AFFYMETRIX INC, 424B1, 1996-06-07

AFFYMETRIX INC
424B1, 1996-06-07
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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LOGO

6,000,000 SHARES

COMMON STOCK

All of the 6,000,000 shares of Common Stock offered hereby are being sold by
Affymetrix, Inc. ("Affymetrix" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. See
"Underwriting" for information relating to the method of determining the initial
public offering price.

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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share..................... $15.00 $1.035 $13.965
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Total (3)..................... $90,000,000 $6,003,000 $83,997,000
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(1) The Underwriters will not receive an Underwriting Discount or Commission on
the sale of 200,000 shares. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $800,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 900,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $103,500,000, $6,934,500, and $96,565,500,
respectively.

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The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about June 11, 1996.

ROBERTSON, STEPHENS & COMPANY

CS FIRST BOSTON

MONTGOMERY SECURITIES

The date of this Prospectus is June 6, 1996

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Affymetrix GeneChip-TM- Technology Opportunities
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All genomics programs are expected to be research collaborations.
All diagnostic product opportunities are in research and development
with the indicated collaborators, except for HIV, which Affymetrix
introduced as a "Research Use Only" product in April 1996.
Diagnostic use of the Company's products would be subject to FDA and
other applicable regulatory approvals, which have not been applied
for or received, and which may not be obtained for several years, if
at all.

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN
THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
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Affymetrix GeneChip Technology
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[Depictions of genes,
double helix and
probe array in cartridge]

Affymetrix GeneChip probe arrays provide the capacity to acquire, analyze, and
manage complex genetic information.

Integrated GeneChip System

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<S> <C> <C>
[PICTURE] [PICTURE] [PICTURE]

GeneChip Fluidics Station GeneChip Scanner GeneChip Software
Controls hybridization of the Quantitatively detects Analyzes and manages genetic
test sample to the probe hybridization of test sample information from the scanner.
array. to the probe array.
</TABLE>

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GeneChip Probe Array
A GeneChip probe array currently contains
from 16,000 to more than 100,000 different
DNA probes. Each probe array is packaged
in a catridge.

Probe Array Image
A GeneChip scanner image of an
HIV probe array for sequencing the
reverse transcriplase and protease
genes. Each small square represents
the quantitative hybridization
intensity of a labeled test sample to
a specific DNA probe.

[PICTURE]

GeneChip Software
GeneChip software translates the quantitative hybridization
intensities into sequence information which can also be used for
gene expression analysis and genetic mapping. The red "a" in the
Sequences window indicates a mutation in HIV causing resistance to
a class of HIV protease inhibitor drugs.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THE PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

UNTIL JULY 1, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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TABLE OF CONTENTS

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PAGE
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Summary................................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 27
Management................................................................ 49
Certain Transactions...................................................... 55
Principal Shareholders.................................................... 57
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 64
Experts................................................................... 64
Additional Information.................................................... 64
Glossary.................................................................. 66
Index to Financial Statements............................................. F-1
</TABLE>

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The Company's executive offices are located at 3380 Central Expressway,
Santa Clara, California 95051. The Company's telephone number is (408) 522-6000.

GeneChip-TM- and Affymetrix-TM- are trademarks of the Company. Tradenames
and trademarks of other companies appearing in this Prospectus are the property
of their respective holders.

3
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SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS", AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. A GLOSSARY OF
TECHNICAL TERMS USED IN THIS PROSPECTUS APPEARS AT PAGE 66 OF THIS PROSPECTUS.

THE COMPANY

Affymetrix has developed and intends to establish its GeneChip system as the
platform of choice for acquiring, analyzing and managing complex genetic
information in order to improve the diagnosis, monitoring and treatment of
disease. The Company's system consists of disposable DNA probe arrays containing
gene sequences on a chip, instruments to process the probe arrays, and software
to analyze and manage genetic information. The Company commenced commercial
sales of the GeneChip system and an HIV probe array for research use in April
1996.

The Company manufactures its DNA probe arrays using an innovative and
proprietary process that combines photolithographic fabrication techniques from
the semicondutor industry with solid phase DNA synthesis to assemble large
amounts of genetic information on a small glass chip called a probe array. The
Company can manufacture a number of identical DNA probe arrays on a glass wafer,
which is then diced into individual probe arrays. Currently, each probe array
manufactured by the Company contains from 16,000 to more than 100,000 different
DNA probes.

Genes provide the fundamental basis for understanding human health and
disease. Increased knowledge of how genes encode the functions of living
organisms has generated a worldwide effort to identify and sequence genes of
many organisms, including the estimated 100,000 genes within the human genome.
This effort is being led by the Human Genome Project and related academic,
government and industry research projects. Once the genes and their sequences
are identified, it is anticipated that many years of additional research will be
required to understand the specific function of each gene and its role in
disease. Affymetrix believes that the GeneChip system can play an important role
in this research and its application in drug discovery and the development of
new diagnostic products. The Company intends to commercialize the GeneChip
system in two principal areas: genomics, or the study of genes and their
function, and diagnostics.

In genomics, Affymetrix intends to sell custom DNA probe arrays to
pharmaceutical and biotechnology companies through collaborative agreements. The
Company would receive revenues in the form of probe array design and development
fees, and subsequently through the sale of DNA probe arrays and instruments. In
addition, the Company may receive milestone payments and royalties from
discoveries made through the use of the DNA probe arrays. Affymetrix also
intends to use the GeneChip technology to help create and commercialize
databases containing information on the function of genes and their role in
disease. There can be no assurance that the Company will be successful in
marketing its GeneChip system for these genomics applications.

In diagnostics, Affymetrix intends to develop DNA probe arrays to analyze
genetic information from patient samples to improve the accuracy and speed of
diagnosis. The Company is pursuing diagnostic products and research applications
in infectious diseases, cancer and other areas, such as monitoring drug
metabolism. The Company intends to market its diagnostic GeneChip products
directly and through collaborative partnerships. Affymetrix believes its
GeneChip technology can also be used as a discovery tool for new diagnostic
markers to be used in conventional immunoassays. There can be no assurance that
the Company will be successful in marketing its GeneChip system for these
diagnostic applications.

The Company's first application for the GeneChip system is to help
researchers identify mutations in HIV that cause resistance to antiviral drugs,
such as AZT. The Company believes that monitoring such mutations may become an
important aspect of managing patients with AIDS. As of March 31, 1996,
Affymetrix had placed five prototype GeneChip systems for the HIV application in
academic research centers and pharmaceutical companies for research use.

An important part of the Company's strategy is to work with collaborative
partners to expand the applications of the Company's technology and to acquire
access to complementary technologies and resources such as manufacturing and
marketing. Affymetrix has two agreements with Genetics Institute, Inc. ("GI") to
apply the Company's technology to understand the function of human genes. The
Company will design, manufacture and supply custom probe arrays for use in GI's
drug discovery programs. Affymetrix also has a collaborative agreement with
Hewlett-Packard Company ("HP"), whereby HP will develop advanced instruments to
read the GeneChip probe arrays. In addition, in collaboration with HP, the
Company will develop and manufacture certain probe arrays to be marketed by HP.

Affymetrix began operations in 1991 as a division of Affymax N.V.
("Affymax"), was incorporated in California in March 1992 and began operating
independently as a wholly-owned subsidiary of Affymax in March 1993. In March
1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax. Prior to
this offering, Glaxo indirectly owns approximately 46% of the Common Stock of
Affymetrix.
RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The Company's GeneChip system and other potential products will
require significant additional development and investment. While the Company's
initial product sales for research use have not required regulatory approvals,
the Company expects that such approvals will be required for diagnostic
applications in the future. There can be no assurance that the Company will
obtain any required regulatory approvals for the GeneChip system or that the
GeneChip system will be successfully commercialized or obtain market acceptance.
Other risk factors include the Company's early stage of development,
uncertainties relating to technological approaches, history of losses and
expectation of future losses, intense competition, rapid technological change,
limited manufacturing capability and sales and marketing experience and the
Company's dependence on proprietary technology. See "Risk Factors."

4
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THE OFFERING

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<S> <C>
Common Stock Offered by the Company........... 6,000,000 shares
Common Stock Outstanding after the Offering... 22,239,231 shares (1)
Use of Proceeds............................... For research and development (including product
development and core research), capital expenditures
(manufacturing scale-up, facilities and laboratory
equipment), expansion of sales and marketing, working
capital and other general corporate purposes. See "Use
of Proceeds."
Nasdaq National Market Symbol................. AFFX
</TABLE>

SUMMARY FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract and grant revenue........................ $ -- $ 43 $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416
Operating expenses:
Research and development...................... 1,576 4,106 6,566 9,483 12,420 2,274 4,177
General and administrative.................... 261 582 577 2,303 3,833 777 1,649
------- ------- ------- ------- -------- --------- ---------
Total operating expenses.................... 1,837 4,688 7,143 11,786 16,253 3,051 5,826
------- ------- ------- ------- -------- --------- ---------
Loss from operations.............................. (1,837) (4,645) (5,730) (10,212) (11,628) (2,197) (4,410)
Interest income (expense), net.................... -- (15) 138 532 881 23 489
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Net loss.......................................... $(1,837) $(4,660) $(5,592) $(9,680) $(10,747) $ (2,174) $ (3,921)
------- ------- ------- ------- -------- --------- ---------
------- ------- ------- ------- -------- --------- ---------
Pro forma net loss per share...................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22)
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Pro forma weighted average shares outstanding..... 10,715 17,653 17,664 17,663 17,664
</TABLE>

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<CAPTION>
MARCH 31, 1996
------------------------
AS
ACTUAL ADJUSTED (2)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments............... $ 34,837 $118,034
Total assets..................................................... 41,185 124,382
Long-term obligation............................................. 898 898
Deficit accumulated during development stage..................... (36,437) (36,437)
Total shareholders' equity....................................... 34,652 117,849
</TABLE>

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(1) Excludes 2,191,518 shares of Common Stock issuable upon exercise of
outstanding options under the Company's 1993 Stock Plan. Also excludes
203,881 shares issuable upon the exercise of warrants outstanding as of
March 31, 1996. See "Management -- Stock Plans" and Note 6 of Notes to
Financial Statements.

(2) As adjusted to reflect the sale of the 6,000,000 shares of Common Stock
offered by the Company hereby at the initial public offering price of $15.00
per share and the receipt of the estimated net proceeds therefrom. See "Use
of Proceeds."

UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; (II) REFLECTS A
2-FOR-3 REVERSE STOCK SPLIT; AND (III) GIVES EFFECT TO THE CONVERSION OF ALL
OUTSTANDING SHARES OF PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS
OFFERING.

5
<PAGE>
RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.

EARLY STAGE OF DEVELOPMENT

The Company is at an early stage of development. The Company has not
commercialized significant quantities of products based on its technologies. As
of March 31, 1996, the Company had placed only nine GeneChip systems, all of
which have been solely for research use and only five of which have been
purchased by customers. Substantially all of the Company's revenues have been
derived from payments from collaborative research and development agreements and
government research grants.

The Company's GeneChip system and other potential products will require
significant additional development and investment, including testing to further
validate performance and demonstrate cost effectiveness. While the Company's
initial product sales for research use have not required regulatory approval,
the Company expects that such approval will be required in the future. The
Company may need to undertake costly and time-consuming efforts to obtain this
approval. There can be no assurance that any products will be successfully
developed, be proven to be accurate and efficacious in any markets, meet
applicable regulatory standards in a timely manner or at all, be protected from
competition by others, avoid infringing the proprietary rights of others, be
manufactured in sufficient quantities or at reasonable costs, or be marketed
successfully.

The Company has experienced significant operating losses since inception and
expects these losses to continue for at least the next several years. Whether
the Company can successfully manage the transition to a commercial-scale
enterprise will depend upon a number of factors including establishing its
commercial manufacturing capability, developing its marketing capabilities,
establishing a direct sales force and entering into collaborative arrangements
to market its products. Failure to make such a transition successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

UNCERTAINTIES RELATING TO TECHNOLOGICAL APPROACHES; NEED FOR ADDITIONAL RESEARCH
AND DEVELOPMENT

The Company intends to develop its GeneChip system for genomics and
diagnostics applications. The GeneChip system involves several new technologies,
including a complex chemical synthesis process necessary to create DNA probe
arrays. In addition, technicians using the GeneChip system require new technical
skills and training. There can be no assurance that technicians will not
experience difficulties with the system that would prevent or limit its use. The
instrumentation and software that comprise the GeneChip system are new and have
not been previously used in commercial applications. As the system is used, it
is possible that previously unrecognized defects will emerge. In addition, DNA
probe arrays are tested only on a random sample basis, and quality problems
could develop with the untested arrays. Further, in order for the Company to
address new applications for the GeneChip system, the Company may be required to
reduce the size of its probe arrays, increase the number of features on these
arrays, develop instruments capable of processing the information from such
probe arrays, and design software capable of managing such information. There
can be no assurance that the Company will be capable of validating or achieving
the improvements in the components of the GeneChip system necessary for its
successful commercialization. The Company's GeneChip technology will also need
to compete against well-established techniques and enhancements to such
techniques for analyzing genes and for diagnostics. There can be no assurance
that the GeneChip system will replace or compete successfully against existing
techniques and instruments. Furthermore, there can be no assurance that the
Company's GeneChip technology will be useful in providing information on the
function of genes or for the analysis of larger sequences of genes.

The development of diagnostic and therapeutic products based on the
Company's technologies will be subject to the risks of failure inherent in the
development of products based on new technologies. These risks include
possibilities that any products based on these technologies will be found to be
ineffective, unreliable or

6
<PAGE>
unsafe, or otherwise fail to receive necessary regulatory clearances; that
products will be difficult to manufacture on a large scale or will be
uneconomical to market; that proprietary rights of third parties will preclude
the Company or its collaborative partners from marketing products; or that third
parties will market superior or equivalent products. Furthermore, there can be
no assurance that the Company's research and development activities will result
in any commercially viable products. See "Business -- Technology."

UNCERTAINTY OF MARKET ACCEPTANCE

The commercial success of the Company's GeneChip system will depend upon
market acceptance by academic research centers, pharmaceutical and biotechnology
companies and reference laboratories. Market acceptance will depend on many
factors, including convincing researchers that the GeneChip system is an
attractive alternative to current technologies for the acquisition, analysis and
management of genetic information; the receipt of regulatory clearances in the
United States, Europe, Japan and elsewhere; the need for laboratories to license
other technologies, such as amplification technologies that may be required to
use the GeneChip system for certain applications; and the availability of new
proprietary markers that may be important to the diagnosis, monitoring and
treatment of disease for incorporation on the Company's probe arrays. Market
acceptance may be adversely affected by ethical concerns that may limit the use
of the GeneChip system for certain diagnostic applications or the analysis of
genetic information. In addition, potential customers will need skilled
laboratory technicians to operate the GeneChip system. Market acceptance of the
GeneChip system could also be adversely affected by limited funding available
for academic research centers and other research organizations that are the
potential customers for the GeneChip system.

Potential customers of the GeneChip system will need to acquire the
Company's fluidics station and probe array scanner in order to utilize the DNA
probe arrays. The cost of this instrumentation may deter certain potential
customers from purchasing probe arrays. The Company may be required to discount
the price of its GeneChip system in order to place the system with customers.
The failure of the Company to place sufficient quantities of the instruments for
the GeneChip system would have a material adverse effect on its ability to sell
the disposable probe arrays. There can be no assurance that academic research
centers, pharmaceutical or biotechnology companies or reference laboratories
will replace existing instrumentation and techniques with the GeneChip system.
Because of these and other factors, there can be no assurance that the Company's
products will gain market acceptance.

The Company expects that its customers will be concentrated in a small
number of academic research centers, pharmaceutical and biotechnology companies
and reference laboratories. As a result, the Company's financial performance may
depend on large orders from a limited number of customers. There are only three
major reference laboratories in the United States, two of which are associated
with large pharmaceutical companies. There can be no assurance that the Company
will be able to successfully market the GeneChip system to reference
laboratories or that the affiliation of these laboratories with pharmaceutical
companies will not adversely affect their decision to purchase GeneChip systems.
The Company's dependence on sales to a few large reference laboratories may also
strengthen the purchasing leverage of these potential customers, which could
reduce the sales price of the GeneChip system. Also, the Company believes that
the sales cycle for the GeneChip system will be lengthy due to the need to
educate potential customers about its characteristics. The failure of the
Company to gain additional customers, the loss of any customer or a significant
reduction in the level of sales to any customer would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Business Strategy" and "-- Sales and Marketing."

UNCERTAINTIES RELATED TO THE HIV PROBE ARRAY

The first commercial application of the Company's GeneChip system is an HIV
probe array designed to detect mutations in HIV, the virus that causes AIDS. The
HIV probe array provides sequence information from the reverse transcriptase and
protease genes of HIV and the system includes a fluidics station, a scanner and
related software. In April 1996, the Company introduced the HIV probe array for
research purposes only. The Company has placed only five HIV probe arrays at
customer sites to date, all in the United States. These systems have been in
operation for only a limited period of time, and their accuracy and efficacy
have not been fully demonstrated. There are other uncertainties relating to the
system, including that the Company has no prior experience in introducing a
commercial product, that technicians may encounter difficulties with the system
that would prevent

7
<PAGE>
or limit its use, and that the Company will rely on third parties to manufacture
and service its instruments. Furthermore, there can be no assurance that the
accuracy of the HIV probe array in providing sequence information from HIV will
be better than current technologies, such as gel-based sequencing techniques.

As new therapies and combinations of therapies for treating HIV are
employed, new mutations in the HIV genome may be discovered that would require
the Company to redesign its current probe array or develop new probe arrays.
Advanced therapies could be discovered that target other components of the virus
or which do not generate drug resistance. In addition, cost containment
pressures for treating HIV patients may limit the price the Company may be able
to charge potential customers for its HIV probe array. There can be no assurance
that the HIV probe array will provide useful diagnostic and monitoring
information, that it will operate without difficulties, that technicians will
have adequate training to use the system, or that the Company will not
experience manufacturing or marketing difficulties selling the HIV probe array
to academic research centers, pharmaceutical and biotechnology companies and
reference laboratories. Furthermore, there can be no assurance that the HIV
probe array will gain regulatory approval for clinical use. The Company's
product revenues in the near term are dependent upon the commercialization of
the HIV probe array. There can be no assurance that these revenues will be
realized in the near term, or at all. Failure of the Company to successfully
commercialize the HIV probe array could have a material adverse effect on the
Company's business, financial condition and results of operations, and may
adversely affect the Company's ability to commercialize any future products it
may develop. See "Business -- Business Strategy" and "-- Sales and Marketing."

HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES

The Company has incurred operating losses in each year since its inception,
including net losses of approximately $10.7 million during the year ended
December 31, 1995, and, at March 31, 1996, the Company had an accumulated
deficit of approximately $36.4 million. The Company's losses have resulted
principally from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which, to date, have been
generated principally from collaborative research and development agreements and
government research grants. The Company expects to incur substantial additional
operating losses over the next several years as a result of increases in its
expenses for research and product development, manufacturing scale-up, expanding
sales and marketing and capital expenditures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

PROFITABILITY UNCERTAIN

The Company has experienced substantial operating losses and has never been
profitable. The Company expects that it may have to discount the price of the
GeneChip system to gain market acceptance, which could adversely affect gross
margins. The Company's future gross margins, if any, will be dependent on, among
other factors, the Company's ability to cost-effectively manufacture the
GeneChip system, product mix and the degree of price discounts required to
market its products to academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The amount of future
operating losses and time required by the Company to reach profitability, if
ever, are highly uncertain. The Company's ability to generate significant
revenues and become profitable is dependent in large part on the ability of the
Company to enter into additional collaborative arrangements and on the ability
of the Company and its collaborative partners to successfully commercialize
products developed under the collaborations. In addition, delays in receipt of
any necessary regulatory approvals by the Company or its collaborators, or
receipt of approvals by competitors, could adversely affect the successful
commercialization of the Company's technologies. There can be no assurance that
the Company will successfully commercialize any product or that the Company will
achieve product revenues or profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

FLUCTUATIONS IN OPERATING RESULTS

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competitors; regulatory actions; market acceptance of the GeneChip system and
other potential products; adoption of new technologies; manufacturing
capabilities; variations in gross margins of the Company's products;
competition; the cost, quality and availability of reagents and components; the
mix of products sold; changes in government funding; and third-party
reimbursement policies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE

Competition in genomics and diagnostics is intense and expected to increase.
Further, the technologies for discovering genes associated with significant
diseases and approaches for commercializing those discoveries are new and
rapidly evolving.

Currently, the Company's principal competition comes from existing
technologies that are used to perform many of the same functions for which the
Company plans to market its GeneChip systems. In the diagnostic field, these
technologies are provided by established diagnostic companies, such as Abbott
Laboratories, Boehringer Mannheim GmbH, Hoffmann-LaRoche, Inc. ("Roche"),
Johnson & Johnson and SmithKline Beecham plc. These technologies include a
variety of established assays, such as immunoassays, histochemistry, flow
cytometry and culture, and newer DNA probe diagnostics to analyze certain
amounts of genetic information. In the genomics field, competitive technologies
include gel-based sequencing using instruments provided by companies such as the
Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. In order
to compete against existing technologies, the Company will need to demonstrate
to potential customers that the GeneChip system provides improved performance
and capabilities.

The market for diagnostic products derived from gene discovery is currently
limited and will be highly competitive. Many companies are developing and
marketing DNA probe tests for genetic and other diseases. Other companies are
conducting research on new technologies for diagnostic tests based on advances
in genetic information. Established diagnostic companies could provide
significant competition to Affymetrix through the development of new products.
These companies have the strategic commitment to diagnostics, the financial and
other resources to invest in new technologies, substantial intellectual property
portfolios, substantial experience in new product development, regulatory
expertise, manufacturing capabilities and the distribution channels to deliver
products to customers. These companies also have an installed base of
instruments in several markets, including clinical and reference laboratories,
which are not compatible with the GeneChip system. In addition, these companies
have formed alliances with genomics companies which provide them access to
genetic information that may be incorporated into their diagnostic tests.

In the genomics field, future competition will likely come from existing
competitors as well as other companies seeking to develop new technologies for
sequencing and analyzing genetic information. In addition, pharmaceutical and
biotechnology companies, such as Genome Therapeutics Corporation, Human Genome
Sciences, Inc., Incyte Pharmaceuticals, Inc. ("Incyte"), Millennium
Pharmaceuticals, Inc., Myriad Genetics, Inc. and Sequana Therapeutics, Inc. have
significant needs for genomic information and may choose to develop or acquire
competing technologies to meet these needs.

Genomics and diagnostic technologies have undergone and are expected to
continue to undergo rapid and significant change. The Company's future success
will depend in large part on its ability to maintain a competitive position with
respect to these technologies. Rapid technological development by the Company or
others may result in products or technologies becoming obsolete. In addition,
products offered by the Company would be made obsolete by less expensive or more
effective tests based on other technologies or by new therapeutic or
prophylactic agents that obviate the need for diagnostic and monitoring
information. There is no assurance that the Company will be able to make the
enhancements to its technology necessary to compete successfully with newly
emerging technologies. See "Business -- Research and Development" and "--
Competition."

