AFFYMETRIX INC - FORM 10-Q

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EX-32.1 - CERTIFICATE OF CEO AND CFO PURSUANT TO SECTION 906 OF SARBANES OXLEY - AFFYMETRIX INC	ex32-1.htm
EX-31.1 - CERTIFICATE OF CEO PURSUANT TO SECTION 302 OF SARBANES-OXLEY - AFFYMETRIX INC	ex31-1.htm

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 JUNE 30, 2011

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 x 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 o		Accelerated filer x

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

COMMON SHARES OUTSTANDING ON JULY 26, 2011: 70,366,112

AFFYMETRIX, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			3

	Item 1.	Financial Statements (Unaudited)	3

		Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010	3

		Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010	4

		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

	Item 4.	Controls and Procedures	25

PART II. OTHER INFORMATION			25

	Item 1.	Legal Proceedings	25

	Item 1A.	Risk Factors	25

	Item 5.	Other Information	36

	Item 6.	Exhibits	36

SIGNATURES			37

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	June 30,			December 31,
	2011			2010
ASSETS:
Current assets:
Cash and cash equivalents	$	27,396		$	35,484
Restricted cash		312			287
Available-for-sale securities—short-term portion		45,021			67,223
Accounts receivable, net		44,606			52,281
Inventories		47,899			49,373
Deferred tax assets—short-term portion		1,002			1,071
Prepaid expenses and other current assets		6,524			9,422
Total current assets		172,760			215,141
Available-for-sale securities—long-term portion		182,916			134,190
Property and equipment, net		48,829			54,177
Acquired technology rights, net		32,738			38,858
Deferred tax assets—long-term portion		4,961			4,894
Other long-term assets		11,987			13,525
Total assets	$	454,191		$	460,785

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable and accrued liabilities	$	37,718		$	44,259
Deferred revenue—short-term portion		9,901			10,950
Total current liabilities		47,619			55,209
Deferred revenue—long-term portion		4,222			4,601
Other long-term liabilities		11,687			11,748
Convertible notes		95,469			95,472
Stockholders’ equity:
Common stock		704			706
Additional paid-in capital		745,950			742,206
Accumulated other comprehensive income		2,706			1,376
Accumulated deficit		(454,166	)		(450,533	)
Total stockholders’ equity		295,194			293,755
Total liabilities and stockholders’ equity	$	454,191		$	460,785

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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
REVENUE:
Product sales	$	58,144		$	65,103		$	125,607		$	138,546
Services		5,259			4,742			9,767			9,205
Royalties and other revenue		1,256			1,833			3,009			4,114
Total revenue		64,659			71,678			138,383			151,865
COSTS AND EXPENSES:
Cost of product sales		22,367			27,535			46,266			55,994
Cost of services and other		3,426			3,554			6,626			8,143
Research and development		15,298			17,815			31,566			36,294
Selling, general and administrative		26,675			28,428			53,887			59,807
Total costs and expenses		67,766			77,332			138,345			160,238
(Loss) income from operations		(3,107	)		(5,654	)		38			(8,373	)
Interest income and other, net		499			738			(1,395	)		(2,860	)
Interest expense		937			2,340			1,875			4,772
Gain from repurchase of convertible notes		-			1,744			-			1,744
Loss before income taxes		(3,545	)		(5,512	)		(3,232	)		(14,261	)
Income tax provision		127			29			401			900
Net loss	$	(3,672	)	$	(5,541	)	$	(3,633	)	$	(15,161	)

Basic and diluted net loss per common share	$	(0.05	)	$	(0.08	)	$	(0.05	)	$	(0.22	)

Shares used in computing basic and diluted net loss per common share		69,504			69,030			70,700			68,981

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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,633	)	$	(15,161	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		16,511			17,472
Share-based compensation		4,374			5,032
Unrealized gain on hedging instruments		(50	)		-
Realized gain on debt and equity investments		(84	)		(255	)
Other-than-temporary impairment on non-marketable securities		1,156			4,920
Deferred tax assets		2			(37	)
Amortization of debt offering costs		204			520
Gain from repurchase of convertible notes		-			(1,744	)
Gain on disposal of property and equipment		(295	)		-
Impairment of property and equipment		-			348
Changes in operating assets and liabilities:
Accounts receivable, net		7,675			12,445
Inventories		1,474			(821	)
Prepaid expenses and other assets		3,968			6,848
Accounts payable and accrued liabilities		(7,530	)		(6,973	)
Deferred revenue		(1,428	)		(1,007	)
Other long-term liabilities		(275	)		(607	)
Net cash provided by operating activities		22,069			20,980
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(3,447	)		(5,631	)
Purchases of available-for-sale securities		(53,482	)		(268,648	)
Proceeds from sales of available-for-sale securities		12,723			210,737
Proceeds from maturities of available-for-sale securities		14,030			80,422
Proceeds from sale of property and equipment		400			-
Purchase of technology rights		(150	)		(250	)
Net cash (used in) provided by investing activities		(29,926	)		16,630
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net		(632	)		(926	)
Repurchase of convertible notes		(3	)		(24,676	)
Net cash used in financing activities		(635	)		(25,602	)
Effect of exchange rate changes on cash and cash equivalents		404			(466	)
Net (decrease) increase in cash and cash equivalents		(8,088	)		11,542
Cash and cash equivalents at beginning of period		35,484			65,642
Cash and cash equivalents at end of period	$	27,396		$	77,184

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AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

(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 (“GAAP”) 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.

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, 2010, as filed with the Securities and Exchange Commission on February 28, 2011.

Use of Estimates

The preparation of the consolidated financial statements is in conformity with GAAP, which requires management to make estimates and and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an on-going basis, management evaluates its estimates including, but not limited to, those related to revenue recognition, long-lived assets, derivative instruments and share-based compensation. The Company bases its estimates on historical experience and on various other market-specific and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

Revenue Recognition

Overview

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

The Company derives the majority of its revenue from product sales of probe arrays, reagents, and related instrumentation that may be sold individually or combined with any of the products, services or other sources of revenue. When a sale combines multiple elements upon delivery or performance of multiple products, services and/or rights to use assets, 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.

Effective January 1, 2010, the Company adopted Auditing Standards Update (“ASU”) No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements on a prospective basis, which establishes the relative selling price method whereby the Company is required to allocate consideration to all deliverables at the inception of the arrangement based on their relative selling prices and the change in accounting principle did not have a material impact on the Company’s financial results.

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Product Sales

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

Services

Services revenue includes equipment service revenue; scientific services revenue, which includes associated consumables; and revenue from custom probe array design fees. Revenue from equipment service contracts are recognized ratably over the life of the contract.

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

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.

Royalties and Other Revenue

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

License revenue is generally recognized upon the execution of an agreement or is recognized ratably over the period of expected performance.

Revenue from royalties is recognized under the terms of the related agreement.

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.

Transactions with Distributors

The Company recognizes revenue from transactions with distributors 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.

