UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~MARCH 31,~~JUNE 30, 2009

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NO. 0-28218

AFFYMETRIX, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE		77-0319159
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

3420 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA		95051
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (408) 731-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer x		Accelerated filer o

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

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

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit and post such files). Yes o No o

COMMON SHARES OUTSTANDING ON ~~MAY 4,~~JULY 31, 2009: ~~70,693,076~~

70,617,732

~~Table of Contents~~

AFFYMETRIX, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			3

	Item 1.	Financial Statements (Unaudited)	3

		Condensed Consolidated Balance Sheets at ~~March 31,~~June 30, 2009 and December 31, 2008	3

		Condensed Consolidated Statements of Operations for the Three and Six Months Ended ~~March 31,~~June 30, 2009 and 2008	4

		Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended ~~March 31,~~June 30, 2009 and 2008	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14 12

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23 16

	Item 4.	Controls and Procedures	23 16

PART II. OTHER INFORMATION			23 16

	Item 1.	Legal Proceedings	23 16

	Item 1A.	Risk Factors	23 16

	Item 4.	Submission of Matters to a Vote of Security Holders	21

	Item 5.	Other Information	32 21

	Item 6.	Exhibits	32 21

SIGNATURES			33 22

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

March 31,

December 31,

2009

2008

ASSETS:

Current assets:

Cash and cash equivalents

$
66,014

$
113,292

Restricted cash—short-term portion

2,249

4,402

Available-for-sale securities—short-term portion

232,999

250,970

Accounts receivable, net

59,465

62,726

Inventories

47,993

51,333

Deferred tax assets—current portion

1,108

1,077

Prepaid expenses and other current assets

12,972

15,725

Total current assets

422,800

499,525

Available-for-sale securities—long-term portion

84,625

26,900

Property and equipment, net

82,416

89,345

Acquired technology rights, net

59,018

62,569

Deferred tax assets—long-term portion

4,678

4,764

Restricted cash—long-term portion

2,425

2,175

Other assets

27,755

28,032

Total assets

$
683,717

$
713,310

LIABILITIES AND STOCKHOLDERS’ EQUITY:

Current liabilities:

Accounts payable and accrued liabilities

$
55,392

$
62,559

Deferred revenue—current portion

16,090

16,198

Total current liabilities

71,482

78,757

Deferred revenue—long-term portion

3,499

3,583

Other long-term liabilities

10,745

10,972

Convertible notes

316,341

316,341

Stockholders’ equity:

Common stock

707

703

Additional paid-in capital

723,619

721,641

Accumulated other comprehensive loss

(1,080
)
(2,296
)
Accumulated deficit

(441,596
)
(416,391
)
Total stockholders’ equity

281,650

303,657

Total liabilities and stockholders’ equity

$
683,717

$
713,310

	June 30,			December 31,
	2009			2008
ASSETS:
Current assets:
Cash and cash equivalents	$	73,267		$	113,292
Restricted cash—short-term portion		1,182			4,402
Available-for-sale securities—short-term portion		208,075			250,970
Accounts receivable, net		57,108			62,726
Inventories		51,803			51,333
Deferred tax assets—current portion		1,649			1,077
Prepaid expenses and other current assets		9,155			15,725
Total current assets		402,239			499,525
Available-for-sale securities—long-term portion		68,277			26,900
Property and equipment, net		74,107			89,345
Acquired technology rights, net		55,714			62,569
Deferred tax assets—long-term portion		4,269			4,764
Restricted cash—long-term portion		2,359			2,175
Other assets		26,299			28,032
Total assets	$	633,264		$	713,310

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable and accrued liabilities	$	61,333		$	62,559
Deferred revenue—current portion		16,274			16,198
Total current liabilities		77,607			78,757
Deferred revenue—long-term portion		3,415			3,583
Other long-term liabilities		11,213			10,972
Convertible notes		247,201			316,341
Stockholders’ equity:
Common stock		706			703
Additional paid-in capital		725,463			721,641
Accumulated other comprehensive income (loss)		1,935			(2,296	)
Accumulated deficit		(434,276	)		(416,391	)
Total stockholders’ equity		293,828			303,657
Total liabilities and stockholders’ equity	$	633,264		$	713,310

Note 1:

The condensed consolidated balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date included in the Company’s Form 10-K for the fiscal year ended December 31, 2008.

See accompanying notes.

Table of Contents

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended
March 31,

2009

2008

REVENUE:

Product sales

$
64,870

$
62,806

Services

11,556

8,420

Royalties and other revenue

2,135

98,349

Total revenue

78,561

169,575

COSTS AND EXPENSES:

Cost of product sales

34,434

25,977

Cost of services and other

7,590

5,678

Research and development

21,283

18,768

Selling, general and administrative

33,982

34,733

Acquired in-process technology

—

800

Restructuring charges

1,967

13,910

Total costs and expenses

99,256

99,866

(Loss) income from operations

(20,695
)
69,709

Interest income and other, net

(840
)
6,872

Interest expense

(3,177
)
(3,589
)
(Loss) income before income taxes

(24,712
)
72,992

Income tax provision

(493
)
(26,740
)
Net (loss) income

$
(25,205
)
$
46,252

Basic net (loss) income per common share

$
(0.37
)
$
0.68

Diluted net (loss) income per common share

$
(0.37
)
$
0.58

Shares used in computing basic net (loss) income per common share

68,617

68,504

Shares used in computing diluted net (loss) income per common share

68,617

83,001

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
REVENUE:
Product sales	$	67,156		$	75,022		$	132,026		$	137,828
Services		12,221			9,005			23,777			17,425
Royalties and other revenue		2,177			2,884			4,312			101,233
Total revenue		81,554			86,911			160,115			256,486
COSTS AND EXPENSES:
Cost of product sales		29,885			32,257			64,319			58,234
Cost of services and other		7,567			6,743			15,157			12,421
Research and development		20,361			19,591			41,644			38,359
Selling, general and administrative		31,686			29,640			65,668			64,373
Acquired in-process technology		—			—			—			800
Restructuring charges		226			898			2,193			14,808
Total costs and expenses		89,725			89,129			188,981			188,995
(Loss) income from operations		(8,171	)		(2,218	)		(28,866	)		67,491
Interest income and other, net		1,356			2,286			516			9,158
Interest expense		(2,903	)		(3,548	)		(6,080	)		(7,137	)
Gain on repurchase of convertible notes		17,447			—			17,447			—
Income (loss) before income taxes		7,729			(3,480	)		(16,983	)		69,512
Income tax provision		(409	)		(155	)		(902	)		(26,895	)
Net income (loss)	$	7,320		$	(3,635	)	$	(17,885	)	$	42,617

Basic net income (loss) per common share	$	0.11		$	(0.05	)	$	(0.26	)	$	0.62
Diluted net income (loss) per common share	$	0.11		$	(0.05	)	$	(0.26	)	$	0.56

Shares used in computing basic net income (loss) per common share		68,651			68,540			68,527			68,522
Shares used in computing diluted net income (loss) per common share		68,939			68,540			68,527			82,971

See accompanying notes.

Table of Contents

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

~~(Unaudited)~~

Three Months Ended
March 31,

2009

2008

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income

$
(25,205
)
$
46,252

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Depreciation and amortization

9,427

6,996

Amortization of intangible assets

3,790

2,598

Charge for acquired in-process technology

—

800

Amortization of investment premiums, net

315

909

Stock-based compensation

2,083

2,622

Realized loss (gain) on equity investments

1,161

(70
)
Realized loss (gain) on the sales of investments

45

(36
)
Deferred tax assets

55

21,272

Amortization of debt offering costs

363

526

(Gain) loss on disposal of property and equipment

(613
)
12,529

Changes in operating assets and liabilities:

Restricted cash

1,903

(4,000
)
Accounts receivable, net

3,261

9,014

Inventories

3,340

(1,682
)
Prepaid expenses and other assets

3,483

9,791

Accounts payable and accrued liabilities

(7,167
)
(19,838
)
Deferred revenue

(192
)
(5,144
)
Other long-term liabilities

(227
)
(836
)
Net cash (used in) provided by operating activities

(4,178
)
81,703

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

(3,823
)
(3,759
)
Purchases of available-for-sale securities

(183,333
)
(133,682
)
Proceeds from sales and maturities of available-for-sale securities

144,542

262,720

Acquisition of business, net of cash acquired

—

(65,159
)
Net cash (used in) provided by investing activities

(42,614
)
60,120

CASH FLOWS FROM FINANCING ACTIVITIES:

Issuance of common stock, net

(101
)
216

Net cash (used in) provided by financing activities

(101
)
216

Effect of exchange rate changes on cash and cash equivalents

(385
)
473

Net (decrease) increase in cash and cash equivalents

(47,278
)
142,512

Cash and cash equivalents at beginning of period

113,292

288,644

Cash and cash equivalents at end of period

$
66,014

$
431,156

	Six Months Ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(17,885	)	$	42,617
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		18,866			14,240
Amortization of intangible assets		7,358			5,455
Charge for acquired in-process technology		—			800
Amortization of investment premiums, net		654			371
Stock-based compensation		4,438			3,267
Realized loss (gain) on equity investments		1,158			(19	)
Realized gain on the sales of investments		(76	)		(35	)
Deferred tax assets		(77	)		21,479
Amortization of debt offering costs		677			1,056
(Gain) loss on disposal of property and equipment		(520	)		12,560
Gain on repurchase of convertible notes		(17,447	)		—
Changes in operating assets and liabilities:
Accounts receivable, net		5,618			7,084
Inventories		(470	)		809
Prepaid expenses and other assets		7,112			8,406
Accounts payable and accrued liabilities		1,811			(17,088	)
Deferred revenue		(92	)		(4,642	)
Other long-term liabilities		241			(384	)
Net cash provided by operating activities		11,366			95,976
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(4,985	)		(7,432	)
Purchases of available-for-sale securities		(274,164	)		(263,831	)
Proceeds from sales and maturities of available-for-sale securities		279,113			277,547
Acquisition of business, net of cash acquired		—			(65,159	)
Purchase of non-marketable equity investments		—			(311	)
Net cash used in investing activities		(36	)		(59,186	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net		(613	)		(3	)
Repurchase of convertible notes		(50,669	)		—
Net cash used in financing activities		(51,282	)		(3	)

Effect of exchange rate changes on cash and cash equivalents		(73	)		297
Net (decrease) increase in cash and cash equivalents		(40,025	)		37,084
Cash and cash equivalents at beginning of period		113,292			288,644
Cash and cash equivalents at end of period	$	73,267		$	325,728

See accompanying notes.