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DEPENDENCE UPON COLLABORATIVE PARTNERS

An important element of the Company's business strategy involves
collaborations with pharmaceutical, diagnostic and biotechnology companies that
have discovered genes and may seek to use the Company's technologies to discover
genetic mutations or develop diagnostic and therapeutic products. The Company
has significant collaborations with HP and GI.

In November 1994, the Company entered into a collaborative agreement with HP
to develop an advanced scanner for use with the GeneChip probe arrays. The HP
scanner is currently under development and, in 1997 the Company expects that HP
will be the sole source of its scanners. Accordingly, if the HP scanner does not
become available on a timely basis or fails to meet its performance and cost
specifications, it would have a material adverse effect on the Company's
business.

The Company has two agreements with GI, dated November 1994 and December
1995, relating to use of GeneChip technology to measure gene expression in order
for GI to develop new therapeutic proteins. If GI is not successful in using the
GeneChip technology or if the Company fails to maintain a satisfactory
relationship with GI, the Company could lose significant revenues and its
ability to obtain additional collaborations with other companies would be
impaired.

The Company has received a substantial portion of its revenues since
inception from its collaborative partners and intends to enter into
collaborative arrangements with other companies to apply its technology, fund
development, commercialize potential future products, and assist in obtaining
regulatory approval. There can be no assurance that any of the Company's present
or future collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products developed under the
collaborations. Any parallel development by a partner of alternative
technologies or components of the GeneChip system, preclusion of the Company
from entering into competitive arrangements, failure to obtain timely regulatory
approvals, premature termination of an agreement, or failure by a partner to
devote sufficient resources to the development and commercialization of the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company's agreements with consultants and collaborators are complex.
There may be provisions within such agreements which give rise to disputes
regarding the rights and obligations of the parties. These and other possible
disagreements could lead to delays in collaborative research, development or
commercialization of certain products, or could require or result in litigation
or arbitration, which would be time-consuming and expensive, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.

There can be no assurance that the Company will be able to negotiate future
collaborative arrangements on acceptable terms, if at all, or that such
collaborations will be successful. See "Business -- Collaborative Agreements and
Grants."

NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL

The Company anticipates that its existing capital resources, together with
the net proceeds of this offering and interest earned thereon, will enable it to
maintain currently planned operations through at least 1998. However, this
expectation is based on the Company's current operating plan, which could change
as a result of many factors, and the Company could require additional funding
sooner than anticipated. In addition, the Company may choose to raise additional
capital due to market conditions or strategic considerations even if it has
sufficient funds for its operating plan. The Company's requirements for
additional capital will be substantial and will depend on many factors,
including payments received under existing and possible future collaborative
agreements; the availability of government research grant payments; the progress
of the Company's collaborative and independent research and development
projects; the costs of preclinical and clinical trials for the Company's
products; the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and development of manufacturing, marketing and
sales capabilities. The Company has no credit facility or other committed
sources of capital. To the extent capital resources are insufficient to meet
future capital requirements, the Company will have to raise additional funds to
continue the development of its technologies. There can be no assurance that
such funds will be available on favorable terms, or at all. To the extent that

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additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
required to curtail operations significantly or to obtain funds through entering
into collaboration agreements on unattractive terms. The Company's inability to
raise capital would have a material effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds."

ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC PREDISPOSITION TESTING

The Company's success will depend in part upon the Company's ability to
develop genetic tests for genes discovered by the Company and others. Genetic
tests, such as certain of the Company's GeneChip tests, may be difficult to
perform and interpret and may lead to misinformation or misdiagnosis. Further,
even when a genetic test identifies the existence of a mutation in an
individual, the interpretation of the result is often limited to the
identification of a statistical probability that the tested individual will
develop the disease or condition for which the test is performed. In addition,
once available, such tests may be subject to ethical concerns or reluctance to
administer or pay for tests for conditions that are not treatable. Further, it
is possible that gene-based diagnostic tests marketed by other companies could
encounter specific difficulties, resulting in societal and governmental concerns
regarding genetic testing.

The prospect of broadly available genetic predisposition testing has raised
issues regarding the appropriate utilization and the confidentiality of
information provided by such testing. It is possible that discrimination by
insurance companies could occur through the raising of premiums by insurers to
prohibitive levels, outright cancellation of insurance or unwillingness to
provide coverage to patients shown to have a genetic predisposition to a
particular disease. In addition, employers could discriminate against employees
with a positive genetic predisposition due to the increased risk for disease
resulting in possible cost increases for health insurance and the potential for
lost employment time. Finally, governmental authorities could, for social or
other purposes, limit the use of genetic testing or prohibit testing for genetic
predisposition to certain conditions which could adversely affect the use of the
Company's products. There can be no assurance that ethical concerns about
genetic testing will not materially adversely affect market acceptance of the
Company's GeneChip system. See "Business -- Government Regulation."

LIMITED MANUFACTURING CAPABILITY; SOLE SOURCE SUPPLIERS

The Company has limited experience manufacturing products for commercial
purposes. To date, the Company has a small scale facility providing limited
quantities of probe arrays for internal and collaborative purposes and initial
sales of the GeneChip system to the research market. To achieve the production
levels of probe arrays necessary for successful commercialization of its
products, the Company will need to scale-up its manufacturing facilities and
establish automated manufacturing capabilities. The Company may also need to
comply with the current good manufacturing practices ("GMP") prescribed by the
United States Food and Drug Administration ("FDA") for sale of products in the
United States, ISO standards for sale of products in Europe, as well as other
standards prescribed by various federal, state and local regulatory agencies in
the United States and other countries. Although the Company does not currently
need to comply with GMP to manufacture probe arrays and related instrumentation
for sale for research purposes, it may need to be GMP compliant to sell these
products to clinical reference laboratories, and it will need to be compliant to
sell these products for clinical use. There can be no assurance that
manufacturing and quality control problems will not arise as the Company
attempts to scale-up its manufacturing facilities or that such scale-up can be
achieved in a timely manner or at commercially reasonable costs.

The Company's probe array manufacturing process is complex and involves a
number of technologies that have never before been combined in the manufacture
of a single product. The Company tests only selected probe arrays from each
wafer and only selected probes on each probe array. It is therefore possible
that defective probe arrays might not be identified before they are shipped. The
Company therefore relies on quality control procedures, including controls on
the manufacturing process and sample testing, to verify the correct completion
of the manufacturing process. In addition, there may be certain aspects of the
Company's manufacturing that are not fully understood and cannot be readily
replicated for commercial use. If the Company is unable to manufacture probe
arrays on a timely basis because of these or other factors, its business,
financial condition and results of operations could be adversely affected.

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As the Company's technologies evolve, new manufacturing techniques and
systems will be required. For example, it is anticipated that batch processing
systems will be needed to meet the Company's future probe array manufacturing
needs. Further, as products requiring increased density are developed,
miniaturization of the features on the arrays will be necessary, requiring new
or modified manufacturing equipment and processes. Further, the Company's
manufacturing equipment requires significant capital investment. The Company
will rely on a single manufacturing facility for its probe arrays for the
foreseeable future. This manufacturing facility is subject to natural disasters
such as earthquakes and floods. The former are of particular significance since
the manufacturing facility is located in an earthquake prone area. In the event
that its manufacturing facility were to be affected by accidental or natural
disasters, the Company would be unable to manufacture products for sale until
the facility was replaced or restored to operation.

Certain key parts of the GeneChip system, such as the probe array scanner,
the fluidics station, and certain reagents, are currently available only from a
single source or a few sources. The Company currently obtains the scanner for
its GeneChip probe arrays from Molecular Dynamics, Inc. ("Molecular Dynamics").
The Company is dependent on Molecular Dynamics for quality testing and service
of this instrument. The Company has entered into an agreement with HP to supply
a new scanner for the GeneChip system, which the Company expects to be available
for commercialization in 1997. The Company's ability to commercialize a probe
array with more features is dependent upon successful development of the HP
scanner. The Company has contracted with RELA, Inc. ("RELA"), a private company,
to supply the fluidics station that is part of the GeneChip system. The fluidics
stations of the nine GeneChip systems placed to date are prototypes manufactured
by the Company and not supplied by RELA. No assurance can be given that probe
array scanners, fluidics stations or reagents will be available in commercial
quantities at acceptable costs. If the Company is required to seek alternative
sources of supply, it could be time consuming and expensive. In addition, the
Company is dependent on its vendors to provide components of appropriate quality
and reliability and to meet applicable regulatory requirements. Consequently, in
the event that supplies from these suppliers were delayed or interrupted for any
reason, the Company's ability to develop and supply its products could be
impaired, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

The GeneChip system is a complex set of instruments and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. During the beta testing phase of the GeneChip system's development, the
Company and its vendors have encountered and addressed a number of technical
problems, including software failures, improper alignment of probe array wafers,
valve and tube failures in the fluidics station, sensor wiring issues and
scanner control problems. Due to the complexity and lack of operating history of
these products, the Company anticipates that additional technical problems may
occur or be discovered as more systems are placed into operation. If these
problems cannot be readily addressed, they could cause delays in shipments,
warranty expenses and damages to customer relationships, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."

LIMITED SALES AND MARKETING EXPERIENCE

The Company does not have a direct sales force and has only limited
experience in sales and marketing. As of March 31, 1996, the Company had placed
nine GeneChip systems, of which only five had been sold. The Company has not
placed any of its GeneChip systems outside the United States. The Company
intends to market its products to academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The Company intends to
market diagnostic tests through a direct sales force to its potential customers
for research use only. The Company intends to market the GeneChip system for
genomic applications through collaborations with pharmaceutical and
biotechnology companies. The Company anticipates a long sales cycle to market
the GeneChip system to its potential customers. The Company will be required to
enter into collaboration or distribution arrangements to commercialize its
products outside the United States. There can be no assurance that the Company
will be able to establish a direct sales force or to establish collaborative or
distribution arrangements to market its products. Failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."

UNCERTAINTIES RELATED TO GOVERNMENT FUNDING

A significant portion of the Company's products for research use are likely
to be sold to universities, government research laboratories, private
foundations and other institutions where funding is dependent upon

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grants from government agencies such as the National Institutes of Health
("NIH"). Research funding by the government, however, may be significantly
reduced under several budget proposals being discussed by the United States
Congress. Any such reduction may materially affect the ability of the Company's
prospective research customers to purchase the Company's products for research
use.

The Company has received and expects to continue to receive significant
funds under various United States Government research and technology programs.
While the programs are generally multi-year awards, they are subject to a yearly
appropriations process in the United States Congress. Proposed legislation being
debated in the United States Congress would eliminate or reduce the program
under which the Company's Advanced Technology Program ("ATP") grant is funded by
the Department of Commerce. There can be no assurance that the Company will
receive the entire $20.8 million of funding designated for it under the ATP
grant, and termination of the ATP grant could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company's grants from the Departments of Commerce and Energy and the NIH
give the government certain rights to license for its own use inventions
resulting from funded work. There can be no assurance that the Company's
proprietary position will not be adversely affected should the government
exercise these rights. See "Business -- Collaborative Agreements and Grants."

UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT

The Company's ability to successfully commercialize its products may depend
on the Company's ability to obtain adequate levels of third-party reimbursement
for use of certain diagnostic tests in the United States, Europe and other
countries. Currently, availability of third-party reimbursement is limited and
uncertain for genetic tests.

In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device or diagnostic test has
not received appropriate FDA or other governmental regulatory clearances, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. The Company's ability
to commercialize certain of its products successfully may depend on the extent
to which appropriate reimbursement levels for the costs of such products and
related treatment are obtained from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). Third-party payors are increasingly challenging the prices charged for
medical products and services. The trend towards managed health care in the
United States and the concurrent growth of organizations such as HMOs, which
could control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for certain of the
Company's products. The cost containment measures that health care providers are
instituting and the results of any health care reform could have an adverse
effect on the Company's ability to sell certain of its products and may have a
material adverse effect on the Company's business, financial condition and
results of operations.

GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL

The Company anticipates the manufacturing, labeling, distribution and
marketing of some or all of the Company's diagnostic products will be subject to
regulation in the United States and in certain other countries.

In the United States, the FDA regulates, as medical devices, most diagnostic
tests and IN VITRO reagents that are marketed as finished test kits or
equipment. Some clinical laboratories, however, purchase individual reagents
intended for specific analytes, and develop and prepare their own finished
diagnostic tests. Although the FDA has not generally exercised regulatory
authority over these individual reagents or the finished tests prepared from
them by the clinical laboratories. The FDA has recently proposed a rule that, if
adopted, would regulate the reagents sold to clinical laboratories as medical
devices. The proposed rule would also restrict sales of these reagents to
clinical laboratories certified under Clinical Laboratory Improvement Amendments
of 1988 ("CLIA") as high complexity testing laboratories. The Company intends to
market some diagnostic products as finished test kits or equipment and others as
individual reagents; consequently, some or all of these products will be
regulated as medical devices.

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Medical devices generally require FDA approval or clearance prior to
marketing in the United States. The process of obtaining FDA clearances or
approvals necessary to market medical devices can be time-consuming, expensive
and uncertain, and there can be no assurance that any clearance or approval
sought by the Company will be granted or that FDA review will not involve
delays, adversely affecting the marketing and sale of the Company's products.
Further, clearance or approval may place substantial restrictions on the
indications for which the product may be marketed or to whom it may be marketed.
Additionally, there can be no assurance that FDA will not request additional
data or request that the Company conduct further clinical studies.

If approval or clearance is obtained, the Company will be subject to
continuing FDA obligations. When manufacturing medical devices, the Company will
be required to adhere to regulations setting forth current GMP, which require
that the Company manufacture its products and maintain its records in a
prescribed manner with respect to manufacturing, testing and quality control
activities. In addition, among other requirements, the Company will be required
to comply with FDA requirements for labeling and promotion of its medical
devices. Further, if the Company wanted to make changes on a product after FDA
clearance or approval, including changes in indications or intended use or other
significant modifications to labeling, manufacturing or product design,
additional clearances or approvals would be required from the FDA.

Failure to obtain required regulatory approval or clearance or failure to
obtain timely approval or clearance, or the imposition of stringent labeling or
sales restrictions on the Company's products, could have a material adverse
effect on the Company. In addition, failure to comply with applicable regulatory
requirements could subject the Company to enforcement action, including product
seizures, recalls, withdrawal of clearances or approvals, restrictions on or
injunctions against marketing the Company's products, and civil and criminal
penalties, any one or more of which could have a material adverse effect on the
Company.

Medical device laws and regulations are also in effect in many countries
outside the United States. These range from comprehensive device approval
requirements for some or all of the Company's medical device products to
requests for product data or certifications. The number and scope of these
requirements are increasing. Failure to comply with applicable state and foreign
medical device laws and regulations may have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company is also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could adversely affect the Company's operations. See "Business -- Government
Regulation."

DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT PROTECTION

As of April 15, 1996, Affymetrix had exclusive licenses from Affymax for
over 20 patents and patent applications in the United States related to its
business in the fields of clinical diagnostics and research supply. In addition,
Affymetrix is the assignee of 52 United States patent applications and one
issued patent in the United States. Many of these patents and applications have
been filed and/or issued in one or more foreign countries. Affymetrix also
relies upon those patents, copyright protection, trade secrets, know-how,
continuing technological innovation and licensing opportunities to develop and
maintain its competitive position. The Company's success will depend in part on
its ability to obtain patent protection for its products and processes, to
preserve its copyright and trade secrets and to operate without infringing the
proprietary rights of third parties.

The Company is party to various license option agreements (including
agreements with Affymax, Stanford University and the University of California)
which give it rights to use certain technologies. Failure of the Company to
maintain rights to such technology could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
inability of the Company to exercise the option for the Stanford technology
under commercially reasonable terms could have an adverse effect on the ability
of the Company to sell certain of its products.

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adverse effect on the ability of the Company to do business. In addition, patent
law relating to the scope of claims in the technology fields in which the
Company operates is still evolving. The degree of future protection for the
Company's proprietary rights, therefore, is uncertain. Furthermore, there can be
no assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
issued to the Company, design around the patented technologies developed by the
Company. In addition, the Company could incur substantial costs in litigation if
it is required to defend itself in patent suits brought by third parties or if
it initiates such suits.

Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that could
result in substantial cost to the Company. No assurance can be given that any
such patent application will not have priority over patent applications filed by
the Company.

The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. For
example, the Company, its collaborators and customers may need to acquire a
license for an amplification technology to use the GeneChip system, and there is
no assurance such a license will be available on commercially reasonable terms.
The Company is aware of third-party patents that may relate to the Company's
technology, including reagents used in probe array synthesis and in probe array
assays, probe array scanners, synthesis techniques, oligonucleotide
amplification techniques, assays, and probe arrays. There can be no assurance
that the Company will not infringe these patents, other patents or proprietary
rights of third parties. In addition, the Company has received and may in the
future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action against
the Company or its collaborative partners claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting the Company to potential liability for damages, require
the Company or its collaborative partner to obtain a license in order to
continue to manufacture or market the affected products and processes. There can
be no assurance that the Company or its collaborative partners would prevail in
any such action or that any license (including licenses proposed by third
parties) required under any such patent would be made available on commercially
acceptable terms, if at all. There are a significant number of United States and
foreign patents and patent applications in the Company's areas of interest, and
the Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The enactment of legislation implementing the General Agreement on Trade and
Tariffs has resulted in certain changes in United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
earliest effective filing date of the application. Because the time from filing
to issuance of biotechnology patent applications in the Company's area of
interest is often more than three years, a twenty-year term after the effective
date of filing may result in a substantially shortened term of the Company's
patent protection which may adversely affect the Company's patent position.

The Company also relies upon copyright and trade secret protection for its
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information. In addition, there can be no assurance
that proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's copyrights and trade
secrets or disclose such technology, or that the Company can meaningfully
protect its trade secrets.

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genetics and genomics fields. There can be no assurance that such publication
would not adversely affect the Company's ability to obtain patent protection for
some genes in which it may have a commercial interest. See "Business --
Intellectual Property."

ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS

The Company is highly dependent on the principal members of its management
and scientific staff. The loss of services of any of these persons could have a
material adverse effect on the Company's product development and
commercialization objectives. In addition, recruiting and retaining qualified
scientific personnel to perform future research and development work will be
critical to the Company's success. There can be no assurance that the Company
will be able to attract and retain such personnel.

Product development and commercialization will require additional personnel
in areas such as diagnostic testing, regulatory affairs, manufacturing and
marketing. The inability to acquire such services or to develop such expertise
could have a material adverse effect on the Company's business, financial
condition and results of operations.

In addition, the Company relies on its scientific advisors to assist the
Company in formulating its research and development strategy. All of the
scientific advisors are employed by employers other than the Company and have
commitments to other entities that may limit their availability to the Company.
Some of the Company's scientific advisors also consult for companies that may be
competitors of the Company. See "Business -- Scientific Advisory Board."

EXPOSURE TO PRODUCT LIABILITY CLAIMS

The Company's business exposes it to potential product liability claims that
are inherent in the testing, manufacturing, marketing and sale of human
diagnostic and therapeutic products. The Company intends to acquire clinical
liability insurance. There can be no assurance that it will be able to obtain
such insurance or general product liability insurance on acceptable terms or at
reasonable costs or that such insurance will be in sufficient amounts to provide
the Company with adequate coverage against potential liabilities. A product
liability claim or recall could have a material adverse effect on the Company's
business, financial condition and results of operations.

BROAD DISCRETION IN ALLOCATION AND USE OF PROCEEDS

Although the Company expects to use approximately $55,000,000 of the net
proceeds of this offering for research and development, including product
development and core research, manufacturing scale-up, and to expand sales and
marketing capabilities, the Company has not yet identified the specific amounts
and uses of approximately $28,000,000 (approximately 34%) of the net proceeds.
The Company's Board of Directors and management will retain broad discretion as
to the allocation of the net proceeds of the offering. See "Use of Proceeds."

CONTROL BY GLAXO, MANAGEMENT AND RELATED PERSONS

Upon completion of this offering, Glaxo will indirectly beneficially own
34.3% of the Company's outstanding Common Stock and executive officers,
directors and principal shareholders (other than Glaxo) will indirectly
beneficially own 14.3% of the Company's outstanding Common Stock. Accordingly,
Glaxo and these shareholders may be able to influence the outcome of shareholder
votes, including votes concerning the election of directors, adoption of
amendments to the Company's Articles of Incorporation and Bylaws and approval of
mergers and other significant corporate transactions. Glaxo and the Company have
executed a governance agreement that confers rights on Glaxo in certain
circumstances. See "Principal Shareholders" and "Certain Transactions."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS

Certain provisions of the Company's Articles of Incorporation and Bylaws and
certain other contractual provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, or control the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. Certain of these provisions allow the Company to
issue Preferred Stock with rights senior to those of the Common Stock without
any further vote or action by the shareholders, eliminate the right of
shareholders to act by written consent which could make it more difficult

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for shareholders to affect certain corporate actions. These provisions could
also have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could decrease the amount of earnings
and assets available for distribution to the holders of Common Stock or could
adversely affect the rights and powers, including voting rights, of the holders
of the Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock.

NO PRIOR TRADING MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE;
DILUTION

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering. The initial public offering price
will be determined by negotiations among the Company and the Representatives of
the Underwriters and may not be indicative of future market prices. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The trading price of the Company's Common
Stock could be subject to significant fluctuations in response to announcements
of results of research activities, collaborative agreements, technological
innovations, or new commercial products by the Company, collaborative partners
or competitors, changes in government regulations, regulatory actions, changes
in patent laws, developments concerning proprietary rights, quarterly variations
in operating results, litigation and other events. The stock market has from
time to time experienced significant price and volume fluctuations which have
particularly affected the market prices of the stocks of technology companies,
and which may be unrelated to the operating performance of particular companies.
Further, there has been particular volatility in the market prices of securities
of biotechnology and other life sciences companies.