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Net Income (Loss) Per Common Share

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

Diluted earnings per share, if any, include certain potential dilutive securities from outstanding stock options (on the treasury stock method), common stock subject to repurchase, convertible notes (on the as-if-converted basis) and outstanding warrants to purchase common stock. The securities excluded from diluted earnings per common share, on an actual outstanding basis, were as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Employee stock options		6,311		5,717		6,311		5,717
Restricted stock subject to repurchase		1,628		1,642		1,628		1,642
Convertible notes		3,169		7,320		3,169		7,320
Total		11,108		14,679		11,108		14,679

Cash Equivalents, Available-for-Sale Securities and Investments

Marketable Securities

The Company’s investments consist of marketable equity and debt securities, including 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 securities with maturities at the date of purchase of 90 days or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. The Company’s investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) (“OCI”) in stockholders’ equity. The cost of its marketable securities is adjusted for the 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. Refer to Note 3. “Financial Instruments – Investments in Debt and Equity Securities” for further information.

Non-marketable Securities

As part of the Company’s strategic efforts to gain access to potential new products and technologies, it invests in equity securities of certain private biotechnology companies. These investments are included in other assets in the Condensed Consolidated Balance Sheets and are carried at cost. The Company also owns approximately 6% interest in a limited partnership investment fund that is accounted for under the equity method.

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Other-than-temporary Impairment

All of the Company’s marketable and non-marketable securities are subject to quarterly reviews for impairment that is deemed to be other-than-temporary (“OTTI”). An investment is considered other-than-temporarily impaired when its fair value is below its amortized cost and (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 from the investment is not expected to recover the entire amortized cost basis. Below is a summary of the Company’s analysis:

Marketable securities – As part of its review, the Company is required to take into consideration current market conditions, 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 and other factors when evaluating for the existence of OTTI in its securities portfolio. OTTI is separated into credit-related losses, which exists when amortized cost basis is not expected to be fully recovered, and non-credit related losses, which is the result of all other factors, such as illiquidity. Any credit-related OTTI is recognized in earnings while noncredit-related OTTI is recorded in OCI. Presentation of OTTI is made in the Condensed Consolidated Statements of Operations on a gross basis with an offset for the amount of OTTI recognized in OCI.

Non-marketable securities – The Company periodically monitors the liquidity and financing activities of its non-marketable securities to determine if any impairment exists and accordingly writes down, to the extent necessary, the carrying value of the 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. Refer to Note 3. “Financial Instruments – Non-Marketable Securities” for further information.

Derivative Financial Instruments

The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges must be adjusted to fair value through earnings.

For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the Company measures the effectiveness of the derivative instruments by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. The effective portion of the gain or loss on the derivative instrument is reported as a component of OCI in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. Refer to Note 3. “Financial Instruments – Foreign Currency Derivatives” for further information.

Recent Accounting Pronouncements

In June of 2011, Accounting Standards Codification Topic 220, Comprehensive Income was amended to increase the prominence of items reported in other comprehensive income. Accordingly, a company can present all non-owner changes in stockholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements The Company plans to adopt this guidance as of January 1, 2012 on a retrospective basis and does not expect the adoption thereof to have a material effect on its consolidated financial statements.

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NOTE 2—FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

A fair value hierarchy was established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are as follows:

Level 1: quoted prices in active markets for identical assets or liabilities;

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

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

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

The fair values of the Company’s Level 1 and Level 2 available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities—short-term portion and available-for-sale securities—long-term portion on the Company’s Condensed Consolidated Balance Sheets based on the maturity of the securities. The Company’s Level 3 assets consist of senior guaranteed notes that were transferred from Level 2 to Level 3 as of the end of June 30, 2011 due to the lack of frequency of pricing information available. The securities had a fair value of $4.1 million and were in an unrealized gain position at June 30, 2011. The senior guaranteed notes are issued by the National Credit Union Administration (“NCUA”), are collateralized by previously-issued residential mortgage-backed securities and fully guaranteed by the full faith and credit of the United States. Since there is no public active market for these securities, the Company determined the fair value using a discounted cash flow model based on estimated interest rates, timing and amount of cash flows, credit and liquidity premiums and yield percentages. The Company sold its Level 3 assets for a price above par during July 2011.

The fair value of the Company’s foreign currency derivative assets and liabilities is determined based on the estimated consideration the Company would pay or receive to terminate these agreements on the reporting date. The foreign currency derivative assets and liabilities are located in other current assets and accrued expenses, respectively, in the Condensed Consolidated Balance Sheets.

The fair value of the Company’s convertible notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for the convertible notes of the same remaining maturities. As of June 30, 2011 and December 31, 2010, the estimated fair value of the convertible notes was $95.5 million.

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Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 (in thousands):

			Significant
	Quoted Prices		Other		Significant
	In Active		Observable		Unobservable
	Markets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
June 30, 2011:
Assets:
U.S. government obligations and agency securities*	$	3,025	$	52,204	$	-	$	55,229
U.S. corporate debt*		-		118,527		4,067		122,594
U.S. and non-U.S. money market funds		-		2,535		-		2,535
Non-U.S. government obligations and agency securities		-		5,577		-		5,577
Non-U.S. corporate debt and equity securities		531		42,471		-		43,002
Total	$	3,556	$	221,314	$	4,067	$	228,937

Foreign currency derivative assets	$	-	$	13	$	-	$	13

Liabilities:
Foreign currency derivative liabilities	$	-	$	1,134	$	-	$	1,134

December 31, 2010:
Assets:
U.S. government obligations and agency securities*	$	3,008	$	49,048	$	-	$	52,056
U.S. corporate debt*		-		103,192		-		103,192
U.S. and non-U.S. money market funds		-		3,634		-		3,634
Non-U.S. government obligations and agency securities		-		8,106		-		8,106
Non-U.S. corporate debt and equity securities		804		39,725		-		40,529
Total	$	3,812	$	203,705	$	-	$	207,517

* Included in the Company’s available-for-sale securities were mortgage-backed investments totaling approximately 7% and 4% of the total portfolio as at June 30, 2011 and December 31, 2010, respectively.

The following table presents a reconciliation of assets measured at fair value on a recurring basis, using significant unobservable inputs (Level 3) for the six months ended June 30, 2011 (in thousands):

	Fair Value
	Measurements
	Using Significant
	Unobservable Inputs
	(Level 3)
Balance at December 31, 2010	$	-
Transfers from Level 2		4,067
Balance at June 30, 2011	$	4,067

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NOTE 3—FINANCIAL INSTRUMENTS

Investments in Debt and Equity Securities

The following is a summary of available-for-sale securities as of June 30, 2011 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government obligations and agency securities*	$	54,919	$	310	$	-		$	55,229
U.S. corporate debt*		122,302		589		(297	)		122,594
U.S. and non-U.S. money market funds		2,532		3		-			2,535
Non-U.S. government obligations and agency securities		5,599		5		(27	)		5,577
Non-U.S. corporate debt and equity securities		43,267		153		(418	)		43,002
Total securities	$	228,619	$	1,060	$	(742	)	$	228,937
Amounts included in:
Cash equivalents								$	1,000
Available-for-sale securities									227,937
Total securities								$	228,937
Amounts mature in:
Less than one year								$	46,020
One to two years									99,233
More than two years									83,684
Total securities								$	228,937