Table of Contents

AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MARCH 31,~~

JUNE 30, 2009

(UNAUDITED)

~~(UNAUDITED)~~

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements include the accounts of Affymetrix, Inc. and its wholly owned subsidiaries (“Affymetrix” or the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included.

The Company has evaluated subsequent events through August 7, 2009, the date on which the financial statements being presented were filed with the Securities and Exchange Commission.

Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 2, 2009.

Use of Estimates

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

Revenue Recognition

~~Overview~~

Overview

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

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

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

~~Product Sales~~

Product Sales

Product sales include sales of ~~GeneChip~~® probe arrays, reagents and related instrumentation. Probe array, reagent and instrumentation revenues are recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.

~~Table~~Also included in product sales is the instrument rental revenue associated with the Company’s reagent rental program available for certain instruments, including its new GeneTitan platform. Generally, the Company will loan the instrument free of ~~Contents~~

~~Services~~

charge when there is a minimum consumables purchase commitment. The Company recovers the cost of providing the instrumentation in the amount it charges for its consumables under these arrangements. The instrument rental revenue is recognized over the life of the contract, generally one to two years, based on the relative fair values of the consumables once shipped. The depreciation costs associated with an instrument are charged to cost of product sales on the greater of through-put or straight-line basis over the same contract period. The costs to maintain these instruments in the field are charged to cost of product sales as incurred.

Services

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

consumables.

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

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

~~Royalties and Other Revenue~~

Royalties and Other Revenue

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

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

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

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

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

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

Table of Contents

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

~~Transactions with Distributors~~

Transactions with Distributors

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

~~Table of Contents~~

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated using the weighted-average number of common shares outstanding during the period less the weighted-average shares subject to repurchase. Diluted income (loss) per share gives effect to the dilutive 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 sets forth a reconciliation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

Three Months Ended
March 31,

2009

2008

Numerator:

Net (loss) income - basic

$
(25,205
)
$
46,252

Add effect of dilutive securities:

Interest on convertible notes (inclusive of amortization of debt issuance costs)

—

2,116

Net (loss) income - diluted

$
(25,205
)
$
48,368

Denominator:

Shares used in computing basic net (loss) income per common share

68,617

68,504

Add effect of dilutive securities:

Employee stock options

—

89

Common stock subject to repurchase

—

39

Convertible notes

—

14,369

Shares used in computing diluted net (loss) income per common share

68,617

83,001

Basic net (loss) income per common share

$
(0.37
)
$
0.68

Diluted net (loss) income per common share

$
(0.37
)
$
0.58

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2009		2008			2009			2008
Numerator:
Net income (loss) – basic	$	7,320	$	(3,635	)	$	(17,885	)	$	42,617
Add effect of dilutive securities:
Interest on convertible notes (inclusive of amortization of debt issuance costs)		—		—			—			4,232
Net income (loss) – diluted	$	7,320	$	(3,635	)	$	(17,885	)	$	46,849

Denominator:
Shares used in computing basic net (loss) income per common share		68,651		68,540			68,527			68,522
Add effect of dilutive securities:
Employee stock options		210		—			—			52
Common stock subject to repurchase		78		—			—			28
Convertible notes		—		—			—			14,369
Shares used in computing diluted net income (loss) per common share		68,939		68,540			68,527			82,971
Basic net income (loss) per common share	$	0.11	$	(0.05	)	$	(0.26	)	$	0.62
Diluted net income (loss) per common share	$	0.11	$	(0.05	)	$	(0.26	)	$	0.56

The following securities were excluded from the computation of diluted net income (loss) ~~income~~ per common share, on an actual outstanding basis, as they were anti-dilutive (in thousands):

Three Months Ended
March 31,

2009

2008

Employee stock options

6,598

4,833

Restricted stock subject to repurchase

2,074

—

Convertible notes

10,502

—

Total

19,174

4,833

Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
Employee stock options 4,990 6,666 5,984 4,697
Restricted stock subject to repurchase 1,027 1,702 1,829 599
Convertible notes 9,744 14,369 10,119 —
Total 15,761 22,737 17,932 5,296

Cash Equivalents, Available-For-Sale Securities and Investments

Marketable Securities

The Company’s investments consist of U.S. government notes and bonds; corporate notes, bonds and asset-backed securities; mortgage-backed securities, municipal notes and bonds; and publicly traded equity securities. The Company reports all debt securities with maturities at the date of purchase of three months or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. Cash equivalents and available-for-sale securities consist of marketable equity and debt securities. Management determines the appropriate classification of debt securities at the time of purchase. As of June 30, 2009 and December 31, 2008, the Company’s investments in debt securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity. The cost of debt securities is adjusted for amortization of premiums and discounts to maturity. This amortization is included in interest income and other, net. Realized gains and losses, as well as interest income, on available-for-sale securities are also included in interest income and other, net. The cost of securities sold is based on the specific identification method. The fair values of securities are based on quoted market prices. The Company includes its available-for-sale securities that have an effective maturity of less than twelve months as of the balance sheet date in current assets and those with an effective maturity greater than twelve months as of the balance sheet date in non-current assets. The Company monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments in public companies are determined using quoted market prices.

Non-marketable Securities

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

Restructuring

The Company has in recent years engaged in, and may continue to engage in, restructuring actions, which require management to utilize significant estimates related to expenses for severance and other employee separation costs, lease cancellation, realizable values of assets that may become duplicative or obsolete, and other exit costs. If the actual amounts differ from the Company’s estimates, the amount of the restructuring charges could be materially impacted. For a full description of the Company’s restructuring actions, see Note 4.

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board ~~(the “FASB”~~(“FASB”) issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) ~~141(R)-1~~~~, Accounting for Assets Acquired~~No. 115-2 and ~~Liabilities Assumed in a Business Combination That Arise from Contingencies~~ FAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP ~~141(R)-1”~~FAS 115-2 and FAS 124-2”), which amends Statement of Financial Accounting Standards (“SFAS”) No. ~~141 (Revised 2007)~~~~, Business Combinations~~ ~~(“SFAS 141(R)”).FSP 141(R)-1 applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of SFAS No. 5,~~ ~~Accounting for Contingencies,~~ if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in SFAS 141(R). The provisions of FSP 141(R)-1 that amend SFAS 141(R) are effective for the first annual reporting period beginning on or after December 15, 2008. The Company adopted FSP 141(R)-1 on January 1, 2009, and the impact of this guidance will depend upon the nature, terms, and size of the acquisitions the Company consummates.

~~In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,~~ ~~Recognition and Presentation of Other-Than-Temporary Impairments~~ ~~(“FSP FAS 115-2 and FAS 124-2”), which amends SFAS No.~~ 115, Accounting for Certain Investments in Debt and Equity Securities(“SFAS 115”), and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. This FSP ~~amends~~revises the other-than-temporary guidance in U.S. GAAP for debt securitiesto make the guidance more operational and extends the disclosure requirements to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. Only credit-related losses will be realized through the income statement as interest rate and market-related losses will be recorded in other comprehensive income on the balance sheet and will not affect the cost basis of the security. The provisions of FSP FAS 115-2 and FAS 124-2 ~~that amend SFAS 115 and SFAS 124~~ are effective for interim and annual reporting periods ending after June 15, 2009. The Company’s implementation of this FSP isdid not ~~expected to affect~~have an effect on its consolidated results of operations or financial condition.

Table of Contents

In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board (“APB”) No. 28-1, Interim Disclosures About Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”) which amends the disclosure requirements under SFAS No. 107, Disclosures About Fair Value of Financial Instruments and APB No. 28, Interim Financial Reporting. These amendments require publicly traded companies to disclose information about the fair value of financial instruments during the interim periods as well as the annual period. The provisions of FSP FAS 107 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. The Company’s implementation of this FSP did not have an effect on its consolidated results of operations or financial condition.

In April 2009, the FASB issued FSP FAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”) which supercedes FSP FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. This FSP provides additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity. It also provides additional guidance on circumstances that may indicate that a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for interim and annual reporting periods ending after June 15, 2009. The Company’s implementation of this FSP did not have an effect on its consolidated results of operations or financial condition.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The provisions of SFAS 165 are effective for interim and annual reporting periods ending after June 15, 2009. The Company’s implementation of this SFAS did not have an effect on its consolidated results of operations or financial condition.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles which establishes the Codification as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. This SFAS replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, in the third quarter of fiscal 2009, all references made to US GAAP will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing US GAAP, it is not expected to have any impact on the Company’s consolidated financial position or results of operations.

NOTE 2—FAIR VALUE

OF FINANCIAL INSTRUMENTS

In accordance with SFAS No. 157,Fair Value Measures, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of ~~March 31,~~June 30, 2009 ~~(in thousands):~~

Level 1

Level 2

Total

Non-U.S. equity securities

$
727

$
—

$
727

U.S. government obligations and agencies

—

215,536

215,536

U.S. corporate debt

—

101,361

101,361

Total

$
727

$
316,897

$
317,624

~~As of March 31, 2009, the Company had no financial assets or liabilities requiring Level 3 classification.~~

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

Level 1

Level 2

Total

Non-U.S. equity securities

$
842

$
—

$
842

U.S. government obligations and agencies

—

203,488

203,488

U.S. corporate debt

—

93,916

93,916

Total

$
842

$
297,404

$
298,246


				Significant
	Quoted Prices			Other
	In Active			Observable
	Markets			Inputs
	(Level 1)			(Level 2)			Total
June 30, 2009
U.S. government obligations and agencies		$	—		$	173,666		$	173,666
U.S. corporate debt			—			101,429			101,429
Non-U.S. equity securities			1,257			—			1,257
Total		$	1,257		$	275,095		$	276,352
December 31, 2008
U.S. government obligations and agencies		$	—		$	203,488		$	203,488
U.S. corporate debt			—			93,916			93,916
Non-U.S. equity securities			842			—			842
Total		$	842		$	297,404		$	298,246

As of June 30, 2009 and December 31, 2008, the Company had no financial assets or liabilities requiring Level 3 ~~classification.~~

classification which have unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets and liabilities.