Purchasers of the Common Stock will incur an immediate and substantial
dilution in the net tangible book value of the Common Stock from the initial
public offering price. Additional dilution is likely to occur upon exercise of
options granted by the Company. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE

Future sales of substantial amounts of the Company's Common Stock in the
public market after this offering could adversely affect the market price of the
Common Stock. Of the 22,239,231 shares to be outstanding after the offering, the
6,000,000 shares of Common Stock offered hereby (plus any shares issued upon
exercise of the Underwriters' over-allotment option) will be freely tradeable
without restriction. Beginning 90 days after June 5, 1996 (the "Effective
Date"), approximately 50,100 additional shares will be eligible for sale in the
public market subject to compliance with Rule 701. In addition, beginning 90
days after the Effective Date approximately 186,140 shares subject to vested
options will be available for sale subject to compliance with Rule 701. Certain
shareholders of the Company, including the officers, directors, employees and
the affiliates of the Company are subject to contractual "lock-up" agreements
generally providing that they will not offer, sell, contract to sell or grant
any option to purchase or otherwise dispose of the shares of Common Stock of the
Company or any securities exercisable for or convertible into the Company's
Common Stock owned by them for a period of 180 days after the Effective Date
without the prior written consent of Robertson Stephens & Company. As a result
of these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701 under the Securities
Act of 1933, as amended (the "Securities Act"), shares subject to lock-up
agreements will not be saleable until such agreements expire or are waived by
Robertson Stephens & Company. Beginning 180 days after the Effective Date,
approximately 10,411,408 additional shares will become eligible for sale subject
to the provisions of Rule 144 or Rule 701 upon the expiration of the lock-up
agreements not to sell such shares. Beginning 180 days after the Effective Date,
approximately 183,366 additional shares subject to vested options will be
available for sale subject to compliance with Rule 701 upon the expiration of
lock-up agreements not to sell such shares. Robertson, Stephens & Company may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. In addition, the
Company intends to register on Form S-8 under the Securities Act within 180 days
after the Effective Date shares of Common Stock issued or reserved for issuance
under the Company's 1993 Stock Plan (the "Stock Plan"), and the 1996 Nonemployee
Directors Stock Option Plan (the "Directors Plan") and such registrations will
be effective on filing. As of March 31, 1996, there were outstanding options for
the purchase of 2,191,518 shares under the Stock Plan, of which options for
158,490 shares were exercisable. No shares have been issued to date under the
Directors Plan. As of April 30, 1996, the holders of approximately 15,834,537
shares are entitled to certain registration rights with respect to such shares.
If a large

17
<PAGE>
number of such shares were registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were required to include in a Company-initiated registration the
shares held by such holders pursuant to the exercise of their registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Management -- Stock Plans," "Description of Capital Stock
- -- Registration Rights of Certain Shareholders," "Shares Eligible for Future
Sale," and "Underwriting."

18
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 6,000,000 shares of
Common Stock offered by the Company hereby at the initial public offering price
of $15.00 per share are estimated to be approximately $83,197,000 ($95,766,000
assuming the Underwriters' over-allotment option is exercised in full), after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company.

The Company intends to use the net proceeds from this offering to develop
new products and applications for the GeneChip system. Such products may be
developed by the Company internally or through collaborative arrangements using
the Company's existing technology and products or complementary products or
technologies acquired from third parties. While such collaborations and
acquisitions may represent a significant use of the proceeds of the offering, no
significant acquisitions are currently planned. The Company expects to use
approximately $30 million for research and development, including product
development and core research; approximately $18 million for capital
expenditures, including scale-up of manufacturing, facilities and laboratory
equipment; and approximately $7 million for expansion of sales and marketing.
The Company will use the balance of approximately $28 million (approximately
34%) of the net proceeds for working capital and other general corporate
purposes. The Company's Board of Directors and management will retain broad
discretion as to the allocation of the net proceeds of the offering.

The amounts actually expended for each purpose and the timing of such
expenditures will depend upon numerous factors, including payments received
under existing and possible future collaborative agreements; the availability of
government research grant payments; the progress of the Company's collaborative
and independent research and development projects; the costs of preclinical and
clinical trials for the Company's products; the prosecution, defense and
enforcement of patent claims and other intellectual property rights; and
development of manufacturing, marketing and sales capabilities. Pending such
uses, the Company intends to invest the net proceeds of this offering in
short-term, investment-grade, interest-bearing securities.

DIVIDEND POLICY

The Company has never paid dividends since its inception and does not intend
to pay any dividends in the foreseeable future. The Company currently intends to
retain any future earnings to fund the development of its business.

19
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of March
31, 1996, (i) on a pro forma basis to give effect to the automatic conversion of
all outstanding shares of the Company's Preferred Stock into Common Stock upon
the closing of this offering and (ii) as adjusted to reflect the receipt of the
estimated net proceeds from the sale of the 6,000,000 shares of Common Stock
offered hereby, at the initial public offering price of $15.00 per share, after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company. This table should be read in conjunction with
the financial statements of the Company and the notes thereto included elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
PRO FORMA AS ADJUSTED
----------- -----------
(in thousands)
<S> <C> <C>
Noncurrent portion of capital lease obligation (1)....................................... $ 898 $ 898
Shareholders' equity:
Preferred stock; no par value, 27,500,000 shares authorized; pro forma and as adjusted,
no shares issued and outstanding...................................................... -- --
Common stock; no par value, 50,000,000 shares authorized;
pro forma 16,239,231 issued and outstanding; as adjusted,
22,239,231 issued and outstanding (2)................................................. 73,528 156,725
Notes receivable from officers......................................................... (41) (41)
Unrealized gain on available-for-sale securities....................................... 1 1
Deferred compensation.................................................................. (2,399) (2,399)
Deficit accumulated during the development stage....................................... (36,437) (36,437)
----------- -----------
Total shareholders' equity........................................................... 34,652 117,849
----------- -----------
Total capitalization............................................................... $ 35,550 $ 118,747
----------- -----------
----------- -----------
</TABLE>

- ------------
(1) See Note 5 of Notes to Financial Statements for a description of the
Company's obligation under capital lease.

(2) Excludes (i) 203,881 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $8.25 per share, (ii) 2,191,518
shares issuable upon exercise of outstanding options at March 31, 1996, at a
weighted average price of $0.65 per share and (iii) 965,228 shares of Common
Stock reserved for future issuance under the Stock Plan. Also excludes
300,000 shares reserved for issuance under the Directors Plan, which was
adopted in April 1996. See "Management -- Stock Plans" and Note 6 of Notes
to Financial Statements.

20
<PAGE>
DILUTION

The pro forma net tangible book value of the Company as of March 31, 1996
was $34,652,000 or approximately $2.13 per share. Pro forma net tangible book
value per share represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding at March 31, 1996. Pro forma net tangible book value dilution per
share represents the difference between the amount per share paid by purchasers
of shares of Common Stock in the offering made hereby and the pro forma net
tangible book value per share immediately after completion of this offering.
After giving effect to the estimated net proceeds from the sale of the 6,000,000
shares of Common Stock offered hereby at the initial public offering price of
$15.00 per share, after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company, the pro forma net tangible
book value of the Company as of March 31, 1996 would have been $117,849,000 or
approximately $5.30 per share of Common Stock. This represents an immediate
increase in net tangible book value of $3.17 per share to existing shareholders
and an immediate dilution in pro forma net tangible book value of $9.70 per
share to purchasers of Common Stock in this offering. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price........................................ $ 15.00
Pro forma net tangible book value as of March 31, 1996............. $ 2.13
Increase attributable to new investors............................. 3.17
---------
Pro forma net tangible book value after the offering................. 5.30
---------
Dilution to new investors............................................ $ 9.70
---------
---------
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price per share paid by the existing
shareholders and by new investors before deducting the underwriting discounts
and commissions and estimated offering expenses payable by the Company at the
initial public offering price of $15.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................. 16,239,231 73.0% $ 70,860,000 44.1% $ 4.36
New investors......................... 6,000,000 27.0 90,000,000 55.9 15.00
------------ ----- -------------- -----
Total............................... 22,239,231 100.0% $ 160,860,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>

The foregoing table assumes no exercise of outstanding stock options or
warrants. As of March 31, 1996, there were outstanding warrants to purchase
203,881 shares of Common Stock at an exercise price of $8.25 per share and
outstanding options to purchase an aggregate of 2,191,518 shares of Common Stock
at a weighted average exercise price of $0.65 per share. To the extent that any
of these options or warrants or additional options or warrants are exercised,
there will be further dilution to new investors. See "Management -- Stock Plans"
and Note 6 of Notes to Financial Statements.

21
<PAGE>
SELECTED FINANCIAL DATA

The statement of operations data set forth below for the years ended
December 31, 1993, 1994 and 1995 and the balance sheet data as of December 31,
1994 and 1995 are derived from financial statements of the Company audited by
Ernst & Young LLP, independent auditors, which are included elsewhere in this
Prospectus. The statement of operations data for the years ended December 31,
1991 and 1992 and the balance sheet data as of December 31, 1991, 1992, and 1993
are derived from financial statements audited by Ernst & Young LLP, which are
not included in this Prospectus. The balance sheet data at March 31, 1996 and
the statement of operations data for the three months ended March 31, 1995 and
1996 and for the period from inception (January 1, 1991) to March 31, 1996 are
derived from unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1996. The Company has never declared or paid
any cash dividends on shares of its capital stock. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
related Notes thereto, and other financial information included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED INCEPTION
(JANUARY 1,
YEAR ENDED DECEMBER 31, MARCH 31, 1991) THROUGH
----------------------------------------------------- -------------------- MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract and grant revenue..... $ -- $ 43 $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 $ 9,071
Operating expenses:
Research and development..... 1,576 4,106 6,566 9,483 12,420 2,274 4,177 38,328
General and administrative... 261 582 577 2,303 3,833 777 1,649 9,205
--------- --------- --------- --------- --------- --------- --------- -------
Total operating expenses... 1,837 4,688 7,143 11,786 16,253 3,051 5,826 47,533
--------- --------- --------- --------- --------- --------- --------- -------
Loss from operations........... (1,837) (4,645) (5,730) (10,212) (11,628) (2,197) (4,410) (38,462)
Interest income.............. -- 3 211 575 1,301 183 517 2,607
Interest expense............. -- (18) (73) (43) (420) (160) (28) (582)
--------- --------- --------- --------- --------- --------- --------- -------
Net loss....................... $ (1,837) $ (4,660) $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) $ (36,437)
--------- --------- --------- --------- --------- --------- --------- -------
--------- --------- --------- --------- --------- --------- --------- -------
Pro forma net loss per share
(1)........................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma weighted average
shares outstanding (1)........ 10,715 17,653 17,664 17,663 17,664
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $ -- $ 94 $ 20,392 $ 17,805 $ 38,883 $ 34,837
Working capital............................... 1 (320) 17,452 15,677 36,070 31,729
Total assets.................................. 1 813 22,817 19,861 44,552 41,185
Long-term obligations......................... -- 564 -- 7,135 948 898
Deficit accumulated during development
stage........................................ (1,837) (6,497) (12,089) (21,769) (32,516) (36,437)
Total shareholders' equity (net capital
deficiency).................................. 1 (181) 19,214 9,170 38,519 34,652
</TABLE>

- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share.

22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.

OVERVIEW

Affymetrix is a development stage company which is developing GeneChip
systems and related applications and technologies for the acquisition, analysis
and management of complex genetic information. The business and operations of
Affymetrix were commenced in 1991 by Affymax and were initially conducted within
Affymax. In March 1992, Affymetrix was incorporated as a California corporation
and became a wholly-owned subsidiary of Affymax. In September 1993, Affymetrix
issued equity securities through a private financing of approximately $21
million that reduced Affymax' ownership to approximately 65%. In March 1995,
Glaxo acquired Affymax, including its then majority ownership interest in
Affymetrix. In August 1995, Affymetrix issued equity securities through a second
private financing of approximately $39 million, further reducing Affymax'
percentage ownership. Glaxo currently indirectly owns approximately 46% of
Affymetrix.

The Company has a limited operating history that, to date, has focused
primarily on the development of its technology. Based on its GeneChip technology
platform, Affymetrix is developing a portfolio of products for academic research
centers, pharmaceutical and biotechnology companies and reference laboratories.
As of March 31, 1996, the Company had placed nine of its GeneChip systems with
customers for validation, initial testing and certain research applications.
Only five of the systems have been purchased by customers, three of which were
for the HIV application. The payments received from the sale of these systems
were recorded as contract revenues pursuant to development agreements. The
Company commercially introduced its first product, the GeneChip system and the
HIV probe array for research use only, in April 1996. Failure of the Company to
successfully develop, manufacture and market additional products over the next
several years or to realize product revenues would have a material adverse
effect on the Company's business, financial condition and results of operations.

The Company has incurred operating losses in each year since its inception,
including net losses of approximately $10.7 million during the year ended
December 31, 1995, and at March 31, 1996, the Company had an accumulated deficit
of approximately $36.4 million. The Company's losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which to date have been
generated principally from collaborative research and development agreements and
government research grants. The Company expects to incur substantial additional
operating losses over the next several years as a result of increases in its
expenses for research and product development, manufacturing and marketing
capabilities.

The Company's quarterly operating results will depend upon the volume and
timing of orders for GeneChip systems and probe arrays received and delivered
during the quarter, variations in payments under collaborative agreements,
including milestones, royalties, license fees, and other contract revenues, and
the timing of new product introductions by the Company. The Company's quarterly
operating results may also fluctuate significantly depending on other factors,
including the introduction of new products by the Company's competitors;
regulatory actions; market acceptance of the GeneChip system and other potential
products; adoption of new technologies; manufacturing capabilities; variations
in gross margins of the Company's products; competition; the cost, quality and
availability of reagents and components; the mix of products sold; changes in
government funding; and third-party reimbursement policies.

The Company expects that it may have to discount the price of the GeneChip
system to gain market acceptance, which could adversely affect gross margins.
The Company's future gross margins, if any, will be dependent on, among other
factors, the Company's ability to cost-effectively manufacture the GeneChip
system, product mix and the degree of price discounts required to market its
products to academic research centers,

23
<PAGE>
pharmaceutical companies and reference laboratories. The amount of future
operating losses and time required by the Company to reach profitability, if
ever, are highly uncertain. The Company's ability to generate significant
revenues and become profitable is dependent in large part on the ability of the
Company to enter into additional collaborative arrangements and on the ability
of the Company and its collaborative partners to successfully commercialize
products incorporating the Company's technologies. In addition, delays in
receipt of any necessary regulatory approvals by the Company or its
collaborators, or receipt of approvals by competitors, could adversely affect
the successful commercialization of the Company's technologies.

From inception through March 31, 1996, the Company has generated $11.7
million from government grants, collaborative agreements and interest income.
The Company has significant collaborative relationships with GI and HP and a
significant grant from the National Institute of Standards and Technology's
Advanced Technology Program. The Company began its collaboration with GI in
November 1994 to develop applications of the GeneChip system to the
identification of new genes and new uses of genes using expression monitoring.
Under this agreement, GI funded the Company's research to determine the
feasibility of this application of GeneChip technology and agreed to make
milestone and royalty payments. In December 1995, GI and the Company signed a
second agreement for the supply of custom probe arrays to GI in return for
up-front fees, milestone payments and royalties for products developed from use
of the probe arrays. As of March 31, 1996, the Company recognized contract
revenues totaling $1.3 million from GI. As a result of entering into an
agreement with Incyte in April 1996, Affymetrix is required to refund 30% of the
development funding received from GI and future funding from GI will be
proportionally reduced. The Company recorded an accrued liability for this
refund and believes that the reduction of future funding from GI will not have a
material effect on its operations. See "Business -- Collaborative Agreements and
Grants."

The Company entered into a collaboration with HP in November 1994 to
develop, manufacture and supply a more advanced scanner for use with the
Company's GeneChip probe arrays and for the Company, in collaboration with HP,
to develop, manufacture and supply certain probe arrays to HP for sale in
certain markets. As of March 31, 1996, the Company recognized contract revenues
totaling $1.5 million from HP.

In October 1994, the Company and Molecular Dynamics received a five-year
grant from the National Institute of Standards and Technology's Advanced
Technology Program in the amount of $31.5 million to develop a miniaturized DNA
diagnostic system based on the Company's technology. Pursuant to the grant,
$20.8 million is designated for the Company and its subcontractors and $10.7
million is designated for Molecular Dynamics and its subcontractors, subject to
the requirements of each company to match such funding. As of March 31, 1996,
the Company's revenues from this grant totaled $1.6 million.

Collaborations will continue to be an important element of the Company's
business strategy. There can be no assurance that the Company will be able to
maintain existing collaborations, enter into future collaborations to develop
applications of its GeneChip system or that any such collaborative arrangements
will be successful.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995

Contract and grant revenue increased by 66% for the three months ended March
31, 1996 to $1.4 million from $854,000 for the three months ended March 31,
1995. The increase was principally due to the sale of one GeneChip system
pursuant to a development agreement in the first quarter of 1996, as compared to
none in the first quarter of 1995, and an increase in ATP grant revenue.

Research and development expenses increased to $4.2 million for the three
months ended March 31, 1996 compared to $2.3 million for the three months ended
March 31, 1995. The increase was attributable primarily to the hiring of
additional research and development personnel, costs incurred to further product
development in anticipation of Affymetrix' initial product launch, and purchase
of research supplies. Affymetrix anticipates that research and development
expenses will continue to increase in future periods.

General and administrative expenses increased to $1.6 million for the three
months ended March 31, 1996 compared to $777,000 for the three months ended
March 31, 1995. The increase in general and administrative expenses was
primarily due to the hiring of additional management personnel and to legal and
other professional

24
<PAGE>
fees in connection with the overall scale-up of operations and business
development efforts. General and administrative expenses are expected to
increase significantly in future periods to support Affymetrix' operations and
business development efforts.

Interest income was $517,000 for the three months ended March 31, 1996
compared to $183,000 for the three months ended March 31, 1995. The increase was
primarily attributable to the investment of the net proceeds from the private
placement of Series B Senior Convertible Preferred Stock in August 1995 and
higher interest rates. Interest expense for the three months ended March 31,
1996 decreased by $132,000 as compared to the three months ended March 31, 1995,
primarily due to the conversion of a $6.0 million subordinated convertible
promissory note held by Affymax in August 1995.

YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994

Contract and grant revenue increased to $4.6 million for 1995 from $1.6
million for 1994 as a result primarily of its ATP grant and revenue earned from
collaborative agreements with GI and HP.

Research and development expenses increased to $12.4 million for 1995
compared to $9.5 million for 1994. The increase in research and development
expenses was attributable primarily to the hiring of additional research and
development personnel, costs incurred to establish a pilot manufacturing
facility, and increased purchases of research supplies.

General and administrative expenses increased to $3.8 million for 1995
compared to $2.3 million for 1994. The increase in general and administrative
expenses was attributable primarily to the hiring of additional management
personnel and the incurring of legal and other professional fees in connection
with the overall scale-up of operations and business development efforts.

Interest income was $1.3 million for 1995 compared to $575,000 for 1994. The
increase resulted from the investment of net proceeds from Affymetrix' private
placement of Series B Senior Convertible Preferred Stock in August 1995.
Interest expense resulted from lease financing for manufacturing equipment and
facilities.

YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993

Contract and grant revenue increased to $1.6 million for 1994 from $1.4
million for 1993 as a result of additional funding from government grants.

Research and development expenses increased to $9.5 million for 1994
compared to $6.6 million for 1993. The increase in research and development
expenses was attributable primarily to the hiring of additional research and
development personnel and increased purchases of research supplies.

General and administrative expenses increased to $2.3 million for 1994
compared to $577,000 for 1993. The increase in general and administrative
expenses was attributable primarily to the hiring of additional administrative
personnel and the incurring of legal and other professional fees in connection
with the expansion of Affymetrix' operations.

Interest income was $575,000 for 1994 compared to $211,000 for 1993. The
increase resulted from the investment of net proceeds from the private placement
of Series A Senior Convertible Preferred Stock in September 1993.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, Affymetrix has financed its operations primarily through
private placements of equity securities, contributions from Affymax, government
grants, collaborative agreements, issuances of convertible debt, equipment lease
financings and interest income. Through March 31, 1996, Affymetrix has received
net cash of $71.4 million from financing activities, consisting principally of
approximately $53.6 million from issuances of common and preferred stock, $10.6
million from contribution by Affymax, $7.1 million from issuances of notes
payable, and $1.3 million in lease financing. As of March 31, 1996, $1.1 million
of notes have been repaid, $6.0 million of convertible notes held by Affymax
have been converted into shares of Series B Senior Convertible Preferred Stock,
and $10.6 million of contributions from Affymax have been converted to shares of
Series 1 Subordinated Convertible Preferred Stock.

25
<PAGE>
Affymetrix' net cash used in operating activities was $3.1 million for the
three months ended March 31, 1996, $10.2 million for 1995, $7.4 million for 1994
and $3.2 million for 1993. The cash used for operations was primarily to fund
research and development expenses and manufacturing start-up costs related to
the introduction and support of Affymetrix' products. Affymetrix has also
received collaborative research and government grant funding totaling $11.0
million, of which $9.1 million has been recognized as contract and grant
revenue.

The cash used by the Company in investing activities since its inception
through March 31, 1996 totaled $41.0 million. Capital expenditures totaled
$701,000 for the three months ended March 31, 1996. Capital expenditures totaled
$2.3 million in 1995, $1.2 million in 1994 and $1.5 million in 1993. Purchases
of available-for-sale securities were $2.0 million for the three months ended
March 31, 1996 and $38.4 million, $3.0 million, and $14.0 million for 1995,
1994, and 1993, respectively. Proceeds from sales and maturities of
available-for-sale securities were $3.6 million for the three months ended March
31, 1996 and $14.0 million and $5.3 million for 1995 and 1994, respectively.
There were no sales or maturities in 1993.

As of March 31, 1996, Affymetrix had cash, cash equivalents, and short-term
investments of $34.8 million. The Company anticipates that these existing
capital resources, together with the net proceeds of this offering and interest
earned thereon, will enable it to maintain currently planned operations through
at least 1998. However, this expectation is based on the Company's current
operating plan, which could change and the Company could require additional
funding sooner than anticipated. In addition, the Company may choose to raise
additional capital due to market conditions or strategic considerations even if
it continues to have sufficient funds for its operating plan. The Company's
requirements for additional capital will be substantial and will depend on many
factors, including payments received under existing and possible collaborative
agreements; the availability of government research grant payments; the progress
of the Company's collaborative and independent research and development
projects; the costs of preclinical and clinical trials for the Company's
products; the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and the development of manufacturing, sales and
marketing capabilities. The Company has no credit facility or other committed
sources of capital. To the extent capital resources, including payments from
existing and possible future collaborative agreements and grants, together with
the net proceeds of the offering are insufficient to meet future capital
requirements, the Company will have to raise additional funds to continue the
development of its 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 the Company's
shareholders. If adequate funds are not available, the Company may be required
to curtail operations significantly or to obtain funds through entering into
collaborative agreements on unattractive terms. The Company's inability to raise
capital would have a material adverse effect on the Company's business,
financial condition and results of operations.

Affymetrix expects its capital requirements to increase over the next
several years as it expands its facilities and acquires scientific equipment to
support manufacturing and research and development efforts. The Company's
expenditure requirements will depend on numerous factors, including the progress
of its research and development programs; the development of commercial scale
manufacturing capabilities; its ability to maintain existing collaborative
arrangements and establish and maintain new collaborative arrangements; the
costs involved in preparing, filing, prosecuting, defending and enforcing
intellectual property rights; the effectiveness of product commercialization
activities and arrangements and other factors.

At December 31, 1995, Affymetrix' net operating loss carryforwards and
research tax credit carryforwards for income tax purposes were approximately
$22.0 million and $1.2 million, respectively. Because Affymetrix has experienced
ownership changes, future utilization of these carryforwards may be subject to
certain limitations as defined by Internal Revenue Code and similar state
regulations. If not utilized,the carryforwards expire at various dates beginning
in 2008 through 2010. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce income
tax liabilities.