The following is a summary of available-for-sale securities as of December 31, 2010 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government obligations and agency securities*	$	52,047	$	85	$	(76	)	$	52,056
U.S. corporate debt*		103,601		275		(684	)		103,192
U.S. and non-U.S. money market funds		3,642		-		(8	)		3,634
Non-U.S. government obligations and agency securities		8,155		24		(73	)		8,106
Non-U.S. corporate debt and equity securities		40,724		48		(243	)		40,529
Total securities	$	208,169	$	432	$	(1,084	)	$	207,517
Amounts included in:
Cash equivalents								$	6,103
Available-for-sale securities									201,414
Total securities								$	207,517
Amounts mature in:
Less than one year								$	73,326
One to two years									45,690
More than two years									88,501
Total securities								$	207,517

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Realized gains for the six months ended June 30, 2011 and 2010 were less than $0.1 million and $0.2 million, respectively. Realized losses for the six months ended June 30, 2011 and 2010 were less than $0.1 million and $0.2 million, respectively. Realized gains and losses are included in interest income and other, net in the Condensed Consolidated Statements of Operations. The gross unrealized losses as of June 30, 2011 and 2010 were primarily related to one mortgage-backed security with a carrying value of $0.6 million that was impacted by the weakening of the global economy and a lack of liquidity in the credit markets, which have not fully recovered. 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 other 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 OTTI on these securities for the six months ended June 30, 2011 and 2010.

Non-Marketable Securities

As of June 30, 2011 and December 31, 2010, the carrying amounts of the Company’s non-marketable securities, totaling $5.7 million and $6.8 million, respectively, equaled their estimated fair values. Their estimated fair values were based on liquidation and net realizable values. During the six months ended June 30, 2011, the Company recognized an expense totaling $1.2 million in interest income and other, net related to its limited partnership investment fund. During the six months ended June 30, 2010, the Company recorded an impairment charge on its non-marketable securities totaling $4.9 million, primarily due to a decline in the estimated fair value of an investment in a private biotechnology company that was deemed other-than-temporary as a result of the respective price per share paid by investors in the most recent round of financing for the company which was significantly lower than the carrying value of the Company’s investment. Net investment losses are included in interest income and other, net in the Condensed Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment portfolio in the future.

Foreign Currency Derivatives

The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets are held in the nonfunctional currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company’s foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on the Condensed Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in OCI until the hedged item is recognized in earnings. As of June 30, 2011, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount currently recorded in OCI and expected to be recognized into earnings over the next 12 months is a net loss of $0.1 million. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in other comprehensive income associated with such derivative instruments are reclassified immediately into earnings through other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during 2011.

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As of June 30, 2011, the total notional values of the Company’s foreign currency forward contracts that mature within 12 months are as follows (in thousands):

			Contracts
	Contracts		Not Designated
	Qualifying		or Qualifying
	as Hedges		as Hedges
June 30, 2011:
Euro	$	3,421	$	9,553
Japanese yen		830		3,948
British pound		974		2,947
Total	$	5,225	$	16,448

As of December 31, 2010, the Company did not have any unsettled foreign currency contracts in place.

As a result of the use of derivative instruments, the Company is exposed to the risk that the counterparties may be unable to meet the terms of the agreements. To mitigate the risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred, however, no losses as a result of counterparty defaults are expected. The Company does not require and are not required to pledge collateral for these financial instruments. The Company does not enter into foreign currency forward contracts for trading or speculative purposes and is not party to any leveraged derivative instrument.

The following table shows the Company’s foreign currency derivatives measured at fair value as reflected on the Condensed Consolidated Balance Sheets as of June 30, 2011 (in thousands):

Fair Value of

Derivatives Not

Derivatives

Qualifying or

Balance Sheet

Designated as

Total

Location

Hedge Instruments

Fair Value

June 30, 2011:

Derivative assets:

Foreign exchange contracts

Other current assets

Derivative liabilities:

Foreign exchange contracts

Accrued expenses

1,057

1,134

The following table shows the pre-tax effect of the Company’s derivative instruments on OCI for the three and six months ended June 30, 2011 (in thousands):

	Amount of Loss Recognized
	in OCI (Effective Portion)
	For the			For the
	Three Months			Six Months
Derivatives designated as cash flow hedges
Foreign exchange contracts	$	(50	)	$	(50	)

There were no amounts classified from OCI into Income during the three and six months ended June 30, 2011.

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The following table shows the pre-tax effect of the Company’s derivative instruments on the Condensed Statements of Operations for the three and six months ended June 30, 2011 (in thousands):

	Amount of Loss Recognized
	in Statements of Operations
	(Amount Excluded from
	Effectiveness Testing)
	For the			For the			Location of Loss Recognized
	Three Months			Six Months			in Statements of Operations
Derivatives designated as cash flow hedges
Foreign exchange contracts	$	(13	)	$	(13	)	Interest Income and Other, Net

Derivatives not designated as hedging instruments
Foreign exchange contracts		(613	)		(2,517	)	Interest Income and Other, Net

The following table shows the pre-tax effect of the Company’s derivative instruments on the Condensed Statements of Operations for the three and six months ended June 30, 2010 (in thousands):

	Amount of Loss Recognized
	in Statements of Operations
	For the			For the			Location of Loss Recognized
	Three Months			Six Months			in Statements of Operations
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	(663	)	$	(1,500	)	Interest Income and Other, Net

The Company did not have any derivatives designated as cash flow hedges as of June 30, 2010.

NOTE 4—SHARE-BASED COMPENSATION

The Company has a share-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. As of June 30, 2011, the Company had approximately 6.2 million shares of common stock reserved for future issuance under its share-based compensation plans. New shares are issued as a result of stock option exercises, restricted stock units vesting and restricted stock award grants.

The Company recognized share-based compensation expense as follows (in thousands):

	Three months ended				Six months ended
	June 30,				June 30,
	2011		2010		2011		2010
Costs of sales	$	282	$	268	$	573	$	432
Research and development		511		548		1,038		1,101
Selling, general and administrative		1,013		1,887		2,763		3,499
Total stock-based compensation expense	$	1,806	$	2,703	$	4,374	$	5,032

As of June 30, 2011, $12.2 million of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2015. The weighted-average term of the unrecognized share-based compensation expense is 2.7 years.

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

	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Risk free interest rate		1.8	%		1.4	%		2.2	%		1.8	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		67	%		76	%		67	%		76	%
Expected option term (in years)		4.5			4.1			4.5			4.1

The risk free interest rate for periods within the contractual life of the Company’s stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company’s historical exercise trends over ten years. The expected volatility for the three and six months ended June 30, 2011 and 2010 is based on a blend of historical and market-based implied volatility. Using the assumptions above, the weighted-average grant date fair value of options granted during the three months ended June 30, 2011 and 2010 was $3.16 and $3.83, respectively, and during the six months ended June 30, 2011 and 2010 was $2.91 and $4.13, respectively.

