to have onour liquidity and cash flow in future periods is as follows (in thousands):
|                                          | ** ** | **Total** | ** ** | **2006** | ** ** | **2007-2008** | ** ** | **2009-2010** | ** ** | **After 2010** | ** ** |
|------------------------------------------|------------|-----------|------------|----------|------------|---------------|------------|---------------|------------|---------------------|------------|
| Senior  convertible notes(1)             |       | $         | 120,000    |     | $          | —        |       | $             | 120,000    |                | $          | — |   | $ | — |   |
| Interest on  senior convertible notes(1) |       | 2,700     |       | 900      |       | 1,800         |       | —        |       | —              |       |
| Operating leases                         |       | 61,278    |       | 11,085   |       | 20,446        |       | 13,270        |       | 16,477              |       |
| Purchase  commitments(2)                 |       | 10,042    |       | 8,979    |       | 922           |       | 141           |       | —              |       |
| Other  commitments(3)                    |       | 2,100     |       | 1,500    |       | 600           |       | —        |       | —              |       |
| Total contractual  obligations           |       | $         | 196,120    |     | $          | 22,464        |       | $             | 143,768    |                | $          | 13,411 |   | $ | 16,477 |   |

 

----

(1)             Our0.75% senior convertible notes are due in 2033, however holders may require usto repurchase all or a portion of their notes on December 31, 2008, 2013,2018, 2023, and 2028.

(2)             Purchasecommitments include agreements to purchase goods or services that areenforceable and legally binding on Affymetrix and that specify all significantterms, including: fixed or minimum quantities to be purchased; fixed, minimumor variable price provisions; and the approximate timing of the transaction.Purchase obligations exclude agreements that are cancelable without penalty.

(3)             Othercommitments relate to an ongoing obligation held by the Company to contribute$1.5 million in a venture capital limited partnership. The venture capitallimited partnership may call in this amount, in part or in full at any timeaccording to the contract terms. Other commitments also includes a fundingobligation to support two fellowships under the Bio-X Program at Stanford.

We have financed ouroperations primarily through product sales, sales of equity and debtsecurities, collaborative agreements, interest income, and licensing of ourtechnology. As of December 31, 2005, we had cash, cash equivalents, andavailable-for-sale securities of approximately $284.9 million. Weanticipate that our existing capital resources along with the cash to begenerated from operations will enable us to maintain currently plannedoperations and planned capital expenditures (estimated to be approximately$65.0 million for the year ending December 31, 2006, which includesour Sacramento and Singapore expansion), for the foreseeable future. However,this expectation is based on our current operating, financing and capitalexpenditure plans, which are subject to change, and therefore we could requireadditional funding. We also expect that our capital requirements will increaseover the next several years as we expand our worldwide commercial operations,expand our manufacturing capabilities, increase our investments in thirdparties and expand our research and development efforts. Our long-term capitalexpenditure requirements will depend on numerous factors, including: theexpansion of commercial scale manufacturing capabilities; our ability to maintainexisting collaborative and customer arrangements and establish and maintain newcollaborative and customer arrangements; the progress of our research anddevelopment programs; initiation or expansion of research programs andcollaborations; the costs involved in preparing, filing, prosecuting, defendingand enforcing intellectual property rights; the effectiveness of productcommercialization activities and arrangements; the purchase of patent licenses;and other factors.

57

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As of December 31,2005, we have no credit facility or other committed sources of capital. To theextent capital resources are insufficient to meet future capital requirements;we will have to raise additional funds to continue the development of ourtechnologies. There can be no assurance that such funds will be available onfavorable terms, or at all. To the extent that additional capital is raisedthrough the sale of equity or convertible debt securities, the issuance of suchsecurities could result in dilution to our stockholders. If adequate funds arenot available, we may be required to curtail operations significantly or toobtain 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.

**ITEM 7A.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

*Interest Rate Risk*

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

The primary objective ofour investment activities is to preserve principal while at the same timemaximize yields without significantly increasing risk. To achieve thisobjective, we invest our excess cash in debt instruments of the U.S. Governmentand its agencies and high-quality corporate issuers, and, by policy, restrictour exposure to any single corporate issuer by imposing concentration limits.To minimize the exposure due to adverse shifts in interest rates, we maintaininvestments at an average maturity of less than three years.

The table below presentsprincipal amounts and related weighted interest rates by year of maturity forour available-for-sale securities and debt obligations, all of which aredenominated in United States dollars, and the fair value of each as ofDecember 31, 2005 and 2004.
| ** **                                    | ** ** | **Periods of Maturity** | ** ** | ** ** | ** ** | **Fair  Value at  December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                          | ** ** | **2007**   | ** ** | **2008**                                   | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **2005** | ** ** |
| **ASSETS:**                                   |       |                              |       |       |       |                                       |       |   |   |   |   |   |   |
| Available-for-sale  securities                |       | $                                 | 229,207    |       | $          | 31,109                                     |       | $ | — |   | $ | — |   | $ | 260,316 |   | $ | 261,314 |   |
| Average interest  rate                        |       | 2.2                               | %          | 3.3        | %          |                                       |       |   |   |   |   |   |   |
| **LIABILITIES:**                              |       |                              |       |       |       |                                       |       |   |   |   |   |   |   |
| 0.75% senior  convertible notes due 2033 |       | $                                 | —     |       | $          | —                                     |       | $ | 120,000 |   | $ | — |   | $ | 120,000 |   | $ | 189,886 |   |
| Average interest rate                         |       |                              |       |       |       | 0.75                                       | %          |   |   |   |   |   |   |

 
| ** **                                    | ** ** | **Periods of Maturity** | ** ** | ** ** | ** ** | **Fair  Value at  December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                          | ** ** | **2006**   | ** ** | **2007**                                   | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **2004** | ** ** |
| **ASSETS:**                                   |       |                              |       |       |       |                                       |       |   |   |   |   |   |   |
| Available-for-sale  securities                |       | $                                 | 145,126    |       | $          | 34,552                                     |       | $ | 106 |   | $ | — |   | $ | 179,784 |   | $ | 180,608 |   |
| Average interest  rate                        |       | 2.4                               | %          | 3.0        | %          | 3.3                                        | %          |   |   |   |   |   |   |
| **LIABILITIES:**                              |       |                              |       |       |       |                                       |       |   |   |   |   |   |   |
| 0.75% senior  convertible notes due 2033 |       | $                                 | —     |       | $          | —                                     |       | $ | — |   | $ | 120,000 |   | $ | 120,000 |   | $ | 162,300 |   |
| Average interest rate                         |       |                              |       |       |       |                                       |       | 0.75 | % |   |   |   |   |

 

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*Foreign Currency ExchangeRate Risk*

We derive a portion ofour revenues in foreign currencies, predominantly in Europe and Japan. Inaddition, a portion of our assets are held in nonfunctional currencies of oursubsidiaries. In early 2003, we began hedging activities by using currencyforward contracts to manage a portion of the currency exposures created fromour activities denominated in foreign currencies. (See Note 1 of the notesto our Consolidated Financial Statements included in this report.) Our hedgingprogram reduces, but does not entirely eliminate, the impact of currencyexchange rate movements.

We hedge a percentage offorecasted international revenue with forward contracts and the gains andlosses on these contracts largely offset gains and losses on the transactionsbeing hedged. Our revenue hedging policy is designed to reduce the negativeimpact on our forecasted revenue due to foreign currency exchange ratemovements. We also hedge a percentage of our assets that are held innonfunctional currencies of our subsidiaries with forward contracts and thegains or losses on these contracts largely offset gains and losses on thechange in value of the underlying asset. Our balance sheet hedging policy isdesigned to reduce the fluctuations in earnings due to changes in foreigncurrency exchange rates. We do not use derivative contracts for speculativepurposes. At December 31, 2005, total outstanding contracts included thenotional equivalent of $21.6 million in foreign currency forward exchangecontracts with a fair market value of $0.8 million. As of December 31,2005, all contracts were set to expire at various times throughDecember 2006. The bank counterparties in these contracts expose us tocredit-related losses in the event of their nonperformance. However, tomitigate that risk we only contract with reputable institutions. We apply hedgeaccounting based upon the criteria established by Statement of FinancialAccounting Standards No. 133 (“SFAS 133”), whereby we designate ourderivatives for revenue hedging purposes as cash flow hedges. We have electednot to designate our derivatives for balance sheet purposes as fair valuehedges under SFAS 133 and have appropriately recorded any changes in fairvalue to interest income and other, net.

A sensitivity analysiswas performed on all of our foreign exchange derivatives as ofDecember 31, 2005. This sensitivity analysis was based on a modelingtechnique that measures the hypothetical market value resulting from a 10% shiftin the value of exchange rates relative to the U.S. dollar. For our forwardcontracts, we used a hypothetical change made to the spot rates of thecurrency. A 10% increase in the value of the U.S. dollar would lead to anincrease in the fair value of our financial hedging instruments by$1.9 million. Conversely, a 10% decrease in the value of the U.S. dollarwould result in a decrease in the fair value of these financial instruments by$2.2 million.

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**ITEM 8.**                    FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**INDEX TO CONSOLIDATEDFINANCIAL STATEMENTSAFFYMETRIX, INC.**
|                                                                  | ** ** | **Page No.** |
|------------------------------------------------------------------|------------|-------------------|
| Report of Independent Registered  Public Accounting Firm         |       | 61                |
| Consolidated Balance Sheets (restated)                           |       | 62                |
| Consolidated Statements of  Operations (restated)                |       | 63                |
| Consolidated Statements of  Comprehensive Income (restated)      |       | 64                |
| Consolidated Statements of  Stockholders’ Equity (restated) |       | 65                |
| Consolidated Statements of Cash  Flows (restated)                |       | 66                |
| Notes to Consolidated Financial  Statements (restated)           |       | 67                |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON CONSOLIDATED FINANCIAL STATEMENTS**

To the Board of Directors and Stockholders ofAffymetrix, Inc.

We have audited the accompanying consolidated balancesheets of Affymetrix, Inc. as of December 31, 2005 and 2004, and therelated consolidated statements of operations, comprehensive income,stockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2005. Our audits also included the financial statementschedule listed in the Index at Item 15(a). These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits. 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the consolidated financialposition of Affymetrix, Inc. at December 31, 2005 and 2004, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein. 

As discussed in Note 3 to the consolidatedfinancial statements, the 2003, 2004 and 2005 consolidated financial statementshave been restated to correct certain errors and record additional non-cashstock-based compensation expense, and the related income tax impact.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Affymetrix, Inc.’s internal control over financial reportingas of December 31, 2005, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 2,2006 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP                                                                     |   |
|----------------------------------------------------------------------------------------------------|--------|
| Palo Alto, California,                                                                             |
| March 2, 2006, except for Notes 3 and 20,  as  to which the date is August 23, 2006 |

 

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**AFFYMETRIX, INC.**

**CONSOLIDATED BALANCESHEETS**

**(In thousands,except per share amounts)**
| ** **                                                                                                                                                   | ** ** | **December 31,**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                   | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| **ASSETS:**                                                                                                                                                  |       |                   |       |   |   |
| Current assets:                                                                                                                                              |       |                   |       |   |   |
| Cash and cash  equivalents                                                                                                                                   |       | $                      | 100,236    |   | $ | 42,595 |   |
| Available-for-sale  securities                                                                                                                               |       | 184,696                |       | 163,120 |   |
| Accounts  receivable (net of allowances of $415 in 2005 and $841 in 2004)                                                                                    |       | 93,028                 |       | 89,441 |   |
| Accounts  receivable from Perlegen Sciences                                                                                                                  |       | 4,082                  |       | 3,964 |   |
| Inventories                                                                                                                                                  |       | 35,980                 |       | 17,997 |   |
| Deferred tax  assets—current portion                                                                                                                    |       | 26,230                 |       | — |   |
| Prepaid expenses  and other current assets                                                                                                                   |       | 12,622                 |       | 5,833 |   |
| Total current  assets                                                                                                                                        |       | 456,874                |       | 322,950 |   |
| Property and equipment,  net                                                                                                                                 |       | 85,560                 |       | 64,179 |   |
| Acquired technology  rights, net                                                                                                                             |       | 61,426                 |       | 64,334 |   |
| Goodwill                                                                                                                                                     |       | 124,498                |       | 18,601 |   |
| Deferred tax  assets—long-term portion                                                                                                                  |       | 17,594                 |       | — |   |
| Notes receivable from  employees                                                                                                                             |       | 1,824                  |       | 1,900 |   |
| Other assets                                                                                                                                                 |       | 27,318                 |       | 27,807 |   |
| Total assets                                                                                                                                                 |       | $                      | 775,094    |   | $ | 499,771 |   |
|                                                                                                                                                         |       |                   |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY:**                                                                                                              |       |                   |       |   |   |
| Current liabilities:                                                                                                                                         |       |                   |       |   |   |
| Accounts payable  and accrued liabilities                                                                                                                    |       | $                      | 71,551     |   | $ | 61,265 |   |
| Deferred  revenue—current portion                                                                                                                       |       | 35,644                 |       | 33,776 |   |
| Other current  liabilities                                                                                                                                   |       | —                 |       | 1,698 |   |
| Total current  liabilities                                                                                                                                   |       | 107,195                |       | 96,739 |   |
| Deferred  revenue—long-term portion                                                                                                                     |       | 15,606                 |       | 29,463 |   |
| Other long-term  liabilities                                                                                                                                 |       | 4,184                  |       | 4,382 |   |
| Convertible notes                                                                                                                                            |       | 120,000                |       | 120,000 |   |
|                                                                                                                                                         |       |                   |       |   |   |
| Commitments and  contingencies (Note 12)                                                                                                                     |       |                   |       |   |   |
| Stockholders’ equity:                                                                                                                                   |       |                   |       |   |   |
| Convertible  redeemable preferred stock, $0.01 par value; 5,000 shares authorized; no  shares issued and outstanding at December 31, 2005 and 2004      |       | —                 |       | — |   |
| Common stock,  $0.01 par value; 200,000 shares authorized; 67,220 and 61,588 shares issued  and outstanding at December 31, 2005 and 2004, respectively |       | 672                    |       | 616 |   |
| Additional  paid-in capital                                                                                                                                  |       | 646,186                |       | 428,717 |   |
| Deferred stock  compensation                                                                                                                                 |       | (10,799                | )          | (4,265 | ) |
| Accumulated  other comprehensive loss                                                                                                                        |       | (1,227                 | )          | (3,371 | ) |
| Accumulated  deficit                                                                                                                                         |       | (106,723               | )          | (172,510 | ) |
| Total  stockholders’ equity                                                                                                                             |       | 528,109                |       | 249,187 |   |
|                                                                                                                                                         |       | $                      | 775,094    |   | $ | 499,771 |   |

See Accompanying Notes

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**AFFYMETRIX, INC.**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

**(In thousands, exceptper share amounts)**
| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                             | ** ** | **(as restated)**                     | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
| **REVENUE:**                                           |       |                                       |       |   |   |   |   |
| Product sales                                          |       | $                                          | 303,013    |   | $ | 277,256 |   | $ | 222,748 |   |
| Product related  revenue                               |       | 47,177                                     |       | 53,629 |   | 58,032 |   |
| Total product  and product related revenue             |       | 350,190                                    |       | 330,885 |   | 280,780 |   |
| Royalties and  other revenue                           |       | 8,339                                      |       | 9,832 |   | 10,556 |   |
| Revenue from  Perlegen Sciences                        |       | 9,073                                      |       | 5,245 |   | 9,460 |   |
| Total revenue                                          |       | 367,602                                    |       | 345,962 |   | 300,796 |   |
| **COSTS AND EXPENSES:**                                |       |                                       |       |   |   |   |   |
| Cost of product  sales                                 |       | 84,708                                     |       | 81,700 |   | 80,158 |   |
| Cost of product  related revenue                       |       | 11,550                                     |       | 9,634 |   | 9,657 |   |
| Cost of revenue  from Perlegen Sciences                |       | 5,154                                      |       | 3,611 |   | 9,460 |   |
| Research and  development                              |       | 77,404                                     |       | 73,405 |   | 65,909 |   |
| Selling, general  and administrative                   |       | 121,952                                    |       | 116,973 |   | 104,797 |   |
| Stock-based  compensation(1)                           |       | 1,106                                      |       | 920 |   | 3,962 |   |
| Amortization of  purchased intangibles                 |       | —                                     |       | — |   | 937 |   |
| Acquired  in-process technology                        |       | 8,315                                      |       | — |   | 10,096 |   |
| Total costs and  expenses                              |       | 310,189                                    |       | 286,243 |   | 284,976 |   |
| Income from operations                                 |       | 57,413                                     |       | 59,719 |   | 15,820 |   |
| Interest income and  other, net                        |       | 6,740                                      |       | 2,317 |   | 16,662 |   |
| Interest expense                                       |       | (1,545                                     | )          | (11,102 | ) | (17,358 | ) |
| Income before income  taxes                            |       | 62,608                                     |       | 50,934 |   | 15,124 |   |
| Income tax benefit  (provision)                        |       | 3,179                                      |       | (3,326 | ) | (2,563 | ) |
| Net income                                             |       | $                                          | 65,787     |   | $ | 47,608 |   | $ | 12,561 |   |
| Basic net income per  common share                     |       | $                                          | 1.03       |   | $ | 0.79 |   | $ | 0.21 |   |
| Diluted net income per  common share                   |       | $                                          | 0.96       |   | $ | 0.74 |   | $ | 0.21 |   |
| Shares used in  computing basic net income per share   |       | 63,816                                     |       | 60,512 |   | 58,860 |   |
| Shares used in  computing diluted net income per share |       | 70,586                                     |       | 66,878 |   | 60,582 |   |

 

----

| (1)    | Stock-based  compensation related to the following: |   |   |   |   |   |   |   |
|--------|-----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|   | Cost of product sales                               |   | $      | 134    |   | $      | — |   | $ | 69 |   |
|   | Research and  development                           |   | 342    |   | 720    |   | 2,144  |   |
|   | Selling, general and  administrative                |   | 630    |   | 200    |   | 1,749  |   |
|   |                                                | $      | 1,106  |   | $      | 920    |   | $      | 3,962 |   |

 

See Accompanying Notes

63

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**AFFYMETRIX, INC.**

**CONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME**

**(In thousands)**
| ** **                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                 | ** ** | **(as restated)**                     | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
|                                                                                       |       |                                       |       |   |   |   |   |
| Net income                                                                                 |       | $                                          | 65,787     |   | $ | 47,608 |   | $ | 12,561 |   |
| Other comprehensive  income (loss):                                                        |       |                                       |       |   |   |   |   |
| Foreign currency  translation, net of tax                                                  |       | 486                                        |       | (397 | ) | (354 | ) |
| Unrealized gains  (losses) on available-for-sale and non-marketable securities, net of tax |       | 119                                        |       | (1,500 | ) | (6,827 | ) |
| Reclassification  adjustment for (losses) gains in net income                              |       | (157                                       | )          | 287 |   | 6,057 |   |
| Unrealized gains  (losses) on cash flow hedges, net of tax                                 |       | 544                                        |       | (1,152 | ) | (963 | ) |
| Reclassification  adjustment for gains in net income                                       |       | 1,152                                      |       | 963 |   | — |   |
| Net change in other  comprehensive income (loss)                                           |       | 2,144                                      |       | (1,799 | ) | (2,087 | ) |
| Comprehensive income                                                                       |       | $                                          | 67,931     |   | $ | 45,809 |   | $ | 10,474 |   |

 

See Accompanying Notes

64

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**AFFYMETRIX, INC.**

**CONSOLIDATED STATEMENTSOF STOCKHOLDER EQUITY**

**(In thousands)**
| ** **                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                            | ** ** | **(as restated)**                     | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Convertible redeemable  preferred stock:                              |       |                                       |       |   |   |   |   |
| Balance,  beginning of year                                           |       | $                                          | —     |   | $ | — |   | $ | — |   |
| Balance, end of  year                                                 |       | —                                     |       | — |   | — |   |
| Common stock:                                                         |       |                                       |       |   |   |   |   |
| Balance,  beginning of year                                           |       | 616                                        |       | 595 |   | 585 |   |
| Common stock  issued                                                  |       | 56                                         |       | 21 |   | 10 |   |
| Balance, end of  year                                                 |       | 672                                        |       | 616 |   | 595 |   |
| Additional paid-in  capital:                                          |       |                                       |       |   |   |   |   |
| Balance,  beginning of year                                           |       | 428,717                                    |       | 391,763 |   | 376,974 |   |
| Issuance of  common stock upon exercise of stock options and warrants |       | 74,649                                     |       | 36,220 |   | 12,487 |   |
| Issuance of  common stock upon exercise of stock purchase right       |       | —                                     |       | — |   | 3,000 |   |
| Issuance of  restricted stock                                         |       | 2,636                                      |       | — |   | — |   |
| Cancellation of  notes or deferred compensation                       |       | —                                     |       | — |   | (698 | ) |
| Income tax  benefit from employee stock option exercises              |       | 33,072                                     |       | 734 |   | — |   |
| Issuance of  common stock from acquisition of ParAllele               |       | 107,112                                    |       | — |   | — |   |
| Balance, end of  year                                                 |       | 646,186                                    |       | 428,717 |   | 391,763 |   |
| Notes receivable from  stockholders:                                  |       |                                       |       |   |   |   |   |
| Balance,  beginning of year                                           |       | —                                     |       | (428 | ) | (720 | ) |
| Repayment of  notes receivable                                        |       | —                                     |       | 454 |   | 344 |   |
| Accretion of  interest on notes receivable                            |       | —                                     |       | (26 | ) | (158 | ) |
| Cancellation of  common stock                                         |       | —                                     |       | — |   | 106 |   |
| Balance, end of  year                                                 |       | —                                     |       | — |   | (428 | ) |
| Deferred stock  compensation:                                         |       |                                       |       |   |   |   |   |
| Balance at  January 1, 2003, as originally reported                   |       | —                                     |       | — |   | (8,015 | ) |
| Restatement (see  Note 3)                                             |       | —                                     |       | — |   | (1,724 | ) |
| Balance, as  restated                                                 |       | (4,265                                     | )          | (5,185 | ) | (9,739 | ) |
| Amortization of  deferred stock compensation                          |       | 1,022                                      |       | 920 |   | 3,962 |   |
| Unearned stock  compensation, net of cancellations                    |       | (7,556                                     | )          | — |   | 592 |   |
| Balance, end of  year                                                 |       | (10,799                                    | )          | (4,265 | ) | (5,185 | ) |
| Accumulated other  comprehensive loss:                                |       |                                       |       |   |   |   |   |
| Balance,  beginning of year                                           |       | (3,371                                     | )          | (1,572 | ) | 515 |   |
| Unrealized gain  (loss) on investments, net of tax                    |       | (38                                        | )          | (1,213 | ) | (770 | ) |
| Unrealized gain  (loss) on hedging contracts, net of tax              |       | 1,696                                      |       | (189 | ) | (963 | ) |
| Foreign currency  translation adjustment, net of tax                  |       | 486                                        |       | (397 | ) | (354 | ) |
| Balance, end of  year                                                 |       | (1,227                                     | )          | (3,371 | ) | (1,572 | ) |
| Accumulated deficit:                                                  |       |                                       |       |   |   |   |   |
| Balance at  January 1, 2003, as originally reported                   |       | —                                     |       | — |   | (212,944 | ) |
| Restatement (see  Note 3)                                             |       | —                                     |       | — |   | (19,735 | ) |
| Balance, as  restated                                                 |       | (172,510                                   | )          | (220,118 | ) | (232,679 | ) |
| Net income                                                            |       | 65,787                                     |       | 47,608 |   | 12,561 |   |
| Balance, end of  year                                                 |       | (106,723                                   | )          | (172,510 | ) | (220,118 | ) |
| Total stockholders  equity                                            |       | $                                          | 528,109    |   | $ | 249,187 |   | $ | 165,055 |   |
| ** **                                                            |       |                                       |       |   |   |   |   |
| **Number of shares of common  stock**                                 |       |                                       |       |   |   |   |   |
| Balance,  beginning of year                                           |       | 61,588                                     |       | 59,474 |   | 58,504 |   |
| Issuance of  common stock for cash or services                        |       | 3,346                                      |       | 2,114 |   | 970 |   |
| Issuance of  common stock for acquisition of ParAllele                |       | 2,286                                      |       | — |   | — |   |
| Balance, end of year                                                  |       | 67,220                                     |       | 61,588 |   | 59,474 |   |