Investments in Debt and Equity Securities

The fair values of all available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities—short-term and available-for-sale securities—long-term on the Company's Consolidated Balance Sheets based on the securities’ maturity. The following is a summary of available-for-sale securities as of June 30, 2009 (in thousands):

Cost
Gross
Unrealized
Gains

Gross
Unrealized
Losses
Fair Value
U.S. government obligations and agency securities $ 172,989 $ 725 $ (48 ) $ 173,666
U.S. corporate debt securities 101,960 299 (830 ) 101,429
Non-U.S. equity securities 890 367 — 1,257
Total securities $ 275,839 $ 1,391 $ (878 ) $ 276,352
Amounts included in:
Cash equivalents $ 3,270 $ 8 $ (7 ) $ 3,271
Available-for-sale securities 272,569 1,383 (871 ) 273,081
Total securities $ 275,839 $ 1,391 $ (878 ) $ 276,352
Amounts mature in:
Less than one year $ 208,356 $ 905 $ (836 ) $ 208,425
One to two years 62,831 479 (17 ) 63,293
More than two years 4,652 7 (25 ) 4,634
Total securities $ 275,839 $ 1,391 $ (878 ) $ 276,352

Table of Contents

The following is a summary of available-for-sale securities as of December 31, 2008 (in thousands):

Cost
Gross
Unrealized
Gains

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

Realized gains and (losses) for the six months ended June 30, 2009 and 2008 were $0.2 million and $(0.1) million, respectively, and $2.0 million and $(1.9) million, respectively. Realized gains and (losses) are included in interest income and other, net in the accompanying Consolidated Statements of Operations. The gross unrealized losses as of June 30, 2009 were primarily related to mortgage-backed securities that were impacted by the weakening of the global economy caused by a lack of liquidity in the credit markets.

The Company conducts a review of investment securities on a quarterly basis for the presence of impairment that is deemed to be other-than-temporary (“OTTI”) in accordance with SFAS 115. As part of its review, the Company is required to take into consideration current market conditions, fair value in relationship to cost, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, its ability and intent to hold investments until a recovery of fair value, which may be maturity, and other factors when evaluating for the existence of OTTI in its securities portfolio.

During the quarter ended June 30, 2009, the Company adopted FSP FAS 115-2 and FAS 124-2 where it assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the balance sheet date. Under these circumstances, OTTI is considered to have occurred if (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis or (3) the present value of expected cash flows is not expected to recover the entire amortized cost basis. The “more likely than not” criteria is a lower threshold than the “probable” criteria used under the previous guidance.

FSP FAS 115-2 and FAS 124-2 requires credit-related OTTI to be recognized in earnings while noncredit-related OTTI on securities not expected to be sold to be recognized in other comprehensive income (“OCI”). Noncredit-related OTTI is based on other factors, including illiquidity. Presentation of OTTI is made in the statement of income on a gross basis with an offset for the amount of OTTI recognized in OCI. Noncredit-related OTTI recognized in earnings previous to January 1, 2009 is reclassified from retained earnings to accumulated OCI as a cumulative effect adjustment.

No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company’s securities. Based on its review of these securities, including the assessment of the severity of the related unrealized losses, the Company has not recorded any other-than-temporary impairments on these securities.

Additionally, the Company did not have any noncredit-related OTTI on securities not expected to be sold, and for which it is not more likely than not that it will be required to sell the securities, before recovery of their amortized cost basis, that was recognized in OCI during the period ended June 30, 2009. The Company did not record any cumulative effect adjustments for noncredit-related portion of OTTI losses previously recognized in earnings.

Other Financial Instruments

The carrying amounts and estimated fair values of financial instruments, other than those accounted for in accordance with SFAS 115, were as follows (in thousands):

June 30, 2009 December 31, 2008

Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair Value

Assets:
Non-marketable equity securities $ 12,147 $ 12,147 $ 13,009 $ 13,009
Liability:
Convertible notes

247,201 175,513 316,341 101,290

The fair value estimates provided above for the Company's convertible notes were based on quoted market prices available at June 30, 2009 and December 31, 2008, respectively. All other fair values were based on current market rates, liquidation and net realizable values. During the first six months ended June 30, 2009, the Company determined that the declines in estimated fair values of certain investments in non-marketable equity securities were other-than-temporary. Accordingly, the Company recorded net impairment losses on the investments of approximately $0.9 million. No impairment was recognized for the six months ended June 30, 2008. Net investment losses are included in interest income and other, net in the Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment portfolio in the future.

NOTE 3—STOCK-BASED COMPENSATION

Stock-Based Compensation Plans

The Company has a stock-based compensation program that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and non-vested stock awards (also known as restricted stock) granted under various stock plans. Stock options are generally time-based, vesting 25% on each annual anniversary of the grant date over four years and expire 7 to 10 years from the grant date. Non-vested stock awards are generally time-based, vesting 25% on each annual anniversary of the grant date over four years. As of ~~March 31,~~June 30, 2009, the Company had approximately ~~2.4~~2.7 million shares of common stock reserved for future issuance under its stock-based compensation plans. New shares are issued as a result of stock option exercises and non-vested restricted stock awards.

The Company allocated stock-based compensation expense under SFAS No. 123R, Share-Based Payment(“SFAS 123R”), as follows (in thousands):

Three Months Ended
March 31,

2009

2008

Costs of product sales

$
405

$
364

Research and development

393

523

Selling, general and administrative

1,285

1,735

Total stock-based compensation expense

$
2,083

$
2,622

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
Costs of product sales	$	434	$	224	$	839	$	588
Research and development		434		341		827		864
Selling, general and administrative		1,487		80		2,772		1,815
Total stock-based compensation expense	$	2,355	$	645	$	4,438	$	3,267

As of ~~March 31,~~June 30, 2009, ~~$31.9~~$17.5 million of total unrecognized stock-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2013. The weighted average term of the unrecognized stock-based compensation expense is ~~3.1~~2.9 years.

Table of Contents

Stock Options

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

Three Months Ended
March 31,

2009

2008

Risk free interest rate

1.4
%
2.5
%
Expected dividend yield

0.0
%
0.0
%
Expected volatility

70
%
42
%
Expected option term (in years)

4.1

4.5

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Risk free interest rate		2.1	%		2.5	%		1.6	%		2.5	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		70	%		42	%		70	%		42	%
Expected option term (in years)		4.1			4.5			4.1			4.5

The risk free interest rate for periods within the contractual life of the Company’s stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company’s historical exercise trends over ten years. The expected volatility is based on a blend of historical and market-based implied volatility. The Company incorporated a significant increase in the expected volatility assumption for the periods ended June 30, 2009 as compared to the periods ended June 30, 2008 due to the increased net losses of the Company and the overall impact of the deterioration of the global economy over the period. Using the assumptions above, the weighted average grant date fair value of options granted during the three months ended ~~March 31,~~June 30, 2009 and 2008 was ~~$1.62~~$2.88 and ~~$7.37,~~$4.05, respectively, and for the six months ended June 30, 2009 and 2008 was $1.88 and $4.61, respectively.

NOTE 4—RESTRUCTURING

Fiscal 2008 Restructuring Plan

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

The Company estimates the total restructuring expenses to be incurred in connection with the 2008 Plan will be approximately ~~$45.4~~$45.6 million. Of this total, approximately ~~$8.2~~$8.6 million of cash outlays relates to employee severance and ~~$37.2~~$37.0 million relates to non-cash charges associated with the abandonment and impairment of certain long-lived manufacturing assets. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), the costs relating to employee severance are being recognized as expense over the remaining service periods of the employees.

~~The cash outlays to be incurred in connection with the 2008 Plan are estimated to be approximately $8.2 million.~~

During the ~~quarter ended March 31,~~first six months of 2009, the Company recognized approximately ~~$1.7~~$2.7 million of ~~expense~~expenses for employee termination benefits associated with the 2008 Plan. During the ~~quarter ended March 31,~~first six months of 2008, the Company recognized approximately $12.5 million of non-cash charges related to the abandonment and impairment of certain manufacturing assets and ~~$1.4~~$2.1 million of expense for employee termination benefits. These expenses are presented as a component of “Restructuring charges” in the Company’s Consolidated Statements of Operations.

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

Fiscal 2007 Restructuring Plan

In July 2007, the Company announced that it was consolidating an administrative facility located in Sunnyvale, California into its main campus in Santa Clara, California (the “2007 Plan”). Additionally, in August and December 2007, the Company terminated certain employees in the research and development and selling, general and administrative functions. The Sunnyvale, California facility was vacated during the fourth quarter of 2007. The estimated cash outlays to be incurred in connection with these restructuring activities are estimated to be approximately $4.6 million. During the ~~quarters~~six months ended ~~March 31,~~June 30, 2009 and 2008, the amount of expense recognized associated with the 2007 Plan was not material.

~~Table of Contents~~

Fiscal 2006 Restructuring Plan

In 2006, the Company initiated a restructuring plan (the “2006 Plan”) to better align certain of its expenses with the Company’s business outlook. The Company’s primary focus of the 2006 Plan was in the general and administrative functions and included rationalizing its facilities. Cash outlays incurred in connection with these restructuring activities were estimated to be approximately $16.8 million. During the ~~quarters~~six months ended ~~March 31,~~June 30, 2009 and 2008, the amount of expense recognized associated with the 2006 Plan was not material.

The activity for the restructuring plans above for the ~~year~~six months ended ~~March 31,~~June 30, 2009 and estimated costs for the amounts expected to be recognized as “Restructuring charges” in the Company’s Consolidated Statements of Operations is as follows (in thousands):

As of
March 31, 2009

Balance as of

Balance as of

Total

Total

December 31,

2009

Cash

Non-Cash

March 31,

costs

expected

2008

Charges

Payments

Settlements

2009

to date

costs

Fiscal 2008 Restructuring Plan:

Employee severance and relocation benefits

$
3,178

$
1,747

$
(715
)
$
—

$
4,210

$
7,540

$
8,200

Abandonment and impairment of certain long-lived manufacturing assets

—

—

—

—

—

37,089

37,089

Fiscal 2007 Restructuring Plan:

Employee severance and relocation benefits

—

—

—

—

—

2,888

2,888

Contract termination costs

504

25

(129
)
—

400

1,694

1,700

Other restructuring costs

—

—

—

—

—

113

113

Fiscal 2006 Restructuring Plan:

Employee severance and relocation benefits

—

—

—

—

—

20,197

20,197

Contract termination costs

1,222

8

(50
)
—

1,180

2,610

2,900

Other restructuring costs

—

—

—

—

—

2,194

2,194

Total

$
4,904

$
1,780

$
(894
)
$
—

$
5,790

$
74,325

$
75,281

As of
June 30, 2009

Balance as of Balance as of Total Total
December 31, 2009 Cash Non-Cash June 30, costs expected
2008 Charges Payments Settlements 2009 to date costs
Fiscal 2008 Restructuring Plan:
Employee severance and relocation benefits $ 3,178 $ 2,718 $ (4,481 ) $ (418 ) $ 997 $ 8,511 $ 8,550
Abandonment and impairment of certain long-lived manufacturing assets — (326 ) 565 (239 ) — 36,763 37,000
Fiscal 2007 Restructuring Plan:
Employee severance and relocation benefits — — — — — 2,888 2,888
Contract termination costs 504 (171 ) (243 ) 251 341 1,498 1,500
Other restructuring costs — — — — — 113 113
Fiscal 2006 Restructuring Plan:
Employee severance and relocation benefits — — — — — 20,197 20,197
Contract termination costs 1,222 (28 ) (171 ) 42 1,065 2,574 2,600
Other restructuring costs — — — — — 2,194 2,194
Total $ 4,904 $ 2,193 $ (4,330 ) $ (364 ) $ 2,403 $ 74,738 $ 75,042

Table of Contents

NOTE 5—INVENTORIES

Inventories consist of the following (in thousands):

March 31,

December 31,

2009

2008

Raw materials

$
21,123

$
22,799

Work-in-process

11,839

12,192

Finished goods

15,031

16,342

Total

$
47,993

$
51,333

June 30, December 31,
2009 2008
Raw materials $ 21,067 $ 22,799
Work-in-process 8,803 12,192
Finished goods 21,933 16,342
Total $ 51,803 $ 51,333

NOTE 6—ACQUIRED TECHNOLOGY RIGHTS

Acquired technology rights are comprised of licenses to technology covered by patents to third parties and are amortized over the expected useful life of the underlying patents, which range from one to fifteen years. Accumulated amortization of these rights amounted to approximately ~~$49.5~~$52.8 million and $52.4 million at ~~March 31,~~June 30, 2009 and December 31, 2008, respectively.