NOTE 5—INVENTORIES

At June 30, 2011 and December 31, 2010, inventories consisted of the following (in thousands):

	June 30,		December 31,
	2011		2010
Raw materials	$	14,828	$	15,477
Work-in-process		9,265		9,235
Finished goods		23,806		24,661
Total	$	47,899	$	49,373

NOTE 6—ACQUIRED TECHNOLOGY RIGHTS

Acquired technology rights, with a carrying value of $110.6 million at June 30, 2011, are comprised of customer relationships, licenses to technology covered by patents owned by third parties or patents acquired by the Company and are amortized over the expected useful lives of these assets, which range from one to fifteen years. Accumulated amortization of these rights amounted to $77.9 million and $71.6 million at June 30, 2011 and December 31, 2010, respectively.

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

	Amortization
For the Year Ending December 31,	Expense
2011, remainder thereof	$	6,215
2012		10,722
2013		8,213
2014		6,333
2015		1,000
Thereafter		255
Total	$	32,738

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NOTE 7—COMPREHENSIVE LOSS

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Net loss	$	(3,672	)	$	(5,541	)	$	(3,633	)	$	(15,161	)
Foreign currency translation adjustment		210			(201	)		415			(466	)
Unrealized gain (loss) on securities		909			(920	)		965			(2,790	)
Unrealized loss on hedging contracts		(50	)		-			(50	)		-
Comprehensive loss	$	(2,603	)	$	(6,662	)	$	(2,303	)	$	(18,417	)

NOTE 8—WARRANTIES

Product Warranty Commitment

The Company provides for anticipated warranty costs at the time the associated product revenue is recognized. Product warranty costs are estimated based upon the Company’s historical experience and the applicable warranty period. The Company periodically reviews the adequacy of its warranty reserve and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. Information regarding the changes in the Company’s product warranty liability for the six months ended June 30, 2011 is as follows (in thousands):

	Amount
Balance at December 31, 2010	$	1,493
Additions charged to cost of product sales		262
Repairs and replacements		(697	)
Balance at June 30, 2011	$	1,058

NOTE 9—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. While the results of any litigation or any other legal proceedings are uncertain, the Company does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on our financial position or results of operations.

Illumina Lawsuit

On May 4, 2009 and November 3, 2009, the Company was named as a defendant in complaints filed by plaintiff Illumina, Inc., in the United States District Court for the Western District of Wisconsin (the “Court”). In the complaints, plaintiff alleged that the Company is infringing Patent Nos. 7,510,841 and 7,612,020 (the “Patents”) by making and selling certain of the GeneChip® products. Plaintiff sought a permanent injunction enjoining the Company from further infringement and unspecified monetary damages. In December 2010, the Court granted the Company’s motion for summary judgment that it did not infringe the patents held by Illumina and directed that the patent lawsuits brought by Illumina be dismissed and the cases closed. Illumina is appealing the Court’s decision and oral arguments on the appeal are scheduled to be heard on August 4, 2011. On March 14, 2011, the Company and Gregory L. Kirk filed a complaint against Illumina in the same Court, seeking correction of inventorship of the Patents by naming Dr. Kirk as an inventor. On July 11, 2011, the Court determined that the case should be stayed pending outcome of the appeal and therefore administratively closed the action with leave to reopen following resolution of the appeal.

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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 plaintiffs’ claims. There is no trial date set in this matter.

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 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 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 Company’s case has been related to complaints previously pending in the Southern District of New York against eight other former Enzo distributors. There is no trial date in the actions between Enzo and the Company.

Administrative Proceedings

The Company’s intellectual property is subject to a number of significant administrative 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. As of the three and six months ended June 30, 2011, the Company had not incurred significant costs in connection with administrative proceedings.

NOTE 10—INCOME TAXES

The provision for income tax for the three and six months ended June 30, 2011 was approximately $0.1 million and $0.4 million, respectively. The provision for income tax primarily consists of foreign 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 than not that all the Company’s net deferred tax assets will be realized. Accordingly, all of the U.S. deferred tax assets, net of reserves for uncertain tax positions, continue to be subject to a valuation allowance as of June 30, 2011.

In the normal course of business, the Company is subject to examination by taxing authorities in the U.S. and multiple foreign jurisdictions. The Company is currently under U.S. federal income tax examination for the 2004, 2005, 2006, 2008 and 2009 tax years.

As of June 30, 2011, there have been no material changes to the total amount of unrecognized tax benefits.

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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 June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 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, 2010.

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,” “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 associated with our ability to offer new products and technologies; our capacity to identify and capitalize upon emerging market opportunities; market acceptance of our products versus those of our competitors; uncertainties related to cost and pricing of Affymetrix products; fluctuations in overall capital spending in the academic and biotechnology sectors; changes in government funding policies; our dependence on collaborative partners; the size and structure of our current sales, technology and technical support organizations; uncertainties relating to our suppliers and manufacturing processes; our ability to achieve and sustain higher levels of revenue, improved gross margins and reduced operating expenses; personnel retention; global credit and financial market conditions; uncertainties relating to Federal and Drug Administration (“FDA”) and other regulatory approvals; risks relating to intellectual property of others and the uncertainties of patent protection and litigation; volatility of the market price of our common stock; and unpredictable fluctuations in quarterly revenues.

Overview

We develop, manufacture and sell products and services for genetic analysis to the life science research and clinical healthcare markets. Researchers around the world use our technology to better understand the role that genes play in disease, the effectiveness and safety of therapies and many other biological factors that affect human well-being. We sell our products to some of the world’s largest pharmaceutical, diagnostic and biotechnology companies, as well as leading academic, government and not-for-profit research institutions and more than 23,500 peer-reviewed papers have been published based on work using our products. We have more than 900 employees worldwide and maintain sales and distribution operations across the United States, Europe, Japan and Asia.

We offer a comprehensive line of products for two principal applications: gene expression and genotyping. Our product sales consist primarily of sales of instruments and related consumables. We have three instrument systems, GeneTitan®, GeneChip® and GeneAtlas™, that include instruments, consumables and software. Our GeneChip® instruments run arrays packaged in cartridges and our GeneTitan® and GeneAtlasTM instruments run arrays packaged in a peg format.

We also offer a variety of assays for gene expression targeting low- to mid-plex markets that are downstream of our whole genome arrays and a range of reagent kits that are compatible with our platforms as well as the products of other vendors.

Overview of the Three and Six Months Ended June 30, 2011

During the second quarter of 2011, our business was adversely affected by a significant drop in sales of consumables to our academic and pharmaceutical customers, particularly in North America, which led to a decrease in revenue as compared to the same period in 2010. Due to lower revenues, we incurred a net loss of $3.7 million for the quarter. However, we generated cash flows from operations of $13.9 million in the second quarter and further decreased our operating expenses by $4.3 million as compared to the same period in 2010.

For the six months ended June 30, 2011, we achieved income from operations of slightly better than breakeven as compared to a loss from operations of $8.4 million for the same period in 2010 despite lower revenues, largely due to a reduction of $10.6 million in total operating expenses and improved gross margins. Revenues were lower due primarily to lower volume of sales. Additionally, as of June 30, 2011, we generated positive operating cash flow of $22.1 million.