 

See Accompanying Notes

65

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**AFFYMETRIX, INC.**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(In thousands)**
| ** **                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                              | ** ** | **(as restated)**                     | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                              |       |                                       |       |   |   |   |   |
| Net income                                                                              |       | $                                          | 65,787     |   | $ | 47,608 |   | $ | 12,561 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                          |       | 20,467                                     |       | 19,660 |   | 22,214 |   |
| Amortization of  intangible assets                                                      |       | 7,731                                      |       | 6,075 |   | 4,463 |   |
| Gain from  repurchase of convertible notes                                              |       | —                                     |       | — |   | (739 | ) |
| Redemption  premium and related write-off of debt issuance costs                        |       | —                                     |       | 8,095 |   | — |   |
| Charge for  acquired in-process technology                                              |       | 8,315                                      |       | — |   | — |   |
| Amortization of  investment premiums, net                                               |       | (1,177                                     | )          | (1,142 | ) | 2,013 |   |
| Stock-based  compensation                                                               |       | 1,106                                      |       | 920 |   | 3,962 |   |
| Write down of  equity investments                                                       |       | 172                                        |       | 2,283 |   | 938 |   |
| Realized loss on  equity method investment in Perlegen Sciences                         |       | 2,000                                      |       | — |   | — |   |
| Realized loss  (gain) on the sales of investments                                       |       | 145                                        |       | 859 |   | (5,603 | ) |
| Deferred tax  assets                                                                    |       | (10,971                                    | )          | — |   | — |   |
| Amortization of  debt offering costs                                                    |       | 759                                        |       | 756 |   | 1,538 |   |
| Accretion of  interest on notes receivable                                              |       | (98                                        | )          | (26 | ) | (158 | ) |
| Loss on disposal  of equipment                                                          |       | 12                                         |       | 657 |   | 447 |   |
| Changes in  operating assets and liabilities:                                           |       |                                       |       |   |   |   |   |
| Accounts  receivable, net                                                               |       | (94                                        | )          | (22,062 | ) | (5,357 | ) |
| Inventories                                                                             |       | (15,137                                    | )          | 4,635 |   | 4,107 |   |
| Prepaid expenses  and other assets                                                      |       | 3,143                                      |       | (2,867 | ) | (2,647 | ) |
| Accounts payable  and accrued liabilities                                               |       | (4,115                                     | )          | (7,535 | ) | 3,217 |   |
| Deferred revenue                                                                        |       | (13,203                                    | )          | (10,126 | ) | 53,984 |   |
| Other long-term  liabilities                                                            |       | (229                                       | )          | 1,142 |   | (5,082 | ) |
| Net cash  provided by operating activities                                              |       | 64,613                                     |       | 48,932 |   | 89,858 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                              |       |                                       |       |   |   |   |   |
| Capital  expenditures                                                                   |       | (40,166                                    | )          | (21,885 | ) | (12,436 | ) |
| Purchases of  available-for-sale securities                                             |       | (227,290                                   | )          | (182,876 | ) | (447,422 | ) |
| Proceeds from  sales and maturities of available-for-sale securities                    |       | 206,395                                    |       | 202,780 |   | 560,057 |   |
| Purchase of non-marketable  equity investments                                          |       | (3,500                                     | )          | (1,741 | ) | (7,500 | ) |
| Purchase of non-marketable  equity investments in Perlegen                              |       | (2,000                                     | )          | — |   | — |   |
| Capital  distribution from non-marketable investment                                    |       | 411                                        |       | — |   | — |   |
| Purchases of  technology rights                                                         |       | (750                                       | )          | (43,063 | ) | (3,303 | ) |
| Purchase of  option to license technology                                               |       | —                                     |       | — |   | (3,000 | ) |
| Issuance of loan  to ParAllele BioScience, Inc.                                    |       | (4,500                                     | )          | — |   | — |   |
| Acquisition of  ParAllele BioScience, Inc., net of cash acquired                   |       | (10,904                                    | )          | — |   | — |   |
| Net cash (used  in) provided by investing activities                                    |       | (82,304                                    | )          | (46,785 | ) | 86,396 |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                               |       |                                       |       |   |   |   |   |
| Issuance of  common stock                                                               |       | 74,705                                     |       | 36,241 |   | 12,497 |   |
| Repayment of  notes receivable from stockholders                                        |       | 141                                        |       | 454 |   | 344 |   |
| Issuance of  senior convertible notes                                                   |       | —                                     |       | — |   | 120,000 |   |
| Repurchase of  convertible subordinated notes                                           |       | —                                     |       | — |   | (100,701 | ) |
| Redemption of  convertible subordinated notes                                           |       | —                                     |       | (271,778 | ) | — |   |
| Net cash  provided by (used in) financing activities                                    |       | 74,846                                     |       | (235,083 | ) | 32,140 |   |
| Effect of foreign  currency translation on cash and cash equivalents                    |       | 486                                        |       | (397 | ) | (354 | ) |
| Net increase (decrease)  in cash and cash equivalents                                   |       | 57,641                                     |       | (233,333 | ) | 208,040 |   |
| Cash and cash  equivalents at beginning of year                                         |       | 42,595                                     |       | 275,928 |   | 67,888 |   |
| Cash and cash  equivalents at end of year                                               |       | $                                          | 100,236    |   | $ | 42,595 |   | $ | 275,928 |   |
| **SUPPLEMENTAL DISCLOSURE OF  NONCASH ACTIVITIES:**                                     |       |                                       |       |   |   |   |   |
| Recognition of  deferred tax assets relating to tax benefits from employee stock plans  |       | $                                          | 32,853     |   | $ | — |   | $ | — |   |
| Acquisition of  technology rights                                                       |       | $                                          | —     |   | $ | — |   | $ | 3,000 |   |
| Issuance of  common stock upon exercise of common stock purchase right                  |       | $                                          | —     |   | $ | — |   | $ | 3,000 |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:**                                  |       |                                       |       |   |   |   |   |
| Cash paid for  interest                                                                 |       | $                                          | 900        |   | $ | 10,623 |   | $ | 17,346 |   |
| Cash paid for income  taxes                                                             |       | $                                          | 2,001      |   | $ | 1,127 |   | $ | 1,751 |   |

 

See Accompanying Notes

66

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**AFFYMETRIX, INC.**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**DECEMBER 31, 2005**

**NOTE 1—NATURE OFOPERATIONS**

Affymetrix, Inc. (“Affymetrix”or the “Company”) is engaged in the development, manufacture, sale and serviceof systems for genetic analysis for use in the life sciences and in clinicaldiagnostics. Affymetrix has developed its GeneChip® system and relatedmicroarray technology as the platform of choice for acquiring, analyzing andmanaging complex genetic information. The Company’s integrated GeneChip®platform includes: disposable DNA probe arrays (chips) consisting of genesequences set out in an ordered, high density pattern, certain reagents for usewith the probe arrays, a scanner and other instruments used to process theprobe arrays, and software to analyze and manage genomic information obtainedfrom the probe arrays. Related microarray technology also offered by Affymetrixincludes instrumentation, software and licenses for fabricating, scanning,collecting and analyzing results from low density microarrays. The Companycommenced the first commercial sale for research use in August 1994, withbroader commercial sales beginning in April 1996. The Company currentlysells its products directly to pharmaceutical, biotechnology, agrichemical,diagnostics and consumer products companies as well as academic researchcenters, government research laboratories, private foundation laboratories andclinical reference laboratories in North America and Europe. The Company alsosells some of its products through life science supply specialists acting asauthorized distributors in Latin America, India, the Middle East and AsiaPacific regions, including China.

**NOTE 2—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**BASIS OF PRESENTATION**

The consolidatedfinancial statements include the accounts of Affymetrix and its wholly ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated. The Company has accounted for its ownership interest in PerlegenSciences, Inc. (“Perlegen”) using the equity method since March 30,2001 (see Note 12). In addition, the Company acquired ParAlleleBioScience, Inc. on October 21, 2005 and it is included in theCompany’s operations from that date (see Note 4).

**USE OF ESTIMATES**

The preparation of theconsolidated financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectamounts reported in the financial statements and accompanying notes. Actualresults could differ materially from those estimates.

**FOREIGN CURRENCY**

Assets and liabilities ofnon-U.S. subsidiaries that operate in a local currency environment aretranslated to U.S. dollars at exchange rates in effect at the balance sheetdate, with the resulting translation adjustments directly recorded to aseparate component of accumulated other comprehensive income (loss) withinstockholders’ equity. Income and expense accounts are translated at averageexchange rates during the year. Foreign currency transaction gains and lossesare recognized in interest income and other, net and were comprised of netgains of $0.5 million, $0.5 million and $3.6 million for the yearsended December 31, 2005, 2004, and 2003, respectively.

67

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**CASH EQUIVALENTS,AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS**

*Marketable Securities*

The Company’s investmentsconsist of U.S. government notes and bonds; corporate notes, bonds and asset-backedsecurities; municipal notes and bonds; and publicly traded equity securities.The Company reports all debt securities with maturities at the date of purchaseof three months or less that are readily convertible into cash and haveinsignificant interest rate risk as cash equivalents. Cash equivalents andavailable-for-sale securities consist of marketable equity and debt securities.Management determines the appropriate classification of debt securities at thetime of purchase. As of December 31, 2005 and 2004, the Company’sinvestments in debt securities are classified as available-for-sale and arecarried at fair value with unrealized gains and losses reported in accumulatedother comprehensive income (loss) in stockholders’ equity. The cost of debtsecurities is adjusted for amortization of premiums and discounts to maturity.This amortization is included in interest income and other, net. Realized gainsand losses, as well as interest income, on available-for-salesecurities are also included in interest income and other, net. The cost ofsecurities sold is based on the specific identification method. The fair valuesof securities are based on quoted market prices. All of the Company’savailable-for-sale securities are included in current assets as managementconsiders the securities readily available to fund current operations. TheCompany monitors its investment portfolio for impairment on a periodic basis.In the event that the carrying value of an investment exceeds its fair valueand the decline in value is determined to be other-than-temporary, animpairment charge is recorded and a new cost basis for the investment isestablished. Fair values for investments in public companies are determinedusing quoted market prices.

*Non-marketable Securities*

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

**ACCOUNTS RECEIVABLE**

Trade accounts receivableare recorded at net invoice value. The Company considers amounts past due basedon the related terms of the invoice. The Company reviews its exposure to amountsreceivable and provides an allowance for specific amounts if collectibility isno longer reasonably assured. The Company also provides an allowance for apercentage of the gross trade receivable balance (excluding any specificallyreserved amounts) based on its collection history.

**DERIVATIVE INSTRUMENTS**

The Company hasinternational operations and during the normal course of business is exposed toforeign currency exchange risks as a result of transactions that aredenominated in currencies other than the United States dollar. Early in 2003,the Company began entering into foreign currency forward contracts to manage aportion of the volatility of transactions that are denominated in foreigncurrencies. The Company’s foreign currency forward contracts are entered intofor periods consistent with the related underlying exposures and do notconstitute positions that are independent of those exposures. In addition, theCompany does not enter into foreign currency forward contracts for trading orspeculative purposes, is not party to any leveraged derivative instrument, andmay only enter into derivative agreements with highly rated counterparties.

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The foreign currencyforward contracts used by the Company are generally short-term in nature,maturing within one year, and are accounted for as cash flow hedges. The effectof exchange rate changes on foreign currency forward contracts is expected tooffset the effect of exchange rate changes on the underlying hedged items. Forthese contracts, unrealized gains or losses from the effective portion of thehedge is reported as a component of other comprehensive income (loss) instockholders’ equity and is reclassified using the specific identificationmethod into earnings in the same period or periods in which the hedgedtransaction affects earnings, and within the same consolidated statement ofoperations line item. The gain or loss from the ineffective portion of thehedge in excess of the cumulative change in the present value of future cashflows of the hedged item, if any, is recognized in interest income and other,net during the period of change.

**INVENTORIES**

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

**PROPERTY AND EQUIPMENT**

Property and equipmentare recorded at cost and are depreciated using the straight-line method overthe estimated useful lives of the assets or the lease term, whichever isshorter. Equipment and furniture is depreciated over useful lives generallyranging from 3 to 7 years, company-owned buildings are depreciated over25 years and leasehold improvements are depreciated over lease termsgenerally ranging from 3 to 15 years. Maintenance and repair costs areexpensed as incurred.

**GOODWILL AND ACQUIREDTECHNOLOGY RIGHTS**

Goodwill represents thedifference between the purchase price and the estimated fair value of the netassets acquired arising from business combinations. In accordance withStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”), goodwill is subject to impairment testsannually, or earlier if indicators of potential impairment exist, using afair-value-based approach. As of December 31, 2005 and 2004, goodwillrelates to the acquisition of Neomorphic in October 2000 and theacquisition of ParAllele in October 2005. There is no impairment ofgoodwill for any period presented.

Acquired technologyrights are carried at cost less accumulated amortization and are comprised oflicenses to technology covered by patents held by third parties or acquired bythe Company. Amortization is computed over the estimated useful life of theunderlying patents, which has historically ranged from one to thirteen years.SFAS 142 requires purchased intangible assets other than goodwill to beamortized over their useful lives unless these lives are determined to beindefinite.

**IMPAIRMENT OF LONG-LIVEDASSETS**

Long-lived assets andcertain identifiable intangible assets are reviewed for impairment when eventsor changes in circumstances indicate that the carrying amount of such assetsmay not be recoverable. Determination of recoverability is based on an estimateof undiscounted future cash flows resulting from the use of the asset and itseventual disposition. In the event that such cash flows are not expected to besufficient to recover the carrying amount of the assets, the assets are writtendown to their estimated fair values.

69

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**INCOME TAXES**

Income tax expense isbased on pretax financial accounting income. Deferred tax assets and liabilitiesare determined based on the difference between the financial statement and taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. Significant estimates andmanagement judgment are required in determining the provision for income taxes.Some of these estimates are based on interpretations of existing tax laws orregulations. The Company believes that their estimates are reasonable and thattheir reserves for income tax related uncertainties are adequate. Deferred taxassets are assessed for the likelihood that they are recoverable. Theassessment considers recent historic results, future market growth, forecastedearnings, future taxable income, and the mix of earnings in jurisdictions inwhich the Company operates. To the extent management believes that the recoveryis not likely, a valuation allowance is recorded to reduce the deferred taxassets to the amount that the Company believes is more likely than not to berealized. Future changes in tax laws, regulations and rates, changes in theinterpretations of existing tax laws or regulations, changes in overall levelsand mix of income before tax, and ultimate outcomes of income tax audits couldhave an impact on the Company’s future effective tax rate.

**CONTINGENCIES**

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

**REVENUE RECOGNITION**

*Overview*

The Company recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred, the amount is fixed or determinable, and collectibility is reasonablyassured. In instances where final acceptance of the product or system isrequired, revenue is deferred until all the acceptance criteria have been met.

The Company derives themajority of its revenue from product sales of GeneChip® probe arrays, reagents,and related instrumentation that may be sold individually or combined with anyof the product or product related revenue items listed below. When a salecombines multiple elements, the Company accounts for multiple elementarrangements under Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”),“Revenue Arrangements with Multiple Deliverables.”

EITF 00-21 providesguidance on accounting for arrangements that involve the delivery or performanceof multiple products, services and/or rights to use assets. In accordance withEITF 00-21, the Company allocates revenue for transactions orcollaborations that include multiple elements to each unit of accounting basedon its relative fair value, and recognizes revenue for each unit of accountingwhen the revenue recognition criteria have been met. The price charged when theelement is sold separately generally determines its fair value. In the absenceof fair value of a delivered element, the Company allocates revenue first tothe fair value of the undelivered elements and the residual revenue to thedelivered elements. The Company recognizes revenue for delivered elements whenthe delivered elements have standalone value and the Company has objective andreliable evidence of fair value for each undelivered element. If the fair valueof any undelivered element included in a multiple element arrangement cannot beobjectively determined, revenue is deferred until all elements are deliveredand services have been performed, or until fair value can objectively bedetermined for any remaining undelivered elements.

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*Product Sales*

Product sales, as well asrevenues from Perlegen Sciences, include sales of GeneChip® probe arrays,reagents and related instrumentation. Probe array, reagent and instrumentationrevenues are recognized when earned, which is generally upon shipment andtransfer of title to the customer and fulfillment of any significantpost-delivery obligations. Accruals are provided for anticipated warrantyexpenses at the time the associated revenue is recognized.

*Product Related Revenue*

Product related revenueincludes subscription fees earned under GeneChip® array access programs;license fees; milestones and royalties earned from collaborative productdevelopment and supply agreements; extended warranty and equipment servicerevenue; product related scientific services revenue; and revenue from customprobe array design fees.

Revenue from subscriptionfees earned under GeneChip® array access programs is recorded ratably over therelated supply term.

The Company enters intocollaborative arrangements which generally include a research and productdevelopment phase and a manufacturing and product supply phase. Thesearrangements may include up-front nonrefundable license fees, milestones, therights to royalties based on the sale of final product by the partner, productsupply agreements and distribution arrangements.

Any up-front,nonrefundable payments from collaborative product development agreements arerecognized over the research and product development period, and at-risksubstantive based milestones are recognized when earned. Any payments receivedwhich are not yet earned are included in deferred revenue.

Revenue related toextended warranty arrangements is deferred and recognized over the applicableperiods. Revenue from custom probe array design fees associated with theCompany’s GeneChip® CustomExpressTM and CustomSeqTM products are recognized whenthe associated products are shipped.

Revenue from scientificand DNA analysis services are generally recognized upon shipment of therequired data to the customer.

*Royalties and OtherRevenue*

Royalties and otherrevenue include royalties earned from third party license agreements andresearch revenue which mainly consists of amounts earned under governmentgrants. Additionally, other revenue includes fees earned through the license ofthe Company’s intellectual property.

Royalty revenues areearned from the sale of products by third parties who have been licensed underthe Company’s intellectual property portfolio. Revenue from minimum royaltiesis amortized over the term of the creditable royalty period. Any royaltiesreceived in excess of minimum royalty payments are recognized under the termsof the related agreement, generally upon notification of manufacture orshipment of a product by a licensee.

Research revenues resultprimarily from research grants received from U.S. Government entities or fromsubcontracts with other life science research-based companies whichreceive their research grant funding from the U.S. Government. Revenues fromresearch contracts are generated from the efforts of the Company’s technicalstaff and include the costs for material and subcontract efforts. The Company’sresearch grant contracts generally provide for the payment of negotiated fixedhourly rates for labor hours incurred plus reimbursement of other allowablecosts. Research revenue is recorded in the period in which the associated costsare incurred, up to the limit of the prior approval funding amounts containedin each agreement. The costs associated with these grants are reported asresearch and development expense.

License revenues aregenerally recognized upon execution of the agreement unless the Company hascontinuing performance obligations, in which case the license revenue isrecognized ratably over the period of expected performance.

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*Transactions withDistributors*

The Company recognizesrevenue on sales to distributors in accordance with SEC Staff AccountingBulletin No. 104, “Revenue Recognition,” or SAB 104. The Companyrecognizes revenue when persuasive evidence of an arrangement exists, deliveryhas occurred or services have been rendered, the seller’s price is fixed ordeterminable, and collectibility is reasonably assured. The Company’sagreements with distributors do not include rights of return.

**RESEARCH AND DEVELOPMENTEXPENSES**

Research and developmentexpenses consist of costs incurred for internal, collaborative and grant-sponsoredresearch and development. Research and development expenses include salaries,contractor fees, building costs, utilities and allocations of shared corporateservices. In addition, the Company funds research and development at othercompanies and research institutions under agreements which are generallycancelable. All such costs are charged to research and development expense asincurred.

**SOFTWARE DEVELOPMENTCOSTS**

Statement of FinancialAccounting Standards No. 86, “Accounting for the Costs of ComputerSoftware to be Sold, Leased or Otherwise Marketed,” requires the capitalizationof certain software development costs subsequent to the establishment oftechnological feasibility. The Company’s software is deemed to have achievedtechnologically feasibility at the point a working model of the softwareproduct is developed. The Company has capitalized approximately $0.5 millionand zero costs incurred subsequent to the establishment of technologicalfeasibility for the years ended December 31, 2005 and 2004, respectively.These costs will be amortized to cost of product sales from the date of generalrelease of the related instrument. The costs of developing routine softwareenhancements are expensed as research and development as incurred because ofthe short time between the determination of technological feasibility and thedate of general release of the related products.

The Company appliesStatement of Position No. 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use.” Historically, exceptfor the implementation of an enterprise resource planning system in 2002,internal use software costs were insignificant. The Company begins amortizingthe costs associated with software developed for internal use at the time inwhich the software is ready for its intended use.

**ADVERTISING COSTS**

The Company expensesadvertising costs as incurred. Advertising costs were $1.9 million for2005, $1.9 million for 2004, and $1.5 million for 2003.

**STOCK-BASEDCOMPENSATION**

At December 31,2005, the Company has seven stock-based employee and non-employeedirector compensation plans, which are described more fully in Note 15.The Company has elected to continue to follow the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees”*(“APB 25”) and related Interpretations for these plans.