~~Table of Contents~~

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

Amortization

For the Year Ending December 31,

Expense

2009, remainder thereof

$
9,662

2010

12,212

2011

12,031

2012

10,257

2013

7,749

Thereafter

7,107

Total

$
59,018

Amortization
For the Year Ending December 31, Expense
2009, remainder thereof $ 6,358
2010 12,212
2011 12,031
2012 10,257
2013 7,749
Thereafter 7,107
Total $ 55,714

NOTE 7—SENIOR CONVERTIBLE NOTES

During the period ended June 30, 2009, the Company repurchased approximately $69.1 million of aggregate principal amount of its 3.50% senior convertible notes due in 2038 in private transactions for total cash consideration of $50.6 million, including accrued interest of $0.9 million. The recognized gain on debt repurchase of $17.4 million is net of transaction costs of $0.9 million and accelerated amortization of deferred financing costs of $1.0 million.

NOTE 8—COMPREHENSIVE INCOME (LOSS) ~~INCOME~~

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

Three Months Ended
March 31,

2009

2008

Net (loss) income

$
(25,205
)
$
46,252

Foreign currency translation (loss) gain adjustment

(385
)
473

Unrealized gain (loss) on debt securities

1,601

(2,300
)
Comprehensive (loss) income

$
(23,989
)
$
44,425

Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
Net income (loss) $ 7,320 $ (3,635 ) $ (17,885 ) $ 42,617
Foreign currency translation adjustment 312 (178 ) (73 ) 297
Unrealized gain (loss) on investments 2,703 107 4,304 (2,195 )
Comprehensive income (loss) $ 10,335 $ (3,706 ) $ (13,654 ) $ 40,719

NOTE 8—9—RELATED PARTY TRANSACTIONS

Perlegen Sciences, Inc.

As of ~~March 31,~~June 30, 2009, the Company, and certain of its affiliates, including certain members of the Board of Directors, held approximately 22% ownership interest in Perlegen Sciences, Inc. (“Perlegen”), a privately-held biotechnology company. In addition, two members of Perlegen’s Board of Directors are also members of the Company’s Board of Directors.

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

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

NOTE 9—10—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

~~Illumina Lawsuit~~

Illumina Lawsuit

On May 4, 2009, the Company was named as a defendant in a complaint filed by plaintiff Illumina, Inc. in the U.S. District Court for the Western District of Wisconsin. In the complaint, plaintiff alleges that ~~we are~~the Company is infringing Patent No. 7,510,841 by making and selling certain of ~~our~~the GeneChip® products. Plaintiff seeks a permanent injunction enjoining usthe Company from further infringement and unspecified monetary damages. The case has been set for trial in Wisconsin on October 4, 2010. The Company will vigorously defend against plaintiff’s claims.

E8 Pharmaceuticals LLC

~~Table of Contents~~

~~E8 Pharmaceuticals LLC~~

On July 1, 2008, the Company was named as a defendant in a complaint filed by plaintiffs E8 Pharmaceuticals LLC and Massachusetts Institute of Technology (MIT) in the United States District Court of Massachusetts. In the complaint, the plaintiffs allege that the Company is infringing one patent owned by MIT and licensed to E8 Pharmaceuticals by making and selling the Company’s GeneChip® products to customers and teaching its customers how to use the products. The plaintiffs seek a permanent injunction enjoining the Company from further infringement, unspecified monetary damages, enhanced damages pursuant to 35 U.S.C. § 284, costs, attorneys’ fees and other relief as the court deems just and proper. The Company will vigorously defend against ~~plaintiff’s~~plaintiffs’ claims.

~~Shareholder Derivative Lawsuits~~

Shareholder Derivative Lawsuits

In 2006, three shareholders of the Company filed purported derivative lawsuits on behalf of the Company, which lawsuits ~~names~~named the Company (as nominal defendant) and several of the Company’s current and former officers and directors, and ~~allege~~alleged that these officers and directors breached their fiduciary duties and other laws by participating in backdating stock options grants. ~~Two of these lawsuits were filed in~~The parties reached a settlement pursuant to which the United States District Court for the Northern District of California, one on August 30, 2006 and the other on September 13, 2006, and were subsequently consolidated. The third lawsuit was filed in the Superior Court of the State of California on October 20, 2006. The substance of the allegations in these cases is similar, and includes claims against the individual defendants for breach of fiduciary duties, unjust enrichment, and violations of federal securities laws, Generally Accepted Accounting Principles, Section 162(m) of the Internal Revenue Code, and certain state laws in each case in connection with the allegedly backdated options. On December 19, 2008, the parties executed a preliminary memorandum of understanding providing for the settlement of the shareholder derivative lawsuits. Under this memorandum, the parties tentativelyCompany agreed ~~among other things,~~ to the adoption of certain corporate governance enhancements and the payment of $3.5 million to counsel for plaintiffs. The ~~proposed~~district court approved the settlement ~~is subject to~~on June 29, 2009 and the ~~negotiation and execution~~Company made the $3.5 million payment in July 2009.

Table of a final memorandum of understanding and stipulation of settlement, and to court approval. The proposed settlement payment has been recorded in the Company’s Consolidated Statement of Operations for the year ended December 31, 2008.

~~Enzo Litigation~~Contents

Enzo Litigation

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

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

~~The Company has filed the action in the Southern District of New York to protect its interests. However, the Company cannot be sure that it will prevail in these matters.~~

~~Administrative Litigation and Proceedings~~

Administrative Proceedings

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

~~Table of Contents~~

NOTE ~~10—~~11—INCOME TAXES

The provision for income tax for the ~~first quarter of~~three and six months ended June 30, 2009 was approximately ~~$0.5 million.~~$0.4 million and $0.9 million, respectively. The provision for income tax ~~results from~~primarily consists of foreign taxes ~~in profitable locations.~~

and state taxes.

Due to the Company’s history of cumulative operating losses, management concluded that, after considering all the available objective evidence, it is not more likely that not that all the Company’s net deferred tax assets will be realized. Accordingly, all of the U.S. deferred tax assets, net of FIN No. 48,Accounting for Uncertainty in Income Taxes reserves, continue to be subject to a valuation allowance as of ~~March 31,~~June 30, 2009.

As of ~~March 31,~~June 30, 2009, there have been no material changes to the total ~~amounts~~amount of unrecognized tax benefits.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations as of ~~March 31,~~June 30, 2009 and for the ~~three-month periods~~three and six months ended ~~March 31,~~June 30, 2009 and 2008 should be read in conjunction with our financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q and with the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

All statements in this quarterly report that are not historical are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act as amended, including statements regarding our “expectations,” “beliefs,” “hopes,” “intentions,” “strategies” or the like. Such statements are based on our current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Actual results or business conditions may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, risks of our ability to achieve and sustain higher levels of revenue, improved gross margins, reduced operating expenses, market acceptance, personnel retention, global economic conditions, fluctuations in overall capital spending in the academic and biotechnology sectors, changes in government funding policies, unpredictable fluctuations in quarterly revenues, uncertainties related to cost and pricing of Affymetrix products, dependence on collaborative partners, uncertainties relating to sole source suppliers, uncertainties relating to FDA, and other regulatory approvals, risks relating to intellectual property of others and the uncertainties of patent protection and litigation.

Overview

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

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

Expanding into new markets. We intend to generate top-line revenue growth through the successful commercialization of our technologies and expansion of our customer base, including leveraging our technologies and those we’ve recently acquired into new markets. We believe that the genotyping market will continue to be one of the most attractive growth opportunities in life sciences and that new content packaged in versatile formats will drive growth. These opportunities include emerging cytogenetic and copy number diagnostics and our Drug Metabolizing Enzymes and Transporters (DMET) product which we believe addresses a significant unmet need for our pharmaceutical partners. We see opportunities in applications that are downstream from genome-wide analysis, particularly in validation and routine testing.

~~Table of Contents~~

Re-engineering our technology platform. This includes the combination of automated instrumentation, powerful new biological assays, and new array designs and content that will result in a significant expansion of our product line. The new GeneTitan System, our next generation mid-to-high end instrumentation platform enables significantly increased efficiency and through-put for researchers conducting array-based experiments. This fully-automated solution leads to higher data quality by removing or minimizing many of the sources of variation in laboratory. In addition to our cartridge based formats, we are transitioning many of our legacy products to the new “peg” array format. We intend to provide a complete menu of gene expression and genotyping applications.

Improving operating leverage. Starting in February 2008, we implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to decrease our cost of manufacturing and operating expenses. We ~~intend to~~have substantially completed the move ~~by mid 2009~~of our probe array manufacturing to our Singapore facility and our reagent manufacturing to our Cleveland facility, ~~and outsource~~as well as the outsourcing of our instrument manufacturing operations.

Critical Accounting Policies & Estimates

~~General~~

~~The following section of Management’s~~

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our ~~consolidated financial statements,~~Condensed Consolidated Financial Statements, which we have ~~been~~ prepared in accordance with U.S. generally accepted accounting ~~principles.~~principles ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that ~~are believed~~it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management has discussed the development, selection and disclosure of significant estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.