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Frank Witney, Ph.D., became our new chief executive officer and president in July 2011. Under Dr. Witney’s leadership, our focus remains on carrying out the strategic initiatives that we laid out at the beginning of the year:

Entering new markets and expanding our product lines. Our goal is to expand our revenue base by entering new markets, growing our customer base and successfully commercializing our established and acquired technologies. In 2011, we intend to continue to expand our focus to include the validation and routine testing markets which we believe offer attractive compound annual growth rates and opportunities for more recurring revenue growth in the future. We seek to expand our product line with new products that combine automated instrumentation, powerful new biological assays, and new array designs and content.

Profitability. We remain focused on improving our operating leverage and were successful in lowering our operating expenses in the first six months of 2011 as compared to the same period in 2010. Profitability in 2011 will depend on a number of factors, including but not limited to, increasing top-line revenue and sustained operating leverage.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting 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 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.

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, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. During the three and six months ended June 30, 2011, there have been no significant changes in our critical accounting policies and estimates compared to the disclosures in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.

Results of Operations

The following discussion compares the historical results of operations for the three and six months ended June 30, 2011 and 2010.

PRODUCT SALES

The components of product sales are as follows:

Dollars in thousands	Three Months Ended				Dollar			Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change			change			June 30,				change			change
	2011		2010		from 2010			from 2010			2011		2010		from 2010			from 2010
Consumables	$	54,346	$	60,632	$	(6,286	)		(10	) %	$	117,200	$	126,895	$	(9,695	)		(8	) %
Instruments		3,798		4,471		(673	)		(15	)		8,407		11,651		(3,244	)		(28	)
Total product sales	$	58,144	$	65,103	$	(6,959	)		(11	) %	$	125,607	$	138,546	$	(12,939	)		(9	) %

Total product sales decreased in the three and six months ended June 30, 2011 as compared to the same period in 2010 primarily due to decreased consumable sales resulting from lower overall chip volumes.

Additionally, instruments revenue decreased in the three and six months ended June 30, 2011 primarily due to lower sales of instruments.

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SERVICES

Dollars in thousands	Three Months Ended				Dollar		Percentage			Six Months Ended				Dollar		Percentage
	June 30,				change		change			June 30,				change		change
	2011		2010		from 2010		from 2010			2011		2010		from 2010		from 2010
Services	$	5,259	$	4,742	$	517		11	%	$	9,767	$	9,205	$	562		6	%

Services revenue increased in the three and six months ended June 30, 2011 as compared to the same period in 2010 primarily due to increased scientific service revenue.

ROYALTIES AND OTHER REVENUE

Dollars in thousands	Three Months Ended				Dollar			Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change			change			June 30,				change			change
	2011		2010		from 2010			from 2010			2011		2010		from 2010			from 2010
Royalties and other revenue	$	1,256	$	1,833	$	(577	)		(31	) %	$	3,009	$	4,114	$	(1,105	)		(27	) %

Royalties and other revenue decreased in the three and six months ended June 30, 2011 as compared to the same periods in 2010 primarily due to less royalties and lower research revenue in 2011.

PRODUCT AND SERVICES GROSS MARGIN

Dollars in thousands	Three Months Ended						Dollar/Point			Six Months Ended						Dollar/Point
	June 30,						change from			June 30,						change from
	2011			2010			2010			2011			2010			2010
Total gross margin on product sales	$	35,777		$	37,568		$	(1,791	)	$	79,341		$	82,552		$	(3,211	)
Total gross margin on services		1,833			1,188			645			3,141			1,062			2,079

Product gross margin as a percentage of products sales		62	%		58	%		4			63	%		60	%		3

Service gross margin as a percentage of services		35	%		25	%		10			32	%		12	%		20

Despite lower revenues, we experienced an increase in product gross margin as a percentage of revenue for the three and six months ended June 30, 2011, as compared to the same periods in 2010, primarily due to a mix shift to higher margin chip products along with lower material and warranty costs, and plant consolidation activities expenses and excess and obsolescence costs for products with finite lives incurred in 2010. These cost improvements were partially offset by lower cost absorption due to higher production levels in 2010.

Service gross margin increased in the three and six months ended June 30, 2011 as compared to the same periods in 2010 primarily due to plant consolidation costs that were incurred in connection with the closing of the West Sacramento facility in the second quarter of 2010.

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RESEARCH AND DEVELOPMENT EXPENSES

Dollars in thousands	Three Months Ended				Dollar			Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change			change			June 30,				change			change
	2011		2010		from 2010			from 2010			2011		2010		from 2010			from 2010
Research and development	$	15,298	$	17,815	$	(2,517	)		(14	) %	$	31,566	$	36,294	$	(4,728	)		(13	) %

The decrease in research and development expenses for the three and six months ended June 30, 2011 as compared to 2010 was primarily due to savings in headcount-related expenses of $0.7 million and $1.6 million, respectively, adjustments of $0.5 million in variable compensation impacting both periods, reductions of $1.0 million and $2.0 million, respectively, in spending on masks, chips and supplies due to the completion of developmental activities on products in 2010, and decreases of $0.4 million and $0.9 million, respectively, in spending on consulting activities.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Dollars in thousands	Three Months Ended				Dollar			Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change			change			June 30,				change			change
	2011		2010		from 2010			from 2010			2011		2010		from 2010			from 2010
Selling, general and administrative	$	26,675	$	28,428	$	(1,753	)		(6	) %	$	53,887	$	59,807	$	(5,920	)		(10	) %

The decrease in selling, general and administrative expenses for the three months ended June 30, 2011 as compared to 2010 was primarily due to savings of $0.6 million from variable compensation adjustments, $0.8 million in legal services and $1.0 million from headcount-related expenses. These decreases were partially offset by one-time severance benefits to our former chief executive officer.

For the six months ended June 30, 2011, the decrease in selling, general and administrative expenses as compared to the same period in 2011 was primarily due to savings of $2.5 million from headcount-related expenses, $0.6 million from variable compensation adjustments and $3.2 million in consulting and other services. These decreases were partially offset by one-time severance benefits to our former chief executive officer.

INTEREST INCOME AND OTHER, NET

Dollars in thousands	Three Months Ended						Dollar			Percentage			Six Months Ended						Dollar			Percentage
	June 30,						change			change			June 30,						change			change
	2011			2010			from 2010			from 2010			2011			2010			from 2010			from 2010
Interest income	$	639		$	670		$	(31	)		(5	) %	$	1,277		$	1,432		$	(155	)		(11	) %
Realized loss on equity investments, net		(15	)		(197	)		182			92			(1,072	)		(4,360	)		3,288			75
Currency (loss) gain, net		(407	)		232			(639	)		(275	)		(1,779	)		44			(1,823	)		(4,143	)
Other		282			33			249			755			179			24			155			646
Total interest income and other, net	$	499		$	738		$	(239	)		(32	) %	$	(1,395	)	$	(2,860	)	$	1,465			51	%

The change in interest income and other, net for the three months ended June 30, 2011 as compared to the same period in 2010 was primarily due to increased currency losses due to the weakening of the U.S. dollar against the Euro versus the prior period.