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The following tableillustrates the effect on reported net income (loss) and net income (loss) percommon share if the Company had applied the fair value recognition provisionsof SFAS 123, as amended by SFAS 148, to stock-based employeecompensation (in thousands, except per share amounts):
|                                                                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                   | ** ** | **(as restated)**                     | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
|                                                                                                                         |       |                                       |       |   |   |   |   |
| Net income—as reported                                                                                                  |       | $                                          | 65,787     |   | $ | 47,608 |   | $ | 12,561 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net  of tax                       |       | 384                                        |       | 920 |   | 3,962 |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value method for all  awards, net of tax |       | (15,800                                    | )          | (15,984 | ) | (29,220 | ) |
| Pro forma net income  (loss)                                                                                                 |       | $                                          | 50,371     |   | $ | 32,544 |   | $ | (12,697 | ) |
| Net income (loss) per  share:                                                                                                |       |                                       |       |   |   |   |   |
| Basic net income  per common share—as reported                                                                          |       | $                                          | 1.03       |   | $ | 0.79 |   | $ | 0.21 |   |
| Diluted net  income per common share—as reported                                                                        |       | $                                          | 0.96       |   | $ | 0.74 |   | $ | 0.21 |   |
| Basic net income  (loss) per common share—pro forma                                                                     |       | $                                          | 0.79       |   | $ | 0.54 |   | $ | (0.22 | ) |
| Diluted net income  (loss) per common share—pro forma                                                                   |       | $                                          | 0.74       |   | $ | 0.51 |   | $ | (0.22 | ) |

 

The fair value of optionswas estimated at the date of grant using a Black-Scholes option pricingmodel with the following weighted average assumptions:
|                                 | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk free interest rate         |       | 4.1                                    | %          | 3.2 | % | 2.0 | % |
| Expected dividend yield         |       | 0.0                                    | %          | 0.0 | % | 0.0 | % |
| Expected volatility             |       | 0.45                                   |       | 0.56 |   | 0.72 |   |
| Expected option term (in years) |       | 3.6                                    |       | 3.4 |   | 2.9 |   |

 

Based on thiscalculation, the weighted average fair value of options granted during 2005,2004 and 2003 was $18.97, $12.99 and $10.72, respectively. For purposes ofpro forma disclosures pursuant to SFAS 123, as amended by SFAS 148,the estimated fair value of options is amortized to expense in accordance withFASB Interpretation No.28 over the options’ vesting period, generally fouryears.

In the fourth quarter of2005, the Company evaluated its assumptions used in determining fair value inpreparation of the adoption of SFAS 123(R). Under the fair value recognitionprovisions of SFAS 123, as amended by SFAS 148, the Company had usedits historical stock price volatility for purposes of its pro formainformation. The Company has changed its expected stock price volatilityassumption to a combination of historical and implied volatility of the Company’scommon stock. The Company’s assessment is that this combined method is morerepresentative of future stock price trends than historical volatility alone.The selection of the historical and implied volatility combination approach wasbased upon the availability of actively traded options on the Company’s commonstock.

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**COMPREHENSIVE INCOME**

Comprehensive income iscomprised of net income and other comprehensive income (loss). Othercomprehensive income (loss) includes unrealized gains and losses on the Company’savailable-for-sale securities that are excluded from net income, changes infair value of derivatives designated as and effective as cash flow hedges, andforeign currency translation adjustments. Total comprehensive income has beendisclosed in the consolidated statement of comprehensive income.

Thecomponents of accumulated other comprehensive losses are as follows (inthousands):
|                                                                                         | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Foreign currency  translation adjustment, net of tax                                    |       | $                     | (909       | ) | $ | (1,395 | ) |
| Unrealized losses on  available-for-sale and non-marketable securities, net of tax |       | (862                  | )          | (824 | ) |
| Unrealized gains  (losses) on hedging contracts, net of tax                             |       | 544                   |       | (1,152 | ) |
| Accumulated other comprehensive loss                                                    |       | $                     | (1,227     | ) | $ | (3,371 | ) |

 

**NET INCOME PER COMMONSHARE**

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

The following table setsforth a reconciliation of basic and diluted net income per common share (inthousands, except per share amounts):
|                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                        | ** ** | **(as restated)**                     | ** ** | **(as previously  reported)** | ** ** | **(as restated)** | ** ** |
| Numerator:                                                                        |       |                                       |       |   |   |   |   |
| Net income—basic                                                             |       | $                                          | 65,787     |   | $ | 47,608 |   | $ | 12,561 |   |
| Add effect of  dilutive securities:                                               |       |                                       |       |   |   |   |   |
| Interest on  convertible notes (inclusive of amortization of debt issuance costs) |       | 1,659                                      |       | 1,655 |   | 74 |   |
| Net  income—diluted                                                          |       | $                                          | 67,446     |   | $ | 49,263 |   | $ | 12,635 |   |
| Denominator:                                                                      |       |                                       |       |   |   |   |   |
| Weighted-average  shares outstanding                                              |       | 63,912                                     |       | 60,591 |   | 58,970 |   |
| Less: weighted-average  shares of common stock subject to repurchase              |       | (96                                        | )          | (79 | ) | (110 | ) |
| Shares used in  computing basic net income per common share                       |       | 63,816                                     |       | 60,512 |   | 58,860 |   |
| Add effect of  dilutive securities:                                               |       |                                       |       |   |   |   |   |
| Employee stock  options                                                           |       | 2,799                                      |       | 2,380 |   | 1,685 |   |
| Common stock  subject to repurchase                                               |       | 96                                         |       | 79 |   | 110 |   |
| Warrants to  purchase common stock                                                |       | 5                                          |       | 37 |   | 38 |   |
| Convertible  notes                                                                |       | 3,870                                      |       | 3,870 |   | 159 |   |
| Shares used in  computing diluted net income per common share                     |       | 70,586                                     |       | 66,878 |   | 60,852 |   |
| Basic net income per  common share                                                |       | $                                          | 1.03       |   | $ | 0.79 |   | $ | 0.21 |   |
| Diluted net income per common share                                               |       | $                                          | 0.96       |   | $ | 0.74 |   | $ | 0.21 |   |

 

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In September 2004,the Emerging Issues Task Force reached a consensus on Issue No. 04-8,“The Effect of Contingently Convertible Debt on Diluted Earnings Per Share,” (“EITF04-8”) which addresses when the dilutive effect of contingentlyconvertible debt instruments should be included in diluted earnings per share.EITF 04-8 requires that contingently convertible debt instruments beincluded in the computation of diluted earnings per share regardless of whetherthe market price trigger has been met. EITF 04-8 also requires that priorperiod diluted earnings per share amounts presented for comparative purposes berestated. EITF 04-8 was effective for reporting periods ending afterDecember 15, 2004. The adoption of EITF 04-8 resulted in a $0.02decrease in diluted earnings per share for the year ended December 31,2004 and had no impact for the year ended December 31, 2003.

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

The securities excludedfrom diluted earnings per common share, on an actual outstanding basis, were asfollows (in thousands):
|                        | ** ** | **Year Ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **             | ** ** | **(in thousands)**                    | ** ** |
| Employee stock options |       | 1,427                                      |       | 2,613 |   | 5,253 |   |
| Convertible notes      |       | —                                     |       | — |   | 2,689 |   |
| Total                  |       | 1,427                                      |       | 2,613 |   | 7,942 |   |

 

**RECENT ACCOUNTINGPRONOUNCEMENTS**

On December 16,2004, the Financial Accounting Standards Board (FASB) issued FASB StatementNo. 123 (revised 2004), “Share-Based Payment”, which is a revision of FASBStatement No. 123, “Accountingfor Stock-Based Compensation”. SFAS 123(R) supersedes APB OpinionNo. 25, “Accounting for StockIssued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”. Generally,the approach in SFAS 123(R) is similar to the approach described inStatement 123. However, SFAS 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the statement of operations based on theirestimated fair values. SFAS 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent accounting standards. This requirement will reduce net operating cashflows and increase net financing cash flows in periods after adoption. Proforma disclosure will no longer be an alternative. The Company will adopt SFAS123(R) effective January 1, 2006 under the modified-prospectivemethod. As permitted by Statement 123, the Company currently accounts forshare-based payments to employees using Opinion 25’s intrinsic value methodand, as such, generally recognizes no compensation cost for employee stockoptions. Accordingly, the adoption of SFAS 123(R)’s fair value method will havea significant impact on the Company’s results of operations, although it willhave no impact on the Company’s overall financial position. With the adoptionof SFAS 123(R), the Company expects to record stock-based compensation ofapproximately $11.0 million, net of tax, or $0.15 per diluted share in 2006.The Company’s estimate of stock-based compensation expense is affected by itsstock price, the number of stock-based awards it may grant in 2006, as well asa number of complex and subjective valuation assumptions and the related taxeffect. These valuation assumptions include, but are not limited to, thevolatility of the Company’s stock price, the estimated forfeiture rates andemployee stock option exercise behaviors.

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**NOTE 3—RESTATEMENT OF PREVIOUSLY ISSUED FINANCIALSTATEMENTS**

On August 9, 2006, the Company concluded that itsconsolidated financial statements for the years ended December 31, 2005,2004 and 2003 should be restated to record additional non-cash stock-basedcompensation expense, and the related income tax impact, resulting from stockoptions granted during fiscal years 1997 to 1999 that were incorrectlyaccounted for under U.S. generally accepted accounting principles. The Company’sdecision to restate its financial statements was based on the results of an internalreview of the Company’s historical stock option granting practices from January1, 1997 through May 31, 2006 performed under the direction of the AuditCommittee of the Board of Directors.  Theinternal review identified certain errors and documentation lapses but did notfind any pattern or practice of inappropriately identifying grant dates withhindsight in order to provide “discounted” or “in-the-money” grants.

The Company has concluded that there was a materialaccounting error as a result of a documentation lapse in July 1999, in whichthe option grant for an aggregate of 1.99 million shares should have beenmeasured for accounting purposes as of a later date.  In light of the restatement required by thismatter, the Company has also included in this restatement corrections relatingto certain other errors and documentation lapses in the fiscal years 1997 and1998.  Approximately 97% of the chargesrelating to the restatement arose from the documentation lapse in July 1999.

The Company has determined that the cumulative,pre-tax, non-cash, stock-based compensation expense resulting from revisedmeasurement dates for options granted between 1997 and 1999 was approximately$21.5 million. Accordingly, the Company recorded stock-based compensationexpense of $0, $0, and $1.7 million for the years ended December 31, 2005,2004 and 2003, respectively, and $19.8 million for the five years preceding2003, based on the vesting periods of the respective grants.  In addition, the Company recorded an incometax benefit of $8.3 million in 2005. Principally as a result of cumulative losses incurred through 2004, theCompany recorded a full valuation allowance against all deferred tax assets forthe years ended December 31, 2004 and 2003 and consequently, there is no incometax effect of the additional stock-based compensation expense recorded in thoseyears.  The cumulative effect of therestatement adjustments on the Company’s consolidated balance sheet at December31, 2005 was an increase in additional paid-in capital of $21.5 million offsetby an increase in the accumulated deficit of $13.2 million, which results in anet effect on stockholders’ equity of $8.3 million.  The adjustments increased previously reportedbasic and diluted net income per common share by $0.13 and $0.12, respectively,for the year ended December 31, 2005 and decreased basic and diluted net incomeper common share by $0.03 for the year ended December 31, 2003.

As part of the Company’s review, the Company assessed whetherthere were other matters that should have been corrected in its previouslyissued consolidated financial statements. Apart from the errors underlying therestatement described above, no other matters have come to the Company’sattention that should be adjusted in its previously issued consolidatedfinancial statements.

The following tables set forth the effects of therestatement on certain line items within the Company’s consolidated statementsof operations for the years ended December 31, 2005, 2004 and 2003 andconsolidated balance sheets as of December 31, 2005 and 2004:

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| ** **                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Stock-based  compensation expense:                               |       |                                       |       |   |   |   |   |
| Cost of product  sales - as previously reported                  |       | $                                          | 134        |   | $ | — |   | $ | — |   |
| Cost of product  sales - as restated                             |       | 134                                        |       | — |   | 69 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Research and  development - as previously reported               |       | 342                                        |       | 720 |   | 1,713 |   |
| Research and  development - as restated                          |       | 342                                        |       | 720 |   | 2,144 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Selling, general  and administrative - as previously reported    |       | 630                                        |       | 200 |   | 525 |   |
| Selling, general  and administrative - as restated               |       | 630                                        |       | 200 |   | 1,749 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Total stock-based  compensation expense - as previously reported |       | $                                          | 1,106      |   | $ | 920 |   | $ | 2,238 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Total stock-based  compensation expense - as restated            |       | $                                          | 1,106      |   | $ | 920 |   | 3,962 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Income before income  taxes:                                     |       |                                       |       |   |   |   |   |
| As previously  reported                                          |       | $                                          | 62,608     |   | $ | 50,934 |   | $ | 16,848 |   |
| As restated                                                      |       | $                                          | 62,608     |   | $ | 50,934 |   | $ | 15,124 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Income tax provision  (benefit):                                 |       |                                       |       |   |   |   |   |
| As previously  reported                                          |       | $                                          | 5,092      |   | $ | 3,326 |   | $ | 2,563 |   |
| As restated                                                      |       | $                                          | (3,179     | ) | $ | 3,326 |   | $ | 2,563 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Net income:                                                      |       |                                       |       |   |   |   |   |
| As previously  reported                                          |       | $                                          | 57,516     |   | $ | 47,608 |   | $ | 14,285 |   |
| As restated                                                      |       | $                                          | 65,787     |   | $ | 47,608 |   | $ | 12,561 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Basic net income per  share:                                     |       |                                       |       |   |   |   |   |
| As previously  reported                                          |       | $                                          | 0.90       |   | $ | 0.79 |   | $ | 0.24 |   |
| As restated                                                      |       | $                                          | 1.03       |   | $ | 0.79 |   | $ | 0.21 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Diluted net income per  share:                                   |       |                                       |       |   |   |   |   |
| As previously  reported                                          |       | $                                          | 0.84       |   | $ | 0.74 |   | $ | 0.24 |   |
| As restated                                                      |       | $                                          | 0.96       |   | $ | 0.74 |   | $ | 0.21 |   |

 

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| ** **                                     | ** ** | **As of  December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Deferred tax assets –  current portion:   |       |                              |       |   |   |
| As previously reported                         |       | $                                 | 22,117     |   | $ | — |   |
| As restated                                    |       | $                                 | 26,230     |   | $ | — |   |
|                                           |       |                              |       |   |   |
| Deferred tax assets –  long-term portion: |       |                              |       |   |   |
| As previously  reported                        |       | $                                 | 13,436     |   | $ | — |   |
| As restated                                    |       | $                                 | 17,594     |   | $ | — |   |
|                                           |       |                              |       |   |   |
| Additional paid-in  capital:                   |       |                              |       |   |   |
| As previously  reported                        |       | $                                 | 624,727    |   | $ | 407,258 |   |
| As restated                                    |       | $                                 | 646,186    |   | $ | 428,717 |   |
|                                           |       |                              |       |   |   |
| Accumulated deficit:                           |       |                              |       |   |   |
| As previously  reported                        |       | $                                 | 93,535     |   | $ | 151,051 |   |
| As restated                                    |       | $                                 | 106,723    |   | $ | 172,510 |   |

The following is asummary of the effect of these corrections on the Company’s pro-forma calculationof its net income per share for the years ended December 31, 2005 and 2003:

 
| ** **                                                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                                   | ** ** | **2005** | ** ** |
| ** **                                                                                                                   | ** ** | **(as previously  reported)**         | ** ** | **(as restated)** | ** ** |
| Net income—as reported                                                                                                  |       | $                                          | 57,516     |   | $ | 65,787 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net  of tax                       |       | 384                                        |       | 384 |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value method for all  awards, net of tax |       | (15,800                                    | )          | (15,800 | ) |
| Pro forma net income                                                                                                         |       | $                                          | 42,100     |   | $ | 50,371 |   |
| Net income per share:                                                                                                        |       |                                       |       |   |   |
| Basic net income  per common share—as reported                                                                          |       | $                                          | 0.90       |   | $ | 1.03 |   |
| Diluted net  income per common share—as reported                                                                        |       | $                                          | 0.84       |   | $ | 0.96 |   |
| Basic net income  per common share—pro forma                                                                            |       | $                                          | 0.66       |   | $ | 0.79 |   |
| Diluted net income per  common share—pro forma                                                                          |       | $                                          | 0.60       |   | $ | 0.74 |   |

 
| ** **                                                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2003**                                   | ** ** | **2003** | ** ** |
| ** **                                                                                                                   | ** ** | **(as previously  reported)**         | ** ** | **(as restated)** | ** ** |
| Net income—as reported                                                                                                  |       | $                                          | 14,285     |   | $ | 12,561 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net  of tax                       |       | 2,238                                      |       | 3,962 |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value method for all  awards, net of tax |       | (29,220                                    | )          | (29,220 | ) |
| Pro forma net loss                                                                                                           |       | $                                          | (12,697    | ) | $ | (12,697 | ) |
| Net income (loss) per  share:                                                                                                |       |                                       |       |   |   |
| Basic net income  per common share—as reported                                                                          |       | $                                          | 0.24       |   | $ | 0.21 |   |
| Diluted net  income per common share—as reported                                                                        |       | $                                          | 0.24       |   | $ | 0.21 |   |
| Basic net loss  per common share—pro forma                                                                              |       | $                                          | (0.22      | ) | $ | (0.22 | ) |
| Diluted net loss per  common share—pro forma                                                                            |       | $                                          | (0.22      | ) | $ | (0.22 | ) |

 

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Certain other footnotesappearing in these financial statements were impacted by these corrections.Refer to Notes 2, 4, 17, 20 and 21.

**NOTE 4—ACQUISITION**

On October 21, 2005,Affymetrix acquired 100% of the outstanding shares of ParAlleleBioScience, Inc. (“ParAllele”), a provider of comprehensive geneticdiscovery solutions to the life science research, pharmaceutical and diagnosticsectors. ParAllele’s products and services utilize a unique approach thatleverages novel biochemical processes rather than complex instrumentation to discoverand analyze minute variations in the human genome. Affymetrix expects theacquisition to accelerate the development and commercialization of new productsand create greater opportunities for market penetration and revenue generationas well as increase Affymetrix’ core assay development capabilities.

Affymetrix accounted forthe merger under the purchase method of accounting in accordance with theprovisions of Statement of Financial Accounting Standards No. 141, “BusinessCombinations.” Under this accounting method, the Company recorded the assetsacquired and liabilities assumed at their estimated fair value, with the excesspurchase price reflected as goodwill. Additionally, certain costs directlyrelated to the merger were reflected as additional purchase price in excess ofnet assets acquired. The results of operations of ParAllele sinceOctober 21, 2005 have been included in Affymetrix’ consolidated financialstatements for the year ended December 31, 2005.

*Purchase Price*

The total purchase priceof the ParAllele acquisition was $122.4 million and includes the followingcomponents (in thousands):
| Fair value of Affymetrix  common stock issued |   | $      | 99,446  |   |
|-----------------------------------------------|--------|--------|---------|--------|
| Merger consideration  paid in cash            |   | 11,723 |    |
| Fair value of stock  options assumed          |   | 7,666  |    |
| Direct transaction  costs                     |   | 3,582  |    |
| Total purchase price                          |   | $      | 122,417 |   |

 

The fair value of the2.29 million shares of Affymetrix’ common stock issued was derived using theaverage market price of Affymetrix’ common stock of $43.66 per share, which wasbased on the closing price for a range of trading days (October 18, 2005through October 21, 2005) around the measurement date. The fair value ofParAllele options assumed and common stock subject to repurchase was determinedusing the Black-Scholes option pricing model with the following weightedaverage assumptions: volatility of 0.39, expected life of 2.94 years, risk-freeinterest rate of 4.24%, and expected dividend yield of 0%. The expected stockprice volatility assumption was determined using a combination of historicaland implied volatility of the Company’s common stock.

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*Purchase Price Allocation*

The following tableallocates the purchase price based on the fair values of the assets acquiredand liabilities assumed as of the acquisition date (in thousands):
| Tangible assets and  liabilities:    |   |    |    |
|--------------------------------------|--------|---------|---------|
| Current assets                       |   | $       | 7,387   |   |
| Long-term assets                     |   | 4,088   |    |
| Current  liabilities                 |   | (9,596  | )       |
| Long-term  liabilities               |   | (8,013  | )       |
| Total net  tangible liabilities      |   | (6,134  | )       |
|                                 |   |    |    |
| Amortizable intangible  assets:      |   |    |    |
| Developed  technology                |   | 1,853   |    |
| Patents                              |   | 3,082   |    |
| Backlog                              |   | 251     |    |
| Total  amortizable intangible assets |   | 5,186   |    |
|                                 |   |    |    |
| Goodwill                             |   | 105,679 |    |
| Deferred tax asset                   |   | 4,368   |    |
| Deferred stock  compensation         |   | 5,003   |    |
| In-process technology                |   | 8,315   |    |
| Total                                |   | $       | 122,417 |   |

 

In April 2004,Affymetrix and ParAllele had entered into a two-year product collaborationagreement in which Affymetrix distributed ParAllele products and suppliedParAllele with probe arrays. No value was assigned to this pre-existing relationshipin the purchase accounting summarized above. Current assets include $0.6million of trade receivables from Affymetrix and current liabilities include$0.7 million of trade payables to Affymetrix as well as $4.5 million loan fromAffymetrix to fund ParAllele’s operations. Upon completion of the acquisition,these balances were eliminated in Affymetrix’ consolidated financialstatements.

*Intangible Assets andGoodwill*

A valuation of thepurchased intangibles was undertaken by a third party valuation specialist toassist Affymetrix’ management in its determination of estimated fair value ofsuch assets. The $4.9 million value assigned to developed technology andpatents is included in acquired technology rights on the Company’s ConsolidatedBalance Sheet and will be amortized to cost of product sales over the estimateduseful lives of these assets, generally five to eight years. Affymetrix hadrecorded amortization expense of approximately $0.2 million for the year endedDecember 31, 2005 related to these acquired patents and technology. The$0.3 million value assigned to backlog will be amortized to selling,general & administrative expenses within one year. Goodwill of $105.7million was recorded as the excess of the purchase price over the net assets acquired.No goodwill was deemed to be deductible for income tax purposes.

*Deferred StockCompensation*

The $5.0 million ofdeferred compensation represents the intrinsic value of the unvested stockoptions assumed by Affymetrix in the transaction. This amount will be amortizedto the appropriate costs and expense line items over the remaining vestingperiods of the underlying equity awards, which extend throughSeptember 2009.