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BUSINESS

The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

BACKGROUND

GENES AND DISEASE

Genes provide the fundamental basis for understanding human health and
disease. Genomics, the study of genes and their functions, will lead to new
approaches to diagnose, monitor and treat disease.

The entire genetic content of an organism is known as its genome. DNA is the
molecule that makes up genes and encodes the genetic instructions. These
instructions are embodied in the sequence of the four nucleotide bases (A, C, G
and T) that are the chemical building blocks of DNA. The DNA molecule is a
combination of two strands held together by chemical bonds between nucleotide
bases on one strand and the other strand. Only certain pairs of nucleotide bases
can form these bonds: A always pairs with T, and C always pairs with G. Such
paired DNA strands are said to be complementary. When two DNA strands are
complementary, they bind together to form a double helix in a process called
hybridization. In humans, the DNA molecule contains 3 billion nucleotide pairs
organized into 46 chromosomes. The human genome is believed to contain over
100,000 genes.

Cells carry out their normal biological functions through the genetic
instructions encoded in their DNA. This process, known as gene expression,
involves several steps. In the first step, nucleotides in a gene are copied into
a related nucleic acid molecule called messenger RNA. Messenger RNA instructs
the cell to produce proteins. Proteins are molecules that regulate or perform
most of the physiological functions of the body. Because the order of
nucleotides in each gene is different, each gene directs the production of a
different protein. Each organism's characteristics are thus ultimately
determined by proteins encoded in its DNA. This process is illustrated below.

[DIAGRAM]

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The diversity of living organisms results from variability in their genomes.
Variability stems from differences in the sequences of genes and from
differences in gene expression. Changes in the sequences of normal genes may be
introduced by environmental or other factors, such as errors in replication of
genes. These changes are known as polymorphisms, and the affected genes can be
passed from generation to generation. In some cases, polymorphisms have no
effect on the organism. However, in other cases, polymorphisms can result in
altered function of the protein encoded by the gene. Such polymorphisms are
called mutations. Mutations in single genes have been associated with diseases
such as cystic fibrosis, and mutations in multiple genes have been associated
with diseases such as cancer and cardiovascular disease. Similarly, it has
recently been discovered that polymorphisms in the genome of HIV, the virus that
causes AIDS, enable that virus to develop resistance to antiviral drugs,
resulting in disease progression and ultimately death. In order to understand
how mutations in particular genes cause disease, scientists must compare genes
from healthy and diseased people. These efforts are laborious and time
consuming, requiring the repeated sequencing of genes from a large number of
people.

The genes expressed, as well as the order and level of their expression,
determine differences among cell types in an organism. Although most cells
contain an organism's full set of genes, only a small fraction of this set is
expressed in each cell. The expression of the wrong or defective genes, or the
expression of too much or too little of genes normally expressed, causes
disease. Such abnormalities in gene expression have been associated with human
diseases, including many types of cancer. The role of gene expression in disease
requires an understanding of how genes interact to cause disease and how
external stimuli, such as drugs, cause variations in gene expression.

THE ROLE OF GENOMICS IN UNDERSTANDING DISEASE

Increased knowledge of how DNA molecules encode the functions of living
organisms has generated a worldwide effort to identify and sequence genes of
many organisms, including the estimated 100,000 genes within the human genome.
This effort is being led by the Human Genome Project and related academic,
government and industry research projects. Once the genes and their nucleotide
sequences are identified, it is anticipated that many years of additional
research will be required to understand the specific function of each gene and
its role in disease. This research, commonly referred to as genomics, may lead
to new opportunities in drug discovery and diagnostics.

The general processes by which researchers are attempting to discover genes
fall into two principal categories: genetic mapping and high-throughput
sequencing. Once a gene has been identified, either through mapping or
high-throughput sequencing, researchers must understand the function of the gene
and how variability in the gene leads to disease. Many diseases are caused by
either changes in the sequence of the gene or by changes in the expression of
the gene. Understanding the role of a gene in disease requires either
quantitative gene expression monitoring or large scale polymorphism screening.

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[CHART]

THE CHART ABOVE ILLUSTRATES TECHNIQUES USED TO
IDENTIFY GENES AND UNDERSTAND THEIR FUNCTIONS, WHICH
CAN LEAD TO THE DEVELOPMENT OF NEW DIAGNOSTIC AND
THERAPEUTIC OPPORTUNITIES.

GENETIC MAPPING. Researchers use genetic mapping to identify the gene or
genes causing an observable and well-characterized disease or genetic disorder.
The gene mapping process is extensive and typically begins by assembling tissue
samples and histories from families where the disease of interest is prevalent.
Researchers then attempt to locate the position of the gene responsible for the
disease using a technique called linkage analysis. This technique relies on the
identification of genes using DNA sequences called markers, whose specific
locations are known among the three billion base pairs of the human genome. By
comparing the patterns of markers in generations of healthy and diseased people,
researchers can link genes to markers and thereby determine that a particular
marker is located near the gene responsible for the disease. By using more
markers, genes can be more precisely mapped. Since many major diseases, such as
diabetes and atherosclerosis, are believed to be caused by the interplay of
numerous genes, it is often necessary to try to map several genes
simultaneously. This mapping process requires extensive efforts and significant
computational capabilities. It is expected that increasing the speed and
accuracy of genetic mapping and improving the ability to analyze information
from thousands of different markers may accelerate the identification of disease
genes.

HIGH-THROUGHPUT SEQUENCING. High-throughput sequencing involves first
identifying genes and subsequently determining their function and possible role
in disease. When a gene is expressed in a particular cell, its DNA is copied
into messenger RNA. In this process, sequences that do not code for an expressed
gene are removed. Thus, messenger RNA contains only expressed gene sequences.
Using high-throughput sequencing methods, DNA copies of the messenger RNA can be
sequenced and thereby reveal the sequence of a gene. Corporate, academic and
government efforts have been successful in identifying a substantial number of
the 100,000 genes in the human genome using such techniques.

GENE EXPRESSION MONITORING. By monitoring the expression of a large number
of genes, researchers seek to correlate changes in expression patterns with a
particular disease. The effectiveness of monitoring gene

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expression is a function of the number of genes that can be monitored
simultaneously, the sensitivity (ability to measure low levels of gene
expression) and the ability of the method used to provide qualitative
information. Relative levels of gene expression are currently monitored
primarily through an intensive process of sequencing many copies of genes.
Scientists believe that the development of technologies that can quantitatively
monitor thousands of genes simultaneously will increase the effectiveness of
gene expression monitoring as a tool for understanding the roles of genes in
disease.

POLYMORPHISM SCREENING. Using polymorphism screening, researchers seek to
correlate variability in the sequence of genes with a specific disease. By
sequencing a gene of interest from a large number of healthy and diseased
persons, researchers are able to statistically correlate specific gene mutations
with the disease. Currently, the polymorphism screening process is done using
gel-based sequencing. A typical polymorphism screening project might require
sequencing 10 genes of 5,000 nucleotide bases each in up to 1,000 patients, or a
total of 50 million bases, to understand the role of these 10 genes in one
disease. Using high-throughput sequencing techniques, even at a cost of cents
per base, such projects are expensive and time consuming. It is expected that
new technologies will be needed to effectively screen the more than 100,000
human genes for polymorphisms that correlate with many known diseases.

OPPORTUNITIES IN DIAGNOSTICS AND THERAPEUTICS

Current diagnostic tests can monitor the physiological effects of disease,
detect infectious organisms by growing them in culture, or use specific markers,
such as proteins, known to be associated with disease. Diagnostic tests rely on
a patient sample of tissue, blood, or urine, and detect the physiological
effect, the infectious organism or the marker, in the sample. For example,
immunoassays detect and measure specific proteins already known to be associated
with a disease using antibodies generated against those proteins. However,
protein markers are not available or are not useful for diagnosing many
diseases. Diagnostic tests that monitor physiological effects are also limited
because different diseases can cause the same effect. For example, an elevated
white blood cell count can be caused by appendicitis, an acute infection or
leukemia.

Most infectious diseases are viral, bacterial or fungal. Diagnosis of
bacterial and fungal infections is generally achieved by growing a culture,
which may take several days. Even after the infectious organism is identified,
further analysis may be required to determine which antibiotics, if any, may be
effective in treating the disease. In the case of many viruses, diagnosis
depends on immunoassay tests that detect antibodies to the virus. However, these
tests provide no information as to whether the virus is resistant to drug
therapy or if the infection is active or latent.

Recent advances in gene-based diagnostic tests using DNA probes, DNA
amplification techniques and sequencing technologies have begun to address these
shortcomings by directly examining the genes associated with a given disease
rather than relying on physiological parameters or antibodies. For example,
amplification of specific genes from an infectious organism eliminates the need
to grow that organism in culture.

However, current techniques for gathering genetic information for diagnosis
and monitoring of disease have limitations. For example, gel-based sequencing
techniques used in some approaches are time-consuming, require skilled
operators, and can analyze only limited lengths of contiguous DNA sequences in a
given run. Gene-based diagnosis often requires rapid turnaround and examination
of noncontiguous DNA sequences. As a result, new techniques and tools are being
developed to improve the diagnosis, monitoring and treatment of disease.

Using genetic mapping and high-throughput sequencing, scientists have been
successful in discovering many genes. Technological improvements that increase
the speed and decrease the cost of gene expression monitoring and polymorphism
screening will improve the ability of researchers to understand the function of
these genes and their role in disease. Such knowledge may assist in the
development of therapeutics with greater efficacy and fewer side effects, as
well as diagnostic products with greater sensitivity and accuracy.

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BUSINESS STRATEGY

Affymetrix' objective is to establish the GeneChip system as the platform of
choice for acquiring, analyzing and managing complex genetic information in
order to improve the diagnosis, monitoring and treatment of disease. The
Company's GeneChip system consists of disposable DNA probe arrays containing
gene sequences on a chip, instruments to process the probe arrays, and software
to analyze and manage genetic information from the probe arrays. The Company
intends to commercialize the GeneChip system in two principal areas: genomics
and diagnostics.

GENOMICS

- ESTABLISH GENECHIP TECHNOLOGY AS A PLATFORM FOR GENOMICS RESEARCH. The
Company intends to develop the GeneChip system for use in several
applications where Affymetrix believes it has substantial advantages over
conventional tools used for DNA sequence analysis in the identification of
genes and their role in disease. Initially, four such applications have
been identified: gene discovery, gene mapping, gene expression monitoring
and polymorphism screening, all of which require analyzing and processing
large amounts of genetic information.

- COMMERCIALIZE CUSTOM PROBE ARRAYS THROUGH CORPORATE PARTNERSHIPS. The
Company intends to sell custom probe arrays to pharmaceutical and
biotechnology companies through collaborative agreements. The Company will
seek to receive revenues through design and development fees, milestone
payments and sales of DNA probe arrays and instruments to the
collaborative partner. If the collaborative partner is successful in
discovering products through the use of the GeneChip technology, the
Company would also seek to receive royalties from the sale of such
products.

- PARTICIPATE IN THE COLLECTION AND APPLICATION OF GENETIC INFORMATION.
Affymetrix intends to use the DNA sequence analysis capabilities of the
GeneChip technology to measure gene expression in order to create
databases containing information on the function of genes and their role
in disease. Affymetrix anticipates that such databases will be developed
and commercialized through partnerships with pharmaceutical and
biotechnology companies.

DIAGNOSTICS

- IMPROVE ACCURACY AND SPEED OF DIAGNOSIS. Affymetrix intends to develop DNA
probe arrays to obtain genetic information from patient samples so that
specific diseases can be rapidly diagnosed. Furthermore, such probe arrays
will be designed to simultaneously collect additional relevant
information, including drug resistance data.

- ESTABLISH DIRECT SALES EFFORTS AND PARTNERSHIPS. Affymetrix intends to
initially market its GeneChip products, for research use only, directly to
academic research centers and reference laboratories that conduct the
majority of gene-based diagnostic tests. In addition, the Company will
seek to partner with, or license technology to, established diagnostic
companies which could develop, seek regulatory approval, and commercialize
probe arrays for broader clinical use.

- DISCOVER NOVEL DIAGNOSTIC MARKERS. The Company intends to use information
from the Human Genome Project and related efforts to identify genes
associated with particular diseases and use the proteins encoded by these
genes in new diagnostic tests. The Company will seek to partner with
established diagnostic companies by providing these novel protein markers
for development and commercialization as conventional immunoassays.

There can be no assurance that the Company will be successful in
implementing its strategy or marketing its GeneChip system for these genomics
and diagnostic applications. The Company's GeneChip system and

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other potential products will require significant additional development and
investment, including testing to further validate performance and demonstrate
cost effectiveness. While the Company's initial product sales for research use
have not required regulatory approvals, the Company expects that such approvals
will be required for diagnostic applications in the future. The Company may need
to undertake costly and time-consuming efforts to obtain required approvals.
There can be no assurance that any products will be successfully developed, be
proven to be accurate and efficacious in any markets, meet applicable regulatory
standards in a timely manner or at all, be protected from competition by others,
avoid infringing the proprietary rights of others, be manufactured in sufficient
quantities or at reasonable costs, or be marketed successfully.

TECHNOLOGY

Affymetrix' probe array technology and systems integrate semiconductor
fabrication techniques, molecular biology, solid phase chemistry, software and
robotics. The Company's GeneChip system consists of four integrated parts:
disposable DNA probe arrays containing genetic information on a chip housed in a
cartridge, a fluidics station for introducing the test sample to the probe
arrays, a scanner to read the data from the probe arrays, and software to
control the instruments, analyze and manage the genetic information. The
GeneChip system is designed for use by pharmaceutical and biotechnology
companies, academic research centers and reference laboratories. The price of
the Company's GeneChip system, excluding probe arrays, is approximately
$120,000. The Company's HIV probe arrays, currently being sold commercially for
research use, are priced at $45 per array, with two arrays (one for each strand
of DNA) presently used per test.

DNA PROBE ARRAYS. The Company produces its DNA probe arrays using a process
based on semiconductor photolithographic fabrication techniques, which enables
it to assemble vast amounts of genetic information on a small glass chip called
a probe array. The genetic information is contained in sequences of DNA probes
that are built on the probe array. This process uses technology initially
developed at Affymax and exclusively licensed to the Company for selected
applications. The Company believes that this technology enables the efficient
use of a large number of DNA probes to analyze DNA or RNA sequences in a test
sample.

ILLUSTRATION OF THE LIGHT DIRECTED PROBE ARRAY SYNTHESIS PROCESS

[DIAGRAM]

The Company uses photolithography to synthesize large numbers of DNA
sequences simultaneously in specific locations on a glass chip. Photolithography
is a technique which uses light to induce chemical reactions that create
exposure patterns on the glass chip. The process begins by coating the chip with
light-sensitive chemical compounds (defined as "protecting" groups) that prevent
chemical coupling. Lithographic masks, which consist of predetermined patterns
that either block or transmit light, are used to selectively illuminate the
glass surface of the chip. Only those areas exposed to light are deprotected and
thus activated for chemical coupling through removal of the light-sensitive
protecting groups. The entire surface is then flooded with a

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solution containing the first in a series of DNA building blocks (A, C, G or T).
Coupling only occurs in those regions which have been deprotected through
illumination. The new DNA building block also bears a light-sensitive protecting
group so that the cycle can be repeated. This process of exposure to light and
subsequent chemical coupling can be repeated on the same chip in order to
generate an array of DNA sequences. The intricate illumination patterns allow
the Company to build arrays of many diverse DNA sequences in a small area. The
Company can manufacture a large number of identical DNA probe arrays on a large
glass wafer, which is then diced into single probe arrays.

Each probe array contains thousands of "features." Each feature contains
millions of copies of the same single-stranded DNA sequence, or probe. The
patterns of photolithographic masks and the order of DNA building blocks used in
the synthesis process dictate the sequence of the probes in each feature on the
chip surface. The number of synthesis cycles determines the length of the DNA
probes in each feature.

[DIAGRAM]

The Company's GeneChip technology enables it to effectively synthesize a
large number of DNA sequences, which would not be possible with existing
technologies. Unlike conventional synthesis, which generally uses a linear
process to create compounds, the Company's synthesis technology is
combinatorial, in that the number of compounds synthesized grows exponentially
with the number of cycles in the synthesis. For example, in a 40 cycle process,
Affymetrix has produced a probe array with over one million features, each
containing a unique DNA sequence. This process would take over ten million
cycles using standard DNA synthesis techniques.

The function of each single-stranded probe on the GeneChip probe array is to
bind to its complementary single strand of DNA or RNA from the patient sample.
Each feature on the GeneChip probe array contains identical copies of a single
strand of DNA. The nucleic acid to be tested is isolated from a sample, such as
blood or biopsy tissue, and fluorescently labeled by one of several standard
biochemical methods. The test sample is then washed over the probe array surface
and the labeled test sample binds, or hybridizes, to the complementary probes if
they are present in the probe array. When scanned by the laser in the GeneChip
scanner, the hybridized test sample generates a fluorescent signal. The presence
and sequence of the nucleic acid sample can be determined by detecting these
signals since the sequence and position of each complementary DNA probe on the
probe array are known. The Company's currently manufactured probe arrays contain
from 16,000 to more than 100,000 features.

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INSTRUMENTATION. The fluidics station controls the introduction of the test
sample to the probe array and the hybridization process. A technician places the
test sample in a small container in the fluidics station, which introduces the
test sample into the cartridge containing the DNA probe array. The technician
uses a computer to control the delivery of reagents and the timing and
temperature required for hybridization of the test sample to the probe array.
The process concludes with a reagent wash that leaves only the hybridized test
sample bound to the probe array. The fluidics station can process four probe
arrays simultaneously, typically taking less than one hour to process these
arrays.

After completion of hybridization on the fluidics station, the technician
places the cartridge in the scanner which reads the probe array. The GeneChip
scanner consists of a laser, high resolution optics, robotics to position and
scan the cartridge, a fluorescence detector and an interface to a personal
computer. The label on the test sample emits fluorescent signals when excited by
the light from the laser. The intensity of the fluorescent signal is recorded by
the scanner and stored in the computer. The current scanner can read 1.28X1.28
centimeter probe arrays with up to 64,000 features. An advanced scanner is being
developed to read 1.28X1.28 centimeter probe arrays with up to 400,000 features.
However, there can be no assurance that this scanner will be successfully
developed or commercialized.

SOFTWARE. The GeneChip product software is supplied as part of the
integrated system and runs on a Windows platform. The fluorescence intensity
data captured from the scanner are used in conjunction with computer files
containing the sequence and location of all the probes on the probe array to
determine the nucleotide sequence of the test sample. For the HIV GeneChip
product, the analysis takes less than 90 seconds for one probe array and the
resulting sequence is displayed on the computer. Customized software enables the
technician to rapidly identify polymorphisms in the test sample and to compare
genetic sequences across test samples.

GENOMICS APPLICATION AREAS

Affymetrix is applying the GeneChip technology to create a platform for
genomics and pharmaceutical research. Genomics applications include gene
discovery, genetic mapping, expression monitoring and polymorphism screening.

GENE DISCOVERY. The discovery of genes may be an important means to
understand disease and to design new therapies. A large number of the genes
identified to date have been classified into families based on common sequences
within these genes. One approach to gene discovery uses these common sequences
to search for and identify previously unknown members of these gene families. To
facilitate this approach, the Company designs DNA probe arrays containing a
large number of probes for both common and variable regions of known genes.
Using this technology, samples containing DNA are screened against the probe
arrays, and, for genes that are already known, both the variable and common
regions are detected from the sample. For previously unknown genes, only the
common regions are detected, thus identifying a new gene.

The Company believes that this approach to gene discovery may accelerate the
rate of new gene identification. In November 1994, Affymetrix established a
collaboration with GI to apply the GeneChip technology to the discovery of new
genes and uses of genes in selected gene areas. As part of this collaboration,
GI and the Company have undertaken a three-year research project whereby GI
provides research funding. In addition, Affymetrix supplies custom probe arrays
to GI for specified fees and may receive milestone payments and royalties.

GENETIC MAPPING. Genetic mapping is an important method for linking
diseases to particular genes. Over the last five years, over 60 genes have been
linked to known diseases by this method. However, the current technologies for
mapping genes are slow and labor intensive. This problem is exacerbated when
looking at complex diseases such as diabetes, asthma, and cardiovascular disease
which are believed to be associated with multiple genes. Using genetic mapping,
researchers attempt to find disease genes by using markers. The correlation
between markers in diseased and healthy people enables researchers to link such
genes to a particular disease state. Research to identify markers is currently
being conducted by various academic and scientific groups to improve genetic
mapping techniques. The Company has established a collaboration with the
Whitehead Institute for Biomedical Research at the Massachusetts Institute of
Technology ("MIT") to design probe arrays with new markers identified by
Whitehead scientists. The Company intends to develop mapping

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probe arrays based upon publicly available markers as well as custom probe
arrays based upon proprietary markers. The Company intends to market these
arrays to pharmaceutical and biotechnology companies for conducting genetic
mapping. There can be no assurance that these arrays will be successfully
developed or marketed to these or other customers.

EXPRESSION MONITORING. Currently, large amounts of genetic sequence
information are being generated, through the Human Genome Project and related
efforts, yet relatively little is understood about the function of most genes.
Affymetrix believes that monitoring gene expression is fundamental for
understanding the function of genes and their role in disease. To facilitate the
monitoring of gene expression, the Company designs probe arrays with DNA probes
that are complementary to a sequence within a gene of interest. By providing
sequence information, these probe arrays may enable researchers to identify the
particular gene and quantitatively measure its level of expression compared to
other genes of interest in the test sample. By synthesizing specific probes for
multiple genes on a single probe array, the Company also enables researchers to
quickly, quantitatively and simultaneously monitor the expression of a large
number of genes of interest. By monitoring the expression of such genes at
different times, researchers can use the probe arrays to understand gene
expression and how it is related to disease progression. The Company believes
that such information will be an important tool in the development of new
therapeutics.

Under its collaboration with GI established in November 1994, the Company is
receiving research funding to develop probe arrays for gene expression
monitoring. The Company will also design, manufacture, and supply custom probe
arrays for GI pursuant to a second agreement executed in December 1995. Multiple
custom DNA probe arrays will be designed by the Company to monitor the
expression patterns of approximately 15,000 genes to be specified by GI. GI
retains all rights to discovered genes and their uses. Affymetrix will supply
custom probe arrays for specified fees and may receive milestone payments and
royalties on certain therapeutic products based on the discovered genes. In
April 1996, the Company also entered into an agreement with Incyte to explore
the potential use of DNA probe arrays in the area of gene expression.

POLYMORPHISM SCREENING. As the identity of genes in the human genome is
determined, the need to understand the significance of the variability of
nucleotide sequences in these genes increases. Researchers must determine the
normal sequence of the gene, which mutations exist and how these mutations
correlate with a disease. This requires the sequencing of samples from a large
number of affected and unaffected individuals. Using sequencing strategies
developed for the HIV probe array, Affymetrix believes that GeneChip probe
arrays could significantly reduce the cost and time of polymorphism screening,
which is currently done through more labor intensive gel-based sequencing
techniques. In May 1996, the Company entered into an agreement with Glaxo to
design, test and supply probe arrays to demonstrate use of the arrays in
detecting polymorphisms in specific genes. Glaxo and Affymetrix will design and
test a probe array containing several genes specified by Glaxo. If successfully
developed, Affymetrix will supply Glaxo's requirements of such probe arrays for
research purposes.