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The change in interest income and other, net for the six months ended June 30, 2011 as compared to the same period in 2010 was primarily due to an expense of $1.2 million recorded during the first quarter of 2011 related to our non-marketable investment in a limited partnership fund as compared to an OTTI loss of $4.9 million recognized on a non-marketable investment in a private biotechnology company during the first quarter of 2010. We continue to monitor the liquidity and financing activities of strategic non-marketable investments to determine if any impairment exists and it is uncertain whether or not we will realize any long-term benefits associated with these strategic investments. In addition, realized gains on our equity investments decreased during 2011 as compared to 2010 as well as increased currency losses primarily due to the weakening of the U.S. dollar against the Euro.

INTEREST EXPENSE

Dollars in thousands	Three Months Ended				Dollar			Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change			change			June 30,				change			change
	2011		2010		from 2010			from 2010			2011		2010		from 2010			from 2010
Interest expense	$	937	$	2,340	$	(1,403	)		(60	) %	$	1,875	$	4,772	$	(2,897	)		(61	) %

Interest expense decreased in the three and six months ended June 30, 2011 as compared to the same period in 2010 due to a lower aggregate principal balance of our senior convertible notes resulting from our repurchases totaling $151.7 million in aggregate principal amount of our 3.50% senior convertible notes during 2010.

INCOME TAX PROVISION

Dollars in thousands	Three Months Ended				Dollar		Percentage			Six Months Ended				Dollar			Percentage
	June 30,				change		change			June 30,				change			change
	2011		2010		from 2010		from 2010			2011		2010		from 2010			from 2010
Income tax provision	$	127	$	29	$	98		338	%	$	401	$	900	$	(499	)		(55	) %

In the three and six months ended June 30, 2011, the provision for income tax consisted primarily of foreign taxes. Due to our history of cumulative operating losses, management concluded that, after considering all the available objective evidence, it is not more likely than not that all our net deferred tax assets will be realized. Accordingly, all of our U.S. deferred tax assets, net of reserves for uncertain tax positions, continue to be subject to a valuation allowance as of June 30, 2011.

Our future effective income tax rate depends on various factors, including tax legislation changes and the overall levels and geographic mix of pretax earnings.

In the normal course of business, we are subject to examination by taxing authorities in the U.S. and multiple foreign jurisdictions. We are currently under U.S. federal income tax examination for the 2004, 2005, 2006, 2008 and 2009 tax years.

As of June 30, 2011, there have been no material changes to our total amount of unrecognized tax benefits.

Liquidity and Capital Resources

Liquidity

Historically, we have financed our operations primarily through product sales, sales of equity and debt securities such as our 3.50% convertible notes in 2007 and licensing of our technology.

Our cash outflows have generally been as follows: cash used in operating activities such as research and development programs, sales and marketing activity, procurement and growth of inventory, compensation and benefits of our employees and other working capital needs; cash paid for acquisitions; cash paid for litigation activity and settlements; and cash used for our debt repurchases and repurchases of our convertible notes as well as interest payments on our convertible notes obligations.

As of June 30, 2011, we had cash, cash equivalents, and available-for-sale securities of approximately $255.6 million. We anticipate that our existing capital resources along with the cash to be generated from operations will enable us to maintain currently planned operations, acquisitions, debt repayments or repurchases and capital expenditures for the foreseeable future.

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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, but are not limited to, lower sales of our products and services; 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 June 30, 2011, 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 or common stock in open market purchases, privately negotiated transactions dependent on market conditions, liquidity, and contractual obligations and other factors such as we did during the year ended December 31, 2010.

Cashflow (in thousands)

	Six Months Ended
	June 30,
	2011			2010
Net cash provided by operating activities	$	22,069		$	20,980
Net cash (used in) provided by investing activities		(29,926	)		16,630
Net cash used in financing activities		(635	)		(25,602	)
Effect of foreign currency translation on cash and cash equivalents		404			(466	)
Net (decrease) increase in cash and cash equivalents	$	(8,088	)	$	11,542

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2011 was comprised of a net loss of $3.6 million, non-cash charges of $21.8 million and a $3.9 million increase in operating assets. Adjustments for non-cash expenses include depreciation and amortization expense of $16.5 million, an impairment charge related to our non-marketable limited partnership investment fund of $1.2 million and share-based compensation expense of $4.4 million.

Investing Activities

Our investing activities include the purchases, sales and maturities of available-for-sale securities. We monitor the level of cash and cash equivalents as compared to available-for-sale securities to manage the return on funds that resulted in net purchases totaling $26.7 million of available-for-sale securities during the first six months of 2011.

We also had capital expenditures of $3.4 million during the period which were primarily related to the purchase of manufacturing equipment and computer hardware.

Financing Activities

Our financing activities generally consist of stock option exercise activity under our employee stock plan. Cash used in the issuance of stock under our employee stock plan, net of treasury shares withheld for taxes, was $0.6 million for the first six months ended June 30, 2011.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Other than the amended lease agreements as reported to the Securities and Exchange Commission in a Current Report on Form 8-K on July 14, 2011 that extended the lease terms for our corporate offices located in Santa Clara, there have been no 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, 2010.

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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. See Note 3. “Financial Instruments” to our Condensed Consolidated Financial Statements elsewhere in this Quarterly Report on Form 10-Q for further information.

There have been no 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, 2010.

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 defined in Exchange Act Rule 13a-15(e)), 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 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 Note 9. “Legal Proceedings” to our Condensed Consolidated Financial Statements elsewhere in this Quarterly Report on Form 10-Q, 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

If we do not continually develop and commercialize new or enhanced products and services, our business may not grow.

Our success depends in large part on our continual, timely development and commercialization of new or enhanced products and services that address evolving market requirements and are attractive to customers. The genetic analysis tools market, including the RNA/DNA probe array field, is characterized by rapid and significant technological changes, frequent new product introductions and enhancements, evolving industry standards and changing customer needs. 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. Other companies may introduce new technologies, techniques, products or services that render our products or services obsolete or uneconomical. 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.

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

availability, quality and price as compared to competitive technologies, products and services;

the functionality of new and existing products and services, and whether they address market requirements;

the timing of introduction of our technologies, products and services as compared to competitive technologies, products and services;

the existence of product defects;

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

citation of our products in published research; and

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

Our new or enhanced technologies, products or services may not be accepted by customers in our target markets. For example, once we have developed or obtained a new technology, we may fail to successfully commercialize new products and services based on that technology, particularly to the extent that our new products and services compete with established technologies or the products and services of more established competitors. Risks relating to product adoptions 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.

Our growth depends in part on our ability to acquire new technologies and successfully integrate past acquisitions, which may absorb significant resources and may not be successful.

As part of our strategy to develop and identify new technologies, products and services, we have made and may continue to acquire new technologies. 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 meet 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 performance of the acquired business, technology, product or service;

our ability to integrate operations, financial and other systems;

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

any disruption in order fulfillment or loss of sales due to integration processes;

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

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

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our assumption of known contingent liabilities that are realized, known liabilities that prove greater than anticipated, or unknown liabilities that come to light, to the extent that the realization of any of these liabilities increases our expenses or adversely affects our business or financial position.