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*In-process Technology*

Management utilized theassistance of a third party valuation specialist to help it determine theestimated fair value of certain research and development programs in-process atthe acquisition date that had not yet reached technological feasibility and hadno alternative future use. These projects primarily included the development ofa DNA genotyping product and to a lesser extent certain RNA and otherexpression products. The fair values of these projects were determined usingthe Income Approach whereby management estimated each project’s related futurenet cash flows between 2005 and 2015 and discounted them to their present valueusing a risk adjusted discount rate of 28%. This discount rate is based on ourestimated weighted average cost of capital adjusted upward for the risksassociated with the projects acquired. The projected cash flows from theacquired projects were based on estimates of revenues and operating profitsrelated to the projects considering the stage of development of each potentialproduct acquired, the time and resources needed to complete the development andapproval of each product, the life of each potential commercialized product andthe inherent difficulties and uncertainties in developing products and servicesbased on complex genetic technologies and biochemical processes. The Companyexpects significant cash flows from these projects to begin in 2006 and is notanticipating any material changes to its historical pricing, expense levels orgross margins related to these products.

As of October 21,2005 and December 31, 2005, the DNA genotyping project was 33% completeand the RNA & other projects were 40% complete. The Company expects toincur costs of approximately $5.6 million to complete the DNA genotypingproject and costs of $1.5 million to complete the RNA & otherprojects. Upon consummation of the acquisition on October 21, 2005 andcompletion of our valuation efforts, $8.3 million was charged to acquiredin-process technology in the Consolidated Statement of Operations.

*Pro Forma Results*

The following pro formadata summarizes the results of operations for the periods indicated as if theParAllele acquisition had been completed as of the beginning of each of theperiods presented. The pro forma data give effect to actual operating resultsprior to the acquisition as well as amortization of intangibles acquired in theacquisition, however, no effect has been given to cost reductions or operatingsynergies. In addition, certain transactions related to the Company’spre-existing relationship with ParAllele have been excluded as well asaccretion charges associated with ParAllele’s preferred stock. These pro formaamounts do not purport to be indicative of the results that would have actuallybeen obtained if the acquisition had occurred as of the beginning of theperiods presented or that may be obtained in the future.

The pro forma results areas follows (in thousands, except per share amounts):
| ** **                          | ** ** | **Year ended  December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(as previously reported)** | ** ** |
| Net revenue                         |       | $                                      | 371,662    |   | $ | 347,978 |   |
| Net income                          |       | $                                      | 47,489     |   | $ | 24,889 |   |
| Basic net income per  common share  |       | $                                      | 0.72       |   | $ | 0.40 |   |
| Diluted net income per common share |       | $                                      | 0.68       |   | $ | 0.38 |   |

 
| ** **                           | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(restatement)**                      | ** ** |
| Net revenue                          |       | $                                      | —     |   | $ | — |   |
| Net income                           |       | $                                      | 8,271      |   | $ | — |   |
| Basic net income per  common share   |       | $                                      | 0.13       |   | $ | — |   |
| Diluted net income per  common share |       | $                                      | 0.11       |   | $ | — |   |

 
| ** **                          | ** ** | **Year ended  December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(restated)**                         | ** ** | **(as previously  reported)** | ** ** |
| Net revenue                         |       | $                                      | 371,662    |   | $ | 347,978 |   |
| Net income                          |       | $                                      | 55,760     |   | $ | 24,889 |   |
| Basic net income per  common share  |       | $                                      | 0.85       |   | $ | 0.40 |   |
| Diluted net income per common share |       | $                                      | 0.79       |   | $ | 0.38 |   |

 

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**Thefiscal year 2005 pro forma net income, basic net income per common share, anddiluted net income per common share were increased by $8.3 million, $0.13 and$0.14, respectively, as a result of the tax benefit associated with therestatement of stock based compensation. See Note 3 for futher information.**

**NOTE 5—COLLABORATIVEAGREEMENTS**

The Company hasagreements with several entities to develop and test probe arrays for thedetection of certain gene sequences, mutations or organisms. Under suchagreements, the Company may receive development fees and may receive paymentsupon achievement of certain technical goals. The Company also has researchagreements with many universities and research organizations. The Company’smaterial agreements are described below:

**BECKMANCOULTER, INC. (“Beckman”)**

In July 1998, theCompany entered into an arrangement with Beckman that involved the execution ofa series of agreements including an Asset Purchase Agreement (the “APA”).Pursuant to the APA, which was implemented and became effective inJune 1999, the Company purchased Beckman’s array business. Under the APA,the Company agreed to grant Beckman licenses to commercialize probe arraysmanufactured using certain Affymetrix technologies other than light-directedsynthesis, and an OEM supply agreement for products that use the Company’sGeneChip® array technology. Under the arrangement,Beckman would pay Affymetrix transfer prices and royalties on sales of theseproducts.

Under the agreements,Affymetrix made a $5.9 million payment to Beckman in 1998 and agreed toprovide a credit of $5.0 million to be applied against research anddevelopment services to be performed by the Company. Affymetrix had the optionof performing or agreeing to perform such services by July 2003, or payingthe amount of the unapplied credit in cash or stock to Beckman. In addition,under the agreement Affymetrix contracted to establish a joint venture withBeckman. The Company determined after review of EITF 98-3, “DeterminingWhether a Nonmonetary Transaction Involves Receipt of Productive Assets or aBusiness” that the purchase should be accounted for as the receipt of anintangible asset. Therefore, the payments and credit obligation to Beckman wereaccounted for as the purchase of an intangible asset which is being amortizedon a straight-line basis over its estimated useful life of 15 years. AtDecember 31, 2005 and 2004, accumulated amortization amounted to $11.3 millionand $6.6 million, respectively. During the year ended December 31,2003, the Company paid to Beckman $5.0 million in settlement of theobligation to perform research and development activities and established ajoint venture with Beckman called Array Automation, LLC. (See Note 12Related Parties).

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**F. HOFFMANN-LAROCHE LTD. (“Roche”)**

In February 1998,Affymetrix entered into a non-exclusive collaborative development agreementwith Roche to initially develop probe array-based diagnostic products.Under the terms of the agreement the parties were collaborating to developmutually agreed upon arrays directed to selected genes, as well to develop theassociated instrumentation and reagents. In January 2003, the Companyexpanded its collaboration with Roche by granting Roche access to its GeneChip® technologies to develop and commercializeGeneChip® diagnostic laboratory tests for DNA analysis,genotyping and resequencing applications, as well as for RNA expressionanalysis, in a broad range of human disease areas. Using Affymetrix’ GeneChip® technologies, Roche is seeking to develop andmarket diagnostic tests for diseases such as cancer, osteoporosis,cardiovascular, metabolic, infectious and inflammatory diseases. Affymetrix andRoche believe that developing targeted microarray expression profiles forcancer and genotyping and resequencing profiles for other diseases will enablethe creation and commercialization of novel standardized diagnostic solutions.These solutions ultimately may allow physicians to better diagnose and treathuman disease. Under the terms of the expanded collaborative agreement, Rochepaid Affymetrix an access fee of $70 million, which the Company isrecognizing as a component of product related revenue over the estimatedresearch and development period of approximately five years. Research revenueunder this contract was approximately $14.2 million and $14.2 millionfor the years ended December 31, 2005 and 2004, respectively. Milestonerevenue earned under this contract was zero and $1.5 million for the year endedDecember 31, 2005 and 2004, respectively. The associated research costsare not significant for each of the years presented. The expanded collaborationagreement, which is subject to Roche’s option to terminate on December 31,2007, December 31, 2010 or any time on or after December 31, 2015,with one year’s prior notice, includes a broad range of other compensationpayable by Roche to Affymetrix throughout the life of the agreement based onannual royalties on sales of diagnostic kits, milestone payments for technicaland commercial achievements, a manufacturing and supply agreement, and relatedlicense installments.

**NOTE 6—CONCENTRATIONS OFRISK**

Cash equivalents andinvestments are financial instruments that potentially subject Affymetrix toconcentrations of risk to the extent of amounts recorded in the consolidatedbalance sheet. Company policy restricts the amount of credit exposure to anyone issuer and to any one type of investment, other than securities issued bythe United States Government.

The Company has notexperienced significant credit losses from its accounts receivable. Affymetrixperforms a regular review of its customer activity and associated credit risksand does not require collateral from its customers. The Company maintains anallowance for doubtful accounts receivable based upon the expectedcollectibility of accounts receivable.

Certain raw materials orcomponents used in the synthesis of probe arrays or the assembly ofinstrumentation, are currently available only from a single source or limitedsources. No assurance can be given that these raw materials or other componentsof the GeneChip® system will be available in commercialquantities at acceptable costs from other vendors should the need arise. If theCompany is required to seek alternative sources of supply, it could be timeconsuming and expensive.

In addition, the Companyis dependent on its vendors to provide components of appropriate quality andreliability and to meet applicable regulatory requirements. Consequently, inthe event that supplies from these vendors are delayed or interrupted for anyreason, the Company’s ability to develop and supply its products could beimpaired, which could have a material adverse effect on the Company’s business,financial condition and results of operations.

Approximately 50% of theCompany’s product and product related revenue is generated from sales outsidethe United States. Though such transactions are denominated in either UnitedStates dollars and foreign currencies, the Company’s results of operations arestill affected by such factors as changes in foreign currency exchange rates,trade protection measures, longer accounts receivable collection patterns andchanges in regional or worldwide economic or political conditions. The risks ofthe Company’s international operations are mitigated in part by the extent towhich its sales are geographically distributed and its foreign currency hedgingprogram.

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**NOTE 7—AVAILABLE-FOR-SALESECURITIES AND OTHER FINANCIAL INSTRUMENTS**

**INVESTMENTS IN DEBT ANDEQUITY SECURITIES**

The fair values of allavailable-for-sale securities are based on quoted market prices and areincluded in current assets as management considers the securities readilyavailable to fund current operations. The following is a summary ofavailable-for-sale securities as of December 31, 2005 (in thousands):
|                                                    | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------------|------------|----------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| U.S. Government  obligations and agency securities |       | $        | 138,114    |                         | $          | 1                             |       | $                   | (605       | ) | $ | 137,510 |   |
| U.S. corporate debt  securities                    |       | 124,198  |       | 34                           |       | (428                          | )          | 123,804             |       |
| Total securities                                   |       | $        | 262,312    |                         | $          | 35                            |       | $                   | (1,033     | ) | $ | 261,314 |   |
| Amounts included in:                               |       |     |       |                         |       |                          |       |                |       |
| Cash equivalents                                   |       | $        | 76,617     |                         | $          | 2                             |       | $                   | (1         | ) | $ | 76,618 |   |
| Available-for-sale  securities                     |       | 185,695  |       | 33                           |       | (1,032                        | )          | 184,696             |       |
| Total securities                                   |       | $        | 262,312    |                         | $          | 35                            |       | $                   | (1,033     | ) | $ | 261,314 |   |
| Amounts mature in:                                 |       |     |       |                         |       |                          |       |                |       |
| Less than one  year                                |       | $        | 230,739    |                         | $          | 35                            |       | $                   | (801       | ) | $ | 229,973 |   |
| One to two years                                   |       | 31,573   |       | —                       |       | (232                          | )          | 31,341              |       |
| Total securities                                   |       | $        | 262,312    |                         | $          | 35                            |       | $                   | (1,033     | ) | $ | 261,314 |   |

 

The following is asummary of available-for-sale securities as of December 31, 2004 (inthousands):
|                                                    | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------------|------------|----------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| U.S. Government  obligations and agency securities |       | $        | 68,253     |                         | $          | 3                             |       | $                   | (289       | ) | $ | 67,967 |   |
| U.S. corporate debt  securities                    |       | 113,179  |       | 14                           |       | (552                          | )          | 112,641             |       |
| Total securities                                   |       | $        | 181,432    |                         | $          | 17                            |       | $                   | (841       | ) | $ | 180,608 |   |
| Amounts included in:                               |       |     |       |                         |       |                          |       |                |       |
| Cash equivalents                                   |       | $        | 17,487     |                         | $          | 1                             |       | $                   | —     |   | $ | 17,488 |   |
| Available-for-sale  securities                     |       | 163,945  |       | 16                           |       | (841                          | )          | 163,120             |       |
| Total securities                                   |       | $        | 181,432    |                         | $          | 17                            |       | $                   | (841       | ) | $ | 180,608 |   |
| Amounts mature in:                                 |       |     |       |                         |       |                          |       |                |       |
| Less than one  year                                |       | $        | 146,316    |                         | $          | 17                            |       | $                   | (613       | ) | $ | 145,720 |   |
| One to three  years                                |       | 35,116   |       | —                       |       | (228                          | )          | 34,888              |       |
| Total securities                                   |       | $        | 181,432    |                         | $          | 17                            |       | $                   | (841       | ) | $ | 180,608 |   |

 

Realized gains and lossesfor the year ended December 31, 2005 were $0.1 million and $0.4million, respectively. Realized gains and losses for the year endedDecember 31, 2004 were $0.3 million and $1.2 million,respectively. Realized gains and losses are included in interest income andother, net in the accompanying Consolidated Statements of Operations. The grossunrealized losses as at December 31, 2005 and 2004, above were caused byinterest rate increases. No significant facts or circumstances have arisen toindicate that there has been any deterioration in the creditworthiness of theissuers of our securities. Based on the Company’s review of these securities,including the assessment of the severity of the related unrealized losses, theCompany has not recorded any other-than-temporary impairments on thesesecurities.

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Excluding ouravailable-for-sale marketable securities, the declines in estimated fair valuesof certain investments were determined to be other-than-temporary. Accordingly,the Company recorded net impairment losses on certain investments in bothpublicly-traded and non-marketable equity securities of $2.2 million,$2.3 million and $0.9 million during the years endedDecember 31, 2005, 2004 and 2003, respectively. Net investment losses areincluded in interest income and other, net on the Consolidated Statement ofOperations. Depending on market conditions, the Company may incur additionalcharges on this investment portfolio in the future.

**DERIVATIVE FINANCIALINSTRUMENTS**

The Company is exposed toforeign currency exchange rate fluctuations in the normal course of itsbusiness. As part of its risk management strategy, the Company uses derivativeinstruments to hedge certain foreign currency exposures. The Company hedges apercentage of forecasted international revenue with forward contracts and thegains and losses on these contracts largely offset gains and losses on thetransactions being hedged. The Company’s revenue hedging policy is designed toreduce the impact on its revenue of foreign currency exchange rate movements.The Company also hedges a percentage of its assets that are held innonfunctional currencies of our subsidiaries with forward contracts and thegains or losses on these contracts largely offset gains and losses on thechange in value of the underlying asset. The Company’s balance sheet hedgingpolicy is designed to reduce the fluctuations in earnings due to changes inforeign currency exchange rates. The Company does not use derivative contractsfor speculative purposes. During the years ended December 31, 2005 and2004, all of the Company’s hedges were deemed effective. At December 31,2005 and 2004, total outstanding contracts included the notional equivalent of$21.6 million and $62.6 million, respectively, in foreign currencyforward exchange contracts with a fair value of $0.8 million and$(1.7) million, respectively, which are included in other current assets(liabilities) on the Consolidated Balance Sheets. As of December 31, 2005,all contracts were set to expire at various times through December 2006.The Company applies hedge accounting based upon the criteria established byStatement of Financial Accounting Standards No. 133, whereby the Company designatesits derivatives for revenue hedging purposes as cash flow hedges. The Companyhas elected not to designate its derivatives for balance sheet purposes as fairvalue hedges under SFAS 133 and have appropriately recorded any changes infair value to interest income and other, net. The net realized foreign currencygains (losses) related to the foreign currency forward contracts were$1.4 million and ($1.1) million for the years ended December 31,2005 and 2004, respectively.

**OTHER FINANCIALINSTRUMENTS**

The carrying amounts andestimated fair values of financial instruments, other than those accounted forin accordance with Statement of Financial Accounting Standards No. 115,were as follows at December 31, 2005 and 2004 (in thousands):

|                                   | ** ** | **2005**             | ** ** | **2004**                       | ** ** |
|-----------------------------------|------------|----------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| Assets:                           |       |                 |       |                           |       |   |   |   |   |
| Non-marketable  equity securities |       | $                    | 18,120     |                           | $          | 18,120 |   | $ | 14,890 |   | $ | 14,890 |   |
| Note receivable  from Nuvelo      |       | 5,240                |       | 5,240                          |       | 4,940 |   | 4,940 |   |
| Employee loans receivable         |       | 1,824                |       | 1,824                          |       | 1,900 |   | 1,900 |   |
| Liability:                        |       |                 |       |                           |       |   |   |   |   |
| Convertible notes                 |       | 120,000              |       | 189,886                        |       | 120,000 |   | 162,300 |   |
|                                   |            |                      |            |                                |            |  |  |  |  |  |  |  |  |

 

The fair value estimatesprovided above for the Company’s convertible notes were based on quoted marketprices available at December 31, 2005 and 2004. All other fair values werebased on current market rates, liquidation and net realizable values.

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**NOTE 8—INVENTORIES**

Inventories consist ofthe following at December 31, 2005 and 2004 (in thousands):
|                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 13,094     |     | $          | 6,719 |   |
| Work-in-process |       | 10,423   |       | 4,181    |       |
| Finished goods  |       | 12,463   |       | 7,097    |       |
| Total           |       | $        | 35,980     |     | $          | 17,997 |   |

 

**NOTE 9—PROPERTY ANDEQUIPMENT**

Property and equipmentconsists of the following as of December 31, 2005 and 2004 (in thousands):
|                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Property and equipment:                         |       |     |       |     |       |
| Construction-in-progress                        |       | $        | 25,233     |     | $          | 16,927 |   |
| Equipment and  furniture                        |       | 115,143  |       | 96,843   |       |
| Building and  leasehold improvements            |       | 55,477   |       | 41,597   |       |
| Land                                            |       | 1,310    |       | 1,310    |       |
|                                            |       | 197,163  |       | 156,677  |       |
| Less accumulated  depreciation and amortization |       | (111,603 | )          | (92,498  | )          |
| Net property and  equipment                     |       | $        | 85,560     |     | $          | 64,179 |   |

 

Construction-in-progressincludes construction costs for new and upgraded facilities in Singapore andWest Sacramento as well as related purchased equipment not yet placed inservice.

**NOTE 10—ACQUIREDTECHNOLOGY RIGHTS**

Acquired technologyrights are comprised of licenses to technology covered by patents owned bythird parties or patents acquired by the Company and are amortized over the expecteduseful lives of these assets, which range from one to fifteen years.Accumulated amortization of these rights amounted to $22.2 million and$14.6 million at December 31, 2005 and 2004, respectively.

In May 2004, theCompany reached an agreement with Oxford Gene Technology, Ltd. (“OGT”)that required the Company to make a total cash payment of $62.5 million toOGT. The agreement included two distinct components. The first componentrelated to the payment of approximately $20.6 million due in connectionwith previously accrued and expensed royalty obligations through May 2004calculated using the terms of the original license agreement. The secondcomponent related to a cash payment of approximately $41.9 million toconvert the Company’s non exclusive royalty bearing license to certain OGTpatents to a fully paid up license. The Company determined that the$41.9 million cash payment is less than the net present value of thefuture estimated royalty obligations under the terms of the original licenseagreement. In accordance with Statement of Financial Accounting Standard 142 (“SFAS 142”),*Goodwill and Other Intangible Assets*,the $41.9 million was recorded as an intangible asset. Consistent with theguidance in SFAS 142 and with Statement of Financial Accounting Standard141 (“SFAS 141”), *Business Combinations*,this fully paid license is being amortized over its remaining useful life ofapproximately ten years.

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The expected futureannual amortization expense of the Company’s acquired technology rights is asfollows (in thousands):
| For the Year Ending December 31, | ** ** | **Amortization  Expense** | ** ** |
|-----------------------------------------------------------|------------|---------------------------|------------|
| 2006                                                      |       | $                         | 7,942      |   |
| 2007                                                      |       | 7,942                     |       |
| 2008                                                      |       | 7,930                     |       |
| 2009                                                      |       | 7,061                     |       |
| 2010                                                      |       | 6,321                     |       |
| Thereafter                                                |       | 24,230                    |       |
| Total expected  future annual amortization                |       | $                         | 61,426     |   |

 

**NOTE 11—ACCOUNTS PAYABLEAND ACCRUED LIABILITIES**

Accounts payable andaccrued liabilities as of December 31, 2005 and 2004 consist of thefollowing (in thousands):
|                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Accounts payable                              |       | $        | 29,718     |     | $          | 14,000 |   |
| Accrued compensation  and related liabilities |       | 20,419   |       | 27,416   |       |
| Accrued taxes                                 |       | 10,354   |       | 10,158   |       |
| Accrued legal                                 |       | 1,357    |       | 694      |       |
| Accrued  warranties                           |       | 6,223    |       | 4,113    |       |
| Other                                         |       | 3,480    |       | 4,884    |       |
| Total                                         |       | $        | 71,551     |     | $          | 61,265 |   |

 

**NOTE 12—RELATED PARTYTRANSACTIONS AND NOTES RECEIVABLE FROM EMPLOYEES**

***RELATED PARTY TRANSACTIONS***

**PERLEGEN SCIENCES, INC.**

As ofDecember 31, 2005, the Company, and certain of itsaffiliates, including the Company’s chief executive officer and members of theboard of directors, held approximately 25% ownership interest in PerlegenSciences, Inc. (“Perlegen”), a privately-held biotechnology company. Inaddition, two members of Perlegen’s board of directors are also members ofthe Company’s board of directors.

The Company formed Perlegen inOctober 2000 as a wholly-owned subsidiary and spun it off inMarch 2001 in a $100 million private equity financing. The Companyacquired its initial ownership interest in Perlegen in an arrangement whichprovides Perlegen rights to use certain of the Company’s intellectual propertyin its development efforts, and also provides the Company rights to use andcommercialize certain data generated by Perlegen in the array field.

The Company accounts for its ownershipinterest in Perlegen using the equity method as the Company and its affiliatesdo not control the strategic, operating, investing and financing activities ofPerlegen. Further, the Company has no obligations to provide funding toPerlegen nor does it guarantee or otherwise have any obligations related to theliabilities or results of operations of Perlegen or its investors. ThroughJanuary 2005, the Company’s investment in Perlegen had no cost basis;accordingly, the Company has not recorded its proportionate share of Perlegen’soperating losses in its financial statements since the completion of Perlegen’sinitial financing. In February 2005, the Company participated in Perlegen’sSeries D preferred stock financing and recorded a $2.0 million investmentrelated to this transaction, which was included in the Company’s ConsolidatedBalance Sheet as a component of other assets. As of June 30, 2005 theCompany had reduced the carrying value of its investment to zero through therecording of its proportionate share of Perlegen’s operating losses it incurredsince February 2005, which is included as a component of interest andother income, net, in the Company’s Consolidated Statement of Operations forthe year ended December 31, 2005.