~~Our significant accounting policies are fully described in Note 2 to our consolidated financial statements. However, certain accounting policies are particularly important to the reporting~~

Table of ~~our financial position and results of operations and require the application of significant judgment by our management.~~ Contents

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, ~~and~~ if different estimates ~~that~~ reasonably could have been used, or if changes in the ~~accounting estimates~~estimate that are reasonably likely to occur ~~periodically,~~ could materially impact the financial statements. ~~Management believes~~There have been no significant changes during the ~~following~~six months ended June 30, 2009 in our critical accounting policies ~~reflect its more significant~~and estimates ~~and assumptions used~~compared to the disclosures in ~~the preparation of the consolidated financial statements.~~

~~Revenue Recognition~~

~~We enter into contracts to sell our products and, while the majority~~Item 7 of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the value of the arrangement should be allocated among the deliverable elements, when and how to recognize revenue for each element, and the period over which revenue should be recognized. We recognize revenue for delivered elements only when the fair values of undelivered elements are known and customer acceptance, if required, has occurred. Changes in the allocation of the sales price between delivered to undelivered elements might impact the timing of revenue recognition, but would not change the total revenue recognizedAnnual Report on ~~any arrangement.~~

~~Accounts Receivable~~

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

~~Inventories~~

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

~~Table of Contents~~

~~Non-marketable Securities~~

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

~~Acquired Technology Rights~~

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

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

~~Impairment of Long-lived Assets~~

Long-lived assets and certain identifiable intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values.

~~Income Taxes~~

Income tax expense is based on pretax financial accounting income. Under the asset and liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effectForm 10-K for the year in which the differences are expected to reverse. We must assess the likelihood that the resulting deferred tax assets will be realized. To the extent we believe that realization is not more likely than not, we establish a valuation allowance. Significant estimates are required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our deferred tax assets. Some of these estimates are based on interpretations of existing tax laws or regulations. We believe that our estimates are reasonable and that our reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of our deferred tax assets or liabilities, future levels of research and development spending, nondeductible expenses, changes in overall levels, character, geographical mix of pretax earnings, and ultimate outcomes of income tax audits.

~~Contingencies~~

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

~~Table of Contents~~

~~Accounting for Stock-based Compensation~~

~~We account for employee stock-based compensation in accordance with SFAS No. 123R,~~ ~~Share-Based Payment~~ (“SFAS 123R”). Under the provisions of SFAS 123R, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected term, volatility and forfeiture rates of the awards. The expected stock price volatility assumption was determined using a combination of historical and implied volatility of our common stock. We determined that blended volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods. We adopted SFAS 123R on a modified prospective basis. As of Marchended December 31, 2009, $31.9 million of total unrecognized compensation cost related to non-vested employee stock awards not yet recognized is expected to be allocated to cost of products sales and operating expenses over a weighted-average period of 3.1 years.

~~Restructuring~~

In recent years we engaged in, and may continue to engage in, restructuring actions, which require management to utilize significant estimates related to expenses for severance and other employee separation costs, lease cancellation, realizable values of assets that may become duplicative or obsolete, and other exit costs. If the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted. Refer to Note 4, “Restructuring”, for further information.

2008.

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board ~~(the “FASB”)~~ issued FASB Staff Position ~~(“FSP”)~~ Financial Accounting Standard ~~(“FAS”) 141(R)-1~~~~, Accounting for Assets Acquired~~No. 115-2 and ~~Liabilities Assumed in a Business Combination That Arise from Contingencies~~ ~~(“FSP 141(R)-1”)~~FAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends Statement of Financial Accounting Standards ~~(“SFAS”) No. 141 (Revised 2007)~~~~, Business Combinations~~ ~~(“SFAS 141(R)”).FSP 141(R)-1 applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of SFAS No. 5,~~ ~~Accounting for Contingencies,~~if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in SFAS 141(R). The provisions of FSP 141(R)-1 that amend SFAS 141(R) are effective for the first annual reporting period beginning on or after December 15, 2008. We adopted FSP 141(R)-1 on January 1, 2009, and the impact of this guidance will depend upon the nature, terms, and size of the acquisitions we consummate.

~~In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,~~ ~~Recognition and Presentation of Other-Than-Temporary Impairments~~ ~~(“FSP FAS 115-2 and FAS 124-2”), which amends SFAS~~ No. 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. This FSP ~~amends~~revises the other-than-temporary guidance in U.S. GAAP for debt securitiesto make the guidance more operational and extends the disclosure requirements to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. Only credit-related losses will be realized through the income statement as interest rate and market-related losses will be recorded in other comprehensive income on the balance sheet and will not affect the cost basis of the security. The provisions of FSP FAS 115-2 and FAS 124-2 ~~that amend SFAS 115 and SFAS 124~~ are effective for interim and annual reporting periods ending after June 15, 2009.Our implementation of this FSP isdid not ~~expected to affect~~have an effect on our consolidated results of operations or financial condition.

In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board No. 28-1, Interim Disclosures About Fair Value of Financial Instruments which amends the disclosure requirements under SFAS No. 107, Disclosures About Fair Value of Financial Instruments and APB No. 28, Interim Financial Reporting. These amendments require publicly traded companies to disclose information about the fair value of financial instruments during the interim periods as well as the annual period. The provisions of FSP FAS 107 and APB 28-1 that amend SFAS 107 and APB 28 are effective for interim and annual reporting periods ending after June 15, 2009. Our implementation of this FSP did not have an effect on our consolidated results of operations or financial condition.

In April 2009, the FASB issued FSP FAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly which supercedes FSP FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. This FSP provides additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity. It also provides additional guidance on circumstances that may indicate that a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for interim and annual reporting periods ending after June 15, 2009. Our implementation of this FSP did not have an effect on our consolidated results of operations or financial condition.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The provisions of SFAS 165 are effective for interim and annual reporting periods ending after June 15, 2009. Our implementation of this SFAS did not have an effect on our consolidated results of operations or financial condition.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles which establishes the Codification as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. This SFAS replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, in the third quarter of fiscal 2009, all references made to US GAAP will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing US GAAP, it is not expected to have any impact on our consolidated financial position or results of operations.

Results of Operations

The following discussion compares the historical results of operations for the three and six months ended ~~March 31,~~June 30, 2009 and 2008, respectively.

Product Sales

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

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Consumables

$
59,662

$
58,756

$
906

2
%
Instruments

5,208

4,050

1,158

29

Total product sales

$
64,870

$
62,806

$
2,064

3

	Three Months Ended				Dollar			Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change			change			June 30,				change			change
	2009		2008		from 2008			from 2008			2009		2008		from 2008			from 2008
Consumables	$	62,147	$	68,860	$	(6,713	)		(10	)%	$	121,809	$	127,616	$	(5,807	)		(5	)%
Instruments		5,009		6,162		(1,153	)		(19	)		10,217		10,212		5			0
Total product sales	$	67,156	$	75,022	$	(7,866	)		(10	)	$	132,026	$	137,828	$	(5,802	)		(4	)

Total product sales ~~increased~~decreased in the second quarter, and for the first ~~quarter~~six months, of 2009 as compared to 2008. Consumables, which include probe arrays and reagents, ~~increased~~decreased primarily due to lower average sales prices as well as volume of sales of our probe arrays and a negative impact from foreign currency, partially offset by an increase in the volume of sales of reagents associated with our ~~acquisitions~~acquisition of ~~USB Corporation and~~ Panomics, ~~Inc~~Inc. in December 2008. ~~This was partially offset by a decrease in unit sales of our probe arrays.~~ Instrument sales ~~increased~~decreased primarily due to ~~an increase in~~lower unit sales of our Probe Array systems and GeneChip® Scanners.

Services (in thousands, except percentage amounts):

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Services

$
11,556

$
8,420

$
3,136

37
%

	Three Months Ended						Dollar			Percentage			Six Months Ended						Dollar			Percentage
	June 30,						change			change			June 30,						change			change
	2009			2008			from 2008			from 2008			2009			2008			from 2008			from 2008
Services		$	12,221		$	9,005		$	3,216		36	%		$	23,777		$	17,425		$	6,352		36	%

Total services revenue increased in the second quarter, and for the first ~~quarter~~six months, of 2009 as compared to 2008, primarily due to an increase of ~~$3.3~~$4.0 million in our scientific services business associated with several genotyping ~~services business.~~

projects, including the Wellcome Trust Case Control Consortium and the Women’s Health Initiative.

~~Table of Contents~~

Royalties and Other Revenue (in thousands, except percentage ~~amounts~~)amounts):

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Royalties and other revenue

$
2,135

$
98,349

$
(96,214
)
(98
)%

	Three Months Ended				Dollar			Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change			change			June 30,				change			change
	2009		2008		from 2008			from 2008			2009		2008		from 2008			from 2008
Royalties and other revenue	$	2,177	$	2,884	$	(707	)		(25	)%	$	4,312	$	101,233	$	(96,921	)		(96	)%

Royalties and other revenue decreased in the ~~first~~second quarter ~~of 2009~~ as compared to 2008, primarily due to a decrease in grant funding of $0.9 million, partially offset by an increase in license fees of $0.2 million. For the first six months of 2009, the decrease, as compared to 2008, is primarily attributable to the recognition of a non-recurring $90 million intellectual property payment received in January 2008. ~~Exclusive~~

Table of ~~the non-recurring intellectual property payment, royalties and other revenue has been declining from historical levels and it is unknown if this trend will reverse in future periods.~~

Contents

Product and Services Gross Margins (in thousands, except percentage/point amounts):

Three Months Ended

Dollar/Point

March 31,

change from

2009

2008

2008

Total gross margin on product sales

$
30,436

$
36,829

$
(6,393
)
Total gross margin on services

3,975

2,742

1,233

Product gross margin as a percentage of products sales

47
%
59
%
(12
)
Service gross margin as a percentage of services

34
%
33
%
1

	Three Months Ended								Dollar/Point				Six Months Ended								Dollar/Point
	June 30,								change				June 30,								change
	2009				2008				from 2008				2009				2008				from 2008
Total gross margin on product sales		$	37,271			$	42,765			$	(5,494	)		$	67,707			$	79,593			$	(11,886	)
Total gross margin on services			4,714				2,314				2,400				8,689				5,056				3,633

Product gross margin as a percentage of product sales			55	%			57	%			(2	)			51	%			58	%			(7	)
Service gross margin as a percentage of services			39	%			26	%			13				37	%			29	%			8

The decrease in product gross margin in the ~~first~~second quarter of 2009 as compared to 2008 is primarily due to ~~$4.6 million~~consumables margin decline of approximately 5.6 points resulting from restructuring costs related to the closing of the West Sacramento facility and weaker average selling prices for certain consumables. This decrease was partially offset by higher factory utilization of approximately 5.0 points.

For the first six months of 2009, the decrease in product gross margin as compared to 2008 is primarily due to a 5.7 point decrease associated with closing our West Sacramento ~~facility.~~facility partially offset by higher factory utilization of 2.2 points. The remaining margin differential was primarily driven by revenue mix shift to lower margin products and ~~RNA~~ consumables average selling price decline.