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 our 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 technologies that will be utilized for diagnosing and enabling informed disease management options in the treatment of disease, there can be no certainty of the technical or commercial success our technologies will achieve in such markets.

Our success in the molecular diagnostics market depends on our collaborative relationships and the ability of our collaborative partners to achieve regulatory approval for such products in the United States and in overseas markets, and successfully market and sell products using our technologies.

Risks Related to Our Sales

We face significant competition, and our failure to compete effectively could adversely affect our sales and results of operations.

We compete with companies that develop, manufacture and market genetic analysis tools for the life science and clinical healthcare markets. We face significant competition as our competitors and new companies develop new, improved or more economical products, services and technologies.

The market for our products and services is highly competitive, has high barriers to entry and has several other large companies with significant market share. For example, companies such as Illumina, Inc., Agilent Technologies and Life Technologies Corporation have products for genetic analysis that are directly competitive with certain of our products. In addition, Illumina, Inc., Life Technologies Corporation and Pacific Biosciences of California, Inc. also offer DNA sequencing technology which we do not offer. As the costs of DNA sequencing fall, we will face increased competition in certain of our existing and potential markets. We also face competition from established diagnostic companies such as Beckman Coulter, Becton, Dickinson and Company, bioMérieux, Celera Diagnostics, Johnson & Johnson, Gen-Probe Incorporated and Roche Diagnostics, which 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 and regulatory expertise. In addition, our collaborative partners may compete with us.

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.

Reduction or delay in research and development budgets and government funding may adversely impact our sales.

We expect that our revenue in the foreseeable future will be derived primarily from products and services provided to pharmaceutical and biotechnology companies, as well as a relatively small number of 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:

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

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

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impact of consolidation within the pharmaceutical industry; and

cost reduction initiatives of customers.

As we implement our strategy to expand into new markets, the size and structure of our current sales, marketing and technical support organizations may limit our ability to sell our products and services.

As we implement our strategy to expand into new markets, we may not be able to establish a sales, marketing and technical support organization sufficient to sell, market and support all of our new products, or to cover all of the regions that we target 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. In addition, we may enter into distribution arrangements with respect to some of our products that we believe will be better served in such arrangements than our current sales and marketing organizations. We have less control over other third parties on whom we rely for sales, marketing and technical support. In addition, these third parties may decide to develop and sell competitive products or otherwise become our competitors, which could harm our business.

Consolidation trends in both our market and many of our customers’ markets have increased competition.

There has been a trend toward industry consolidation in our markets for the past several years. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in operating results and could harm our business.

Additionally, there has been a trend toward consolidation in many of the customer markets we sell to, in particular the pharmaceutical industry. Consolidation in our customer markets results in increased competition for important market segments and fewer available accounts, and larger consolidated customers may be able to exert increased pricing pressure on companies in our market.

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

Our commercial success depends in part on our ability to develop and maintain collaborative relationships with key companies as well as with key academic researchers. In particular, we depend on our collaborators for in-licensed technology and components for a variety of our product lines. We collaborate with a number of instrumentation and reagent companies, including Beckman Coulter, CapitalBio Corporation, Genisphere LLC, Life Technologies Corporation, Luminex Corporation, Siemens Medical Solutions Diagnostics, Takara Bio Inc., New England Biolabs, Inc. and Qiagen GmbH. Some of these collaborators, like Life Technologies Corporation, Takara Bio Inc. and New England Biolabs, Inc. and Luminex Corporation, are currently sole suppliers of components of some of our reagent kits but they are also our competitors. Relying on our collaborative relationships is risky to our future success because:

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

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 and services;

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.

Risks Related to the Manufacturing of Our Products

We depend on a limited number of suppliers. We will be unable to launch or commercialize our products in a timely manner if our suppliers are unable to meet our requirements or if shipments from these suppliers are delayed or interrupted.

We outsource the manufacturing of our instruments to a limited number of suppliers. Some of our instruments and other key parts of our product lines, including components of our manufacturing equipment and certain raw materials used in the manufacture of our products are currently only available from a single supplier. Therefore, we depend on our suppliers to supply our instruments, or components of our products, in required volumes, at appropriate quality and reliability levels, and in compliance with regulatory requirements on a timely basis. If supplies from these vendors do not meet our requirements, or were delayed or interrupted for any reason, we would not be able to commercialize our products successfully or in a timely fashion, and our business could be adversely impacted.

Our business is dependent on our ability to forecast our needs for components and products in our product 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.

We may lose customers or sales if we are unable to meet customer demand for our products on a timely and cost-effective basis, or if we are unable to ensure the proper performance and quality of our products.

We produce our 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. As we develop new and enhanced products, we must be able to resolve in a timely, cost-effective manner manufacturing issues that may arise from time to time.

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 products 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 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 since certain of our products have a limited shelf life, which would have a negative impact on our gross margin.

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We have in the past, and may in the future, adjust our manufacturing 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. Manufacturing and product quality issues may arise as we launch new products in our Singapore and Ohio facilities and rely increasingly upon manufacturing by third parties. 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 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 databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of these 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 will depend upon multiple and complex factors that would be considered in determining the appropriate actions required to remedy any inaccuracies. Our inability to timely deliver acceptable products as a result of these factors would likely adversely affect our relationship with customers, and could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Operations

We may not achieve sustained profitability.

Prior to 2002, we incurred losses each year since our inception, and we reported losses in 2006, and from 2008 through June 30, 2011. As a result, we had an accumulated deficit of approximately $454.2 million as of June 30, 2011. Our ability to achieve sustained profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level of our expenses. We expect to continue incurring significant expenses related to research and development, sales and marketing efforts to commercialize our products, litigation and non-cash stock based compensation, and we expect to continue to experience fluctuations in our operating results. If our revenue grows more slowly than we anticipate, or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenue, we may not become profitable on a sustained basis, or at all.

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, and our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. For example, our stock price has been volatile in recent years, resulting in a significant number of stock options granted to our employees having a strike price that is higher than the current trading price of our common stock. 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.

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. Although such transactions are denominated in both U.S. dollars and foreign currencies, our future revenue, gross margin, expenses and financial condition are still affected by such factors as changes in foreign currency exchange rates; unexpected changes in, or impositions of, legislative or regulatory requirements, including export and trade barriers and taxes; longer payment cycles and greater difficulty in accounts receivable collection.

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We also are subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, potential hostilities, epidemics and changes in diplomatic and trade relationships. We cannot assure investors that one or more of the foregoing factors will not have a material adverse effect on our business, financial condition and operating results or require us to modify our current business practices.

Our effective tax rate may vary significantly.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. 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.

Changes in overall levels and the geographic mix of pretax earnings may adversely impact our future effective tax rate. Certain jurisdictions have lower tax rates, and the amount of earnings to be taxed in these jurisdictions may fluctuate. If we do not have profitable operations in these jurisdictions, our effective tax rate could be adversely impacted. Changes in tax laws, applicability of tax holidays 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 effective income tax rate increases in the future. We are subject to tax audits were 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.