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In accordance with Financial AccountingStandards Board Interpretation No. 46R (“FIN 46R”), “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51” as amended,the Company has concluded that Perlegen is a Variable Interest Entity (VIE) inwhich it holds a variable interest, and that the Company is not the primarybeneficiary. Accordingly, no change to the Company’s historical accounting forPerlegen is required.

On January 9, 2003, the Companyentered into an agreement with Perlegen to in-license certain intangible assetsthat are expected to accelerate its plans to design and commercialize theCompany’s microarrays for whole genome and candidate region DNA analysis. Inaddition to broadening its access to certain specific Perlegen technologies,this licensing agreement advanced by approximately three years its priorcommercialization rights to the Perlegen single nucleotide polymorphism (SNP)database for the development of Affymetrix microarray DNA products that theCompany already had under development prior to January 2003. Thisagreement also eliminated any future royalty obligations for array productsthat the Company may commercialize based on information contained in Perlegen’sSNP database. Under the terms of the licensing agreement, the Company paidPerlegen a total of $15.0 million in cash and granted Perlegen a$3.0 million credit to be applied against the margin on the Company’sfuture sales of chips to Perlegen that were utilized by Perlegen in theirrevenue generating activities. In the second quarter of 2004, Perlegen had usedall of the $3.0 million credit and as such, the Company has started torecord margin on specific sales to Perlegen.

The $15.0 million of cashconsideration in this transaction was allocated to the following intangibleasset categories based upon their relative estimated fair values: (i) Theadvancement by three years of its access to the Perlegen SNP database, whichallowed the Company to substantially accelerate its ongoing development of alimited number of DNA analysis products; and (ii)Various licenses ormodification of existing licenses for several Perlegen technologies whichprovided the Company benefits across a larger number of its microarrayproducts;

In connection with the advanced access tothe Perlegen SNP database, the Company recorded a charge of approximately$10.1 million related to the license in the first quarter of 2003. Theremaining $4.9 million was recorded as intangible assets which are beingamortized over their useful lives of six to ten years.

The Company’s management engaged anindependent third party valuation professional to assist them in determiningthe relative fair values of each intangible asset licensed and the allocationof the consideration paid. While management considered the work of theindependent third party valuation professional, management took primary responsibilityfor allocating the consideration paid for the intangible assets acquired. The$10.1 million charge associated with advanced access to the Perlegen SNPdatabase was included in acquired in-process technology in the ConsolidatedStatement of Operations as the database has no alternative future use to usbeyond its developing a limited number of closely related DNA analysisproducts. The advanced access to the Perlegen SNP database was obtained for usein developing a finite number of products within its DNA analysis product line.Therefore, as of the license date, the Company did not forecast any materialchanges from its historical gross margins for any of its DNA analysis products.

The Company determined the value of theSNP database license by using the Income Approach. In applying this approach,the Company estimated the net present value of future cash flows expected fromthe sale of DNA analysis products to be developed in reliance on the contentfrom the Perlegen SNP database. The analysis included forecasted future cashflows that the Company expected from the progress made on its DNA microarraydevelopment projects prior to the date of the Perlegen SNP database license.These cash flows were first estimated by forecasting total revenue associatedwith sales of certain of its future DNA analysis products. A portion of thisrevenue was then removed to account for the contribution provided by itsexisting core technology that was considered to benefit the DNA products underdevelopment. Appropriate operating expenses, cash flow adjustments, andcontributory asset returns were deducted from the estimated cash flows toestablish a forecast of net cash flows. Finally, these net cash flows wereconverted to a present value using a discount rate of 30%, which was based onits weighted average cost of capital adjusted for the technical and marketrisks associated with its ongoing research project in which the SNP databasecontent would be used. Significant cash inflows from the associated DNAproducts were forecasted to begin in 2004 and continue through 2008.

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The remaining various licenses orsubstantive modification of existing licenses for several other Perlegenin-licensed technologies had alternative future uses to us beyond thedevelopment of a limited number of closely related DNA analysis products. TheCompany determined the relative fair value assigned to these assets using theRoyalty Savings approach. In applying this approach, the Company estimated thevalue of the licenses by capitalizing the royalties saved because the Companyobtained royalty-free access to these licenses. These cash flows were estimatedby forecasting total royalty savings by multiplying the assumed royalty ratesby the estimated annual revenues for certain products for the fiscal years 2004through 2012. Finally, these cash flows were discounted to a present valueusing a lower discount rate of 17%, which the Company believes appropriatelyreflects the risk associated with its future product revenue streams.

In December 2003, the Company sold950,000 shares of Perlegen common stock and realized a gain of$1.4 million which was included in interest and other income, net.Additionally, In January 2004, the Company sold 400,000 shares of Perlegencommon stock and realized a gain of $0.6 million which was included ininterest income and other, net.

On June 28, 2005, the Companyexecuted an agreement with a customer pursuant to which the Company agreed toprovide genotypic data in the context of whole genome association studies.The Company has subcontracted certain elements of this agreement to Perlegenwhich will use Affymetrix GeneChip® technology to provide the genotypic data. TheCompany may incur up to $3.6 million in expenses related to subcontractservices from Perlegen through the term of the agreement, which is expected toend in 2006. As of December 31, 2005, no expenses have been incurred.

In the third andfourth quarters of 2005, the Company supplied Perlegenwith probe arrays for use in providing genotyping services to thirdparties in specific projects. These sales to Perlegenare outside the scope of the existingsupply arrangement with Perlegen and are included inrevenue from Perlegen on the Consolidated Statement of Operations for theyear ended December 31, 2005.

**ARRAY AUTOMATION, LLC**

The Company is currentlya partner in Array Automation, LLC (“AAL”), a joint venture with BeckmanCoulter, Inc. (“Beckman”). In July 1998, the Company entered into anasset purchase agreement with Beckman. As part of the asset purchase agreement,the Company agreed to establish a joint venture with Beckman. AAL wasincorporated in July 2003, with the primary purpose of product researchand development in the field of non-photolithographic arrays of polynucleotidesequences and instruments. In accordance with the agreement between the Companyand 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 and49% to Beckman, after Beckman has recovered all of the cumulative losses it hasrecorded.

Based on the applicationof FIN 46R, the Company has concluded that AAL is a VIE, but that the Companyis not the primary beneficiary of AAL. Accordingly, the Company will accountfor its investment in AAL using the equity method. Since the cost basis of theCompany’s assets contributed to AAL were of zero value, the Company’sinvestment in AAL is also recorded at zero value. As a result, the Company willnot record any impact of AAL’s operating results in its consolidated statementsof operations until, and only if, Beckman has recovered all of the losses thatit will absorb pursuant to the terms of the joint venture agreement. If AAL isterminated with a cumulative deficit, the Company is not obligated to fund anysuch losses. In addition, the Company does not have any obligation to providefunding to AAL, guarantee or otherwise have any obligations related to theliabilities of AAL or its investors.

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***NOTES RECEIVABLE FROM EMPLOYEES***

The Company has notesreceivable from employees totaling $1.8 million and $1.9 million asof December 31, 2005 and 2004, respectively. The notes are generally duefour to five years after the date of issuance and accrued interest is due basedon the Internal Revenue Service imputed interest rate at the date of issuance.Interest rates have generally been between 2% and 6%. In July 2001, theCompany entered into a credit arrangement with an officer of the Company for anamount not to exceed $1.2 million. In January 2004, the officerborrowed the entire $1.2 million available under the arrangement.Repayment of the $1.2 million is due on the earlier date of i) fouryears from the date of withdrawal or ii) the date the executive leaves theCompany. The note bears interest at the IRS imputed rate of 3.5%, and accruedinterest is payable after two years.

**NOTE 13—COMMITMENTS ANDCONTINGENCIES**

***OPERATING LEASES***

Affymetrix leaseslaboratory, office and manufacturing facilities under non-cancelable operatingleases that expire at various times through 2016. Some of these leases containrenewal options ranging from two to five years and escalation clauses. Rentexpense related to operating leases was approximately $8.9 million in 2005,$8.6 million in 2004, and $6.9 million in 2003. In connection withsome of these facility leases, the Company has made security deposits totaling$2.7 million, which are included in long-term other assets in theConsolidated Balance Sheets. Future minimum lease obligations atDecember 31, 2005 under all non-cancelable operating leases are as follows(in thousands):
| Year Ending December 31, | ** ** | **Amount** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2006                                    |       | $          | 11,085     |   |
| 2007                                    |       | 10,375     |       |
| 2008                                    |       | 10,071     |       |
| 2009                                    |       | 7,171      |       |
| 2010                                    |       | 6,098      |       |
| Thereafter                              |       | 16,478     |       |
| Total minimum lease payments            |       | $          | 61,278     |   |

 

***PRODUCT WARRANTY COMMITMENT***

The Company provides foranticipated warranty costs at the time the associated revenue is recognized.Product warranty costs are estimated based upon the Company’s historical experienceand the warranty period. The Company periodically reviews the adequacy of itswarranty reserve, and adjusts, if necessary, the warranty percentage andaccrual based on actual experience and estimated costs to be incurred. In thethird quarter of 2005, the Company adjusted its warranty reserve byapproximately $2.0 million for anticipated costs associated with its decisionto replace the Mapping 500K Array sets purchased by certain of its early accesscustomers. Information regarding the changes in the Company’s product warrantyliability for the years ended December 31, 2004 and December 31, 2005is as follows (in thousands):
|                                    | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
| Balance at  December 31, 2003 |       | $          | 2,950      |   |
| New warranties  issued             |       | 4,684      |       |
| Repairs and  replacements          |       | (3,521     | )          |
| Adjustments                        |       | —     |       |
| Balance at  December 31, 2004 |       | 4,113      |       |
| New warranties  issued             |       | 5,002      |       |
| Repairs and  replacements          |       | (4,918     | )          |
| Adjustments                        |       | 2,026      |       |
| Balance at  December 31, 2005 |       | $          | 6,223      |   |

 

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***FUNDING COMMITMENTS***

The Company has invested$8.5 million and is committed to invest up to an additional$1.5 million in a venture capital limited partnership. The investment isincluded on the Consolidated Balance Sheet as a component of other assets andis accounted for under the equity method.

***NON-CANCELABLE SUPPLY AGREEMENTS***

As of December 31,2005, the Company had approximately $3.9 million of non-cancelableinventory supply agreements that are in effect through 2009.

***INDEMNIFICATIONS***

From time to time theCompany has entered into indemnification provisions under certain of itsagreements with other companies in the ordinary course of business, typicallywith business partners, customers, and suppliers. Pursuant to these agreements,the Company generally indemnifies, holds harmless, and agrees to reimburse theindemnified parties on a case by case basis for losses suffered or incurred bythe indemnified parties in connection with any U.S. patent or otherintellectual property infringement claim by any third party with respect to itsproducts. The term of these indemnification provisions is generally perpetualfrom the time of the execution of the agreement. The maximum potential amountof future payments the Company could be required to make under theseindemnification provisions is unlimited. In addition, the Company has enteredinto indemnification agreements with its officers and directors. The Companyhas not incurred material costs to defend lawsuits or settle claims related tothese indemnification provisions. As of December 31, 2005, the Company hadnot accrued a liability for this guarantee, because the likelihood of incurringa payment obligation in connection with this guarantee is remote.

***LEGAL PROCEEDINGS***

**GENERAL**

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

*Multilyte Litigation*

Multilyte Ltd., aBritish corporation, and Affymetrix are engaged in legal proceedings in Germanyand the United States to address allegations made by Multilyte that the Companyinfringes certain patents owned by Multilyte (the “Multilyte patents”) bymaking and selling our GeneChip® DNA microarray products.

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*Germany*

In the actions pending inGermany, on July 18, 2003, Multilyte filed proceedings in the state courtof Düsseldorf, alleging infringement of the Multilyte patents. In a separateaction in Germany, on October 15, 2003, the Company commenced nullity proceedingsin German Federal Patent Court in Munich alleging that the German part ofMultilyte’s two European patents (EPs 0 134 215 and 0 304 202)are invalid. On June 29 and 30, 2004, the German Federal Patent Court inMunich held that both Multilyte European patents are invalid in Germany.Following that ruling, on July 12, 2004, the Düsseldorf court stayed bothsets of infringement proceedings before it, pending Multilyte’s appeal of thedecisions of the German Federal Patent Court in Munich nullifying bothMultilyte patents. The Company was notified on April 5, 2005 thatMultilyte has abandoned its appeal of the decision nullifying the EuropeanPatent 0 134 215.

*United States*

In the U.S. action, onAugust 13, 2003, the Company commenced proceedings in the United StatesDistrict Court for the Northern District of California seeking a declaratoryjudgment that eight Multilyte patents are not infringed and are invalid.Multilyte has agreed that the Company does not infringe five of the eight namedpatents. On October 24, 2003, the Company filed an amended complaintseeking a declaratory judgment as to three of the original eight namedpatents—U.S. Patents 5,432,099, 5,599,720 and 5,807,755. Multilyte answered theCompany’s complaint for declaratory judgment and asserted counterclaims againstthe Company alleging infringement of the three patents named by the Company inits complaint. Multilyte has submitted the three patents-in-suit to the UnitedStates Patent and Trademark Office for voluntary re-examination. These patentsremain in re-examination in the USPTO. On April 28, 2005, the Courtgranted the Company’s motions for summary judgment of non-infringement andentered a final judgment in the action in favor of the Company againstMultilyte. On May 5, 2005, Multilyte filed a notice of motion to amend thejudgment asserting that the Court’s entry of final judgment was prematurebecause it did not give Multilyte the opportunity to present evidence showinginfringement under the Court’s most recent claim construction. On June 23,2005, the Court again granted summary judgment of non-infringement. The Courtthen entered judgment in favor of the Company. Multilyte has appealed the Court’sdecision to the United States Court of Appeals for the Federal Circuit which heldoral argument on the appeal on March 7, 2006.

The Company believes thatMultilyte’s remaining claims against it are without merit and has filed thedeclaratory judgment and nullity actions to protect its interests. However, theCompany cannot be sure that it will prevail in these matters. The Company’sfailure to successfully defend against these allegations could result in amaterial adverse effect on its business, financial condition and results ofoperations.

*Enzo Litigation*

On October 28, 2003,Enzo Life Sciences, Inc., a wholly-owned subsidiary of EnzoBiochem, Inc. (collectively “Enzo”) filed a complaint against the Companythat is now pending in the United States District Court for the SouthernDistrict of New York for breach of contract, injunctive relief and declaratoryjudgment. The Enzo complaint relates to a 1998 distributorship agreement withEnzo under which the Company served as a non-exclusive distributor of certainreagent labeling kits supplied by Enzo. In its complaint, Enzo seeks monetarydamages and an injunction against the Company from using, manufacturing orselling Enzo products and from inducing collaborators and customers to use Enzoproducts in violation of the 1998 agreement. Enzo also seeks the transfer ofcertain Affymetrix patents to Enzo. In connection with its complaint, Enzoprovided the Company with a notice of termination of the 1998 agreementeffective on November 12, 2003.

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On November 10,2003, the Company filed a complaint against Enzo in the United States DistrictCourt for the Southern District of New York for declaratory judgment, breach ofcontract and injunctive relief relating to the 1998 agreement. In itscomplaint, the Company alleges that Enzo has engaged in a pattern of wrongfulconduct against it and other Enzo labeling reagent customers by, among otherthings, asserting improperly broad rights in its patent portfolio, improperlyusing the 1998 agreement and distributorship agreements with others in order tocorner the market for non-radioactive labeling reagents, and improperly usingthe 1998 agreement to claim ownership rights to the Company’s proprietarytechnology. The Company seeks declarations that it has not breached the 1998agreement, that it is entitled to sell its remaining inventory of Enzo reagentlabeling kits, and that nine Enzo patents that are identified in the 1998agreement are invalid and/or not infringed by it. The Company also seeksdamages and injunctive relief to redress Enzo’s alleged breaches of the 1998agreement, its alleged tortious interference with the Company’s businessrelationships and prospective economic advantage, and Enzo’s alleged unfaircompetition. The Company filed a notice of related case stating that itscomplaint against Enzo is related to the complaints already pending in theSouthern District of New York against eight other former Enzo distributors. TheU.S. District Court for the Southern District of New York has related theCompany’s case. There is no trial date in the actions between Enzo and theCompany.

The Company believes thatthe claims set forth in Enzo’s complaint are without merit and have filed theaction 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’sfailure to successfully defend against these allegations could result in amaterial adverse effect on its business, financial condition and results ofoperation.

*Administrative Litigationand Proceedings*

The Company’sintellectual property is subject to a number of significant administrative andlitigation actions. For example, in Europe and Japan, we expect third partiesto oppose significant patents that the Company owns or controls. Currently,Multilyte Ltd. and ProtoGene Laboratories, Inc. filed oppositionsagainst the Company’s EP 0 619 321 patent in the European Patent Office.PamGene B.V. has filed an opposition against the Company’s EP 0 728 520 patentand it was revoked at oral proceedings on January 14, 2004. Affymetrix hasappealed this ruling. Also, Abbott Laboratories, Applera, Clondiag andCombiMatrix are parties in opposition against the Company’s EP 0 834 575. Anoral hearing was conducted by the Opposition Division which upheld the patenton December 4, 2004, and this decision has been appealed. AbbottLaboratories, CombiMatrix, PamGene B.V., Applera and Dr. Peter Schneiderfiled an opposition against the Company’s EP 0 834 576 patent. The OppositionDivision revoked the patent during an oral hearing on February 23, 2005and Affymetrix has appealed this ruling. CombiMatrix has filed an oppositionagainst EP 0 695 941, Agilent, CombiMatrix, Clondiag and Applera have filed anopposition against EP 0 853 679, Applera has opposed EP 0 972 564 and DegussaAG has filed an opposition against EP 1 086 742. These procedures will resultin the respective patents being either upheld in their entirety, allowed toissue in amended form in designated European countries, or revoked.

Further, in the UnitedStates, the Company expects that third parties will continue to “copy” theclaims of its patents in order to provoke interferences in the United StatesPatent & Trademark Office, and it may copy the claims of others. Theseproceedings could result in the Company’s patent protection being significantlymodified or reduced, and could result in significant costs and consumesubstantial managerial resources.

At this time, the Companycannot determine the outcome of any of the matters described above.

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**NOTE 14—CONVERTIBLESUBORDINATED NOTES**

On September 22,1999, the Company completed the sale of $150 million principal amount of5% convertible subordinated notes due 2006 (the “5% Notes”). The 5% Notesmature 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% Notesare convertible, at the option of the holder at any time prior to maturity orredemption, 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 ofthe 5% Notes at any time after October 7, 2002, and the debt holder has aright to require the Company to purchase all or a portion of the 5% Notes upona change in control. The 5% Notes are subordinated to all of the Company’sexisting and future senior indebtedness. Total offering expenses related to the5% notes were $5.4 million and have been included in other assets. Theseexpenses will be amortized to interest expense over the life of the notes.

On February 14,2000, the Company completed the sale of $225.0 million principal amount of4.75% 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% perannum, 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 priorto maturity or redemption, into shares of the Company’s common stock at aconversion price of $160.50 per share, subject to adjustment. The Company canredeem some or all of the 4.75% Notes at any time after February 20, 2003and the debt holders have a right to require the Company to purchase all or aportion of the 4.75% Notes upon a change in control. The 4.75% Notes aresubordinated to all of the Company’s existing and future senior indebtedness.Total offering expenses related to these notes were $7.2 million and havebeen included in other assets. These expenses will be amortized to interestexpense over the life of the 4.75% Notes. Between August 2001 and June 2003, the Company repurchased$59.5 million and $48.0 million principal amounts of its 4.75% Notesand 5% Notes, respectively. On January 9, 2004, the Company completed theredemption of its 5% Notes ($102.0 million face value). In connection withthe redemption, the Company recorded a charge of $3.2 million to interestexpense in the first quarter of 2004, related to the unamortized issuance costsand 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). In connection with the redemption, theCompany recorded a charge of $4.9 million to interest expense related tothe unamortized issuance costs and redemption fee associated with the repurchasednotes.

**NOTE 15—SENIORCONVERTIBLE 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 issuancecosts (which will be amortized over 5 years, the earliest term forredemption outside of the Company’s control), from the 0.75% Notes offeringwere $116.0 million. The 0.75% Notes bear interest of 0.75% per year onthe principal amount payable semi-annually in arrears on June 15 andDecember 15 of each year, beginning June 15, 2004. The Company usedthe net proceeds of the offering to repurchase its 4.75% Notes. The 0.75% Notesare convertible into 32.2431 shares of Affymetrix common stock per $1,000principal amount of notes which equates to 3,869,172 shares of common stock, or$31.01 per share of common stock subject to adjustment, prior to the close ofbusiness on the business day prior to the maturity date under the followingcircumstances: (1) during any quarterly conversion period prior toDecember 15, 2028, if the sales price of the Company’s common stock for atleast 20 trading days in the 30 consecutive trading-day period ending on thefirst day of such conversion period reaches a specified threshold, (2) onor after December 28, 2028, at any time after the sale price of theCompany’s common stock on any date is greater than 130% of the then currentconversion price, (3) during the five consecutive trading-day period inwhich the average of the trading prices for the notes was less than 98% of theaverage of the sale price of the Company’s common stock multiplied by the thenapplicable conversion rate, (4) the 0.75% Notes are called for redemption,or (5) specified corporate transactions have occurred.

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On December 15,2008, the security holders have the option to deliver the 0.75% Notes toAffymetrix and require the Company to repurchase all outstanding 0.75% Notesfor $1,000 in cash each up to a maximum of $120.0 million for alloutstanding 0.75% Notes. Additionally, security holders also have the option torequire the Company to repurchase the 0.75% Notes payable in cash along withany accrued but unpaid interest on December 15, 2013, 2018, 2023, and2028. Additionally, Affymetrix has the option of redeeming all or part of the0.75% Notes plus accrued but unpaid interest on or after December 15, 2008for cash.