The increase in services gross margin in the second quarter, and for the first ~~quarter~~six months ended, of 2009 as compared to 2008 ~~was~~is primarily due to higher revenue and a more favorable mix of programs.

Research and Development Expenses (in thousands, except percentage amounts):

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Research and development

$
21,283

$
18,768

$
2,515

13
%

	Three Months Ended				Dollar		Percentage			Six Months Ended				Dollar		Percentage
	June 30,				change		change			June 30,				change		change
	2009		2008		from 2008		from 2008			2009		2008		from 2008		from 2008
Research and development	$	20,361	$	19,591	$	770		4	%	$	41,644	$	38,359	$	3,285		9	%

The increase in research and development expenses in the second quarter, and for the first six months, of 2009 as compared to 2008 was primarily due to higher headcount related expenses and increased spending for supplies ~~and outside services.~~

~~Our research and~~associated with our acquisitions in the second half of 2008 as well as the development costs have recently increased and we believe a substantial investment in research and development is essential to a long-term sustainable competitive advantage and is critical to expansion into additional markets.

of new technologies.

Selling, General and Administrative Expenses (in thousands, except percentage amounts):

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Selling, general and administrative

$
33,982

$
34,733

$
(751
)
(2
)%

	Three Months Ended				Dollar		Percentage			Six Months Ended				Dollar		Percentage
	June 30,				change		change			June 30,				change		change
	2009		2008		from 2008		from 2008			2009		2008		from 2008		from 2008
Selling, general and administrative	$	31,686	$	29,640	$	2,046		7	%	$	65,668	$	64,373	$	1,295		2	%

The ~~decrease~~increase in selling, general and administrative expenses in the second quarter of 2009 as compared to 2008 was primarily due to ~~a decrease~~an increase in the following areas: $1.7 million in variable compensation ~~plus lower stock option based~~expenses, $1.4 million in stock-based compensation expense and $1.3 million in legal expenses as a result of various litigious matters. These increases were partially offset by decreases in the following areas: $1.1 million for staff-related expenses and $0.7 million for lower consulting and purchased services.

The increase in selling, general and administrative expenses for the six months ended June 30, 2009 as compared to 2008 was primarily due to the following areas: an increase of $1.0 million in stock-based compensation expense and $4.4 million in legal expenses, partially offset by a decrease of $1.5 million in variable compensation expenses, $0.6 million in staff-related expenses and $1.6 million in consulting and purchased services.

~~Table of Contents~~

~~Acquired-in-process technology (in thousands, except percentage amounts):~~

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Acquired in-process technology

$
—

$
800

$
(800
)
(100
)%

During the first quarter of 2008, we recorded a charge of approximately $0.8 million to acquired in-process technology upon the completion of our acquisition of USB Corp. on January 30, 2008. We determined the estimated fair value of certain research and development programs in-process at the acquisition date that had not yet reached technological feasibility and had no alternative future use. These projects primarily included certain molecular biology projects. The fair values of these projects were determined using the Income Approach whereby we estimated each project’s related future net cash flows between 2008 and 2014 and discounted them to their present value using a risk adjusted discount rate of 21%. This discount rate is based on our estimated weighted average cost of capital adjusted upward for the risks associated with the projects acquired.

Restructuring charges (in thousands, except percentage amounts):

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Restructuring

$
1,967

$
13,910

$
(11,943
)
(86
)%

~~Fiscal 2008 Restructuring Plan~~

	Three Months Ended				Dollar			Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change			change			June 30,				change			change
	2009		2008		from 2008			from 2008			2009		2008		from 2008			from 2008
Restructuring	$	226	$	898	$	(672	)		(75	)%	$	2,193	$	14,808	$	(12,615	)		(85	)%

In February 2008, we had committed to a restructuring plan (the “2008 Plan”) designed primarily to optimize our production capacity and cost structure and improve our future gross margins. The plan involves the closure of our West Sacramento manufacturing facility after which all of our products will be manufactured at our Singapore and Ohio facilities, as well as by third parties. We ~~expect~~substantially completed the closure of the West Sacramento facility ~~to be substantially complete by~~at the end of the second quarter of 2009.

During the three months ended June 30, 2009, we recognized approximately $1.0 million in restructuring expenses primarily related to employee termination benefits, partially offset by approximately $0.6 million related to the 2006 and 2007 restructuring plans. This is compared to the three months ended June 30, 2008 of $0.9 million in restructuring charges recognized. These expenses are presented as a component of “Restructuring charges” in our Consolidated Statements of Operations.

During the six months ended June 30, 2009, we recognized a total of $2.7 million in restructuring expenses, primarily related to employee termination benefits, partially offset by approximately $0.6 million related to the 2006 and 2007 restructuring plans, compared to $14.6 million in 2008, of which $12.5 million is related to non-cash charges associated with the abandonment of certain long-lived assets. These expenses are presented as a component of “Restructuring charges” in our Consolidated Statements of Operations.

We estimate the total restructuring expenses to be incurred in connection with the 2008 Plan will be approximately ~~$45.4~~$45.6 million. Of this total, approximately ~~$8.2~~$8.6 million relates to employee severance and ~~$37.2~~$37.0 million relates to non-cash charges associated with the abandonment and impairment of certain long-lived manufacturing assets. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ~~(“SFAS 146”)~~, the costs relating to employee severance and relocation are being recognized as expense over the remaining service periods of the employees.

~~The cash outlays to be incurred in connection with the 2008 Plan are estimated to be approximately $8.2 million. During the quarter ended March 31,~~ Through June 30, 2009, we have recognized approximately $1.8 million of expense for employee termination benefits associated with the 2008 Plan. During the quarter ended March 31, 2008 we recognized $12.5 million of non-cash charges related to the abandonment and impairment of certain manufacturing assets and $1.4 million of expense for employee termination benefits. These expenses are presented as a component of “Restructuring charges” in our Consolidated Statements of Operations.

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

$45.3 million.

Interest Income and Other, Net

(in thousands, except percentage amounts):

The components of interest income and other, net, are as ~~follows (in thousands, except percentage amounts):~~

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Interest income

$
1,370

$
4,861

$
(3,491
)
(72
)%
Realized (loss) gain on equity

(1,206
)
1,763

(2,969
)
(168
)
Currency (loss) gain, net

(1,832
)
260

(2,092
)
(805
)
Other

828

(12
)
840

7,000

Total interest income and other, net

$
(840
)
$
6,872

$
(7,712
)
(112
)

follows:

	Three Months Ended						Dollar			Percentage			Six Months Ended						Dollar			Percentage
	June 30,						change			change			June 30,						change			change
	2009			2008			from 2008			from 2008			2009			2008			from 2008			from 2008
Interest income	$	1,258		$	3,436		$	(2,178	)		(63	)%	$	2,628		$	8,297		$	(5,669	)		(68	)%
Realized (loss) gain on equity investments, net		124			(51	)		175			343			(1,082	)		(104	)		(978	)		(940	)
Currency (losses) gains, net		—			(1,145	)		1,145			(100	)		(1,833	)		(886	)		(947	)		107
Other		(26	)		46			(72	)		(157	)		803			1,851			(1,048	)		(57	)
Total interest income and other, net	$	1,356		$	2,286		$	(930	)		(41	)	$	516		$	9,158		$	(8,642	)		(94	)

~~Table of Contents~~

Interest income and other, net decreased in the second quarter, and for the first ~~quarter~~six months, of 2009 as compared to ~~the same period in~~ 2008 primarily due to decreased interest income resulting from lower average cash balances and lower ~~yields on marketable securities, a loss~~rates of ~~$1.1 million on our non-marketable investment and $1.8 million in currency losses.~~

return.

Table of Contents

Interest Expense (in thousands, except percentage amounts):

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Interest expense

$
(3,177
)
$
(3,589
)
$
(412
)
(11
)%

	Three Months Ended						Dollar			Percentage			Six Months Ended						Dollar			Percentage
	June 30,						change			change			June 30,						change			change
	2009			2008			from 2008			from 2008			2009			2008			from 2008			from 2008
Interest expense	$	(2,903	)	$	(3,548	)	$	(645	)		(18	)%	$	(6,080	)	$	(7,137	)	$	(1,057	)		(15	)%

Interest expense decreased in the second quarter, and for the first ~~quarter~~six months, of 2009 as compared to 2008, primarily due to the ~~retirement~~lower aggregate principal balance of ~~our $120 million 0.75%~~the senior convertible notes resulting from the repurchase of $119.9 million in aggregate principal amount in December ~~2008.~~

2008 as well as $69.1 million in aggregate principal amount in June 2009.

Income Tax ~~(Provision) Benefit~~Provision (in thousands, except percentage amounts):

Three Months Ended

Dollar

Percentage

March 31,

change from

change from

2009

2008

2008

2008

Income tax provision

$
(493
)
$
(26,740
)
$
(26,247
)
(98
)%

	Three Months Ended						Dollar		Percentage			Six Months Ended						Dollar			Percentage
	June 30,						change		change			June 30,						change			change
	2009			2008			from 2008		from 2008			2009			2008			from 2008			from 2008
Income tax provision	$	(409	)	$	(155	)	$	254		164	%	$	(902	)	$	(26,895	)	$	(25,993	)		(97	)%

The provision for income tax ~~decreased approximately $26.0 million in~~for the three and six months ended June 30, 2009 primarily consists of foreign taxes and state taxes. For the first ~~quarter of 2009 as compared to the same period in 2008. The decrease was due to a decrease in profitability. In the first quarter~~six months of 2009, the ~~provision for income tax results from foreign taxes in profitable locations.~~

decrease is due to lower profitability.

Due to our history of cumulative operating losses, management concluded ~~in the fourth quarter of 2008~~ that, after considering all the available objective evidence, it is not more likely that not that all our net deferred tax assets will be realized. Accordingly, all of our U.S. deferred tax assets, net of FIN 48 reserves, continue to be subject to a valuation allowance as of ~~March 31,~~June 30, 2009.

As of ~~March 31,~~June 30, 2009, there have been no material changes to our total amount of unrecognized tax ~~benefits.~~

~~Table~~benefits and we do not expect any material changes to the estimated amount of ~~Contents~~

liability within the next twelve months.