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 significantly impact our financial results of operations.

Risks Related to Our Investments

Our strategic equity investments may result in losses.

We periodically make strategic equity investments in various public and private 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 have required us to record losses relative to our ownership interest. This could result in future charges to our earnings. 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 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 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 investments since June 30, 2011, any significant deterioration in conditions of the global credit and financial markets, including deterioration that may be caused by a failure of the U.S. government to raise its debt ceiling, may negatively impact our current portfolio of cash equivalents or investments or our ability to meet our financing objectives. Other-than-temporary declines in the market price and valuation of any of our 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 and our customers are subject to various government regulations, and we may incur significant expenses to comply with, and experience delays in our product commercialization as a result of, these regulations.

The Food and Drug Administration (“FDA”) has jurisdiction over the commercialization of medical devices, including in vitro diagnostic test kits and the reagents and instrumentation used in these tests. In vitro diagnostic tests, reagents, and instruments may be subject to pre-market review and post-market controls by the FDA. 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 United States. Commercialization of our and our collaborative partners’ in-vitro diagnostic products outside of the research environment may depend upon successful completion of clinical trials. Clinical development is a long, expensive and uncertain process and we do not know whether we, or any of our collaborative partners, will be permitted to undertake clinical trials of any potential in-vitro diagnostic products. It may take us or our collaborative partners many years to complete any such testing, and failure can occur at any stage. Delays or rejections of potential products may be encountered based on changes in regulatory policy 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.

Many of our products are labeled for “research use only”. Products intended for research use only are not subject to clearance or approval by the FDA. However, research use only products may fall under the FDA’s jurisdiction if these are used for clinical rather than research purposes. Even when 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.

The FDA, the U.S. Department of Health and Human Services and foreign government regulators are increasingly focused on genetic analysis tools, including the use of arrays, which are labeled for research use only, by clinical laboratories in laboratory-developed tests (“LDTs”) offered by these laboratories, including labs certified under the Clinical Laboratory Improvement Amendments (“CLIA”). We cannot predict the extent of the FDA’s future efforts in regulation and enforcement policies with respect to the sale and use of arrays for the development of LDTs by CLIA-certified laboratories. If regulations or enforcement policies restrict our customers’ development of LDTs using our products labeled for research use only, or if we otherwise are required to obtain FDA premarket clearance or approval prior to commercializing these products, our ability to generate revenue from the sale of our products may be delayed or otherwise adversely affected. Moreover, our failure to comply with governmental rules and regulations related to our products could cause us to incur significant adverse publicity, subject us to investigations and notices of non-compliance or lead to fines or restrictions upon our ability to sell our products. We also may be at risk for liability related to government reimbursement of tests involving the use of our products if it is determined that these tests require FDA-clearance or approval and no such clearance or approval has been obtained.

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.

We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. A failure to comply with these regulations might result in suspension of these contracts or administrative or other penalties, and could have a material adverse effect on our ability to compete for future government grants, contracts and programs.

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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 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 United States, third-party payer price resistance, the trend towards managed health care and the implementation of the Patient Protection and Affordable Care Act of 2010 could reduce payment rates for health care products and services, adversely affecting the profits of our customers and collaborative partners and reducing our future royalties. Under Medicare rules, diagnostic tests must be ordered by a physician who is treating the beneficiary and who uses the test results in patient management. Under this rule, some Medicare contractors may deny coverage for a test, even if the test has been cleared or approved by the FDA, without proof, as determined sufficient by the contractor, that the test is useful in patient management.

We face risks related to handling of hazardous materials and other regulations governing environmental safety.

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

Risks Related to Our Intellectual Property

We may be unable to effectively protect or enforce our intellectual property, which could harm our competitive position.

Maintaining a strong patent position is critical to our business. Patent law relating to the scope of claims in the technology fields in which we operate is uncertain, so we cannot be assured the patent rights 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 be assured 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.

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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. 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.

In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements with our employees, consultants and third-parties, to protect our confidential and proprietary information. Such measures may not provide adequate protection for our proprietary information.

Litigation or other proceedings or third party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or impact our stock price.

Third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. As we launch new products and enter new markets, we expect that competitors will claim that our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. We are currently engaged in litigation with third parties who allege that we have infringed their intellectual property rights, including a lawsuit in which our competitor Illumina, Inc. alleges that the manufacture and sale of certain of our new peg-based arrays and related instruments infringe two of their patents. See Note 9. “Legal Proceedings” to our Condensed Consolidated Financial Statements elsewhere in this Quarterly Report on Form 10-Q for further information. In addition, 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. Third parties may have obtained, and may in the future obtain, patents allowing them to claim that the use of our technologies infringes these patents.

We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a material adverse impact on our stock price, which may be disproportionate to the actual import of the ruling itself. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products. In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and maintain profitability.

Risks Related to Our Common Stock

The market price of our common stock has been volatile.

Our common stock traded as low as $3.75 and as high as $8.07 per share during the twelve-month period ending June 30, 2011. Moreover, the daily volume of our common stock fluctuated from 182,300 to 9,290,900 shares during that period. Our stock price may be affected by a number of factors, including those listed in these “Risk Factors” and other, unknown factors. Our stock price also may be affected by comments by securities analysts regarding our business or prospects, our inability to meet analysts’ expectations, general fluctuations in the stock market or in the stock prices of our industry peers or our customers and general conditions and publicity regarding the genomics, biotechnology, pharmaceutical or life science industries.

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

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

Our revenue 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 instrumentation and consumables in which 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 revenue 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 revenue may cause us to experience material losses.

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

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

competition;

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

the frequency of experiments conducted by our customers;

our customers’ inventory of 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.

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number		Description of Document

10.43		Offer Letter from the Company to Frank Witney dated May 26, 2011.
10.44		Separation Agreement between the Company and Kevin M. King dated May 31, 2011.
10.45(1)		Sixth Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3380 Central Expressway, Santa Clara, CA).
10.46(1)		Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3420 Central Expressway, Santa Clara, CA).
10.47(1)		Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3450 Central Expressway, Santa Clara, CA).
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on July 14, 2011 (File No. 000-28128)

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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/ TIMOTHY C. BARABE
	Name:	Timothy C. Barabe
	Title:	Executive Vice President and Chief Financial Officer

July 29, 2011

		Duly Authorized Officer and Principal Financial
		And Accounting Officer

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AFFYMETRIX, INC.

EXHIBIT INDEX

JUNE 30, 2011

Exhibit Number		Description of Document

10.43		Offer Letter from the Company to Frank Witney dated May 26, 2011.
10.44		Separation Agreement between the Company and Kevin M. King dated May 31, 2011.
10.45(1)		Sixth Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3380 Central Expressway, Santa Clara, CA).
10.46(1)		Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3420 Central Expressway, Santa Clara, CA).
10.47(1)		Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3450 Central Expressway, Santa Clara, CA).
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on July 14, 2011 (File No. 000-28128)

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