**NOTE 16—STOCKHOLDERS’EQUITY**

**STOCKHOLDER RIGHTS PLAN**

On October 15, 1998,the Board of Directors of the Company declared a dividend of (i) onepreferred share purchase right (a “Right”) for each outstanding share of commonstock of the Company, and (ii) a number of Rights for each share ofSeries AA Preferred Stock of the Company equal to the number of shares ofcommon stock into which such share of Series AA Preferred Stock wasconvertible. The dividend was paid on October 27, 1998 (the “Record Date”)to the stockholders of record on that date. Each Right entitles the registeredholder to purchase from the Company one one-thousandth of a share ofSeries B Junior Participating Preferred Stock, par value $.01 per share,of the Company (the “Series B Preferred Stock”) at a price of $62.50 perone one-thousandth of a share of Series B Preferred Stock, subject toadjustment. The Rights will be exercisable if a person or group hereafteracquires beneficial ownership of 15% or more of the common stock of the Companyor announces a tender offer for 15% or more of the common stock. The Board ofDirectors will be entitled to redeem the Rights at one cent per Right at anytime before any such person acquires beneficial ownership of 15% or more of theoutstanding common stock. If a person or group acquires 15% or more of theoutstanding common stock of the Company, each Right will entitle its holder topurchase, at the Right’s exercise price, a number of shares of common stockhaving a market value at that time of twice the Right’s exercise price. Rightsheld by the 15% holder will become void and will not be exercisable to purchaseshares at the bargain purchase price. If the Company is acquired in a merger orother business combination transaction after a person acquires 15% or more ofthe Company’s common stock, each Right will entitle its holder to purchase, atthe Right’s then-current exercise price, a number of the acquiring company’scommon shares having a market value at that time of twice the Right’s exerciseprice.

On February 7, 2000,the Company’s Board of the Directors approved an amendment to its stockholdersrights plan. The amendment increases the exercise price of the Preferred SharePurchase Rights to $625.00 and extends the expiration date of the plan toFebruary 2010. Under the amended plan, each Preferred Share Purchase Rightentitles stockholders to buy one one-thousandth of a share of Series BJunior Participating Preferred Stock of the Company at the new exercise priceof $625.00. The Rights will be exercisable if a person or group acquiresbeneficial ownership of 15% or more of the common stock of the Company orannounces a tender offer for 15% or more of the common stock.

**STOCK OPTION AND BENEFITPLANS**

In 1996, the Board ofDirectors adopted the Affymetrix 1996 Non-Employee Directors Stock Option Plan(the “1996 Stock Plan”), which was amended and restated in 2001, under whichonly nonqualified stock options may be granted to non-employee directors of theCompany. Options granted under the 1996 Stock Plan expire no later than tenyears and two days from the date of grant. The option price shall be at least100% 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. Optionsgranted under the 1996 Stock Plan are subject to the vesting provisions setforth in that plan. A total of 600,000 shares of common stock are authorizedfor issuance under the 1996 Stock Plan and the shares are subject to repurchaseby the Company under the terms of the grant. All options granted under the 1996Stock Plan are exercisable in full six months after the date of grant and aresubject to repurchase at the original exercise price by the Company over theremaining vesting period which is generally five years for initial grants andone year for annual grants. At December 31, 2005, there were no shares subjectto repurchase under this plan.

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In 1998, the Board ofDirectors adopted the Affymetrix 1998 Stock Incentive Plan (the “1998 StockPlan”) under which nonqualified stock options and restricted stock may begranted to employees and outside consultants, except that members of the Boardof Directors and individuals who are considered officers of the Company underthe rules of the National Association of Securities Dealers shall not beeligible. Options granted under the 1998 Stock Plan expire no later than tenyears from the date of grant. The option price shall be at least 100% of thefair value of the Company’s common stock on the date of grant (110% in certaincircumstances), as determined by the Board of Directors. Options may be grantedwith different vesting terms from time to time as determined by the Board ofDirectors. A total of 3,600,000 shares of common stock are authorized forissuance under the 1998 Stock Plan.

In 2000, the Board ofDirectors adopted the 2000 Equity Incentive Plan (the “2000 Stock Plan”), whichwas 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 Planexpire no later than ten years from the date of grant. The option price shallbe at least 100% of the fair value of the Company’s common stock on the date ofgrant (110% in certain circumstances), as determined by the Board of Directors.Options may be granted with different vesting terms from time to time asdetermined by the Board of Directors. In 2004, the 2000 Stock Plan was amendedand restated to increase share availability by 2,500,000 shares bringing thetotal shares of common stock authorized for issuance under the 2000 Stock Planto 7,500,000.

On October 21, 2005,Affymetrix completed the acquisition of ParAllele and assumed all optionsoutstanding under its stock option plan, which was subsequently amended and isnow the Affymetrix/ParAllele 2001 Stock Option Plan (“ParAllele Stock Plan”).If all assumed options under the ParAllele Stock Plan became fully vested andexercised, they would convert to 190,944 shares of Affymetrix’ common stock. Noadditional options are authorized for grant. Options granted under theParAllele Stock Plan expire no later than ten years from the date of grant.

Activity under the stockplans through December 31, 2005 is as follows (in thousands, except pershare amounts):
|                                    | ** ** | ** **                         | ** ** | **Options Outstanding** | ** ** |
|------------------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **Options  Available  for  Grant** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Averaged  Exercise Price  Per Share** | ** ** |
| Balance at  December 31, 2002 |       | 2,082                              |       | 11,126                       |       | $ | 24.66 |   |
| Granted                            |       | (436                               | )          | 436                          |       | $ | 23.10 |   |
| Exercised                          |       | —                             |       | (834                         | )          | $ | 14.33 |   |
| Canceled                           |       | 652                                |       | (653                         | )          | $ | 24.21 |   |
| Expired                            |       | (660                               | )          | —                       |       | — |   |
| Balance at  December 31, 2003 |       | 1,638                              |       | 10,075                       |       | $ | 25.48 |   |
| Authorized                         |       | 2,500                              |       | —                       |       | — |   |
| Granted                            |       | (1,729                             | )          | 1,730                        |       | $ | 30.75 |   |
| Exercised                          |       | —                             |       | (2,101                       | )          | $ | 17.32 |   |
| Canceled                           |       | 361                                |       | (361                         | )          | $ | 39.05 |   |
| Expired                            |       | (43                                | )          | —                       |       | $ | 23.01 |   |
| Balance at  December 31, 2004 |       | 2,727                              |       | 9,343                        |       | $ | 27.72 |   |
| Authorized                         |       | 191                                |       | —                       |       | — |   |
| Granted                            |       | (1,076                             | )          | 1,076                        |       | $ | 45.08 |   |
| Exercised                          |       | —                             |       | (3,294                       | )          | $ | 22.89 |   |
| Canceled                           |       | 368                                |       | (368                         | )          | $ | 37.25 |   |
| Expired                            |       | (15                                | )          | —                       |       | — |   |
| Balance at December 31, 2005  |       | 2,195                              |       | 6,757                        |       | $ | 31.31 |   |

 

96

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The following table summarizesinformation concerning currently outstanding and exercisable options atDecember 31, 2005:
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                           | ** ** |
|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number**                   | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Weighted-Average  Exercise Price  Per Share** | ** ** | **Number** | ** ** | **Weighted-Average  Exercise Price  Per Share** | ** ** |
| ** **                                  | ** ** | **(in thousands)**      | ** ** | **(In Years)**                                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| $0.26 - $20.38                              |       | 1,069                        |       | 4.18                                                   |       | $ | 13.81 |   | 876 |   | $ | 14.59 |   |
| $20.50 - $24.44                             |       | 1,429                        |       | 4.37                                                   |       | $ | 23.41 |   | 1,246 |   | $ | 23.53 |   |
| $24.48 - $30.32                             |       | 894                          |       | 4.85                                                   |       | $ | 26.97 |   | 500 |   | $ | 26.59 |   |
| $30.34 - $34.51                             |       | 1,278                        |       | 5.85                                                   |       | $ | 31.23 |   | 635 |   | $ | 31.23 |   |
| $34.56 - $45.94                             |       | 647                          |       | 6.13                                                   |       | $ | 40.60 |   | 192 |   | $ | 37.14 |   |
| $45.98 - $50.07                             |       | 1,000                        |       | 5.04                                                   |       | $ | 47.88 |   | 841 |   | $ | 47.86 |   |
| $50.28 - $60.94                             |       | 407                          |       | 6.35                                                   |       | $ | 55.53 |   | 151 |   | $ | 55.52 |   |
| $61.25 - $133.50                            |       | 33                           |       | 4.70                                                   |       | $ | 77.95 |   | 33 |   | $ | 77.95 |   |
| Total                                       |       | 6,757                        |       | 5.07                                                   |       | $ | 31.31 |   | 4,474 |   | $ | 29.86 |   |

 

**RESERVED SHARES**

At December 31, 2005,the Company has shares reserved for future issuance as follows (in thousands):
| Options outstanding                  |   | 6,757  |   |
|--------------------------------------|--------|--------|--------|
| Options available for  future grants |   | 2,195  |   |
| Convertible  subordinated notes      |   | 3,870  |   |
|                                 |   | 12,822 |   |

 

**NOTE 17—INCOME TAXES**

The following tablepresents the U.S. and foreign components of consolidated income (loss) beforeincome taxes and the provision for income taxes (in thousands):
|                                                        | ** ** | **Year Ended December 31, 2005** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                     | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
| **INCOME (LOSS)  BEFORE INCOME TAXES:** |       |                                                 |       |   |   |   |   |
| U.S.                                                   |       | $                                                    | 127,382    |   | $ | — |   | $ | 127,382 |   |
| Foreign                                                |       | (64,774                                              | )          | — |   | (64,774 | ) |
| Income before income  taxes                            |       | $                                                    | 62,608     |   | $ | — |   | $ | 62,608 |   |
|                                                   |       |                                                 |       |   |   |   |   |
| **PROVISION (BENEFIT) FOR INCOME  TAXES:**             |       |                                                 |       |   |   |   |   |
| Current:                                               |       |                                                 |       |   |   |   |   |
| Federal                                                |       | $                                                    | 30,380     |   | $ | — |   | $ | 30,380 |   |
| State                                                  |       | 2,663                                                |       | — |   | 2,663 |   |
| Foreign                                                |       | 1,969                                                |       | — |   | 1,969 |   |
| Subtotal                                               |       | $                                                    | 35,012     |   | $ | — |   | $ | 35,012 |   |
| Deferred:                                              |       |                                                 |       |   |   |   |   |
| Federal                                                |       | $                                                    | (29,170    | ) | $ | (7,366 | ) | $ | (36,536 | ) |
| State                                                  |       | —                                               |       | (905 | ) | (905 | ) |
| Foreign                                                |       | (750                                                 | )          | — |   | (750 | ) |
| Subtotal                                               |       | $                                                    | (29,920    | ) | $ | (8,271 | ) | $ | (38,191 | ) |
| Provision (benefit) for income taxes                   |       | $                                                    | 5,092      |   | $ | (8,271 | ) | $ | (3,179 | ) |

 

97

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|                                                | ** ** | **Year Ended December 31, 2004** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **As Previously  Reported**                     | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
| **INCOME BEFORE INCOME TAXES:** |       |                                                 |       |   |   |   |   |
| U.S.                                           |       | $                                                    | 48,208     |   | $ | — |   | $ | 48,208 |   |
| Foreign                                        |       | 2,726                                                |       | — |   | 2,726 |   |
| Income before income  taxes                    |       | $                                                    | 50,934     |   | $ | — |   | $ | 50,934 |   |
|                                           |       |                                                 |       |   |   |   |   |
| **PROVISION FOR INCOME TAXES:**                |       |                                                 |       |   |   |   |   |
| Current:                                       |       |                                                 |       |   |   |   |   |
| Federal                                        |       | $                                                    | 437        |   | $ | — |   | $ | 437 |   |
| State                                          |       | 280                                                  |       | — |   | 280 |   |
| Foreign                                        |       | 2,609                                                |       | — |   | 2,609 |   |
| Subtotal                                       |       | $                                                    | 3,326      |   | $ | — |   | $ | 3,326 |   |
| Deferred:                                      |       |                                                 |       |   |   |   |   |
| Federal                                        |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| State                                          |       | —                                               |       | — |   | — |   |
| Foreign                                        |       | —                                               |       | — |   | — |   |
| Subtotal                                       |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| Provision for income taxes                     |       | $                                                    | 3,326      |   | $ | — |   | $ | 3,326 |   |

 
|                                                            | ** ** | **Year Ended December 31, 2003** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **As Previously  Reported**                     | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
| **INCOME (LOSS) BEFORE INCOME TAXES:** |       |                                                 |       |   |   |   |   |
| U.S.                                                       |       | $                                                    | 15,064     |   | $ | (1,724 | ) | $ | 13,340 |   |
| Foreign                                                    |       | 1,784                                                |       | — |   | 1,784 |   |
| Income (loss) before  income taxes                         |       | $                                                    | 16,848     |   | $ | (1,724 | ) | $ | 15,124 |   |
|                                                       |       |                                                 |       |   |   |   |   |
| **PROVISION FOR INCOME TAXES:**                            |       |                                                 |       |   |   |   |   |
| Current:                                                   |       |                                                 |       |   |   |   |   |
| Federal                                                    |       | $                                                    | 1,500      |   | $ | — |   | $ | 1,500 |   |
| State                                                      |       | 293                                                  |       | — |   | 293 |   |
| Foreign                                                    |       | 770                                                  |       | — |   | 770 |   |
| Subtotal                                                   |       | $                                                    | 2,563      |   | $ | — |   | $ | 2,563 |   |
| Deferred:                                                  |       |                                                 |       |   |   |   |   |
| Federal                                                    |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| State                                                      |       | —                                               |       | — |   | — |   |
| Foreign                                                    |       | —                                               |       | — |   | — |   |
| Subtotal                                                   |       | $                                                    | —     |   | $ | — |   | $ | — |   |
| Provision for income taxes                                 |       | $                                                    | 2,563      |   | $ | — |   | $ | 2,563 |   |

 

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The difference betweenthe provision (benefit) for income taxes and the amount computed by applyingthe Federal statutory income tax rate (35%) to income before taxes is explainedas follows (in thousands):
|                                                     | ** ** | **Year Ended December 31, 2005** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **As Previously  Reported**                     | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
| Tax at federal  statutory rate                      |       | $                                                    | 21,913     |   | $ | — |   | $ | 21,913 |   |
| Previously unbenefited  losses                      |       | (49,279                                              | )          | (8,271 | ) | (57,550 | ) |
| State taxes, net                                    |       | 4,042                                                |       | — |   | 4,042 |   |
| Non-deductible  stock compensation                  |       | 281                                                  |       | — |   | 281 |   |
| Foreign taxes                                       |       | 523                                                  |       | — |   | 523 |   |
| Unbenefited foreign  loss                           |       | 28,597                                               |       | — |   | 28,597 |   |
| Alternative minimum  taxes                          |       | —                                               |       | — |   | — |   |
| Non-deductible  in-process research and development |       | 2,910                                                |       | — |   | 2,910 |   |
| Research credits                                    |       | (2,137                                               | )          | — |   | (2,137 | ) |
| Export tax benefits                                 |       | (1,142                                               | )          | — |   | (1,142 | ) |
| Domestic manufacturing  deduction                   |       | (840                                                 | )          | — |   | (840 | ) |
| Other                                               |       | 224                                                  |       | — |   | 224 |   |
|                                                |       | $                                                    | 5,092      |   | $ | (8,271 | ) | $ | (3,179 | ) |

 
|                                                     | ** ** | **Year Ended December 31, 2004** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **As Previously  Reported**                     | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
| Tax at federal  statutory rate                      |       | $                                                    | 17,827     |   | $ | — |   | $ | 17,827 |   |
| Previously unbenefited  losses                      |       | (17,503                                              | )          | — |   | (17,503 | ) |
| State taxes, net                                    |       | 182                                                  |       | — |   | 182 |   |
| Non-deductible  stock compensation                  |       | 322                                                  |       | — |   | 322 |   |
| Foreign taxes                                       |       | 1,657                                                |       | — |   | 1,657 |   |
| Unbenefited foreign  loss                           |       | —                                               |       | — |   | — |   |
| Alternative minimum  taxes                          |       | 1,751                                                |       | — |   | 1,751 |   |
| Non-deductible  in-process research and development |       | —                                               |       | — |   | — |   |
| Research credits                                    |       | —                                               |       | — |   | — |   |
| Export tax benefits                                 |       | —                                               |       | — |   | — |   |
| Domestic manufacturing  deduction                   |       | —                                               |       | — |   | — |   |
| Other                                               |       | (910                                                 | )          | — |   | (910 | ) |
|                                                |       | $                                                    | 3,326      |   | $ | — |   | $ | 3,326 |   |

 

99

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|                                                     | ** ** | **Year Ended December 31, 2003** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **As Previously  Reported**                     | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
| Tax at federal  statutory rate                      |       | $                                                    | 5,896      |   | $ | (603 | ) | $ | 5,293 |   |
| Previously unbenefited  losses                      |       | (6,571                                               | )          | 603 |   | (5,968 | ) |
| State taxes, net                                    |       | 190                                                  |       | — |   | 190 |   |
| Non-deductible  stock compensation                  |       | 783                                                  |       | — |   | 783 |   |
| Foreign taxes                                       |       | 748                                                  |       | — |   | 748 |   |
| Unbenefited foreign  loss                           |       | —                                               |       | — |   | — |   |
| Alternative minimum  taxes                          |       | 1,500                                                |       | — |   | 1,500 |   |
| Non-deductible  in-process research and development |       | —                                               |       | — |   | — |   |
| Research credits                                    |       | —                                               |       | — |   | — |   |
| Export tax benefits                                 |       | —                                               |       | — |   | — |   |
| Domestic manufacturing  deduction                   |       | —                                               |       | — |   | — |   |
| Other                                               |       | 17                                                   |       | — |   | 17 |   |
|                                                |       | $                                                    | 2,563      |   | $ | — |   | $ | 2,563 |   |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. Significant components of theCompany’s deferred tax assets are as follows (in thousands):
|                                              | ** ** | **December 31, 2005**  | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **As Previously  Reported** | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
| Deferred tax assets:                         |       |                             |       |   |   |   |   |
| Net operating  loss carryforwards            |       | $                                | 52,925     |   | $ | (1,247 | ) | $ | 51,678 |   |
| Tax credit  carryforwards                    |       | 29,024                           |       | — |   | 29,024 |   |
| Deferred revenue                             |       | 12,899                           |       | — |   | 12,899 |   |
| Capitalized  research and development costs  |       | 3,126                            |       | — |   | 3,126 |   |
| Intangibles                                  |       | 2,242                            |       | — |   | 2,242 |   |
| Stock-based  compensation                    |       | —                           |       | 3,837 |   | 3,837 |   |
| Accrued  compensation                        |       | 3,492                            |       | — |   | 3,492 |   |
| Accrued warranty                             |       | 2,452                            |       | — |   | 2,452 |   |
| Equipment  reserve                           |       | 4,452                            |       | — |   | 4,452 |   |
| Other, net                                   |       | 9,209                            |       | — |   | 9,209 |   |
| Total deferred  tax assets                   |       | 119,821                          |       | 2,590 |   | 122,411 |   |
| Valuation allowance for  deferred tax assets |       | (82,324                          | )          | 5,681 |   | (76,643 | ) |
| Net deferred tax  assets                     |       | 37,497                           |       | 8,271 |   | 45,768 |   |
| Net deferred tax  liabilities:               |       |                             |       |   |   |   |   |
| Property and  equipment                      |       | (1,944                           | )          | — |   | (1,944 | ) |
| Net deferred tax assets                      |       | $                                | 35,553     |   | $ | 8,271 |   | $ | 43,824 |   |

 

100

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|                                              | ** ** | **December 31, 2004**  | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **As Previously  Reported** | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
| Deferred tax assets:                         |       |                             |       |   |   |   |   |
| Net operating  loss carryforwards            |       | $                                | 64,034     |   | $ | (1,247 | ) | $ | 62,787 |   |
| Tax credit  carryforwards                    |       | 16,682                           |       | — |   | 16,682 |   |
| Deferred revenue                             |       | 18,631                           |       | — |   | 18,631 |   |
| Capitalized  research and development costs  |       | 3,985                            |       | — |   | 3,985 |   |
| Intangibles                                  |       | 2,704                            |       | — |   | 2,704 |   |
| Stock-based  compensation                    |       | —                           |       | 5,406 |   | 5,406 |   |
| Accrued  compensation                        |       | 3,349                            |       | — |   | 3,349 |   |
| Accrued warranty                             |       | 1,652                            |       | — |   | 1,652 |   |
| Equipment  reserve                           |       | 2,477                            |       | — |   | 2,477 |   |
| Other, net                                   |       | 4,668                            |       | — |   | 4,668 |   |
| Total deferred  tax assets                   |       | 118,182                          |       | 4,159 |   | 122,341 |   |
| Valuation allowance for  deferred tax assets |       | (118,182                         | )          | (4,159 | ) | (122,341 | ) |
| Net deferred tax  assets                     |       | —                           |       | — |   | — |   |
| Net deferred tax  liabilities:               |       |                             |       |   |   |   |   |
| Property and  equipment                      |       | —                           |       | — |   | — |   |
| Net deferred tax assets                      |       | $                                | —     |   | $ | — |   | $ | — |   |

 

As of December 31,2005, the Company had total net operating loss carryforwards of $180.6 million,comprised of $141.1 million for U.S. federal purposes and $39.5 million forstate purposes. The net operating loss carryforwards expire in the years 2018through 2023. Additionally, the Company has federal and state research anddevelopment tax credit carryforwards and other various tax credit carryforwardsof approximately $35.6 million, which expire in the years 2007 through 2025.Utilization of the Company’s net operating loss and tax credit carryforwardsmay be subject to substantial annual limitations due to the ownership changelimitations provided by the Internal Revenue Code and similar state provisions.Such an annual limitation could result in the expiration of the net operatingloss before utilization.

The valuation allowancedecreased by $45.7 million and $4.8 million for the years endedDecember 31, 2005 and 2004, respectively. Based upon the weight ofavailable evidence, which included an analysis of projected future book andtaxable income, as of December 31, 2005, the Company retained a valuationallowance of $76.6 million.

During fiscal 2005, theCompany reduced its deferred tax asset valuation allowance by approximately$45.7 million. In assessing the realizability of its deferred tax assets, theCompany considers whether it is more likely than not that some portion or allof the deferred tax assets will not be realized. The Company consideredhistorical book income, the scheduled reversal of deferred tax assets, andprojected future book and taxable income in making this assessment. Based upona detailed analysis of historical and projected book and taxable income, theCompany determined that the realization of certain deferred tax assets forwhich a valuation allowance had been previously recorded is considered morelikely than not.

Approximately $67.7million of the valuation allowance as of December 31, 2005 is attributableto the income tax benefits of stock option deductions, the benefit of whichwill be credited to stockholders’ equity when, and if, realized. The remainingvaluation allowance of approximately $8.9 million as of December 31, 2005is attributable to the acquisition of certain ParAllele tax attributes, thebenefit of which will be credited to goodwill when, and if, realized.

Cumulative unremittedforeign earnings that are considered to be permanently invested outside theUnited States and on which no U.S. taxes have been provided were approximately$6.0 million as of December 31, 2005. The residual U.S. tax liability, ifsuch amounts were remitted, would be nominal.