There can be no assurance that the Company's collaborative partners will
perform their obligations as expected or will devote sufficient resources to the
development, testing or marketing of the Company's potential products developed
under the collaborations. Further, there can be no assurance that any products
for genomics applications will be successfully developed, be proven to be
accurate and efficacious in any markets, be protected from competition by
others, avoid infringing the proprietary rights of others, be manufactured in
sufficient quantities or at reasonable costs, or be marketed successfully.

DIAGNOSTIC PRODUCTS AND RESEARCH APPLICATIONS

Affymetrix intends to use the GeneChip platform in conjunction with public
and private gene databases to discover and develop diagnostic products. The
Company is pursuing diagnostic products and research applications in infectious
diseases, cancer and other areas, including drug metabolism.

INFECTIOUS DISEASES. The Company believes its GeneChip technology may
enable it to develop tests which, by sequencing large amounts of genetic
information and quantitatively measuring levels of gene expression, can provide
information that could improve treatments for many infectious diseases.

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Industry sources estimate that in North America and Europe approximately 1.5
million persons are infected with HIV and that approximately 100,000 persons are
diagnosed with AIDS annually. Many HIV symptomatic patients receive antiviral
treatment with reverse transcriptase inhibitors, such as AZT, or protease
inhibitors, both of which block proteins required for the virus to replicate.
The HIV genome encodes the reverse transcriptase and protease gene proteins
within approximately 1,400 bases (or approximately 15%) of the viral genome.
Mutations in the viral genome result from errors in replication. Some of these
mutations confer resistance to the antiviral drugs being administered to the
patient. It is believed that the identity of nucleotides in the reverse
transcriptase and protease genes will be essential in order to monitor a
patient's drug resistance profile.

Affymetrix has developed the GeneChip system with an HIV probe array as its
first product for commercialization. The Company believes this GeneChip system
will enable researchers to identify the mutations associated with drug
resistance in HIV infected patients and allow researchers to identify new
mutations. The HIV probe array contains DNA probes in approximately 20,000
features that represent sequences of the reverse transcriptase and protease
genes of the virus. These features can identify mutations at any of the sites in
the genes that have been associated with drug resistance. The Company expects to
initially market the HIV product for research use in identifying the correlation
between mutations in the virus and drug resistance. The Company believes that
monitoring drug resistance related mutations during therapy may become a
valuable aspect of patient management. Affymetrix has placed five GeneChip
systems for the HIV application in academic research and pharmaceutical
companies for evaluation and validation. The Company commenced commercial sales
of the GeneChip system and HIV probe array for research use only in April 1996.
The Company will rely on third parties to manufacture and service its
instruments. The Company has no prior experience in introducing a commercial
product. There can be no assurance that technicians will not experience
difficulties with the system that would prevent or limit its use. In addition,
there can be no assurance that the efficiency and accuracy of the HIV probe
array in providing sequence information from HIV will be better than current
technologies, such as gel-based sequencing.

The Company intends to develop additional diagnostic products in the
infectious disease area that could determine complex drug resistance and gene
identification information. The Company is evaluating the development of
additional GeneChip probe tests for bacterial, viral and fungal infections, such
as tuberculosis and cytomegalovirus (CMV). The Company intends to seek
collaborators to participate in the funding, development and marketing of these
tests.

CANCER. In the United States, approximately 1.1 million new cases of cancer
are diagnosed annually and the incidence of cancer deaths is approximately
520,000 individuals each year. Colorectal, breast, prostate and lung cancer
account for approximately half of all diagnoses.

The p53 gene encodes a protein whose normal function is to control cell
replication. However, mutations in the p53 gene can result in the loss of this
function and are known to contribute to the aggressive growth of some types of
cancer, including colorectal, breast and bladder cancers. Mutations have been
observed to date at more than 400 distinct sites in the p53 gene sequence.
Currently available diagnostic tests include IN VITRO assays that use antibodies
to detect the accumulation of p53 molecules in cells but cannot directly detect
mutations in the p53 gene. Gel-based sequencing methods are impractical because
mutations can occur over a large area of the genome, requiring many gels to be
processed to sequence the entire gene. As a result, these methods are unable to
predict the rate of cancer progression. Understanding the rate of progression is
often necessary to determine whether to treat the cancer with chemotherapy,
radiation or surgery.

The Company is currently developing a GeneChip p53 probe array that contains
DNA probes to detect known mutation sites, as well as to sequence areas of the
p53 gene where other mutations may occur but have currently not been identified.
Initially, the Company intends to market these p53 probe arrays to academic
research centers and reference laboratories to study the p53 gene. The Company
also intends to seek regulatory approval to use the p53 probe array for clinical
use to assist in monitoring cancer progression and improving patient therapy.
The Company is currently evaluating other genes associated with cancer for
potential product development. There can be no assurance that the p53 probe
array or other cancer products will be developed, receive regulatory approvals
or be successfully commercialized.

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OTHER APPLICATIONS. The Company is developing its GeneChip technology to
address other applications in pharmaceutical research, such as monitoring drug
metabolism.

Monitoring drug metabolism is an essential component in drug development.
Drug metabolism determines how quickly or slowly a drug is eliminated or
rendered inactive and whether any of the drug is processed into a toxic
compound. Genetic differences among patients are an important factor in drug
metabolism. Variations in drug metabolism are important to the development of
new drugs because these variations determine how patients will react to drugs
and which drugs will have relatively uniform effects across a broad population.
Certain of the genes coding for metabolic enzymes have been identified and
sequenced by researchers. Patients who have mutations in these genes are poor
metabolizers of drugs and may suffer from excessive drug accumulation and severe
toxicity from standard drug doses.

Affymetrix is collaborating with HP to develop a GeneChip probe array with
probes containing the gene sequence of mutations in two genes coding for
metabolic enzymes. Mutations in these two genes have been associated with
patients who are poor metabolizers of numerous drugs. HP will have worldwide
marketing rights for the probe arrays in the nonclinical market, which are to be
manufactured and supplied by the Company. The Company is entitled to royalties
and revenues, if any, from the supply of these probe arrays to HP. There can be
no assurance that these DNA probe arrays will be developed or commercialized or
will result in revenues to the Company.

NEW DIAGNOSTIC MARKERS. As genes are discovered through the Human Genome
Project and related efforts, the Company believes that additional correlations
will be found between genes and disease. Affymetrix believes that by using probe
arrays to monitor the levels of expression of many genes in parallel, it will be
able to identify proteins encoded by these genes that can serve as new markers
for conventional immunoassays. The Company intends to collaborate with
diagnostic companies to incorporate such protein markers into established
immunoassay formats. There can be no assurance that the Company will be able to
identify any new markers, negotiate such collaborative agreements on acceptable
terms, if at all, or that such collaborations will be successful.

There can be no assurance that any products for diagnostic applications will
be successfully developed, be proven to be accurate and efficacious in any
markets, meet applicable regulatory standards in a timely manner or at all, be
protected from competition by others, avoid infringing the proprietary rights of
others, be manufactured in sufficient quantities or at reasonable costs, or be
marketed successfully.

MANUFACTURING

The Company's strategy is to manufacture its disposable DNA probe arrays
in-house and contract with third-party suppliers to manufacture the fluidics
station and scanner for its GeneChip system.

The Company is currently manufacturing limited quantities of probe arrays
for internal and collaborative purposes and for initial product sales for
research use. The Company's probe array manufacturing process involves wafer
preparation, probe synthesis, dicing of synthesized wafers into chips, assembly
of chips into cartridges, and quality control. Glass wafers are prepared for
synthesis through the application of chemical coatings. DNA probes are
synthesized on the wafers using the Company's proprietary photolithographic
process. The completed wafers are then diced to yield individual probe arrays,
which are assembled into disposable cartridges and packaged for shipment. The
Company's probe array synthesis, dicing and assembly processes currently use
robotics and the Company's manufacturing process is partially automated. The
Company intends to further automate the manufacturing process. There can be no
assurance that manufacturing and quality control problems will not arise as the
Company attempts to scale-up its manufacturing facilities or that such scale-up
can be acheived in a timely manner or at commercially reasonable costs.
Affymetrix has developed software programs that automatically design
photolithographic masks used in probe array manufacturing and control the probe
array manufacturing lines.

The Company relies on outside vendors to manufacture its fluidics stations
and scanners. The Company has a supply agreement with Molecular Dynamics for its
current scanner, which can read up to 64,000 features per

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1.28X1.28 centimeter probe array. The Company's HIV probe array currently has
20,000 features on a 1.28X1.28 centimeter probe array and may be used with the
Molecular Dynamics scanner. The Company expects to purchase scanners from
Molecular Dynamics through the end of 1996.

As part of the Company's collaboration with HP, HP is developing a higher
resolution scanner. The HP scanner is designed to read probe arrays with up to
400,000 features per 1.28X1.28 centimeter probe array. The Company expects that
the HP scanner will be commercially available for use with the Company's probe
arrays in 1997.

The fluidics stations currently in the field are prototype versions that
were manufactured by the Company. The Company has entered into an agreement with
RELA, a private company, for the supply of fluidics stations. Pursuant to the
Company's supply agreement with RELA, the Company must provide a six-month
rolling forecast of its purchase requirements for fluidics stations and is
obligated to make certain minimum purchases, at prices that vary depending on
the volume ordered.

There can be no assurance that the HP scanner will be developed
successfully. Further, no assurance can be given that probe array scanners,
fluidics stations or reagents will be available in commercial quantities at
acceptable costs. If the Company is required to seek alternative sources of
supply, it could be time consuming and expensive. In addition, the Company is
dependent on its vendors to provide components of appropriate quality and
reliability and to meet applicable regulatory requirements. Consequently, in the
event that supplies from these suppliers were delayed or interrupted for any
reason, the Company's ability to develop and supply its products could be
impaired, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

The GeneChip system is a complex set of instruments and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. During the beta testing phase of the GeneChip system's development, the
Company and its vendors have encountered and satisfactorily addressed a number
of technical problems, including software failures, improper alignment of probe
array wafers, valve and tube failures in the fluidics station, sensor wiring
issues and scanner control problems. Due to the complexity and lack of operating
history of these products, the Company anticipates that additional technical
problems may occur or be discovered as more systems are placed into operation.
If these problems cannot be readily addressed, they could cause delays in
shipments, warranty expenses and damages to customer relationships, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.

Although the Company does not currently need to comply with GMP to
manufacture probe arrays and related instrumentation for sale for research
purposes, it may need to be GMP compliant to sell these products to clinical
reference laboratories and it will need to be compliant to sell these products
for clinical use. There can be no assurance that manufacturing and quality
control problems will not arise as the Company attempts to scale-up its
manufacturing facilities or that such scale-up can be achieved in a timely
manner or at a commercially reasonable cost.

SALES AND MARKETING

The Company intends to market the GeneChip system for diagnostic
applications through direct sales efforts and collaborative arrangements with
corporate partners and distributors. The Company intends to market the GeneChip
system for genomics applications through collaborations with corporate partners.
The Company's near term strategy is to commercialize the GeneChip system for
research use only. The Company's longer term strategy is to seek regulatory
approval for and to commercialize GeneChip systems as diagnostic tests for
clinical use. To date, the Company has placed nine systems for research use in
the United States. Five of these systems are for HIV applications.

The Company believes that the primary market for diagnostic applications in
the United States will be academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The Company intends to
establish a direct sales force to market to these potential customers for
research use. The Company believes that academic research centers could use the
GeneChip system in their disease related research. Affymetrix believes
pharmaceutical companies could use the GeneChip system to study genetic
variations in patients participating in clinical trials of new drugs. Currently,
there are three major reference laboratory companies in the United States, two
of which are associated with large pharmaceutical companies.

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These reference laboratories are specialized laboratories at multiple locations
that conduct complex testing for the diagnosis and monitoring of disease and
clinical trials and testing for pharmaceutical and biotechnology companies. The
Company believes that each of these reference laboratories could be a customer
for the GeneChip system and may require multiple systems at each location
depending on the volume and complexity of the tests.

The Company believes that the primary international customers for diagnostic
applications of its GeneChip system will be academic research centers,
pharmaceutical and biotechnology companies, and independent testing
laboratories. The Company initially intends to market to these customers through
collaborative partners. To date, the Company has not placed any of its GeneChip
systems outside the United States.

Affymetrix believes that the primary customers for genomics applications of
its GeneChip system will be pharmaceutical and biotechnology companies that
would use the GeneChip system in the discovery of new therapeutics. Affymetrix
intends to market to these customers directly and to form non-exclusive
contracts for the design, manufacture and supply of custom GeneChip probe
arrays. Affymetrix currently has a small internal technical support group to
service its GeneChip system, which the Company intends to expand as necessary.
The Company believes that it will need to develop a larger technical support
infrastructure to service these collaborations.

Under the Company's collaboration with HP, HP has worldwide rights to market
GeneChip systems in specified nonclinical markets. Affymetrix has the right to
market the system in the clinical diagnostic market, subject to HP's option to
certain rights in selected clinical markets.

Market acceptance will depend on many factors, including convincing
researchers the GeneChip system is an attractive alternative to current
technologies for the acquisition, analysis and management of genetic
information; the receipt of regulatory clearances in the United States, Europe,
Japan and elsewhere; the need for laboratories to license other technologies,
such as amplification technologies that may be required to use the GeneChip
system for certain applications; and the availability of new proprietary markers
that may be important to the diagnosis, monitoring and treatment of disease for
incorporation on the Company's probe arrays. Market acceptance may be adversely
affected by ethical concerns that may limit the use of the GeneChip system for
certain diagnostic applications or the analysis of genetic information. In
addition, potential customers will need skilled laboratory technicians to
operate the GeneChip system. Market acceptance of the GeneChip system could also
be adversely affected by limited funding available for academic research centers
and other research centers that are the potential customers for the GeneChip
system. The Company anticipates a long sales cycle to market the GeneChip system
to its potential customers. There can be no assurance that the Company will be
able to establish a direct sales force or to establish collaborative or
distribution arrangements to market its products. Failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.

RESEARCH AND DEVELOPMENT

The Company believes that substantial investment in research and development
is essential to obtaining a competitive position in the genetic information and
diagnostics markets. Affymetrix focuses on three types of research and
development: applied research, including diagnostic product research and
discovery; core technology development, including manufacturing process
refinement, new instrumentation design, and novel chemical synthesis; and basic
research to explore and expand the potential uses of DNA probe arrays and to
discover new technologies.

APPLIED RESEARCH. Affymetrix has several diagnostic research projects in
three major diagnostic fields: infectious disease, cancer and other diseases. In
the infectious disease area, the Company is evaluating probe array applications
for several infectious organisms, such as tuberculosis and CMV. The Company's
research in cancer is focused on monitoring mutations associated with cancer
progression and the discovery of diagnostic markers for cancers such as breast
and colorectal cancers. The Company has a collaboration with Dr. Francis Collins
at the NIH for the development of probe arrays directed to the detection of
certain mutations believed to be associated with the development of breast
cancer.

Other research efforts at Affymetrix are currently focused on developing
probe arrays for the diagnosis of genetic diseases and certain other disorders.
Affymetrix has conducted a feasibility study funded by Roche to

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develop a probe array to detect mutations causing cystic fibrosis. Affymetrix
also intends to initiate research programs based on known markers, such as HLA,
for determining compatibility for tissue transplants. The Company intends to
initiate research programs to discover novel markers for prevalent chronic human
diseases, such as cardiovascular disease, osteoporosis and arthritis.

CORE TECHNOLOGY DEVELOPMENT. The Company conducts research in several
areas, including novel and improved synthesis chemistries, manufacturing
processes, new manufacturing instrumentation, and enhancements in the design of
fluidics stations and scanners. A significant research effort is dedicated to
designing data analysis software to extract information from DNA probe arrays.

BASIC RESEARCH. Affymetrix' basic research efforts are focused on expanding
the applications of the GeneChip system and discovering related new
technologies. These efforts are focused on improving sensitivity, increasing
capacity and conducting more complex assays.

The Company's research and development expenses for the years ended December
31, 1995, 1994 and 1993, were $12.4 million, $9.5 million and $6.6 million
respectively. Research and development expenses for the three-month period ended
March 31, 1996 and 1995 were $4.2 million and $2.3 million, respectively.

Genomics and diagnostic technologies have undergone and are expected to
continue to undergo rapid and significant change. Rapid technological
development by the Company or others may result in products or technologies
becoming obsolete. In addition, any products offered by the Company would be
made obsolete by less expensive or more effective tests based on other
technologies or by new therapeutic or prophylactic agents that obviate the need
for diagnostic and monitoring information. There is no assurance that the
Company will be able to make the enhancements to its technology necessary to
compete successfully with newly emerging technologies.

COLLABORATIVE AGREEMENTS AND GRANTS

The Company's strategy regarding collaborative agreements is to expand the
applications of the Company's technology and to acquire access to complementary
technologies and resources, such as manufacturing and marketing, from its
collaborative partners. Accordingly, the Company's agreements emphasize
preserving the Company's rights to technological improvements and future
business opportunities rather than large up-front fees or sizeable commitments
of research funding from its partners.

GENETICS INSTITUTE, INC.

In November 1994, the Company entered into a collaboration with GI to
develop and apply new technologies for understanding the functions of human
genes. Under the agreement, GI provides research funding to the Company for the
development of DNA probe arrays used in DNA sequence analysis to enable GI to
discover new genes and uses for genes and to rapidly screen for the expression
of specified genes in both normal and diseased tissues.

The initial term of the research collaboration with GI is three years. In
the event that the specified technical milestones are achieved prior to such
time, GI and the Company may either conclude the collaboration or agree to
continue the collaboration with additional milestones for the remainder of the
three years. The agreement provides that if the Company enters into similar
agreements for gene expression with other third parties, it may be required to
refund a portion of the development funding received from GI and future funding
may be proportionately reduced. As a result of the agreement entered into with
Incyte in April 1996, the Company expects to refund a portion of such funding to
GI in 1996. In addition, either party has the right to terminate the
collaboration for lack of feasibility or if the parties cannot reach agreement
on certain matters, in which event the Company could be obligated to refund up
to 50% of the funding paid by GI.

Until five years from the end of the research collaboration, Affymetrix has
agreed to supply custom probe arrays to GI for gene discovery and gene
expression research in certain designated fields in return for specified
payments. In addition, upon the achievement of technical milestones, GI pays
Affymetrix milestone payments. Until November 1999, the Company cannot develop
probe arrays duplicating specific characteristics of those developed for GI.
Thereafter, the Company can sell such probe arrays, provided that they do not
contain proprietary sequences or other confidential information belonging to GI.
GI will have all rights to therapeutic

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compounds discovered through the use of DNA probes provided by the Company, and
the Company will receive royalties on certain such therapeutic compounds. The
Company retains all rights to enhancements to the GeneChip system technology
developed in the collaboration.

In December 1995, the Company and GI expanded their relationship by entering
into a supply agreement in the field of genomics under which the Company will
manufacture and supply additional custom probe arrays based on specific genes
identified and selected by GI. Unlike the 1994 agreement with GI, this agreement
does not provide research funding to the Company. Pursuant to the agreement, GI
is obligated to purchase and the Company is obligated to supply certain minimum
quantities of the custom probe arrays developed for GI until the later of 2001
or four years after development of specified probe arrays. The Company will
receive fees for the design and delivery of the custom probe arrays, as well as
certain milestone payments and royalties on most therapeutic compounds if
developed by GI using these probe arrays. GI has exclusive rights to specific
probe arrays supplied by the Company.

As of March 31, 1996, the Company had received a total of $1.8 million from
GI, a portion of which is subject to refund.

HEWLETT-PACKARD COMPANY

In November 1994, the Company entered into a collaborative agreement with HP
to combine the Company's GeneChip technology and HP's measurement and instrument
capabilities to develop and manufacture a more advanced scanner for use with
GeneChip probe arrays.

Pursuant to the agreement, the Company will develop and manufacture probe
arrays and HP will develop and manufacture instruments to read the arrays. Each
of the parties is obligated to supply the components of the system developed by
it to the other party. Under certain circumstances, if either party ceases to
supply its component, the other party could obtain the manufacturing rights to
such component.

The agreement also specifies marketing rights outside of the clinical market
in certain non-clinical fields. HP has primary rights to market the GeneChip
system to the bioanalytical market, and the Company has primary rights to market
the GeneChip system in the biomedical research market. The Company has rights to
market the system for clinical use, subject to HP's option to certain rights in
selected clinical markets. The Company also has reserved rights to supply custom
probe arrays for collaborations in the genomics field.

As of March 31, 1996, the Company had received a total of $3.0 million from
HP under this collaboration, consisting of research funding, license fees and
option payments. The Company is also entitled to receive certain milestone
payments and royalties on HP's sales of the GeneChip system and HP is entitled
to receive royalties on any systems sold by the Company. The collaboration is
for a five-year term and is renewable for consecutive three-year terms
thereafter, subject to either party's right to terminate on six months notice.

Pursuant to the agreement, the Company, in collaboration with HP, will
manufacture and supply a limited number of custom probe array designs for HP in
the nonclinical field. HP also has a one-year option, to sponsor the development
of custom probe arrays in certain specified fields and to obtain exclusive
rights to such probe arrays. In the event that HP exercises such option, the
Company will be required to develop the probe arrays on a timely basis. If the
Company fails to provide the requested probe arrays, it will be required to
grant HP rights to develop and manufacture such probe arrays, subject to the
payment of established royalty rates to the Company.

ADVANCED TECHNOLOGY PROGRAM (UNITED STATES DEPARTMENT OF COMMERCE)

In October 1994, the Company and Molecular Dynamics were awarded a $31.5
million five-year grant to develop novel point-of-care diagnostic systems under
the National Institute of Standards and Technology's
Advanced Technology Program. Pursuant to the grant, $20.8 million is designated
for the Company and its subcontractors and $10.7 million for Molecular Dynamics
and its subcontractors subject to the requirement of each company to match such
funding. The grant specifies the development of an advanced miniaturized nucleic
acid diagnostic device intended to reduce the costs and increase the speed and
reliability of DNA diagnostic tests. The device would be used in point-of-care
settings, such as hospitals, clinics and doctors' offices. The research
agreements between the Company and its subcontractors under the ATP grant (the
University of

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California, Stanford University and the University of Washington) require that
the universities assign the rights to any project inventions made by them to the
Company subject to specified royalty payments. The ATP agreement provides that
the Company and Molecular Dynamics retain rights in their respective fields to
intellectual property developed as part of the project.