Liquidity and Capital Resources

Cashflow (in thousands):

Three Months Ended

March 31,

2009

2008

Net cash (used in) provided by operating activities

$
(4,178
)
$
81,703

Net cash (used in) provided by investing activities

(42,614
)
60,120

Net cash (used in) provided by financing activities

(101
)
216

Effect of foreign currency translation on cash and cash equivalents

(385
)
473

Net (decrease) increase in cash and cash equivalents

$
(47,278
)
$
142,512

Six Months Ended
June 30,
2009 2008
Net cash provided by operating activities $ 11,366 $ 95,976
Net cash used in investing activities (36 ) (59,186 )
Net cash used in financing activities (51,282 ) (3 )
Effect of foreign currency translation on cash and cash equivalents (73 ) 297
Net (decrease) increase in cash and cash equivalents $ (40,025 ) $ 37,084

Net Cash ~~(Used in)~~ Provided by Operating Activities

Cash ~~(used in)~~ provided by operating activities is net (loss) income adjusted for certain non-cash items and changes in operating assets and liabilities. Cash ~~used in~~provided by operating activities infor the first ~~quarter~~six months of 2009 was primarily comprised of a net loss of ~~$25.2~~$17.9 million and non-cash charges that included depreciation and amortization of ~~$13.2~~$26.2 million, stock-based compensation expense of ~~$2.1~~$4.4 million, ~~and~~ a loss of $1.2 million on equity investments and a gain of ~~$1.2 million.~~$17.4 million on the repurchase of convertible notes. Significant changes in assets and liabilities are as follows:

Our total accounts receivable was ~~$59.5~~$57.1 million at ~~March 31,~~June 30, 2009, a decrease of ~~$3.2~~$5.6 million from December 31, 2008. The decrease is primarily due to continued focus on collection efforts.

Our ~~inventory~~prepaid expenses and other assets balance was ~~$48.0~~$9.2 million at ~~March 31,~~June 30, 2009, a decrease of ~~$3.3~~$6.6 million from December 31, 2008. The decrease is primarily related to the receipt of a non-trade receivable.

Our accounts payable and accrued liabilities balance was $61.3 million at June 30, 2009, a decrease of $1.2 million from December 31, 2008. The decrease is primarily due to the ~~transition of manufacturing operations from West Sacramento to Singapore and Ohio.~~

~~Our accounts payable and accrued liabilities balance was $55.4 million at March 31, 2009, a~~net decrease of ~~$7.2 million from December 31, 2008. The decrease is primarily due to the payout of annual variable compensation, the payment of the~~ semi-annual interest on our convertible debt of $1.1 million and ~~severance~~timing of payments for operating costs ~~related to~~of $3.0 million, offset by the ~~closure~~increase in annual variable compensation of ~~our West Sacramento facility.~~

$2.5 million and legal costs for certain litigation proceedings of $0.7 million.

Net Cash ~~(Used in) 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.

Cash used for capital expenditures was ~~$3.8~~$5.0 million ~~for both~~and $7.4 million in the first ~~quarter~~six months of 2009 and 2008, respectively. Our capital expenditures in 2009 primarily related to the transition of manufacturing operations from West Sacramento to Singapore and Ohio as well as investments in the re-engineering of our technology platforms.

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

Our financing activities generally consist of transactions under our convertible senior notes and stock option exercise activity under our employee stock plan. Cash used in ~~the issuance of common stock was $0.1 million in~~financing activities for the first ~~quarter~~six months of 2009 asis primarily related to the repurchase of $69.1 million of aggregate principal amount of our 3.50% senior convertible notes for a ~~result~~total of the restricted stock awards withheld at the time of vesting to cover the taxes owed. Cash provided by the issuance of stock under our employee stock plan was $0.2 million in the first quarter of 2008.

$50.6 million.

Liquidity

We have financed our operations primarily through product sales, sales of equity and debt securities, collaborative agreements, interest income, and licensing of our technology. As of ~~March 31,~~June 30, 2009, we had cash, cash equivalents, and available-for-sale securities of approximately ~~$388.3 million.~~$353.2 million, including restricted cash. We anticipate that our existing capital resources along with the cash to be generated from operations will enable us to maintain currently planned operations, acquisitions and capital expenditures, for the foreseeable future. Capital expenditures are estimated to be approximately ~~$15.0~~$13.0 to ~~$17.0~~$15.0 million for the year ending December 31, 2009.

~~Table of Contents~~

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

As of ~~December 31, 2008,~~June 30, 2009, we have no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements; we will have to raise additional funds to continue the development of our technologies. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our stockholders. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into collaboration agreements on unattractive terms. Our inability to raise capital would have a material adverse effect on our business, financial condition and results of operations.

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

Table of Contents

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

There have been no other significant changes in our off-balance sheet arrangements and aggregate contractual obligations as compared to the disclosures in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.

~~Table of Contents~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

We derive a portion of our revenues in foreign currencies, predominantly in Europe and Japan. In addition, a portion of our assets are held in nonfunctional currencies of our subsidiaries. We use currency forward contracts to manage a portion of the currency exposures created from our activities denominated in foreign currencies. Our hedging program is designed to reduce, but does not entirely eliminate, the impact of currency exchange rate movements.

There have been no other significant changes in our market risk compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2008.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Affymetrix’s management carried out an evaluation, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as of the end of our last fiscal quarter. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q, such that the information relating to Affymetrix and its consolidated subsidiaries required to be disclosed in our Exchange Act reports filed with the SEC (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Affymetrix’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

Affymetrix’s management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in Affymetrix’s internal control over financial reporting. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in “Item 1. Condensed Consolidated Financial Statements — Note 9.10. Commitments and Contingencies” to the interim condensed consolidated financial statements, and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

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

Risks Related to the Growth of Our Business

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

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

~~Table of Contents~~

As a result, we are continually looking to develop, license or acquire new technologies and products to further broaden and deepen our product line. Some of the factors affecting market acceptance of our products include:

· ~~availability, quality and price as compared to competitive products;~~

· ~~the functionality of new and existing products;~~

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

· ~~the existence of undetected product defects;~~

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

· ~~citation of the products in published research; and~~

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

availability, quality and price as compared to competitive products;

the functionality of new and existing products;

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

the existence of undetected product defects;

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

citation of the products in published research; and

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

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

Table of Contents

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

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

Factors that will affect the success of our acquisitions include:

· ~~our ability to retain key employees of the acquired company;~~

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

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

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

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

our ability to retain key employees of the acquired company;

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

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

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

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

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

The clinical applications of GeneChip® technologies for diagnosing and enabling informed disease management options in the treatment of disease is an emerging market opportunity in molecular diagnostics. At this time, we cannot be certain that molecular diagnostic markets will develop as quickly as we expect. Although we believe that there will be clinical applications of our GeneChip® technologies that will be utilized for diagnosing and enabling informed disease management options in the treatment of disease, there can be no certainty of the technical or commercial success our technologies will achieve in such markets.

~~Table of Contents~~

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

Risks Related to Our Sales

We face significant competition.

The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition, new product introductions and strong price competition. We face significant competition as existing companies develop new or improved products and as new companies enter the market with new technologies.

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

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

In the molecular diagnostics field, competition will likely come from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases and other companies conducting research on new technologies to ascertain and analyze genetic information. Further, in the event that we develop new technology and products that compete with existing technology and products of well established companies, there can be no guarantee that the marketplace will readily adopt any such new technology and products that we may introduce in the future.

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

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

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

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

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

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

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

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

· ~~Impact of consolidation within the pharmaceutical industry; and~~

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

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

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

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

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

impact of consolidation within the pharmaceutical industry; and

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

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

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

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

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

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

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

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

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

· ~~our collaborations may be unsuccessful; or~~

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

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

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

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

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

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

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

our collaborations may be unsuccessful; or

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

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

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

Risks Related to the Manufacturing of Our Products

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

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

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

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

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

We have in the past, and may in the future, adjust our capacity based on business requirements, which may include the rationalization of our facilities, including the abandonment of long-lived manufacturing assets and additional charges related to a reduction in capacity. In 2008, we implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to increase our gross margins. Our restructuring plan ~~includes~~included the closure of our West Sacramento, California facility and the consolidation of our manufacturing to three ~~locations.~~locations which were substantially completed in the second quarter of 2009. Manufacturing and product quality issues may arise as we ~~implement this transition process and increase our production rates and~~ launch new products in our Singapore and Ohio facilities. We may lose customers if we are unable to manufacture products or if we experience delays in the manufacture of our products as a result of this transition.

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

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

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

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

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

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

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

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Risks Related to Our Operations

We may not achieve sustained profitability.

Although we were profitable for the year ended December 31, 2007, we incurred losses each year from our inception through the year ended December 31, 2002 and also for the years ended December 31, 2006 and December 31, 2008. As a result, we had an accumulated deficit of approximately ~~$441.6~~$434.3 million on ~~March 31,~~June 30, 2009. We expect to continue experiencing fluctuations in our operating results and cannot assure sustained profitability.

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

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

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

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

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

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

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

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

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

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

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

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Our effective tax rate may vary significantly.

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

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

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

Other factors that could affect our effective tax rate include levels of research and development spending and nondeductible expenses such as stock based compensation or merger related expenditures, and ultimate outcomes of income tax audits. In addition, U.S. Government officials have recently expressed interest in revising the tax code to end tax breaks for U.S. based multinational companies. While it is unclear when or how the code might be revised, if at all in this area, it is possible that in the future, we may experience a lower long-term benefit from our current tax strategy than we expected.

Risks Related to Our Investments

Our strategic equity investments may result in losses.

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

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

Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or short-term investments since December 31, 2008, we cannot assure you that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or short-term investments or our ability to meet our financing objectives. Other-than-temporary declines in the market price and valuation of any of our short-term investments would require us to adjust the carrying value of the investment through an impairment charge.

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Risks Related to Government Regulation and Litigation

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

The FDA must approve certain in-vitro diagnostic products before they can be marketed in the U.S. Certain in-vitro diagnostic products must also be approved by the regulatory agencies of foreign governments or jurisdictions before the product can be sold outside the U.S. Commercialization of our and our collaborative partners’ in-vitro diagnostic products outside of the research environment that may depend upon successful completion of clinical trials. Clinical development is a long, expensive and uncertain process and we do not know whether we, or any of our collaborative partners, will be permitted to undertake clinical trials of any

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potential in-vitro diagnostic products. It may take us or our collaborative partners many years to complete any such testing, and failure can occur at any stage. Delays or rejections of potential products may be encountered based on changes in regulatory policy for product approval during the period of product development and regulatory agency review. Moreover, if and when our projects reach clinical trials, we or our collaborative partners may decide to discontinue development of any or all of these projects at any time for commercial, scientific or other reasons. Any of the foregoing matters could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

safety.

Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous and radioactive materials and the generation, transportation and storage of waste. We could discover that we or an acquired business is not in material compliance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.

We may be exposed to liability due to product defects.

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

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

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

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

We have been, and may in the future be, subject to litigation or other proceedings or actions arising in relation to our historical stock option granting practices and the restatement of our prior period financial statements. For example, three purported derivative lawsuits were filed against us and several of our current and former officers and directors alleging that the defendants breached their fiduciary duty by backdating stock option grants. For additional information our shareholders’ derivative lawsuits, refer to Note 9 to the Condensed Consolidated Financial Statements in Item 1, Commitments and Contingencies of this Form 10-Q for further information.