101

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Of the total tax benefitsresulting from the exercise of employee stock options and other employee stockprograms, the amounts booked to stockholders’ equity were approximately $33.1million and $0.7 million for the years ended December 31, 2005 and 2004respectively.

**NOTE 18—PRODUCT SALES,GEOGRAPHIC SALES, AND SIGNIFICANT CUSTOMERS**

The Company hasdetermined that, in accordance with Statement of Financial Accounting StandardsNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation”, it operates in one segment as it only reports operating resultson an aggregate basis to the chief operating decision makers of the Company.The Company reported product and product related revenue by type and by regionas follows (in thousands):
|                                             | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Total product and  product related revenue: |       |                                       |       |   |   |   |   |
| Probe arrays                                |       | $                                          | 197,949    |   | $ | 168,243 |   | $ | 139,591 |   |
| Reagents                                    |       | 42,428                                     |       | 31,744 |   | 20,419 |   |
| Instruments                                 |       | 62,636                                     |       | 77,269 |   | 62,738 |   |
| Subscription  fees                          |       | 12,448                                     |       | 20,669 |   | 26,208 |   |
| Service and  other                          |       | 20,172                                     |       | 15,526 |   | 18,451 |   |
| License fee and  milestone revenue          |       | 14,557                                     |       | 17,434 |   | 13,373 |   |
| Total product  and product related revenue  |       | $                                          | 350,190    |   | $ | 330,885 |   | $ | 280,780 |   |
| Customer location:                          |       |                                       |       |   |   |   |   |
| United States                               |       | $                                          | 173,496    |   | $ | 171,674 |   | $ | 152,937 |   |
| Europe                                      |       | 108,907                                    |       | 100,553 |   | 82,850 |   |
| Japan                                       |       | 47,920                                     |       | 43,488 |   | 35,409 |   |
| Other                                       |       | 19,867                                     |       | 15,170 |   | 9,584 |   |
| Total                                       |       | $                                          | 350,190    |   | $ | 330,885 |   | $ | 280,780 |   |

 

There were no customersrepresenting 10% or more of total revenue in 2005, 2004 and 2003.

**NOTE 19—DEFINED-CONTRIBUTIONSAVINGS PLANS**

**401(K) PLAN**

The Company maintains adefined-contribution savings plan which is qualified underSection 401(k) of the Internal Revenue Code. The plan coverssubstantially all full-time U.S. employees. Participating employees may defer aportion of their pretax earnings, up to the Internal Revenue Service annualcontribution limit. The Company’s expense associated with matching employeecontributions totaled $3.3 million in 2005, $3.0 million in 2004 and$1.7 million in 2003. Company contributions vest to employees ratably overfour years.

**DIRECTOR AND EXECUTIVEDEFERRED COMPENSATION PLAN**

In December 2004,the Board of Directors approved the creation of the Affymetrix, Inc.Deferred Compensation Plan (the “Plan”). The Plan provides directors, executiveofficers and other eligible employees with the opportunity to enter intoagreements to defer specified percentages of their cash compensation derivedfrom base salary, bonus awards and other specified compensation (includingdirector fees). Distributions occur upon termination of service (or the 6-monthanniversary after termination), death, or upon such other dates that may beelected by the participant in accordance with the terms of the Plan. Generallyparticipants may elect for distributions of deferred amounts upon terminationor death to be paid in the form of either a lump sum or in annual installments.Distributions would be made in the event of a change of control of Affymetrix.Deferrals are adjusted for gain or loss based on the performance of one or moreinvestment options selected by the participant from among investment fundschosen by the Compensation Committee of the Board. The Company in its solediscretion may suspend or terminate the Plan or revise or amend it in anyrespect, except that no such action may reduce vested amounts credited todeferral accounts, and such accounts will continue to be owed to theparticipants or beneficiaries and will continue to be a liability of theCompany until paid. For the years ended December 31, 2005 and 2004, theCompany incurred no significant expenses in connection with the Plan.

102

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**NOTE 20—SUBSEQUENT EVENTS**

*DefaultUnder Convertible Notes*

The Company violated thereporting covenant under the indentures governing the 0.75% Notes as a resultof the Company’s failure to file its Form 10-Q for the quarter endedJune 30, 2006 by the required deadline. As a consequence of theseviolations, the holders of the 0.75% Notes have the right to accelerate thematurity of such Notes if they or the trustee provide the Company with noticeof the default and the Company is unable to cure the default within60 days after that notice.

*NASDAQNotice*

On August 17, 2006, theCompany announced that it will request a hearing before the NASDAQ ListingQualifications Panel (the “Panel”) in response to the receipt of a NASDAQ StaffDetermination letter dated August 17, 2006 indicating that the Company is notin compliance with the filing requirements for continued listing as set forthin Marketplace Rule 4310(c)(14). As anticipated, the letter was issued in accordancewith NASDAQ procedures due to the delayed filing of the Company’s Form 10-Q forthe quarter ended June 30, 2006. Pending a decision by the Panel, Affymetrixshares will remain listed on the NASDAQ Stock Market.

**NOTE 21—UNAUDITEDQUARTERLY FINANCIAL INFORMATION**
| ** **                                     | ** ** | **2005**                                                              | ** ** | **2004**           | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **Fourth  Quarter(3)**                                                | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter(1)** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share amounts)** | ** ** |
| ** **                                     | ** ** | **(as previously reported)**                                | ** ** |
| Total revenue (excluding  Perlegen)            |       | $                                                                     | 108,734    |               | $          | 81,227 |   | $ | 82,140 |   | $ | 86,428 |   | $ | 106,383 |   | $ | 78,988 |   | $ | 78,362 |   | $ | 76,984 |   |
| Perlegen revenue                               |       | $                                                                     | 2,755      |               | $          | 2,220 |   | $ | 1,911 |   | $ | 2,187 |   | $ | 1,325 |   | $ | 2,742 |   | $ | 1,392 |   | $ | 1,649 |   |
| Total cost of goods sold  (excluding Perlegen) |       | $                                                                     | 30,653     |               | $          | 23,410 |   | $ | 20,411 |   | $ | 21,784 |   | $ | 26,808 |   | $ | 19,474 |   | $ | 21,464 |   | $ | 23,588 |   |
| Perlegen cost of goods  sold                   |       | $                                                                     | 803        |               | $          | 1,359 |   | $ | 1,750 |   | $ | 1,242 |   | $ | 572 |   | $ | 569 |   | $ | 1,099 |   | $ | 1,371 |   |
| Net income (loss)                              |       | $                                                                     | 24,774     |               | $          | 8,713 |   | $ | 7,811 |   | $ | 16,218 |   | $ | 27,055 |   | $ | 15,377 |   | $ | 7,009 |   | $ | (1,833 | ) |
| Basic net income (loss)  per share             |       | $                                                                     | 0.38       |               | $          | 0.14 |   | $ | 0.12 |   | $ | 0.26 |   | $ | 0.44 |   | $ | 0.25 |   | $ | 0.12 |   | $ | (0.03 | ) |
| Diluted net income (loss) per share(2)         |       | $                                                                     | 0.35       |               | $          | 0.13 |   | $ | 0.12 |   | $ | 0.24 |   | $ | 0.41 |   | $ | 0.24 |   | $ | 0.11 |   | $ | (0.03 | ) |

 
| ** **                                     | ** ** | **2005(4)**                                                           | ** ** | **2004**           | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **Fourth  Quarter**                                                   | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share amounts)** | ** ** |
| ** **                                     | ** ** | **(restatement)**                                                     | ** ** |
| Total revenue (excluding  Perlegen)            |       | $                                                                     | —     |               | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Perlegen revenue                               |       | $                                                                     | —     |               | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Total cost of goods sold  (excluding Perlegen) |       | $                                                                     | —     |               | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Perlegen cost of goods  sold                   |       | $                                                                     | —     |               | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Net income                                     |       | $                                                                     | 5,835      |               | $          | 684 |   | $ | 526 |   | $ | 1,226 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Basic net income per  share                    |       | $                                                                     | 0.08       |               | $          | 0.01 |   | $ | 0.01 |   | $ | 0.02 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Diluted net income per share                   |       | $                                                                     | 0.08       |               | $          | 0.01 |   | $ | — |   | $ | 0.02 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

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| ** **                                    | ** ** | **2005 (4)**                                                     | ** ** | **2004**                                                              | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Fourth  Quarter(3)**                                                | ** ** | **Third  Quarter**                                                    | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter(1)** | ** ** |
| ** **                                    | ** ** | **(in thousands, except per share amounts)** | ** ** | **(in thousands, except per share amounts)** | ** ** |
| ** **                                    | ** ** | **(as restated)**                                                | ** ** | **(as previously reported)**                                | ** ** |
| Total revenue (excluding Perlegen)            |       | $                                                                     | 108,734    |                                                                  | $          | 81,227 |   | $ | 82,140 |   | $ | 86,428 |   | $ | 106,383 |   | $ | 78,988 |   | $ | 78,362 |   | $ | 76,984 |   |
| Perlegen revenue                              |       | $                                                                     | 2,755      |                                                                  | $          | 2,220 |   | $ | 1,911 |   | $ | 2,187 |   | $ | 1,325 |   | $ | 2,742 |   | $ | 1,392 |   | $ | 1,649 |   |
| Total cost of goods sold (excluding Perlegen) |       | $                                                                     | 30,653     |                                                                  | $          | 23,410 |   | $ | 20,411 |   | $ | 21,784 |   | $ | 26,808 |   | $ | 19,474 |   | $ | 21,464 |   | $ | 23,588 |   |
| Perlegen cost of goods sold                   |       | $                                                                     | 803        |                                                                  | $          | 1,359 |   | $ | 1,750 |   | $ | 1,242 |   | $ | 572 |   | $ | 569 |   | $ | 1,099 |   | $ | 1,371 |   |
| Net income (loss)                             |       | $                                                                     | 30,609     |                                                                  | $          | 9,398 |   | $ | 8,337 |   | $ | 17,444 |   | $ | 27,055 |   | $ | 15,377 |   | $ | 7,009 |   | $ | (1,833 | ) |
| Basic net income (loss) per share             |       | $                                                                     | 0.46       |                                                                  | $          | 0.15 |   | $ | 0.13 |   | $ | 0.28 |   | $ | 0.44 |   | $ | 0.25 |   | $ | 0.12 |   | $ | (0.03 | ) |
| Diluted net income  (loss) per share(2)       |       | $                                                                     | 0.43       |                                                                  | $          | 0.14 |   | $ | 0.12 |   | $ | 0.26 |   | $ | 0.41 |   | $ | 0.24 |   | $ | 0.11 |   | $ | (0.03 | ) |

 

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(1)             In January 2004, the Company completedthe redemption of its 5.0% Notes ($102.0 million face value). Inconnection with the redemption, the Company recorded a charge of$3.2 million to interest expense in the first quarter of 2004, related tothe unamortized issuance costs and redemption fee associated with therepurchased 5.0% Notes. In February 2004, the Company also completed theredemption of its 4.75% Notes ($165.5 million face value). In connectionwith the redemption, the Company recorded a charge of $4.9 million tointerest expense related to the unamortized issuance costs and redemption feeassociated with the repurchased 4.75% Notes.

(2)             In September 2004, the Emerging IssuesTask Force reached a consensus on Issue No. 04-8, “The Effect of ContingentlyConvertible Debt on Diluted Earnings Per Share,” (“EITF 04-8”) whichaddresses when the dilutive effect of contingently convertible debt instrumentsshould be included in diluted earnings per share. EITF 04-8 requires thatcontingently convertible debt instruments be included in the computation ofdiluted earnings per share regardless of whether the market price trigger hasbeen met. EITF 04-8 also requires that prior period diluted earnings pershare amounts presented for comparative purposes be restated. EITF 04-8is effective for reporting periods ending after December 15, 2004. TheCompany’s diluted earnings per share calculation has been restated to includeshares issuable upon conversion of the Company’s 0.75% senior convertible notesissued in 2003 for periods where the Company reported net income. There were nochanges to reported diluted earnings per share except for the third quarter of2004 where the diluted earnings per share decreased from $0.25 to $0.24.

(3)             On October 21, 2005, we recorded a chargeof approximately $8.3 million related to acquired in-process technology inconnection with our acquisition of ParAllele BioScience, Inc. (“ParAllele”),a provider of comprehensive genetic discovery solutions to the lifescience research, pharmaceutical and diagnostic sectors.

(4)             On August 9, 2006, the Company concludedthat its consolidated financial statements for the years endedDecember 31, 2005, 2004 and 2003 should be restated to record additionalnon-cash stock-based compensation expense, and the related income tax impact,resulting from stock options granted during fiscal years 1997 to 1999 that wereincorrectly accounted for under U.S. generally accepted accounting principles.The Company has determined that the cumulative, pre-tax, non-cash, stock-basedcompensation expense resulting from using revised measurement dates foraccounting purposes was approximately $0, $0 and $1.7 million for theyears ended December 31, 2005, 2004, and 2003, respectively, and $19.8 millionfor the five years preceding 2003, based on the vesting periods of therespective grants.  In addition, theCompany recorded an income tax benefit of $8.3 million in fiscal 2005.

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

Not applicable.

**ITEM 9A.   CONTROLSAND PROCEDURES**

**Backgroundof Restatement**

On August 9, 2006, we concluded that our consolidatedfinancial statements for the years ended December 31, 2005, 2004 and 2003should be restated to record additional non-cash stock-based compensationexpense, and the related income tax impact, resulting from stock optionsgranted during fiscal years 1997 to 1999 that were incorrectly accounted forunder U.S. generally accepted accounting principles. Our decision to restateour financial statements was based on the results of an internal review of ourhistorical stock option granting 

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practicesfrom January 1, 1997 through May 31, 2006 performed under the direction of theAudit Committee of the Board of Directors. The internal review identified certain errors and documentation lapsesbut did not find any pattern or practice of inappropriately identifying grantdates with hindsight in order to provide “discounted” or “in-the-money” grants.

We have concluded that there was a material accountingerror as a result of a documentation lapse in July 1999, in which the optiongrant for an aggregate of 1.99 million shares should have been measured foraccounting purposes as of a later date. In light of the restatement required by this matter, we have alsoincluded in this restatement corrections relating to certain other errors anddocumentation lapses in the fiscal years 1997 and 1998.  Approximately 97% of the charges relating tothe restatement arose from the documentation lapse in July 1999.

We have determined that the cumulative, pre-tax,non-cash, stock-based compensation expense resulting from revised measurementdates for options granted between 1997 and 1999 was approximately$21.5 million. Accordingly, we recorded stock-based compensation expenseof $0, $0, and $1.7 million for the years ended December 31, 2005, 2004and 2003, respectively, and $19.8 million for the five years preceding 2003,based on the vesting periods of the respective grants.  In addition, we recorded an income taxbenefit of $8.3 million in 2005. Principally as a result of cumulative losses incurred through 2004, werecorded a full valuation allowance against all deferred tax assets for theyears ended December 31, 2004 and 2003 and consequently, there is no income taxeffect of the additional stock-based compensation expense recorded in thoseyears.  The cumulative effect of therestatement adjustments on our consolidated balance sheet at December 31, 2005was an increase in additional paid-in capital of $21.5 million offset by anincrease in the accumulated deficit of $13.2 million, which results in a neteffect on stockholders’ equity of $8.3 million. The adjustments increased previously reported basic and diluted netincome per common share by $0.13 and $0.12, respectively, for the year endedDecember 31, 2005 and decreased basic and diluted net income per common shareby $0.03 for the year ended December 31, 2003.

As part of our review, we assessed generally whetherthere were other matters that should have been corrected in our previouslyissued consolidated financial statements. Apart from the errors underlying therestatement described above, no other matters have come to our attention thatshould be adjusted in our previously issued consolidated financial statements.

**Disclosure Controls andProcedures**

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

105

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**Management’s Report onInternal Control Over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and15d-15(f). Under the supervision of our Chief Executive Officer and ChiefFinancial Officer and with the participation of our management, we conducted anevaluation of the effectiveness of our internal control over financialreporting as of December 31, 2005 based on the framework in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Our assessment of andconclusion on the effectiveness of internal control over financial reportingdid not include the internal controls of the operations acquired from ParAlleleBioScience, Inc. on October 21, 2005, which are included in our fiscal2005 consolidated financial statements and which, in the aggregate, consistedof $5.4 million and $4.5 million of total assets and net assets,respectively, as of December 31, 2005 and which in the aggregate,represented $4.5 million and $1.1 million of revenues and losses fromoperations, respectively, for the year then ended. Based on that evaluation,our management concluded that our internal control over financial reporting waseffective as of December 31, 2005. Management’s assessment of theeffectiveness of our internal control over financial reporting as ofDecember 31, 2005 has been audited by Ernst & Young LLP, anindependent registered public accounting firm, as stated in their report whichappears below.

**Management’sConsideration of the Restatement**

     In reaching theconclusion that our disclosure controls and procedures and our internal controlover financial reporting were effective as of December 31, 2005,management considered, among other things, the control deficiencies related toaccounting for stock-based compensation, which resulted in the need to restateour previously issued consolidated financial statements as disclosed in Note 3,“Restatement of Previously Issued Financial Statements,” included inItem 8 of this report. Management has concluded that the controldeficiencies that resulted in the restatement of the previously issuedconsolidated financial statements did not constitute a material weakness as ofDecember 31, 2005 because management determined that as ofDecember 31, 2005 there were effective controls designed and in place toprevent or detect a material misstatement and therefore the likelihood ofstock-based compensation, deferred compensation and deferred tax assets beingmaterially misstated is not more than remote.

106

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholders of Affymetrix, Inc.

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control over Financial Reporting, that Affymetrix, Inc.maintained effective internal control over financial reporting as ofDecember 31, 2005, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria). Affymetrix, Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

As indicated in theaccompanying Management’s Report on Internal Control over Financial Reporting,management’s assessment of and conclusion on the effectiveness of internalcontrol over financial reporting did not include the internal controls ofParAllele BioScience, Inc., which is included in the 2005 consolidatedfinancial statements of Affymetrix, Inc. and constituted $5.4 million and$4.5 million of total and net assets, respectively, as of December 31,2005 and $4.5 million and $1.1 million of revenues and losses fromoperations, respectively, for the year then ended. Our audit of internalcontrol over financial reporting of Affymetrix, Inc. also did not include anevaluation of the internal control over financial reporting of ParAlleleBioscience, Inc.

In our opinion,management’s assessment that Affymetrix, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2005, isfairly stated, in all material respects, based on the COSO criteria. Also, inour opinion, Affymetrix, Inc. maintained, in all material respects,effective internal control over financial reporting as of December 31,2005, based on the COSO criteria.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Affymetrix, Inc. as ofDecember 31, 2005 and 2004, and the related consolidated statements ofoperations, comprehensive income, stockholders’ equity, and cash flows for eachof the three years in the period ended December 31, 2005 of Affymetrix,Inc. and our report dated March 2, 2006, except for Notes 3 and 20,as to which the date is August 23, 2006, expressed an unqualified opinionthereon.
| /s/ Ernst & Young  LLP |   |
|---------------------------------|--------|
| Palo Alto, California,          |
| March 2, 2006              |

 

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**Changes in InternalControl Over Financial Reporting**

Other than as set out inthis Item 9A, there were no changes in our internal control over financialreporting identified in connection with the evaluation required byparagraph (d) of Exchange Act Rules 13a-15 or 15d-15that occurred during our last fiscal quarter that have materially affected orare reasonably likely to materially affect, our internal control over financialreporting.

**ITEM 9B.   OTHERINFORMATION**

Not applicable.

**PART III**

**ITEM 10.   DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

Information regarding ourdirectors and executive officers is incorporated by reference to the sectionsof the Company’s proxy statement for the 2006 Annual Meeting of Stockholders(the “Proxy Statement”) entitled “Election of Directors” and “Management.”

The informationconcerning our audit committee required by this Item is incorporated byreference to the sections of the Proxy Statement entitled “Governance of theCompany” and “Report of the Audit Committee.”

The informationconcerning compliance with Section 16(a) of the Exchange Act requiredby this Item is incorporated by reference to the section of the Proxy Statemententitled “Section 16(a) Beneficial Ownership Reporting Compliance”under the heading “Stock Ownership of Principal Stockholders and Management.”

**CODE OF ETHICS**

Affymetrix has adopted acode of business conduct and ethics for directors, officers (includingAffymetrix’ Chief Executive Officer, Chief Financial Officer and CorporateController) and employees, known as the Code of Business Conduct and Ethics.The Code of Business Conduct and Ethics is available on Affymetrix’ website at *http://www.affymetrix.com* in the CorporateGovernance section under the “Investors” link. Stockholders may request a freecopy of the Code of Business Conduct and Ethics by sending an email request toinvestor@affymetrix.com.

**ITEM 11.   EXECUTIVECOMPENSATION**

Incorporated by referenceto the sections of the Proxy Statement entitled “Executive Compensation,” “CompensationCommittee Report,” “Certain Transactions” and “Compensation of Directors.”

**ITEM 12.   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.**

Incorporated by referenceto the section of the Proxy Statement entitled “Stock Ownership of PrincipalStockholders and Management.”

**ITEM 13.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

Incorporated by referenceto the section of the Proxy Statement entitled “Certain Transactions.”

**ITEM 14.   PRINCIPALACCOUNTING FEES AND SERVICES**

Information aboutprincipal accountant fees and services as well as related pre-approval policiesappears under “Fees Paid to Ernst & Young LLP” and “Audit and FinanceCommittee Pre-Approval of Audit and Permissible Non-Audit Services ofIndependent Registered Public Accounting Firm” in the Proxy Statement. Thoseportions of the Proxy Statement are incorporated by reference into this report.

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**PART IV**

**ITEM 15.   EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

(a)(1)                                         FinancialStatements. The financial statements as set forth under Item 8 of thisreport on Form 10-K/A are incorporated herein by reference.

(a)(2)                                         FinancialStatement Schedule—Schedule II—Valuation and Qualifying Accounts. Allother schedules have been omitted as they are not required, not applicable orthe information is otherwise included.