The ATP grant is administered by the United States Department of Commerce.
As of March 31, 1996, the Company had received $1.4 million under the ATP grant.
The grant is subject to yearly appropriations by the United States Congress for
the ATP program, and legislation has been introduced to eliminate the program.
There can be no assurance that funding for the ATP program will not be reduced
or eliminated at any time. The reduction or elimination of the ATP grant could
have a material adverse effect on the Company's business, financial condition
and results of operations.

NATIONAL INSTITUTES OF HEALTH

In August 1995, the Company received a three-year grant for approximately
$6.0 million from the NIH National Center for Human Genome Research, for a
project entitled "Sequencing and Mapping with DNA Probe Arrays." Under the
project, the Company is developing applications of DNA probe arrays for larger
scale gene sequencing and creating a laboratory at the Company for use by
outside researchers. The grant also includes a subcontract with Stanford
University to continue research and development of the DNA probe array
technology. The Company has been awarded approximately $2.0 million for the
first year of the grant, and the remaining amounts are subject to yearly
appropriations by the NIH. There can be no assurance that the NIH will obtain
the necessary funding from the United States Congress to continue to fund this
grant.

OTHER AGREEMENTS

The Company has agreements with several entities to develop and test probe
arrays for the detection of certain gene sequences, mutations or organisms.
These include a one-year feasibility agreement with Roche Molecular Systems,
Inc., entered into in November 1995, for detection of certain mutations
associated with the cystic fibrosis transmembrane regulator (CFTR) gene, a
six-month feasibility agreement with Incyte, entered into in April 1996 to
evaluate the use of DNA probe arrays to generate gene expression data, and a
development and supply agreement entered into in May 1996 with Glaxo for
detection of polymorphisms in specific genes, which has a term of up to three
years. Under such agreements, the Company is typically paid a development fee
and may receive milestone payments upon achievement of certain technical goals.
The Company also has research agreements with several universities and research
organizations. For example, the Company has an agreement with Dr. Francis
Collins at the NIH for the development of probe arrays to detect certain
mutations believed to be associated with the development of breast cancer, and
an agreement with Dr. Eric Lander at the Whitehead Institute for Biomedical
Research at MIT to collaborate in the investigation of single nucleotide
polymorphism markers using DNA probe arrays.

The Company generally obtains rights to intellectual property arising from
these agreements. If a project is successful, the Company and the third-party
collaborator would negotiate the right to commercialize products resulting from
such project. The Company has received a substantial portion of its revenues
since inception from its collaborative partners and intends to enter into
collaborative arrangements with other companies to apply its technology, fund
development, commercialize potential future products, and assist in obtaining
regulatory approval. There can be no assurance that any of the Company's present
or future collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products developed under the
collaborations. There can be no assurance that the Company will be able to
maintain its current collaborations, negotiate collaborative arrangements on
acceptable terms, if at all, or that any collaborations will be successful.

INTELLECTUAL PROPERTY

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innovation and licensing opportunities to develop and maintain its competitive
position. The Company's success will depend in part on its ability to obtain
patent protection for its products and processes, to preserve its copyright and
trade secrets and to operate without infringing the proprietary rights of third
parties.

In 1993 Affymetrix and Affymax entered into a technology license agreement
(the "Technology License Agreement") pursuant to which Affymax granted to
Affymetrix an exclusive, worldwide, royalty-free license with right to
sublicense, among other things, certain patents and patent applications (and any
foreign counterparts) to develop, make, use and sell certain products for the
clinical diagnostic and research supply markets, including rights to sell DNA
probe arrays. The patents licensed to Affymetrix include those for the
light-directed synthesis technology and for several other technologies.
Affymetrix has the exclusive right to sell DNA probe array technology for DNA
sequencing and sequence analysis. The Company's rights to the other technologies
are for the fields of diagnostics and analytical and bioanalytical tests, and do
not include other fields such as drug discovery. In addition, Affymax granted to
Affymetrix an exclusive license to certain trademarks, including "Affymetrix."

Pursuant to the Technology License Agreement, Affymax also granted to
Affymetrix certain rights to future inventions made by, or on behalf of, Affymax
to use such inventions for the development and commercialization of, among other
things, certain products in the clinical diagnostics and research supply
markets, including rights to sell DNA probe arrays. These rights consist of
either an exclusive, worldwide royalty-free license with right to sublicense or
a right of first negotiation covering such inventions made during the period
until July 2000. In turn, Affymetrix granted to Affymax certain parallel rights
to future inventions made by, or on behalf of, Affymetrix during the same period
for the development and commercialization of products in drug discovery and
related fields, not including those related to DNA sequence analysis. The rights
granted to Affymax consist of an exclusive, worldwide royalty-free license with
right to sublicense, to develop and commercialize any new Affymetrix technology
that is dominated by one or more patents licensed to Affymetrix in drug
discovery and related fields, and the right of first negotiation with respect to
other Affymetrix inventions in these fields, not including those related to DNA
sequence analysis. In addition, Affymetrix agreed to notify Affymax in advance
of its intention to sell certain products in the research supply market to
ensure that such products cannot be used for drug discovery, as reagents for IN
VIVO imaging or certain other related purposes.

The Company is party to various license option agreements with third parties
(including Stanford University and the University of California) which give it
rights to use certain technologies. Failure of the Company to maintain rights to
such technology could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, inability of the
Company to exercise the option for the Stanford technology under commercially
reasonable terms could have an adverse effect on the ability of the Company to
sell certain of its products.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the Company's
pending patent applications will result in issued patents, that the Company will
develop additional proprietary technologies that are patentable, that any
patents issued to the Company or its strategic partners will provide a basis for
commercially viable products or will provide the Company with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the ability of the Company to do
business. In addition, patent law relating to the scope of claims in the
technology fields in which the Company operates is still evolving. The degree of
future protection for the Company's proprietary rights, therefore, is uncertain.
Furthermore, there can be no assurance that others will not independently
develop similar or alternative technologies, duplicate any of the Company's
technologies, or, if patents are issued to the Company, design around the
patented technologies developed by the Company. In addition, the Company could
incur substantial costs in litigation if it is required to defend itself in
patent suits brought by third parties or if it initiates such suits.

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scanners, synthesis techniques, oligonucleotide amplification techniques,
assays, and probe arrays. There can be no assurance that the Company will not
infringe on these patents, other patents or proprietary rights of third parties.
In addition, the Company has received and may in the future receive a notice
claiming infringement from third parties as well as invitations to take licenses
under third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition to
subjecting the Company to potential liability for damages, require the Company
or its collaborative partner to obtain a license in order to continue to
manufacture or market the affected products and processes. There can be no
assurance that the Company or its collaborative partners would prevail in any
such action or that any license (including licenses proposed by third parties)
required under any such patent would be made available on commercially
acceptable terms, if at all. There are a significant number of United States and
foreign patents and patent applications in the Company's areas of interest, and
the Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company's academic collaborators have certain rights to publish data and
information in which the Company has rights. There is considerable pressure on
academic institutions to publish discoveries in the genetics and genomics
fields. There can be no assurance that such publication would not adversely
affect the Company's ability to obtain patent protection for some genes in which
it may have a commercial interest.

COMPETITION

Currently, the Company's principal competition comes from existing
technologies that are used to perform many of the same functions for which the
Company plans to market its GeneChip systems. In the diagnostic field, these
technologies are provided by established diagnostic companies such as Abbott
Laboratories, Boehringer Mannheim GmbH, Roche, Johnson & Johnson, and SmithKline
Beecham plc. These technologies include a variety of established assays, such as
immunoassays, histochemistry, flow cytometry and culture, and newer DNA probe
diagnostics to analyze certain limited amounts of genetic information. In the
genomics field, competitive technologies include gel-based sequencing using
instruments provided by companies such as the

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Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. In order
to compete against existing technologies, the Company will need to demonstrate
to potential customers that the GeneChip system provides improved performance
and capabilities.

The market for diagnostic products derived from gene discovery is currently
limited and will be highly competitive. Many companies are developing and
marketing DNA probe tests for genetic and other diseases. Other companies are
conducting research on new technologies for diagnostic tests based on advances
in genetic information. Established diagnostic companies could provide
significant competition to Affymetrix through the development of new products.
These companies have the strategic commitment to diagnostics, the financial and
other resources to invest in new technologies, substantial intellectual property
portfolios, substantial experience in new product development regulatory
expertise, manufacturing capabilities and the distribution channels to deliver
products to customers. These companies also have an installed base of
instruments in several markets, including clinical and reference laboratories,
which are not compatible with the GeneChip system. In addition, these companies
have formed alliances with genomics companies which provide them access to
genetic information that may be incorporated into their diagnostic tests.

In the genomics field, future competition will likely come from existing
competitors as well as other companies seeking to develop new technologies for
sequencing and analyzing genetic information. In addition, pharmaceutical and
biotechnology companies, such as Genome Therapeutics Corporation, Human Genome
Sciences, Inc., Incyte, Millenium Pharmaceuticals, Inc., Myriad Genetics, Inc.
and Sequana Therapeutics, Inc. have significant needs for genomic information
and may choose to develop or acquire competing technologies to meet these needs.

GOVERNMENT REGULATION

The Company anticipates that the manufacturing, labeling, distribution and
marketing of some or all of the Company's diagnostic products will be subject to
government regulation in the United States and in certain other countries.

In the United States, the FDA regulates, as medical devices, most diagnostic
tests and IN VITRO reagents that are marketed as finished test kits or
equipment. Some clinical laboratories, however, purchase individual reagents
intended for specific analytes, and, using those reagents, to develop and
prepare their own finished diagnostic tests. Although the FDA has not generally
exercised regulatory authority over these individual reagents or the finished
tests prepared from them by the clinical laboratories. The FDA has recently
proposed a rule that, if adopted, would regulate reagents sold to clinical
laboratories as medical devices. The proposed rule would also restrict sales of
these reagents to clinical laboratories certified under CLIA as high complexity
laboratories. The Company intends to market some diagnostic products as finished
test kits or equipment and others as individual reagents; consequently, some or
all of these products will be regulated as medical devices.

The Food, Drug, and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance (known as a "510(k)") or an approved
premarket approval ("PMA"). Some of the Company's products may require a PMA and
others may require a 510(k). With respect to devices reviewed through the 510(k)
process, a Company may not market a device until an order is issued by the FDA
finding the product to be substantially equivalent to a legally marketed device
known as a "predicate device." A 510(k) submission may involve the presentation
of a substantial volume of data, including clinical data, and may require a
substantial review. The FDA may agree that the product is substantially
equivalent to a predicate device and allow the product to be marketed in the
United States. The FDA, however, may (i) determine that the device is not
substantially equivalent and require a PMA, or (ii) require further information,
such as additional test data, including data from clinical studies, before it is
able to make a determination regarding substantial equivalence. By requesting
additional information, the FDA can further delay market introduction of a
company's products. If the FDA indicates that a PMA is required for any of the
Company's products, the application will require extensive clinical studies,
manufacturing information and likely review by a panel of experts outside the
FDA. Clinical studies to support either a 510(k) submission or a PMA application
would need to be conducted in accordance with FDA requirements. Failure to
comply with FDA requirements could result in the FDA's refusal to accept the
data or the imposition of regulatory sanctions. FDA review of a PMA application
could take significantly longer than that for a 510(k).

45
<PAGE>
There can be no assurance that the Company will be able to meet the FDA's
requirements or that any necessary approval will be received. Once granted, a
510(k) clearance or PMA approval may place substantial restrictions on how the
device is marketed or to whom it may be sold. Even where a device is exempted
from 510(k) clearance or PMA approval, the FDA may impose restrictions on its
marketing. In addition to requiring clearance or approval for new products, the
FDA may require clearance or approval prior to marketing products that are
modifications of existing products. There can be no assurance that any necessary
510(k) clearance or PMA approval will be granted on a timely basis or at all.
FDA imposed restrictions could limit the number of customers to whom particular
products could be marketed or what may be communicated about particular
products. Delays in receipt of or failure to receive any necessary 510(k)
clearance or PMA, or the imposition of stringent restrictions on the Company's
labeling and sales of its products could have a material adverse effect on the
Company.

As a medical device manufacturer, the Company would also be required to
register and list its products with the FDA. In addition, the Company would be
required to comply with the FDA's GMP regulations, which require that medical
devices be manufactured and records be maintained in a prescribed manner with
respect to manufacturing, testing and control activities. Further, the Company
would be required to comply with FDA requirements for labeling and promotion of
its medical devices. For example, the FDA prohibits cleared or approved devices
from being marketed for uncleared or unapproved uses. In addition, the medical
device reporting regulation would require that the Company provide information
to the FDA whenever there is evidence to reasonably suggest that one of its
devices may have caused or contributed to a death or serious injury, or that
there has occurred a malfunction that would be likely to cause or contribute to
a death or serious injury if the malfunction were to recur.

Medical device manufacturers are subject to periodic inspections by the FDA
and state agencies. Additionally, FDA will conduct a preapproval inspection for
all PMA devices and in some cases for 510(k) devices as well. If the FDA
believes that a company is not in compliance with applicable laws or
regulations, it can institute proceedings to issue a warning letter apprising of
violative conduct, detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the company, its
officers or its employees. In addition, clearances or approvals could be
withdrawn in appropriate circumstances. Failure to comply with regulatory
requirements or any adverse regulatory action could have a material adverse
effect on the Company.

Medical device laws and regulations are also in effect in many of the
countries in which the Company may do business outside the United States. These
range from comprehensive device approval requirements for some or all of the
Company's medical device products to requests for product data or
certifications. The number and scope of these requirements are increasing.
Medical device laws and regulations are also in effect in some states in which
the Company does business. There can be no assurance that the Company will
obtain regulatory approvals in such countries or that it will not be required to
incur significant costs in obtaining or maintaining its foreign regulatory
approvals. In addition, the export by the Company of certain of its products
which have not yet been cleared for domestic commercial distribution may be
subject to FDA export restrictions. The failure to obtain product approvals in a
timely fashion or to comply with state or foreign medical device laws and
regulations may have a material adverse impact on the Company.

In addition, federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes. For
example, the FDA is currently considering significant changes to its GMP and to
other regulations. The Company cannot predict what impact, if any, such changes
might have on its business; however, such changes could have a material impact
on the Company.

Any of the Company's customers using its diagnostic devices for clinical use
in the United States may be regulated under the CLIA. CLIA is intended to ensure
the quality and reliability of clinical laboratories in the United States by
mandating specific standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations promulgated
under CLIA establish three levels of diagnostic tests ("waived," "moderately
complex" and "highly complex") and the standards applicable to a clinical
laboratory depend on the level of the tests it performs. CLIA requirements may
prevent some clinical laboratories from using certain of the Company's

46
<PAGE>
diagnostic products. Therefore, there can be no assurance that the CLIA
regulations and future administrative interpretations of CLIA will not have a
material adverse impact on the Company by limiting the potential market for the
Company's products.

The Company is also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.

REIMBURSEMENT

The Company's ability to successfully commercialize its products may depend
on the Company's ability to obtain adequate levels of third-party reimbursement
for use of certain diagnostic tests, in the United States, European and other
countries. Currently, the availability of third-party reimbursement is limited
and uncertain for genetic tests.

In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device or diagnostic test has
not received appropriate FDA or other governmental regulatory clearances, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. The Company's ability
to commercialize certain of its products successfully may depend on the extent
to which appropriate reimbursement levels for the costs of such products and
related treatment are obtained from government authorities, private health
insurers and other organizations, such as HMOs. Third-party payors are
increasingly challenging the prices charged for medical products and services.
The trend towards managed health care in the United States and the concurrent
growth of organizations such as HMOs, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reform health care or reduce government insurance
programs, may all result in lower prices for certain of the Company's products.
The cost containment measures that health care providers are instituting and the
impact of any health care reform could have an adverse effect on the Company's
ability to sell certain of its products and may have a material adverse effect
on the Company's business, financial condition and results of operations.

EMPLOYEES

As of March 31, 1996, Affymetrix had 117 full-time employees, 29 of whom
hold Ph.D. degrees. The employee group includes chemists, engineers, computer
scientists, mathematicians and molecular biologists with experience in the
diagnostic products, medical products, semiconductor, computer software or
electronics industries. None of the Company's employees is represented by a
collective bargaining agreement, nor has the Company experienced work stoppages.
The Company believes that its relations with its employees are good.

FACILITIES

Affymetrix subleases 47,000 square feet in Santa Clara, California from
Affymax for research laboratories and administrative offices under a lease
expiring in 1996. The Company has an option to renew the lease on this facility
for an additional seven years. The Company leases 20,000 square feet of space
for manufacturing operations in Sunnyvale, California under a lease that expires
in 2000. The Company has options to renew this lease for two successive
three-year terms. The Company also leases 31,000 square feet of research and
development space in Sunnyvale, California under a lease that expires in 1999.
The Company expects to add to its existing facilities over the next few years.
See "Certain Transactions."

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

SCIENTIFIC ADVISORY BOARD

The Company's scientific advisors have made significant contributions to the
development of Affymetrix technologies. Each scientific advisor spends between
one day per week and one day per quarter working on Company projects. Scientific
advisors are compensated on a retainer or per diem basis and have options to
acquire Common Stock of the Company subject to vesting during continued service.

47
<PAGE>
PAUL BERG, PH.D., is Cahill Professor in Cancer Research, Professor of
Biochemistry and Director of the Beckman Center for Molecular and Genetic
Medicine at Stanford University School of Medicine. He received the Nobel Prize
in Chemistry in 1980, the National Medal of Science in 1983 and is a member of
the National Academy of Sciences, the Royal Society, London, and the French
Academy of Sciences. Dr. Berg also serves as a member of the Company's Board of
Directors.

RONALD W. DAVIS, PH.D., is Professor of Biochemistry and Genetics at
Stanford University Medical School. He was elected to the National Academy of
Sciences in 1983 and has received numerous awards for his contributions to the
field of genetics. He has published more than 155 papers. Dr. Davis' research
focuses on developing new technologies and instrumentation to study genomic
organization and whole genome analysis, including whole genome DNA sequencing,
gene expression, gene deletion, functional analysis, protein interaction, and
point mutational analysis.

ERIC LANDER, D. PHIL., is a director of Whitehead Institute/MIT Center for
Genome Research and Professor of Biology at the Massachusetts Institute of
Technology. Dr. Lander was a MacArthur Prize Fellow from 1987 to 1992 and serves
as Chair of the Genome Research Review Committee of the National Center for
Human Genome Research. Dr. Lander's research focuses on genetic mapping and
genome structure in the mouse and human, genetic analysis of polygenic traits
and population genetics of human diseases.

JOSHUA LEDERBERG, PH.D., is Sackler Foundation Scholar and Research
Geneticist at Rockefeller University, where he was President from 1978 to 1990.
Dr. Lederberg received the Nobel Prize in Medicine in 1958 for his research in
the genetic structure and function of microorganisms and in 1989 was awarded the
National Medal of Science. Dr. Lederberg has been involved in artificial
intelligence programs and has served on the Advisory Health Research Council of
the World Health Organization for many years.

RICHARD A. MATHIES, PH.D., is Professor of Chemistry at the University of
California, Berkeley. Dr. Mathies is an expert on the development of new methods
for the detection and analysis of biomolecules, such as capillary array
electrophoresis and photolithographic chemical analysis systems. Dr. Mathies is
assisting Affymetrix with high sensitivity fluorescence detection methodologies,
photophysics and the development of microchemical nucleic acid preparation and
analysis systems. Dr. Mathies received an NIH Merit Award in 1991 and the
American Society for Photobiology Research Award in 1989. He has received
fellowships from the Helen Hay Whitney and Alfred P. Sloan Foundations.

R. FABIAN PEASE, PH.D., is Professor of Electrical Engineering at Stanford
University. Dr. Pease's current research focuses on micro- and nano-lithography,
novel ultra-small electron devices, and advanced packaging concepts. From 1971
to 1978, he was supervisor of the electron beam exposure group at Bell
Laboratories, where he and his colleagues developed the electron beam
mask-making process that was the semiconductor industry standard for over a
decade. Dr. Pease is assisting Affymetrix with the application of very large
scale integrated circuit technology to the development of the Company's
light-directed synthesis technology.

CALVIN F. QUATE, PH.D., is Professor of Applied Physics and Electrical
Engineering at Stanford University. Dr. Quate served as senior Research Fellow
of the Xerox Palo Alto Research Center from 1984 to 1994. He is a director of
Tencor Instruments and Park Scientific Instruments. Dr. Quate's awards include
the IEEE Morris N. Liebmann Award (1981), Rank Prize for Opto-Electronics
(1982), IEEE Achievement Award, Ultraoxics, Ferroelectrics and Frequency Control
Society (1986), IEEE Medal of Honor (1988), President's National Medal of
Science (1992) and Foreign Member Royal Society (1995).

LUBERT STRYER, M.D., Chairman of the Scientific Advisory Board, is Winzer
Professor in the School of Medicine and Professor of Neurobiology at Stanford
University. He served as President and Scientific Director of Affymax Research
Institute and Managing Director of Affymax in 1989 and 1990. He is a co-inventor
of the Company's light-directed synthesis technology. Dr. Stryer has pioneered
the development of novel fluorescence detection techniques and holds ten patents
involving fluorescence and light-activated chemical synthesis. Dr. Stryer is the
author of BIOCHEMISTRY, a major text used widely in colleges and universities
around the world. Dr. Stryer received the American Chemical Society Award in
Biological Chemistry (the Eli Lilly Award) and is a member of the National
Academy of Sciences and received an honorary Doctor of Science from the
University of Chicago.

48
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
March 31, 1996, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
John D. Diekman........................... 53 Chairman and Chief Executive Officer
Stephen P.A. Fodor........................ 42 President, Chief Operating Officer and Director
Paul M. Kaplan............................ 50 Vice President of Product Development
Vernon A. Norviel......................... 37 Vice President and General Counsel
Kenneth J. Nussbacher..................... 43 Executive Vice President and Chief Financial Officer
Richard P. Rava........................... 38 Vice President of Research and Engineering
Paul Berg (1)............................. 69 Director
Douglas M. Hurt (2)....................... 39 Director
Vernon R. Loucks, Jr...................... 61 Director
Barry C. Ross............................. 47 Director
David B. Singer (2)....................... 33 Director
John A. Young (1)(2)...................... 64 Director
Alejandro C. Zaffaroni (1)................ 73 Director
</TABLE>

- ------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

JOHN D. DIEKMAN, PH.D., has served as a Director of the Company and Chairman
since the Company's inception and was appointed Chief Executive Officer in July
1995. Dr. Diekman served as President and Chief Operating Officer of Affymax
from July 1991 to March 1995 and as Chairman of the Affymax Board of Directors
from July 1994 to July 1995. Prior to 1991, Dr. Diekman served as President of
Monoclonal Antibodies Inc. (now Quidel Corp.), a diagnostic products company;
Salutar, Inc., an IN VITRO diagnostic company; and Zoecon Corporation, an
agrochemical company. Dr. Diekman also currently serves as a director of Quidel
Corp.