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Risks Related to Our Intellectual Property

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

Maintaining a strong patent position is critical to our business. Litigation on these matters has been prevalent in our industry and we expect that this will continue. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and the extent of future protection is highly uncertain, so we cannot assure you that the patent rights that we have or may obtain will be valuable. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot assure you that our patent applications will have priority over those filed by others. Also, our intellectual property may be subject to significant administrative and litigation proceedings such as opposition proceedings against our patents in Europe, Japan and other jurisdictions. Because of the size and breadth of our patent portfolio we may or may not choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities.

If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations. Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. For example, we currently are engaged in litigation regarding intellectual property rights with third parties. For additional information concerning intellectual property litigation and administrative proceedings, refer to Note 1310 to the Condensed Consolidated Financial Statements in Item 8,1, Commitments and Contingencies of ~~the December 31, 2008~~this Form ~~10-K~~10-Q for further information.

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

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

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

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Risks Related to Our Common Stock

The market price of our common stock has been volatile.

The market price of our common stock is volatile. During the twelve-month period ending ~~March 31,~~June 30, 2009, the daily volume of our common stock fluctuated from 209,700 to ~~25,474,600~~12,461,700 shares. Moreover, during that period, our common stock traded as low as $1.78 per share and as high as ~~$18.03~~$10.99 per share.

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

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

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

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

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

· ~~competition~~

competition;

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

· the frequency of experiments conducted by our customers;

· our customers’ inventory of ~~GeneChip~~products;

® ~~products;~~

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

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

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

(a) Date of Meeting

The annual meeting of the stockholders of Affymetrix, Inc. was held on June 17, 2009. 61,974,004 shares of Affymetrix common stock were present at the meeting, representing 87.6% of a total of 70,745,584 shares of common stock outstanding and eligible to vote at such time.

(b) and (c) Name of Each Director Elected at the Meeting and Description of Each Matter Voted on and Number of Votes Cast

		For		Against		Withheld
1.	To elect directors to serve until the next meeting of stockholders or until their successors are elected.
	Stephen P.A. Fodor, Ph.D.		59,816,793		—		2,157,211
	Kevin M. King		59,892,148		—		2,081,856
	Paul Berg, Ph.D.		55,554,192		—		6,419,812
	John D. Diekman, Ph.D.		36,620,015		—		25,353,989
	Gary S. Guthart, Ph.D.		60,795,402		—		1,178,602
	Robert H. Trice, Ph.D.		61,073,276		—		900,728
	Robert P. Wayman		61,069,814		—		904,190
	John A. Young		55,653,411		—		6,320,593

Consequently, all nominees were elected by the stockholders of Affymetrix.

					For				Against				Abstain
	2.		To ratify the appointment of Ernst & Young LLP as independent registered public accounting firm of the Company for the fiscal year ending December 31, 2009.			61,424,566				475,435				74,003

Consequently, the proposals were approved by the stockholders of Affymetrix.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number		Description of Document

~~31.1~~	3.2	Amended and Restated Bylaws
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
~~31.2~~	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
~~32.1~~	32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	By:	/s/ JOHN C. BATTY
	Name:	John C. Batty
	Title:	Executive Vice President and Chief Financial Officer

~~May 8,~~August 7, 2009

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AFFYMETRIX, INC.

EXHIBIT INDEX

~~MARCH 31,~~

June 30, 2009

Exhibit Number		Description of Document

~~31.1~~	3.2	Amended and Restated Bylaws
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
~~31.2~~	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
~~32.1~~	32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

	March 31,			December 31,
	2009			2008
ASSETS:
Current assets:
Cash and cash equivalents	$	66,014		$	113,292
Restricted cash—short-term portion	2,249			4,402
Available-for-sale securities—short-term portion	232,999			250,970
Accounts receivable, net	59,465			62,726
Inventories	47,993			51,333
Deferred tax assets—current portion	1,108			1,077
Prepaid expenses and other current assets	12,972			15,725
Total current assets	422,800			499,525
Available-for-sale securities—long-term portion	84,625			26,900
Property and equipment, net	82,416			89,345
Acquired technology rights, net	59,018			62,569
Deferred tax assets—long-term portion	4,678			4,764
Restricted cash—long-term portion	2,425			2,175
Other assets	27,755			28,032
Total assets	$	683,717		$	713,310

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable and accrued liabilities	$	55,392		$	62,559
Deferred revenue—current portion	16,090			16,198
Total current liabilities	71,482			78,757
Deferred revenue—long-term portion	3,499			3,583
Other long-term liabilities	10,745			10,972
Convertible notes	316,341			316,341
Stockholders’ equity:
Common stock	707			703
Additional paid-in capital	723,619			721,641
Accumulated other comprehensive loss	(1,080		)	(2,296		)
Accumulated deficit	(441,596		)	(416,391		)
Total stockholders’ equity	281,650			303,657
Total liabilities and stockholders’ equity	$	683,717		$	713,310

	Three Months Ended March 31,
	2009			2008
REVENUE:
Product sales	$	64,870		$	62,806
Services	11,556			8,420
Royalties and other revenue	2,135			98,349
Total revenue	78,561			169,575
COSTS AND EXPENSES:
Cost of product sales	34,434			25,977
Cost of services and other	7,590			5,678
Research and development	21,283			18,768
Selling, general and administrative	33,982			34,733
Acquired in-process technology	—			800
Restructuring charges	1,967			13,910
Total costs and expenses	99,256			99,866
(Loss) income from operations	(20,695		)	69,709
Interest income and other, net	(840		)	6,872
Interest expense	(3,177		)	(3,589		)
(Loss) income before income taxes	(24,712		)	72,992
Income tax provision	(493		)	(26,740		)
Net (loss) income	$	(25,205	)	$	46,252

Basic net (loss) income per common share	$	(0.37	)	$	0.68
Diluted net (loss) income per common share	$	(0.37	)	$	0.58

Shares used in computing basic net (loss) income per common share	68,617			68,504
Shares used in computing diluted net (loss) income per common share	68,617			83,001

	Level 1		Level 2		Total
Non-U.S. equity securities	$	727	$	—	$	727
U.S. government obligations and agencies	—		215,536		215,536
U.S. corporate debt	—		101,361		101,361
Total	$	727	$	316,897	$	317,624

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government obligations and agency securities	$	172,989	$	725	$	(48	)	$	173,666
U.S. corporate debt securities		101,960		299		(830	)		101,429
Non-U.S. equity securities		890		367		—			1,257
Total securities	$	275,839	$	1,391	$	(878	)	$	276,352
Amounts included in:
Cash equivalents	$	3,270	$	8	$	(7	)	$	3,271
Available-for-sale securities		272,569		1,383		(871	)		273,081
Total securities	$	275,839	$	1,391	$	(878	)	$	276,352
Amounts mature in:
Less than one year	$	208,356	$	905	$	(836	)	$	208,425
One to two years		62,831		479		(17	)		63,293
More than two years		4,652		7		(25	)		4,634
Total securities	$	275,839	$	1,391	$	(878	)	$	276,352

	June 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Non-marketable equity securities	$	12,147	$	12,147	$	13,009	$	13,009
Liability:
Convertible notes		247,201		175,513		316,341		101,290

												As of March 31, 2009
	Balance as of									Balance as of		Total		Total
	December 31,		2009		Cash			Non-Cash		March 31,		costs		expected
	2008		Charges		Payments			Settlements		2009		to date		costs
Fiscal 2008 Restructuring Plan:
Employee severance and relocation benefits	$	3,178	$	1,747	$	(715	)	$	—	$	4,210	$	7,540	$	8,200
Abandonment and impairment of certain long-lived manufacturing assets	—		—		—			—		—		37,089		37,089
Fiscal 2007 Restructuring Plan:
Employee severance and relocation benefits	—		—		—			—		—		2,888		2,888
Contract termination costs	504		25		(129		)	—		400		1,694		1,700
Other restructuring costs	—		—		—			—		—		113		113
Fiscal 2006 Restructuring Plan:
Employee severance and relocation benefits	—		—		—			—		—		20,197		20,197
Contract termination costs	1,222		8		(50		)	—		1,180		2,610		2,900
Other restructuring costs	—		—		—			—		—		2,194		2,194
Total	$	4,904	$	1,780	$	(894	)	$	—	$	5,790	$	74,325	$	75,281

														As of June 30, 2009
	Balance as of											Balance as of		Total		Total
	December 31,		2009			Cash			Non-Cash			June 30,		costs		expected
	2008		Charges			Payments			Settlements			2009		to date		costs
Fiscal 2008 Restructuring Plan:
Employee severance and relocation benefits	$	3,178	$	2,718		$	(4,481	)	$	(418	)	$	997	$	8,511	$	8,550
Abandonment and impairment of certain long-lived manufacturing assets		—		(326	)		565			(239	)		—		36,763		37,000
Fiscal 2007 Restructuring Plan:
Employee severance and relocation benefits		—		—			—			—			—		2,888		2,888
Contract termination costs		504		(171	)		(243	)		251			341		1,498		1,500
Other restructuring costs		—		—			—			—			—		113		113
Fiscal 2006 Restructuring Plan:
Employee severance and relocation benefits		—		—			—			—			—		20,197		20,197
Contract termination costs		1,222		(28	)		(171	)		42			1,065		2,574		2,600
Other restructuring costs		—		—			—			—			—		2,194		2,194
Total	$	4,904	$	2,193		$	(4,330	)	$	(364	)	$	2,403	$	74,738	$	75,042

	Amortization
For the Year Ending December 31,	Expense
2009, remainder thereof	$	9,662
2010	12,212
2011	12,031
2012	10,257
2013	7,749
Thereafter	7,107
Total	$	59,018

	Amortization
For the Year Ending December 31,	Expense
2009, remainder thereof	$	6,358
2010	12,212
2011	12,031
2012	10,257
2013	7,749
Thereafter	7,107
Total	$	55,714

	Three Months Ended				Dollar		Percentage
	March 31,				change from		change from
	2009		2008		2008		2008
Consumables	$	59,662	$	58,756	$	906	2	%
Instruments	5,208		4,050		1,158		29
Total product sales	$	64,870	$	62,806	$	2,064	3

	Three Months Ended						Dollar/Point
	March 31,						change from
	2009			2008			2008
Total gross margin on product sales	$	30,436		$	36,829		$	(6,393	)
Total gross margin on services	3,975			2,742			1,233

Product gross margin as a percentage of products sales	47		%	59		%	(12		)
Service gross margin as a percentage of services	34		%	33		%	1