(a)(3)                                         Exhibits:
| EXHIBIT  NUMBER | ** ** | **DESCRIPTION OF DOCUMENT**                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  2.1(1)    |       | Agreement and Plan of Merger dated as of  May 31, 2005 among ParAllele BioScience, Inc.,  Affymetrix, Inc., Pinecone Acquisition, Inc. and Jonathan  MacQuitty.                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  2.2(1)    |       | Form of Voting and Lockup Agreement dated as of  May 31, 2005 between Affymetrix and each of Abingworth Management,  Ronald Davis, Bill Ericson, Malek Faham, Maneesh Jain, George Karlin-Neuman,  Elizabeth Krodel, Jonathan MacQuitty, André Marion, MDV Partners, Nicholas  Naclerio, Camille Samuels, Robert Smith, Aaron Solomon, Versant Ventures,  Gregory Went and Thomas Willis. |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  2.3(2)    |       | Amendment No. 1, dated as of September 1,  2005, to Agreement and Plan of Merger dated as of May 31, 2005 among  ParAllele BioScience, Inc., Affymetrix, Inc., Pinecone  Acquisition, Inc. and Jonathan MacQuitty.                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  2.4(3)    |       | Amendment No. 2, dated as of October 5,  2005, to Agreement and Plan of Merger dated as of May 31, 2005 among  ParAllele BioScience, Inc., Affymetrix, Inc., Pinecone  Acquisition, Inc. and Jonathan MacQuitty.                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  3.1(4)    |       | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  3.2(5)    |       | Bylaws.                                                                                                                                                                                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  3.3(6)    |       | Amendment No. 1 to the Bylaws dated as of  April 25, 2001.                                                                                                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  3.4(7)    |       | Summary of Rights to Purchase Shares of Preferred  Stock pursuant to the Rights Agreement dated as of October 15, 1998.                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  4.1(8)    |       | Rights Agreement, dated October 15, 1998,  between Affymetrix, Inc. and American Stock Transfer & Trust  Company, as Rights Agent.                                                                                                                                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  4.2(9)    |       | Amendment No. 1 to Rights Agreement, dated as  of February 7, 2000, between Affymetrix, Inc. and American Stock  Transfer & Trust Company, as Rights Agent.                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  4.3(10)   |       | Indenture dated as of December 15, 2003,  between Affymetrix, Inc. and The Bank of New York, as Trustee.                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  4.4(10)   |       | Affymetrix, Inc. 0.75% Senior Convertible Notes  due 2033 Registration Rights Agreement dated December 15, 2003.                                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1(11)†  |       | 1993 Stock Plan, as amended.                                                                                                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2(11)†  |       | 1996 Nonemployee Directors Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3(12)        |       | Lease between Sobrato Interests and  Affymetrix, Inc. dated June 12, 1996 (3380 Central Expressway,  Santa Clara, CA).                                                                                                                                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4(12)        |       | Lease between Sobrato Interests and  Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway, Santa  Clara, CA).                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5(13)†  |       | 1998 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6(13)†  |       | Form of Officer and Director Indemnification  Agreement.                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7(14)        |       | Lease Agreement by and between the Company and Aetna  Life Insurance Company dated as of                                                                                                                                                                                                                                                                                                                 |

 

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| EXHIBIT  NUMBER | ** ** | **DESCRIPTION OF DOCUMENT**                                                                                                                                                                                                     |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       | July 30, 1999.                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                            |
| 10.8(15)        |       | Amendment No. 1 to the 1996 Nonemployee  Directors Stock Option Plan of Affymetrix, Inc.                                                                                                                              |
|            |       |                                                                                                                                                                                                                            |
| 10.9(16)        |       | Amended and Restated 1996 Non-Employee  Directors Stock Plan.                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                            |
| 10.10(17)*      |       | Common Terms Agreement between F. Hoffmann-La  Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                                                |
|            |       |                                                                                                                                                                                                                            |
| 10.11(17)*      |       | License Agreement between F. Hoffmann-La Roche  Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                                                     |
|            |       |                                                                                                                                                                                                                            |
| 10.12(17)*      |       | Affymetrix Instrument and Chip Supply Agreement  between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated  January 29, 2003.                                                                                      |
|            |       |                                                                                                                                                                                                                            |
| 10.13(17)*      |       | Research & Development Collaboration  Agreement between F. Hoffmann-La Roche Ltd. and  Affymetrix, Inc. dated January 29, 2003.                                                                         |
|            |       |                                                                                                                                                                                                                            |
| 10.14(17)*      |       | Diagnostic Product and Instrument Agency Agreement  between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated  January 29, 2003.                                                                              |
|            |       |                                                                                                                                                                                                                            |
| 10.15(17)*      |       | Affymetrix Instrument Agency Agreement between  F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated  January 29, 2003.                                                                                          |
|            |       |                                                                                                                                                                                                                            |
| 10.16(18)       |       | Lease between Sobrato Interests and Affymetrix dated  July 3, 2002 (3420 Central Expressway, Santa Clara, CA).                                                                                                             |
|            |       |                                                                                                                                                                                                                            |
| 10.17(18)       |       | First Amendment to Lease between Sobrato Interests  and Affymetrix dated September 30, 2003 (3420 Central Expressway, Santa  Clara, CA).                                                                                   |
|            |       |                                                                                                                                                                                                                            |
| 10.18(18)† |       | 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. |
|            |       |                                                                                                                                                                                                                            |
| 10.19(19)       |       | Affymetrix, Inc. Amended and Restated 2000  Equity Incentive Plan.                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                            |
| 10.20(20)       |       | Form of Non-Qualified Stock Option  Agreement under the Affymetrix, Inc. Amended and Restated 1996 Non-Employee  Directors Stock Plan.                                                                                |
|            |       |                                                                                                                                                                                                                            |
| 10.21(20)       |       | Form of Stock Option Agreement under the  Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.                                                                                                           |
|            |       |                                                                                                                                                                                                                            |
| 10.22(21)       |       | Affymetrix, Inc. Deferred Compensation Plan.                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                            |
| 10.23(22)       |       | Fifth Amendment to Lease between Sobrato Interests  and Affymetrix, Inc. dated July 3, 2002 (3380 Central Expressway,  Santa Clara, CA).                                                                              |
|            |       |                                                                                                                                                                                                                            |
| 10.24(22)       |       | First Amendment to Lease between Sobrato Interests  and Affymetrix, Inc. dated July 3, 2002 (3450 Central Expressway,  Santa Clara, CA).                                                                              |
|            |       |                                                                                                                                                                                                                            |
| 10.25(23)       |       | Lease between Keppel Logistics Pte Ltd. and  Affymetrix Pte Ltd. dated as of January 1, 2006 (7 Gul Circle,  Singapore 629363).                                                                                       |
|            |       |                                                                                                                                                                                                                            |
| 10.26(23)       |       | Form of Restricted Stock Agreement under the  Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.                                                                                                       |
|            |       |                                                                                                                                                                                                                            |
| 21              |       | List of Subsidiaries.                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                            |
| 23              |       | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                            |
| 31.1            |       | Certification of Chief Executive Officer Pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                           |
|            |       |                                                                                                                                                                                                                            |
| 31.2            |       | Certification of 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.                                                                                                                           |

 

110

----

 

----

(1)             Incorporated byreference to Registrant’s Form S-4 as filed on July 20, 2005(File No. 333-126718).

(2)             Incorporated byreference to Registrant’s Form S-4/A as filed on September 1,2005 (File No. 333-126718).

(3)             Incorporated byreference to Registrant’s Form S-4/A as filed on October 5,2005 (File No. 333-126718).

(4)             Incorporatedby reference to Registrant’s Form 8-K as filed on June 13, 2000(File No. 000-28218).

(5)             Incorporatedby reference to Appendix C of Registrant’s Definitive Proxy Statement onSchedule 14A as filed on April 29, 1998 (File No. 000-28218).

(6)             Incorporatedby reference to Registrant’s Form 10-Q as filed on May 15, 2001(File No. 000-28218).

(7)             Incorporatedby reference to Registrant’s Form 8-K as filed on October 16,1998 (File No. 000-28218).

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

(9)             Incorporatedby reference to Registrant’s Form 8-A/A as filed on March 29,2000 (File No. 000-28218).

(10)       Incorporatedby reference to Registrant’s Form S-3 as filed on January 29,2004 (File No. 333-112311).

(11)       Incorporatedby reference to Registrant’s Registration Statement on Form S-1 (FileNo. 333-3648), as amended.

(12)       Incorporatedby reference to Registrant’s Quarterly Report on Form 10-Q as filedon August 14, 1996 (File No. 000-28218).

(13)       Incorporatedby reference to Registrant’s Report on Form 10-K as filed onMarch 31, 1999 (File No. 000-28218).

(14)       Incorporatedby reference to Registrant’s Form 10-Q as filed on August 16,1999 (File No. 000-28218).

(15)       Incorporatedby reference to Registrant’s Registration Statement on Form S-3 asfiled on July 12, 1999 (File No. 333-82685), as amended.

(16)       Incorporatedby reference to Registrant’s Form 10-Q as filed on May 15, 2001(File No. 000-28218).

(17)       Incorporatedby reference to Registrant’s Form 10-Q as filed on May 15, 2003(File No. 000- 0-28218).

(18)       Incorporatedby reference to Registrant’s Form 10-K as filed on March 15,2004 (File No. 000-28218).

(19)       Incorporatedby reference to Registrant’s Form 10-Q as filed on August 9,2004 (File No. 000-0-28218).

(20)       Incorporatedby reference to Registrant’s Form 10-Q as filed on November 9,2004 (File No. 000-0-28218).

(21)       Incorporatedby reference to Registrant’s Form 8-K as filed on December 14,2004 (File No. 000-28218).

(22)       Incorporatedby reference to Registrant’s Form 10-K as filed on March 16,2005 (File No. 000-28218).

(23) Incorporated byreference to Registrant’s Form 10-K as filed on March 9, 2006 (File No.000-28218).

*                    Confidentialtreatment granted

†                     Managementcontract, compensatory plan or arrangement

111

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**AFFYMETRIX, INC.**

**Schedule II—Valuationand Qualifying Accounts**

**(in thousands)**
| ** **                          | ** ** | **Balance at  Beginning of  Period** | ** ** | **Recorded to  Costs and  Expenses** | ** ** | **Deductions(1)** | ** ** | **Balance at  End of Period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|----------------------------------------------|------------|
| Year Ended  December 31, 2005: |       |                                           |       |                                           |       |              |       |                                         |       |
| Allowance for  doubtful accounts    |       | $                                              | 841        |                                           | $          | (33               | )          | $                                            | (393       | ) | $ | 415 |   |
| Year Ended  December 31, 2004: |       |                                           |       |                                           |       |              |       |                                         |       |
| Allowance for  doubtful accounts    |       | $                                              | 761        |                                           | $          | 144               |       | $                                            | (64        | ) | $ | 841 |   |
| Year Ended  December 31, 2003: |       |                                           |       |                                           |       |              |       |                                         |       |
| Allowance for doubtful  accounts    |       | $                                              | 2,835      |                                           | $          | (1,224            | )          | $                                            | (850       | ) | $ | 761 |   |

 

----

(1)             Uncollectibleaccounts written off, net of recoveries.

112

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**SIGNATURES**

Pursuant to therequirements of Section 13 of 15(d) of the Securities Exchange Act of1934, the registrant has caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                 | AFFYMETRIX, INC. |
|-----------------|------------------|
|            | (Registrant)     |
|            |             |
|            |             |
| August 30, 2006 | By:              | /s/ STEPHEN P.A. FODOR, PH.D. |
|            |             | Stephen P.A. Fodor, Ph.D. |
|            |             | *FOUNDER, CHAIRMAN OF THE BOARD AND* |
|            |             | *CHIEF EXECUTIVE OFFICER* |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| Name   | ** ** | **Title**                           | ** ** | **Date**                           |
|--------|------------|-------------------------------------|------------|------------------------------------|
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ STEPHEN P.A. FODOR, PH.D.       |       | Founder,  Chairman of the          |   | August 30, 2006 |
|   |       | Stephen P.A. Fodor, Ph.D.           |       | Board and Chief  Executive Officer |   |   |
|   |       |                                |       | (Principal  Executive Officer)     |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ GREGORY T. SCHIFFMAN            |       | Executive Vice  President          |   | August 30, 2006 |
|   |       | Gregory T. Schiffman                |       | and Chief  Financial  Officer |   |   |
|   |       |                                |       | (Principal  Financial Officer)     |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ JOHN D. DIEKMAN, PH.D.          |       | Director                           |   | August 30, 2006 |
|   |       | John D. Diekman, Ph.D.              |       |                               |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ PAUL BERG, PH.D.                |       | Director                           |   | August 30, 2006 |
|   |       | Paul Berg, Ph.D.                    |       |                               |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ SUSAN D. DESMOND HELLMANN, M.D. |       | Director                           |   | August 30, 2006 |
|   |       | Susan D. Desmond-Hellmann, M.D.     |       |                               |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ VERNON R. LOUCKS, JR.           |       | Director                           |   | August 30, 2006 |
|   |       | Vernon R. Loucks, Jr.          |       |                               |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       |                                |       | Director                           |   |   |
|   |       | Susan E. Siegel                     |       |                               |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ DAVID B. SINGER                 |       | Director                           |   | August 30, 2006 |
|   |       | David B. Singer                     |       |                               |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ ROBERT H. TRICE                 |       | Director                           |   | August 30, 2006 |
|   |       | Robert H. Trice, Ph.D.              |       |                               |   |   |
|   |       |                                |       |                               |   |   |
| By:    |       | /s/ JOHN A. YOUNG                   |       | Director                           |   | August 30, 2006 |
|   |       | John A. Young                       |       |                               |   |   |

 

113

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**INDEX TO EXHIBITS**
| EXHIBIT  NUMBER | ** ** | **DESCRIPTION OF DOCUMENT**                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  2.1(1)    |       | Agreement and Plan of Merger dated as of  May 31, 2005 among ParAllele BioScience, Inc.,  Affymetrix, Inc., Pinecone Acquisition, Inc. and Jonathan  MacQuitty.                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  2.2(1)    |       | Form of Voting and Lockup Agreement dated as of  May 31, 2005 between Affymetrix and each of Abingworth Management,  Ronald Davis, Bill Ericson, Malek Faham, Maneesh Jain, George Karlin-Neuman,  Elizabeth Krodel, Jonathan MacQuitty, André Marion, MDV Partners, Nicholas Naclerio,  Camille Samuels, Robert Smith, Aaron Solomon, Versant Ventures, Gregory Went  and Thomas Willis. |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  2.3(2)    |       | Amendment No. 1, dated as of September 1,  2005, to Agreement and Plan of Merger dated as of May 31, 2005 among  ParAllele BioScience, Inc., Affymetrix, Inc., Pinecone  Acquisition, Inc. and Jonathan MacQuitty.                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  2.4(3)    |       | Amendment No. 2, dated as of October 5,  2005, to Agreement and Plan of Merger dated as of May 31, 2005 among  ParAllele BioScience, Inc., Affymetrix, Inc., Pinecone  Acquisition, Inc. and Jonathan MacQuitty.                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  3.1(4)    |       | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  3.2(5)    |       | Bylaws.                                                                                                                                                                                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  3.3(6)    |       | Amendment No. 1 to the Bylaws dated as of  April 25, 2001.                                                                                                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  3.4(7)    |       | Summary of Rights to Purchase Shares of Preferred  Stock pursuant to the Rights Agreement dated as of October 15, 1998.                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  4.1(8)    |       | Rights Agreement, dated October 15, 1998,  between Affymetrix, Inc. and American Stock Transfer & Trust  Company, as Rights Agent.                                                                                                                                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  4.2(9)    |       | Amendment No. 1 to Rights Agreement, dated as  of February 7, 2000, between Affymetrix, Inc. and American Stock  Transfer & Trust Company, as Rights Agent.                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  4.3(10)   |       | Indenture dated as of December 15, 2003,  between Affymetrix, Inc. and The Bank of New York, as Trustee.                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|  4.4(10)   |       | Affymetrix, Inc. 0.75% Senior Convertible Notes  due 2033 Registration Rights Agreement dated December 15, 2003.                                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1(11)†  |       | 1993 Stock Plan, as amended.                                                                                                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2(11)†  |       | 1996 Nonemployee Directors Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3(12)        |       | Lease between Sobrato Interests and Affymetrix, Inc.  dated June 12, 1996 (3380 Central Expressway, Santa Clara, CA).                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4(12)        |       | Lease between Sobrato Interests and  Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway, Santa  Clara, CA).                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5(13)†  |       | 1998 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6(13)†  |       | Form of Officer and Director Indemnification  Agreement.                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7(14)        |       | Lease Agreement by and between the Company and Aetna  Life Insurance Company dated as of July 30, 1999.                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8(15)        |       | Amendment No. 1 to the 1996 Nonemployee  Directors Stock Option Plan of Affymetrix, Inc.                                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9(16)        |       | Amended and Restated 1996 Non-Employee  Directors Stock Plan.                                                                                                                                                                                                                                                                                                                                            |

 

114

----

 
| EXHIBIT  NUMBER | ** ** | **DESCRIPTION OF DOCUMENT**                                                                                                                                                                                                     |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10(17)*      |       | Common Terms Agreement between F. Hoffmann-La  Roche Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                                                |
|            |       |                                                                                                                                                                                                                            |
| 10.11(17)*      |       | License Agreement between F. Hoffmann-La Roche  Ltd. and Affymetrix, Inc. dated January 29, 2003.                                                                                                                     |
|            |       |                                                                                                                                                                                                                            |
| 10.12(17)*      |       | Affymetrix Instrument and Chip Supply Agreement  between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated  January 29, 2003.                                                                                      |
|            |       |                                                                                                                                                                                                                            |
| 10.13(17)*      |       | Research & Development Collaboration  Agreement between F. Hoffmann-La Roche Ltd. and  Affymetrix, Inc. dated January 29, 2003.                                                                         |
|            |       |                                                                                                                                                                                                                            |
| 10.14(17)*      |       | Diagnostic Product and Instrument Agency Agreement  between F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated  January 29, 2003.                                                                              |
|            |       |                                                                                                                                                                                                                            |
| 10.15(17)*      |       | Affymetrix Instrument Agency Agreement between  F. Hoffmann-La Roche Ltd. and Affymetrix, Inc. dated  January 29, 2003.                                                                                          |
|            |       |                                                                                                                                                                                                                            |
| 10.16(18)       |       | Lease between Sobrato Interests and Affymetrix dated  July 3, 2002 (3420 Central Expressway, Santa Clara, CA).                                                                                                             |
|            |       |                                                                                                                                                                                                                            |
| 10.17(18)       |       | First Amendment to Lease between Sobrato Interests  and Affymetrix dated September 30, 2003 (3420 Central Expressway, Santa  Clara, CA).                                                                                   |
|            |       |                                                                                                                                                                                                                            |
| 10.18(18)† |       | 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. |
|            |       |                                                                                                                                                                                                                            |
| 10.19(19)       |       | Affymetrix, Inc. Amended and Restated 2000  Equity Incentive Plan.                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                            |
| 10.20(20)       |       | Form of Non-Qualified Stock Option  Agreement under the Affymetrix, Inc. Amended and Restated 1996 Non-Employee  Directors Stock Plan.                                                                                |
|            |       |                                                                                                                                                                                                                            |
| 10.21(20)       |       | Form of Stock Option Agreement under the  Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.                                                                                                           |
|            |       |                                                                                                                                                                                                                            |
| 10.22(21)       |       | Affymetrix, Inc. Deferred Compensation Plan.                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                            |
| 10.23(22)       |       | Fifth Amendment to Lease between Sobrato Interests  and Affymetrix, Inc. dated July 3, 2002 (3380 Central Expressway,  Santa Clara, CA).                                                                              |
|            |       |                                                                                                                                                                                                                            |
| 10.24(22)       |       | First Amendment to Lease between Sobrato Interests  and Affymetrix, Inc. dated July 3, 2002 (3450 Central Expressway,  Santa Clara, CA).                                                                              |
|            |       |                                                                                                                                                                                                                            |
| 10.25(23)       |       | Lease between Keppel Logistics Pte Ltd. and  Affymetrix Pte Ltd. dated as of January 1, 2006 (7 Gul Circle,  Singapore 629363).                                                                                       |
|            |       |                                                                                                                                                                                                                            |
| 10.26(23)       |       | Form of Restricted Stock Agreement under the  Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.                                                                                                       |
|            |       |                                                                                                                                                                                                                            |
| 21              |       | List of Subsidiaries.                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                            |
| 23              |       | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                            |
| 31.1            |       | Certification of Chief Executive Officer Pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                           |
|            |       |                                                                                                                                                                                                                            |
| 31.2            |       | Certification of 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 byreference to Registrant’s Form S-4 as filed on July 20, 2005(File No. 333-126718).

(2)             Incorporated byreference to Registrant’s Form S-4/A as filed on September 1,2005 (File No. 333-126718).

115

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(3)             Incorporated byreference to Registrant’s Form S-4/A as filed on October 5,2005 (File No. 333-126718).

(4)             Incorporatedby reference to Registrant’s Form 8-K as filed on June 13, 2000(File No. 000-28218).

(5)             Incorporatedby reference to Appendix C of Registrant’s Definitive Proxy Statement onSchedule 14A as filed on April 29, 1998 (File No. 000-28218).

(6)             Incorporatedby reference to Registrant’s Form 10-Q as filed on May 15, 2001(File No. 000-28218).

(7)             Incorporatedby reference to Registrant’s Form 8-K as filed on October 16,1998 (File No. 000-28218).

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

(9)             Incorporatedby reference to Registrant’s Form 8-A/A as filed on March 29,2000 (File No. 000-28218).

(10)       Incorporatedby reference to Registrant’s Form S-3 as filed on January 29,2004 (File No. 333-112311).

(11)       Incorporatedby reference to Registrant’s Registration Statement on Form S-1(File No. 333-3648), as amended.

(12)       Incorporatedby reference to Registrant’s Quarterly Report on Form 10-Q as filedon August 14, 1996 (File No. 000-28218).

(13)       Incorporatedby reference to Registrant’s Report on Form 10-K as filed onMarch 31, 1999 (File No. 000-28218).

(14)       Incorporatedby reference to Registrant’s Form 10-Q as filed on August 16,1999 (File No. 000-28218).

(15)       Incorporatedby reference to Registrant’s Registration Statement on Form S-3 asfiled on July 12, 1999 (File No. 333-82685), as amended.

(16)       Incorporatedby reference to Registrant’s Form 10-Q as filed on May 15, 2001(File No. 000-28218).

(17)       Incorporatedby reference to Registrant’s Form 10-Q as filed on May 15, 2003(File No. 000- 0-28218).

(18)       Incorporatedby reference to Registrant’s Form 10-K as filed on March 15,2004 (File No. 000-28218).

(19)       Incorporatedby reference to Registrant’s Form 10-Q as filed on August 9,2004 (File No. 000-0-28218).

(20)       Incorporatedby reference to Registrant’s Form 10-Q as filed on November 9,2004 (File No. 000-0-28218).

(21)       Incorporatedby reference to Registrant’s Form 8-K as filed on December 14,2004 (File No. 000-28218).

(22)       Incorporatedby reference to Registrant’s Form 10-K as filed on March 16,2005 (File No. 000-28218).

(23) Incorporated byreference to Registrant’s Form 10-K as filed on March 9, 2006 (File No.  000-28218).

*                    Confidentialtreatment granted

†                     Managementcontract, compensatory plan or arrangement

116

----