STEPHEN P.A. FODOR, PH.D., is the President and Chief Operating Officer of
the Company and has been a Director of the Company since February 1993. From
September 1994 to July 1995, he served as President and Chief Technical Officer
and, from February 1993 until September 1994, as Chief Technical Officer of the
Company. Dr. Fodor previously was Vice President and Director of Physical
Sciences at the Affymax Research Institute. For the invention of the
photolithographic synthesis technology used by the Company to manufacture its
probe arrays, Dr. Fodor and his colleagues were awarded the 1992 AAAS
Newcomb-Cleveland Prize for the best research article published in SCIENCE and
the 1993 "Distinguished Inventor Award" from the Intellectual Property Owners'
Association.

PAUL M. KAPLAN, PH.D., has been Vice President of Product Development since
joining the Company in April 1994. From 1988 to 1994, Dr. Kaplan served as Vice
President, Research and Development of the Diagnostic Division at Centocor,
Inc., where he was responsible for the identification, development and
commercialization of a variety of proprietary immunoassay products.

VERNON A. NORVIEL, J.D., was appointed Vice President and General Counsel of
the Company in February 1996. From 1989 to 1996, as a partner with Townsend and
Townsend and Crew LLP ("Townsend"), Mr. Norviel led the intellectual property
and patent prosecution efforts of the Company. Mr. Norviel continues as a
partner with Townsend on a part time basis.

KENNETH J. NUSSBACHER, J.D., joined the Company in September 1995 as
Executive Vice President and Chief Financial Officer. From 1989 to 1995, Mr.
Nussbacher held various management positions at Affymax, most

49
<PAGE>
recently as Executive Vice President for Business and Legal Affairs and Managing
Director of Affymax Technologies N.V. Prior to 1989, Mr. Nussbacher practiced
intellectual property law in the high technology field as General Counsel of
Daisy Systems, as Vice President, Intellectual Property for Atari, Inc., and
with Kirkland & Ellis, in Chicago.

RICHARD P. RAVA, PH.D., has served as Vice President of Research and
Engineering since September 1994. Dr. Rava joined the Company in February 1993
as Director of Biomedical Engineering. From 1992 to 1993, Dr. Rava was a Senior
Scientist at Affymax Research Institute. From 1990 to 1992, he was a Principal
Research Scientist in the George R. Harrison Spectroscopy Laboratory at MIT and
the research coordinator for the NIH Laser Biomedical Research Center at MIT.

PAUL BERG, PH.D., has been a Director of the Company since August 1993. Dr.
Berg is Cahill Professor in Cancer Research, Professor of Biochemistry and
Director of the Beckman Center for Molecular and Genetic Medicine at Stanford
University School of Medicine. He received the Nobel Prize in Chemistry in 1980,
the National Medal of Science in 1983 and is a member of the National Academy of
Sciences, the Royal Society, London, and the French Academy of Sciences. Dr.
Berg also serves as a member of the Company's Scientific Advisory Board.

DOUGLAS M. HURT, a Director of the Company since June 1995, is Senior Vice
President and Chief Financial Officer of Glaxo Wellcome, Inc. Mr. Hurt has held
various financial management positions at Glaxo since 1983 and was designated by
Glaxo to serve on the Board of Directors.

VERNON R. LOUCKS, JR., has been a Director of the Company since August 1993.
Mr. Loucks has served as Chief Executive Officer of Baxter International Inc.
("Baxter") since 1980 and Chairman of Baxter since 1987. Mr. Loucks also serves
as a director of The Dun and Bradstreet Corp., Emerson Electric Co., Quaker Oats
Co. and Anheuser-Busch Companies, Inc.

BARRY C. ROSS, PH.D., a Director of the Company since March 1995, has served
as Director of Group Research Strategy and Alliances at Glaxo Wellcome Research
and Development Ltd. since 1995. Dr. Ross joined Glaxo in 1984 and served as
Director, Medicinal Chemistry from 1989-93 and was designated by Glaxo to serve
on the Board of Directors.

DAVID B. SINGER, a Director of the Company since February 1993, served as
Vice Chairman from July 1995 to April 1996. From February 1993 to June 1995, Mr.
Singer was President and Chief Executive Officer of the Company. He served as
Vice President of Finance and Treasurer of Affymax from 1991 to 1993 and as
Director of Corporate Development at Affymax from 1990 to 1991.

JOHN A. YOUNG, a Director of the Company since August 1993, is the retired
President and Chief Executive Officer of Hewlett-Packard Co. Mr. Young also
serves as a director of Wells Fargo & Company, Chevron Corp., SmithKline Beecham
Corp., Novell, Inc., Ciphergen Bio Systems, Inc., General Magic, Inc., Shaman
Pharmaceuticals, Inc. and is a member of the Business Council.

ALEJANDRO C. ZAFFARONI, PH.D., a founder of the Company, has served as a
Director since February 1993. Dr. Zaffaroni is also the founder of Affymax, ALZA
Corporation ("ALZA"), DNAX Research Institute of Molecular & Cellular Biology,
Inc. and a co-founder of Syntex. Dr. Zaffaroni served as Chairman of Affymax
from its inception to July 1994 and as Chief Executive Officer and Managing
Director of Affymax from its inception until its acquisition by Glaxo Wellcome
in March 1995. He served as Chairman and Chief Executive Officer of ALZA from
1968 to 1987 and has been Co-Chairman of ALZA since 1987.

BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION

All directors are elected at the annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the discretion
of the Board of Directors. There are no family relationships among the Company's
directors and executive officers.

The Board of Directors currently has an Audit Committee and a Compensation
Committee. The Audit Committee oversees the actions taken by the Company's
independent auditors and reviews the Company's

50
<PAGE>
internal financial and accounting controls and policies. The Compensation
Committee is responsible for determining salaries, incentives and other forms of
compensation for officers and other employees of the Company and administers
various incentive compensation and benefit plans.

DIRECTOR COMPENSATION

During the fiscal year ending December 31, 1995, John D. Diekman, Stephen
P.A. Fodor and David B. Singer received the cash compensation described under
"Management -- Executive Compensation." During the same fiscal year each of the
remaining directors received a cash payment of $2,500 for each meeting attended
plus reasonable expenses. In December 1995, each nonemployee director received
an option to purchase 33,333 shares of Common Stock at $0.675 per share under
the Company's Stock Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for officers and other employees of
the Company and administers various incentive compensation and benefit plans.
The Compensation Committee consists of Paul Berg, John A. Young and Alejandro C.
Zaffaroni. Stephen P.A. Fodor, President and Chief Operating Officer of the
Company, participates in all discussions and decisions regarding salaries and
incentive compensation for all employees and consultants of the Company, except
that Dr. Fodor is excluded from discussions regarding his own salary and
incentive compensation.

EXECUTIVE COMPENSATION

The following table sets forth certain compensation paid by the Company in
the year ended December 31, 1995 to the Company's Chief Executive Officer,
former Chief Executive Officer, and to the Company's other executive officers
who earned in excess of $100,000 (collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- ----------------------------------------------------------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C>
John D. Diekman
Chief Executive Officer and Chairman...................... $ 97,304(1) $ -- 166,666 $ --
David B. Singer
Former President and Chief Executive Officer.............. 183,010 -- 33,333 6,189
Stephen P.A. Fodor
President and Chief Operating Officer..................... 188,819 -- 166,666 --
Paul M. Kaplan
Vice President of Product Development..................... 146,218 -- 26,666 33,638(2)
Richard P. Rava
Vice President of Research and Engineering................ 136,962 -- 60,000 --
</TABLE>

- ------------
(1) Represents Dr. Diekman's compensation commencing July 1, 1995, when he
joined the Company. Prior to March 1996 when he became a full-time employee,
Dr. Diekman devoted 80% of his time to the Company and 20% to Affymax.

(2) Includes reimbursement for certain relocation expenses of $21,556 and
housing allowances of $12,082.

51
<PAGE>
STOCK OPTION GRANTS

The following table contains information concerning the stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1995:

OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERMS (1)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED (2) FISCAL YEAR SHARE DATE 5% 10%
- ---------------------------- ------------- --------------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John D. Diekman............. 100,000 9.7% $ 0.675 07/01/05 $ 2,376,000 $ 3,823,500
66,666 6.5 0.675 12/20/05 1,584,000 2,549,000
David B. Singer............. 33,333 3.2 0.675 12/20/05 792,000 1,274,500
Stephen P.A. Fodor.......... 166,666 16.2 0.675 12/20/05 3,960,000 6,372,500
Paul M. Kaplan.............. 26,666 2.6 0.675 12/20/05 633,600 1,019,600
Richard P. Rava............. 60,000 5.8 0.675 12/20/05 1,425,600 2,294,100
</TABLE>

- ------------

(1) Based on the initial public offering price of $15.00 per share. Potential
gains are net of the exercise price but before taxes associated with the
exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of the Company, overall
market conditions and the option holders' continued employment through the
vesting period.

(2) Grants generally vest at a rate of 20% each year following the date of
grant, as long as the optionee remains an employee with, consultant to, or
director of, the Company. The maximum term of each option granted is ten
years from the date of grant. The exercise price is equal to the fair market
value of the stock on the grant date as determined by the Board of
Directors.

The following table sets forth for each of the Named Executive Officers
certain information with respect to the exercise of options to purchase Common
Stock during the year ended December 31, 1995 and the number of shares subject
to both exercisable and unexercisable stock options as of December 31, 1995.

AGGREGATE OPTION EXERCISES IN FISCAL YEAR-END AND FISCAL YEAR-END VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1995 DECEMBER 31, 1995 (1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED (2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Diekman.................... -- -- -- 166,666 -- $ 2,387,500
David B. Singer.................... -- -- 50,000 33,333 $ 716,300 477,500
Stephen P.A. Fodor................. -- -- 20,000 246,666 286,500 3,533,500
Paul M. Kaplan..................... -- -- 8,000 58,666 116,600 848,400
Richard P. Rava.................... 10,000 $ 3,750 1,333 88,666 19,100 1,278,900
</TABLE>

- ------------

(1) Based on the initial public offering price of $15.00 per share minus the
exercise price.

(2) Based on the fair market value at the date of exercise, as determined by the
Board of Directors, minus the exercise price.

52
<PAGE>
STOCK PLANS

1993 STOCK PLAN

The Company's Stock Plan was adopted by the Board of Directors in February
1993, approved by the shareholders in July 1993 and has been subsequently
amended. As of March 31, 1996, a total of 3,700,000 shares of Common Stock have
been reserved for issuance under the Stock Plan. As of March 31, 1996, options
to purchase a total of 543,254 shares of Common Stock had been exercised (of
which 148,889 are subject to repurchase by the Company), options to purchase a
total of 2,191,518 shares at a weighted average exercise price of $0.65 per
share were outstanding, and 965,228 shares remain available for future option or
purchase rights grants.

The purpose of the Stock Plan is to attract, retain and motivate officers,
key employees, consultants and directors of the Company by giving them the
opportunity to acquire Stock ownership in the Company. The Stock Plan provides
for the granting to employees of the Company (including officers and employee
directors) of "incentive stock options" within the meaning of Section 422 of the
Code, for the grant of nonstatutory stock options to employees and consultants
of the Company, and for the grant of purchase rights providing for the direct
sale of stock to eligible participants, subject to the Company's repurchase
rights. To the extent an optionee would have the right in any calendar year to
exercise for the first time incentive stock options for shares having an
aggregate fair market value (under all plans of the Company and determined for
each share as of the grant date) in excess of $100,000, any such excess options
shall be automatically converted to a nonstatutory stock option.

The Stock Plan is administered by the Board of Directors or a committee of
the Board of Directors (the "Administrator"). The Administrator determines the
type and terms of options and purchase rights granted under the Stock Plan,
including the number of shares covered, exercise or purchase price, term and
condition for exercise of the option or purchase right. The exercise price of
all stock options granted under the Stock Plan must be at least 100% (85% for
purchase rights) of the fair market value of the Common Stock of the Company on
the grant date. The term of an incentive stock option may not exceed ten years
from the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of stock of the
Company, the exercise price of any stock option granted shall be at least 110%
(100% for purchase rights) of the fair market value of the Common Stock on the
grant date and the term of such option may not exceed five years. Payment of the
exercise price may be in cash, check, or, at the discretion of the
administrator, by promissory notes or shares of stock held by the optionee or
purchaser, or a combination thereof.

No option may be transferred by the optionee other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations order
("QDRO"). During the lifetime of an optionee, only the optionee (or the
optionee's spouse pursuant to a QDRO) may exercise an option. An option shall be
exercisable on or after each vesting date in accordance with the terms set forth
in the option agreement; provided, however, that the right to exercise an option
must vest at the rate of at least 20% per year over five years from the grant
date.

In the event of certain changes in control of the Company or a sale of
substantially all its assets, the Administrator may cancel each outstanding
option upon payment in cash to the optionee of the amount by which any cash and
any other property which the optionee would have received for the shares of
stock covered by the vested portion of the option exceeds the exercise price of
the option. The Board may amend, suspend or terminate the Stock Plan as long as
such action does not adversely affect any outstanding option or purchase right
and provided that shareholder approval shall be required for any amendment to
(i) increase the number of shares subject to the Stock Plan, (ii) materially
change eligibility for the grant of options or purchase rights, or (iii)
materially increase the benefits accruing to participants. If not terminated
earlier, the Stock Plan will terminate in 2003.

1996 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN

The Company's Directors Plan was adopted by the Board of Directors in March
1996 and approved by the shareholders in April 1996. There are 300,000 shares of
Common Stock reserved for issuance under the Directors Plan. Only nonemployee
directors of the Company are eligible to participate in the Directors Plan and

53
<PAGE>
only nonstatutory stock options can be granted. The Directors Plan provides that
option grants to nonemployee directors of the Company are made on a mandatory
basis and not on a discretionary basis. The Directors Plan may be administered
by the Board of Directors or the Board may delegate its authority to a committee
composed of not less than two outside directors (the "Administrator") and may
delegate routine matters to management.

If a person who is neither an officer nor an employee of the Company and who
has not previously been a member of the Board is elected or appointed director,
the Company is required to grant that person an initial 10-year option to
purchase 33,333 shares of the Company's Common Stock at an exercise price equal
to the fair market value of Common Stock on the date of grant. Each such option
will become exercisable at the rate of one-fifth of the number of shares covered
by the option on each anniversary of the grant date so long as the director is
serving on the Board with full vesting over five years.

In addition, on the date of each annual meeting of the shareholders of the
Company held after January 1, 2001 for existing nonemployee directors who
continue on the Board and after 54 months after the initial option grant to new
nonemployee directors who continue on the Board, the Company will grant to each
nonemployee director a ten-year option to purchase 6,667 shares of the Company's
Common Stock, at an exercise price equal to the fair market value of Common
Stock on the date of grant. These options will vest one year after grant.

The consideration payable in connection with any option (including any
related taxes) may be paid in cash, by promissory note of the nonemployee
director or by delivery of shares of Common Stock of the Company. Options
generally terminate three months after a nonemployee director ceases to be, for
any reason, a director of the Company, with the following exceptions: if a
nonemployee director ceases to be a director due to death, disability or
retirement, the option may be exercised for 18 months after the termination.

The Board may amend, alter, or discontinue the Directors Plan or any option
at any time, except that the consent of a participant is required if the
participant's existing rights under an outstanding option would be impaired. In
addition, to the extent required under applicable tax and securities laws and
regulations, the shareholders of the Company must approve any amendment,
alteration, or discontinuance of the Directors Plan that would increase the
total number of shares reserved under the Directors Plan and in certain other
circumstances as the Board may deem advisable to comply with such laws and
regulations. In addition, the provisions of the plan governing who is granted
options, the number of shares covered by each option, the exercise price, and
the period of exercisability and the timing of option grants may not be amended
more than once every six months, other than for changes to comply with the
Internal Revenue Code of 1986 or the Employee Retirement Income Security Act of
1974.

In the event of a merger, consolidation, sale of all or substantially all of
the Company's assets, or any like occurrence, the options will vest at twice the
rates set forth above.

LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION

The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. Such
limitation of liability has no effect on the availability of equitable remedies,
such as injunctive relief or rescission. The Company is also empowered under its
Articles of Incorporation to enter into indemnification agreements with its
directors and officers and to purchase insurance on behalf of any person whom it
is required to indemnify. The Company's Bylaws provide that the Company will
indemnify its directors and officers as a contractural obligation and may
indemnify its employees and agents against certain liabilities to the fullest
extent permitted by California law. The Company has entered into indemnification
agreements with each of its current directors and officers or persons
controlling the Company pursuant to the foregoing provisions.

54
<PAGE>
CERTAIN TRANSACTIONS

In September 1993, the Company sold an aggregate of 6,000,000 shares of
Series A Preferred Stock (the "Series A") at $3.50 per share in a private
placement transaction. In August 1995, in another private placement transaction,
the Company sold an aggregate of 8,666,666 shares of Series B Preferred Stock
(the "Series B") at $4.50 per share.

The purchasers of the Series A and Series B (collectively, the "Preferred
Stock") included, among others, the following executive officers and directors
of the Company and investors known to own beneficially more than 5% of the
Company's outstanding Common Stock (assuming conversion of all outstanding
shares of Preferred Stock into Common Stock) (see "Principal Shareholders"):
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------
DIRECTORS AND EXECUTIVE OFFICERS SERIES A SERIES B
- ------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
John D. Diekman................................................................ 20,000 40,000
Paul A. Berg................................................................... 10,000 15,000
John A. Young.................................................................. 20,000 40,000
Vernon R. Loucks, Jr........................................................... -- 40,000
Alejandro C. Zaffaroni......................................................... -- 450,000

5% SHAREHOLDERS
- -------------------------------------------------------------------------------
<S> <C> <C>
Glaxo Wellcome plc (indirectly through Affymax N.V.)........................... 1,250,000 1,333,333
College Retirement Equities Fund............................................... 1,428,570 800,000
R.A. Investment Group.......................................................... 570,000 856,000
</TABLE>

In July 1995, the Company and Glaxo entered into an agreement (the
"Governance Agreement") pursuant to which Glaxo has the right to designate a
number of directors based on the percentage of voting stock then held directly
or indirectly by Glaxo and is obligated to vote its shares for the slate of
directors recommended to the shareholders. Glaxo currently has the right to
designate four of the nine directors of the Company. See "Management --
Executive Officers and Directors." Pursuant to the Governance Agreement, Glaxo
also agreed that any merger, consolidation or business combination whereby the
Company would become a direct or indirect wholly-owned subsidiary of Glaxo and
any material transaction between the Company and Glaxo must be approved by a
majority of the independent directors of the Company. In addition, pursuant to
the Governance Agreement, the Company granted Glaxo certain registration rights
with respect to its shares. See "Description of Stock -- Registration Rights of
Certain Shareholders."

In December 1994, Affymax provided a bridge loan to the Company in the
principal amount of $6.0 million. The loan was evidenced by a subordinated
convertible promissory note, the terms of which were amended by the Governance
Agreement (the "Convertible Note") and was converted into 1,333,333 shares of
Series B Senior Convertible Preferred Stock in August 1995. Interest on the
Convertible Note through the date of conversion, amounting to $319,856, was
satisfied by the Company issuing Affymax three five-year warrants to purchase an
aggregate of 202,441 shares of Series 2 Subordinated Convertible Preferred Stock
at $5.50 per share.

In connection with the lease agreement between the Company and a third
party, in December 1994, Affymax agreed to relieve the Company of certain
financial covenants and to guarantee its obligation to the third party in
exchange for warrants to purchase Series 2 Subordinated Convertible Preferred
Stock. In December 1994, Affymax received a five-year warrant to purchase
103,382 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per
share pursuant to this agreement.

Effective January 1, 1993, the Company entered into the Technology License
Agreement with Affymax whereby the Company was granted an exclusive worldwide
royalty free license from Affymax, with the right to sublicense, to certain
technology and to certain future inventions to be used in the development,
production and sale of products and services in the clinical diagnostic and
research supply markets. See "Intellectual Property." In August 1993, the
Company agreed to issue Affymax 8,500,000 shares of Series 1 Subordinated
Convertible Preferred Stock as consideration for the Technology License
Agreement and funding the Company's operations through September 1993.

55
<PAGE>

The Company and Affymax Research Institute, a subsidiary of Affymax ("ARI"),
entered into a Services Agreement dated October 1, 1993, pursuant to which ARI
agreed to perform certain administrative and management services for the
Company. For the fiscal year ended December 31, 1995, the Company expensed under
this Agreement the amount of $291,000. John D. Diekman is a director of ARI.

In February 1994, the Company entered into a sublease with Affymax providing
for the Company to sublease facilities in Santa Clara from Affymax until October
1, 1995. The sublease provides for its term to be extended until August 31, 2003
in the event that, at the Company's request, Affymax exercises its option to
extend the underlying lease until that date. In April 1995, the option was
exercised to extend the lease to October 1, 1996.

The Company believes that the agreements with Affymax are on terms no less
favorable to the Company than would be obtained from unaffiliated third parties.

In May 1996, the Company entered into an agreement with Glaxo to develop and
supply probe arrays to detect polymorphisms in specific genes. See "Business --
Genomics Application Areas" and "-- Collaborative Agreements and Grants."

In December 1993, in connection with grants to each of Stephen P.A. Fodor
and David B. Singer of rights to purchase 133,333 shares of Common Stock at
$0.30 per share, subject to repurchase at the Company's option, the Company
entered into Loan and Pledge Agreements with each of Dr. Fodor and Mr. Singer.
Pursuant to those agreements, the Company lent Dr. Fodor and Mr. Singer each
$40,000, which loans are evidenced by secured promissory notes due in July 1998
or when their employment is terminated. These notes bear interest at the rate of
5.07% per annum. Interest payments on the notes are due and payable each year
until the loan is repaid.

In November 1994, the Company agreed to guarantee a loan in the amount of
$117,000 of Stephen P. A. Fodor.

In June 1995, the Company entered into an agreement with David B. Singer in
connection with his assumption of the position of Vice Chairman of the Board.
Pursuant to Mr. Singer's transition from President, Chief Executive Officer and
Chief Financial Officer to Vice Chairman, Mr. Singer continues to be paid
$14,583 per month and may receive health care coverage until December 15, 1996.
In addition, pursuant to the agreement, the Company relinquished its right to
repurchase any of the 133,333 shares of Common Stock acquired by Mr. Singer in
December 1993, amended the option to purchase 100,000 shares granted to Mr.
Singer in December 1994 to fully vest 50,000 shares as of September 1995, and
waived its right to demand repayment of Mr. Singer's $40,000 promissory note
until July 1998. Pursuant to the agreement, Mr. Singer agreed to continue to
serve as a Director of the Company if nominated and elected by the shareholders,
to serve as Vice Chairman of the Board, and to provide consulting services to
the Company relating to the financing of the Company, grants and government
relations.

The Company and Symyx, Inc. ("Symyx") have entered into a sublease agreement
for a portion of the property leased to the Company in Sunnyvale at market
rates. Kenneth J. Nussbacher is a director, and Alejandro C. Zaffaroni is a
director and greater than 10% stockholder, of Symyx.

The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such persons to the fullest extent permitted by California law. See
"Management -- Limitation of Liability and Indemnification Matters."

56
<PAGE>
PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of April 30, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby by (i) each
person who is known by the Company to be the beneficial owner of more than 5% of
the Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all current directors and executive officers as a
group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY
OWNED (1)(2)
SHARES ---------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
- -------------------------------------------------------------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Glaxo Wellcome plc (3).......................................................... 7,705,067 46.8% 34.3%
Greenford Road
Greenford, Middlesex, UBG OHE, UK
College Retirement Equities Fund................................................ 1,507,991 9.3% 6.8%
730 Third Avenue
New York, NY 10017
R.A. Investment Group........................................................... 959,554 5.9% 4.3%
200 West Madison, Suite 3800
Chicago, IL 60606
Paul A. Berg, Ph.D (4).......................................................... 38,488 * *
John D. Diekman, Ph.D (5)....................................................... 76,177 * *
Stephen P.A. Fodor, Ph.D (6).................................................... 153,333 * *
Douglas M. Hurt (7)............................................................. 7,705,067 46.8 % 34.3%
Paul M. Kaplan (8).............................................................. 13,334 * *
Vernon R. Loucks, Jr............................................................ 59,999 * *
Richard P. Rava, Ph.D (9)....................................................... 11,333 * *
Barry C. Ross, Ph.D (7)......................................................... 7,705,067 46.8 % 34.3%
David B. Singer................................................................. 160,666 * *
John A. Young................................................................... 41,643 * *
Alejandro C. Zaffaroni, Ph.D (10)............................................... 140,000 * *
All directors and executive officers as a group (13 persons) (11)............... 8,426,706 50.9 % 37.4%
</TABLE>

- ------------
* Represents beneficial ownership of less than one percent of the Common Stock.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of Shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of April 30, 1996
are deemed outstanding. Such shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of each other person. The
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table.

(2) Percentage of beneficial ownership is based on 16,248,148 shares of Common
Stock outstanding as of April 30, 1996 and 22,248,148 shares of Common Stock
outstanding after completion of this offering.

(3) Held through its subsidiary, Affymax N.V. Includes 203,881 shares issuable
upon exercise of outstanding warrants at $8.25 per share.

57
<PAGE>
(4) Includes 3,333 shares issuable upon exercise of options exercisable within
60 days of April 30, 1996.

(5) Includes 40,000 shares issuable upon exercise of options within 60 days of
April 30, 1996.

(6) Includes 20,000 shares issuable upon exercise of options within 60 days of
April 30, 1996.

(7) Represents 7,705,067 shares beneficially owned by Glaxo, of which Mr. Hurt
and Dr. Ross disclaim beneficial ownership.

(8) Represents 13,334 shares issuable upon exercise of options exercisable
within 60 days of April 30, 1996.

(9) Includes 1,333 shares issuable upon exercise of options within 60 days of
April 30, 1996.

(10) Includes 6,667 shares issuable upon exercise of options within 60 days of
April 30, 1996 and excludes the shares Dr. Zaffaroni will purchase in the
offering. See "Underwriting."

(11) Includes 98,000 shares issuable upon exercise of options within 60 days of
April 30, 1996. Also includes 7,705,067 shares owned by Glaxo, of which Mr.
Hurt and Dr. Ross disclaim beneficial ownership. Excludes the shares Dr.
Zaffaroni will purchase in the offering. See "Underwriting."

58
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, no par value, and 27,500,000 shares of Preferred Stock, no par
value (the "Undesignated Preferred Stock").

COMMON STOCK

At March 31, 1996, assuming the conversion of all outstanding Preferred
Stock and the issuance of 203,881 shares of Common Stock pursuant to the
exercise or conversion of outstanding warrants, 16,443,112 shares of Common
Stock were outstanding and held of record by shareholders. Options to purchase
an aggregate of 2,191,518 shares of Common Stock were also outstanding. See
"Management -- Stock Plans."

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable.

PREFERRED STOCK

Effective upon the closing of this offering, the Company will be authorized
to issue 27,500,000 shares of Undesignated Preferred Stock. The Board of
Directors will have the authority to issue the Undesignated Preferred Stock in
one or more series and to determine the powers, preferences and rights and the
qualifications, limitation or restrictions granted to or imposed upon any wholly
unissued shares of Undesignated Preferred Stock and fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the shareholders. The issuance of Undesignated Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the shareholders and may adversely affect
the voting and other rights of the holders of Common Stock. At present, the
Company has no plans to issue any shares of Undesignated Preferred Stock.

REGISTRATION RIGHTS OF CERTAIN SHAREHOLDERS

Certain holders of Common Stock or their transferees are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Registration rights are held with respect to 9,871,185 shares of Common Stock
issuable upon the conversion of Preferred Stock under the terms of agreements
between the Company and the holders of Series A and B Senior Preferred Stock
(collectively the "Registrable Securities"). Subject to certain limitations in
the agreements, the holders of Registrable Securities have "piggyback" rights to
request that their shares be registered for public resale with respect to up to
four registrations of the Company's securities. However, if such piggyback
rights are exercised in connection with an underwritten offering of the
Company's Common Stock, the underwriter of such offering has the right to reduce
to 20% of the total the number of such shares to be included in such public
offering or, in the case of the initial public offering, to exclude such shares
entirely. In addition, at a time when the Company is eligible to register
securities on Form S-3, holders of Registrable Securities not already registered
may demand that the Company file a Form S-3, provided that the aggregate
offering price of the Registrable Securities would be at least $2,000,000. The
Company will pay certain expenses in connection with the exercise of the
foregoing rights. These registration rights expire five years after an initial
public offering of the Company's securities.

Pursuant to the Governance Agreement, the Company also has granted to Glaxo,
as long as Glaxo and its subsidiaries hold more than 10% of the outstanding
Common Stock of the Company, the right to demand, at any time after six months
following the Company's initial public offering, that the Company file an
underwritten registration statement covering the registration of at least 40% of
the Common Stock held by Glaxo and its subsidiaries. Glaxo's registration rights
cover 7,705,067 shares of Common Stock issuable on conversion of Preferred Stock
(including Series 1 Subordinated Convertible Preferred and Series 2 Subordinated
Convertible Preferred Stock, issuable upon exercise of warrants). If such demand
is made after the time the Company is, or

59
<PAGE>
normally would have been, eligible to register securities on Form S-3, the
Company will pay certain expenses incurred by Glaxo in exercising these demand
rights. Glaxo has this demand right with respect to up to four registrations of
the Company's securities on Form S-1 and an unlimited number of registrations on
Form S-3. In addition, pursuant to the Governance Agreement, Glaxo has piggyback
rights similar to those held by holders of the Registrable Securities.

WARRANTS

Pursuant to the terms of an agreement between Affymetrix and Affymax dated
December 29, 1994, whereby Affymax agreed to guarantee Affymetrix' lease
obligations to a third party, Affymetrix has issued to Affymax a warrant to
purchase 103,382 shares of Series 2 Subordinated Convertible Preferred Stock.
The warrants have an exercise price of $5.50 and expire in December 1999.
Pursuant to the terms of a note agreement, Affymetrix has issued to Affymax
warrants to purchase 202,441 shares of Series 2 Subordinated Convertible
Preferred Stock for certain interest payments otherwise due on the note through
August 1995, at which time the note was converted into Preferred Stock. These
warrants have an exercise price of $5.50 and expire from March to July 2000.
After the offering, as a result of automatic conversion of the Preferred Stock
upon the closing of this offering and the 2-for-3 reverse stock split, these
warrants will be exercisable for a total of 203,881 shares of Common Stock at an
exercise price of $8.25 per share. See "Certain Transactions."

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.

60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
22,239,231 shares of Common Stock. Of these shares, the 6,000,000 shares sold in
this offering (plus any shares issued upon exercise of the Underwriters'
over-allotment option) will be freely tradeable without restriction under the
Securities Act, unless purchased or held by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act and the regulations
promulgated thereunder.

The remaining 16,239,231 shares of Common Stock outstanding (or any
securities exercisable for or convertible into the Company's Common Stock) held
by officers, directors, employees, consultants and certain shareholders, are
"restricted securities" within the meaning of Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which are summarized
below. Sales of the Restricted Shares in the public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock. None of the Restricted Shares will be available for sale upon the
Effective Date. Approximately 50,100 of these shares of Common Stock will be
eligible for sale in the public market 90 days after the Effective Date subject
to the provisions of Rule 701. In addition, an additional 186,140 shares subject
to vested options will be available for sale 90 days after the Effective Date
subject to compliance with Rule 701.

The officers, directors, certain employees and shareholders of the Company
have entered into contractual "lock-up" agreements generally providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of the shares of Common Stock of the Company or any securities
exercisable for or convertible into the Company's Common Stock owned by them for
a period of 180 days after the Effective Date without the prior written consent
of Robertson, Stephens & Company. Pursuant to the Stock Plan, all shares of
Common Stock issued upon exercise of options are also subject to a lock-up
arrangement for a period of 180 days after the date of this prospectus.
Robertson, Stephens & Company may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.

As a result of these contractual restrictions, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
shares subject to lock-up agreements will not be saleable until such agreements
expire or are waived by Robertson, Stephens & Company. Beginning 180 days after
the Effective Date, approximately 10,411,408 additional Restricted Shares will
become eligible for sale subject to the provisions of Rule 144 or Rule 701 upon
the expiration of the lock-up agreements not to sell such shares. In addition,
beginning 180 days after the Effective Date, an additional 183,366 shares
subject to vested options will be available for sale subject to compliance with
Rule 701 upon the expiration of lock-up agreements not to sell such shares.
Robertson, Stephens & Company may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.

In general, under Rule 144, as currently in effect, beginning 90 days after
the Effective Date, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 222,392 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years, is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.

Beginning 90 days after the Effective Date, certain shares issued upon
exercise of options granted by the Company prior to the date of this Prospectus
will also be available for sale in the public market pursuant to Rule 701 under
the Securities Act. Any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without

61
<PAGE>
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before selling
such shares.

The Company intends to file registration statements under the Securities Act
180 days after the Effective Date to register shares of Common Stock reserved
for issuance under the Stock Plan and the Directors Plan, thus permitting the
resale of such shares by non-affiliates in the public market without restriction
under the Securities Act. Such registration statements will become immediately
upon filing.

As of April 30, 1996, the holders of approximately 15,834,537 shares are
entitled to certain registration rights with respect to such shares. If a large
number of such shares were registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were required to include in a Company-initiated registration the
shares held by such holders pursuant to the exercise of their registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Description of Capital Stock -- Registration Rights of
Certain Shareholders."

Prior to this offering, there has been no public market for the Common Stock
of the Company and no predictions can be made as to the effect, if any, that
market sales of shares of Common Stock prevailing from time to time may have on
the market price of the Common Stock. Nevertheless, sales of significant numbers
of shares of the Common Stock in the public market may adversely affect the
market price of the Common Stock offered hereby and could impair the Company's
future ability to raise capital through an offering of its equity securities.

62
<PAGE>
UNDERWRITING

The Underwriters named below acting through their representatives,
Robertson, Stephens & Company LLC, CS First Boston Corporation and Montgomery
Securities (the "Representatives"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement to purchase from the Company the
number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all of such shares
if any are purchased:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC........................................................... 1,872,000
CS First Boston Corporation................................................................. 1,404,000
Montgomery Securities....................................................................... 1,404,000
Goldman, Sachs & Co......................................................................... 210,000
Schroder Wertheim & Co. Incorporated........................................................ 210,000
Dominick & Dominick, Incorporated........................................................... 150,000
Genesis Merchant Group Securities........................................................... 150,000
Kaufman Bros., L.P.......................................................................... 150,000
Pacific Growth Equities, Inc................................................................ 150,000
Punk, Ziegel & Knoell....................................................................... 150,000
Van Kasper & Company........................................................................ 150,000
----------
Total................................................................................... 6,000,000
----------
----------
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession of not more than $0.61 per share, of
which $0.10 may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowances to dealers may
be reduced by the Representatives.

The Underwriters will sell 200,000 shares of the Common Stock to Alejandro
C. Zaffaroni, a founder and director of the Company, at the initial public
offering price set forth on the cover page of this Prospectus. The Underwriters
will not receive an underwriting discount or commission on the sale of these
shares of Common Stock to Dr. Zaffaroni.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 900,000 shares of Common Stock at the same price per share as the
Company receives for the 6,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
6,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 6,000,000
shares are being sold. The Company will be obligated, pursuant to the option, to
sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.

The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended, and liability arising
from breaches of representations and warranties contained in the Underwriting
Agreement.

Each officer, director and certain shareholders together holding
approximately 12,643,742 shares of Common Stock have agreed with the
Representatives that, until 180 days from the Effective Date, subject to certain
limited exceptions, they will not, directly or indirectly, sell, offer contract
to sell, pledge, grant any option to purchase or otherwise dispose of any shares
of Common Stock or any securities convertible into, or exchangeable for, or any
rights to purchase or acquire, shares of Common Stock, owned directly by such
holders or with respect to which they have the power of disposition, without the
prior written consent of Robertson, Stephens & Company LLC. Approximately
10,411,408 of such shares will be eligible for immediate public sale following

63
<PAGE>
expiration of the lock-up period pursuant to Rule 144. Robertson, Stephens &
Company LLC may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. In addition,
the Company has agreed that, until 180 days from the Effective Date, the Company
will not, without the prior written consent of Robertson, Stephens & Company
LLC, subject to certain limited exceptions, sell or otherwise dispose of, any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into, exercisable for or exchangeable for
shares of Common Stock other than the Company's sale of shares in this offering,
the issuance of Common Stock upon the exercise of the outstanding warrants or
options, or the Company's grant of options and issuance of stock under existing
employee stock option or stock purchase plans. See "Shares Eligible for Future
Sale."

The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock was determined through negotiations between the Company and the
Representatives. The material factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company in
recent periods, market valuations of other companies that the Company and the
Representatives believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and the Company's management.

A managing director of CS First Boston Corporation, one of the
Representatives, is the beneficial owner of 7,407 shares of Common Stock.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Heller Ehrman White & McAuliffe, Palo Alto, California. Julian N.
Stern, the beneficial owner of 26,980 shares of Common Stock, is the sole
shareholder and employee of a professional corporation that is a partner of
Heller Ehrman White & McAuliffe. Certain legal matters relating to the offering
will be passed upon for the Underwriters by Wilson, Sonsini, Goodrich & Rosati,
Palo Alto, California.

EXPERTS

The financial statements of Affymetrix at December 31, 1994 and 1995, and
for the years ended December 31, 1993, 1994 and 1995, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.

The statements in this Prospectus as set forth under the captions "Risk
Factors -- Dependence on Proprietary Technology and Unpredictability of Patent
Protection" and "Business -- Intellectual Property" have been passed upon by
Townsend and Townsend and Crew LLP, Palo Alto, California, patent counsel to the
Company, as experts on such matters, and are included herein in reliance upon
that review and approval.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
Company and the Common Stock offered hereby. Statements contained in this
Prospectus as to the provisions of any referenced contracts or other documents
summarize the material elements of such contracts or documents. Such statements,
however, are not necessarily complete, and in each instance reference is made to
the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits and

64
<PAGE>
schedules filed therewith, may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in New
York, New York and Chicago, Illinois, at prescribed rates.

65
<PAGE>
GLOSSARY

<TABLE>
<S> <C>
Amplification..................... An increase in the number of copies of specific DNA or
RNA fragments.
Base.............................. The nucleotides that comprise DNA.
Chromosomes....................... The self-replicating genetic structures in cells
containing the cellular DNA that bears in its nucleotide
sequence the linear array of genes.
Complementary sequence............ Nucleic acid base sequences that can form a
double-stranded structure by matching base pairs; the
complementary sequence to GTAC is CATG.
DNA (deoxyribonucleic acid)....... The molecule that encodes genetic information. DNA is a
double-stranded molecule held together by weak bonds
between base pairs. The four nucleotides in DNA contain
the bases adenine (A), guanine (G), cytosine (C) and
thymine (T). In nature, base pairs form only between A
and T and between G and C; thus, the base sequence of
each single strand can be deduced from that of its
complementary sequence.
DNA sequence...................... The relative order of base pairs, whether in a fragment
of DNA, a gene, a chromosome, or an entire genome.
DNA synthesis..................... The process of building strands of nucleotide bases
through controlled chemical reactions.
Feature........................... A discrete section of a probe array containing millions
of copies of the same DNA probe. Each probe array
contains from 16,000 to more than 100,000 individual
features.
Fluorescent label................. A compound that may be attached to another molecule and
that is capable of emitting light. The emitted light may
be detected to determine the presence or location of
the molecule.
Gel-based sequencing.............. Determination of the order of nucleotides (base
sequences) in a DNA molecule using a matrix of a
polymeric molecule to form a gel, which separates
pieces of DNA in an electric field based upon their
sizes.
Gene.............................. The fundamental physical and functional unit of
heredity. A gene is an ordered sequence of nucleotides
located in a particular position on a particular
chromosome that encodes a specific functional product.
Gene expression................... The process by which a gene's coded information creates
the structures present and operating in the cell.
Expressed genes include those that are transcribed into
mRNA and then translated into protein and those that
are transcribed into RNA but not translated into
protein.
Gene expression monitoring........ The process of correlating the level and timing of gene
expression with abnormal cellular behavior and disease.
Genetic code...................... The sequence of nucleotides, coded in triplets along the
mRNA, that determines the sequence of amino acids in
protein synthesis. The DNA sequence of a gene can be
used to predict the mRNA sequence, and the genetic code
can in turn be used to predict the amino acid sequence.
</TABLE>

66
<PAGE>
<TABLE>
<S> <C>
Genetic mapping................... Determining the relative positions of genes on a DNA
molecule and the distance between them.
Genetic marker.................... An identifiable physical location on a chromosome, whose
inheritance can be monitored.
Genome............................ All the genetic material in the chromosomes of a
particular organism. Genome size is generally given as
its total number of base pairs.
Genomics.......................... The study of genes and their function.
High-throughput sequencing........ The process of identifying and sequencing small
stretches of genes expressed in a certain cell type
using gel-based sequencing techniques.
HIV............................... Human Immunodeficiency Virus, the virus responsible for
HIV disease and its end-stage, AIDS (Acquired
Immunodeficiency Syndrome).
Human Genome Project.............. Collective name for several projects begun in 1986 by
United States Department of Energy to map and sequence
the human genome and develop new techniques and
instruments for detecting and analyzing DNA.
Hybridization..................... The process of joining two complementary strands of DNA
or one each of DNA and RNA to form a double-stranded
molecule.
Immunoassay....................... A diagnostic test that uses a protein produced by the
immune system, called an antibody, to detect specific
proteins that may be used to aid in the identification
or treatment of disease.
In vitro.......................... Studies or phenomena that take place outside the body
(for instance, in test tubes).
Linkage analysis.................. Locating of genes on chromosomes by determining the
inheritance patterns of genetic markers that are close
to one another.
mRNA (messenger RNA).............. RNA that serves as a template for protein synthesis. See
"Genetic code."
Mutation.......................... A transmissible change in the genetic material of an
organism, usually in a single gene.
Nucleic acid...................... A large molecule composed of nucleotide subunits.
Nucleotide........................ A subunit of DNA or RNA consisting of a nitrogenous base
(adenine, guanine, thymine, or cytosine in DNA;
adenine, guanine, uracil, or cytosine in RNA), a
phosphate molecule and a sugar molecule (deoxyribose in
DNA, ribose in RNA). Thousands of nucleotides are
linked to form a DNA or RNA molecule.
Nucleotide pair................... Two nitrogenous bases (adenine and thymine or guanine
and cytosine) held together by weak bonds. Two strands
of DNA are held together in the shape of a double helix
by the bonds between base pairs.
Polymorphism...................... Difference in DNA sequence among individuals.
Polymorphism Screening............ The process of correlating genetic variations with
disease or traits.
Photolithography.................. A technique that uses light to induce chemical reactions
that create exposure patterns on a surface.
</TABLE>

67
<PAGE>
<TABLE>
<S> <C>
Probe............................. Short sequence of DNA used to identify longer stretches
of complementary DNA or RNA sequence.
Probe array....................... Small, disposable chip consisting of densely packed DNA
sequences (probes), where the identity and position of
each probe is known on the chip surface.
Protein........................... A large molecule composed of one or more chains of amino
acids in a specific order; the order is determined by
the base sequence of nucleotides in the gene or genes
coding for the protein. Proteins are required for the
structure, function and regulation of the body's cells,
tissues, and organs, and each protein has unique
functions. Examples of proteins are hormones, enzymes,
and antibodies.
RNA (Ribonucleic acid)............ A chemical found in the nucleus and cytoplasm of cells;
it plays an important role in protein synthesis and
other chemical activities of the cell. The structure of
RNA is similar to that of DNA. There are several
classes of RNA molecules, including messenger RNA,
transfer RNA, ribosomal RNA, and other small RNAs, each
serving a different purpose.
Solid-phase DNA synthesis......... DNA synthesis in which the chains of bases are anchored
to a solid substrate, such as glass, as opposed to being
synthesized in solution.
Virus............................. A noncellular biological entity that can reproduce only
within a host cell. Viruses consist of nucleic acid
covered by protein. Some animal viruses are also
surrounded by membrane. Once inside the infected cell,
the virus uses the synthetic capability of the host to
produce progeny virus.
Wafer............................. Pieces of glass on which multiple probe arrays are
simultaneously manufactured. The wafers are subsequently
diced to yield individual probe arrays.
</TABLE>

68
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2

Financial Statements:
Balance Sheets........................................................................................... F-3
Statements of Operations................................................................................. F-4
Statement of Shareholders' Equity........................................................................ F-5
Statements of Cash Flows................................................................................. F-7
Notes to Financial Statements............................................................................ F-8
</TABLE>

F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Affymetrix, Inc.

We have audited the accompanying balance sheets of Affymetrix, Inc. (a
development stage company) at December 31, 1994 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995 and for the period from
inception (January 1, 1991) to December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Affymetrix, Inc. (a
development stage company) at December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and for the period from inception (January 1, 1991) to
December 31, 1995, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Palo Alto, California
February 9, 1996,
except for the first paragraph of Note 9 as to which the date is
May 20, 1996

F-2
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31, PRO FORMA
----------- SHAREHOLDERS'
1996 EQUITY AT
----------- MARCH 31,
-------------
(UNAUDITED) 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 6,659 $ 2,481 $ 308
Short-term investments....................................... 11,146 36,402 34,529
Contract and grant receivables............................... 90 1,342 636
Inventories.................................................. -- 670 1,469
Other current assets......................................... 88 260 422
--------- --------- -----------
Total current assets....................................... 17,983 41,155 37,364
Property and equipment, at cost:
Equipment and furniture...................................... 2,554 4,254 4,955
Leasehold improvements....................................... 356 586 587
--------- --------- -----------
2,910 4,840 5,542
Less accumulated depreciation and amortization............... (1,047) (1,583) (1,863)
--------- --------- -----------
Net property and equipment................................. 1,863 3,257 3,679
Other assets................................................... 15 140 142
--------- --------- -----------
$ 19,861 $ 44,552 $ 41,185
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities............... $ 1,046 $ 2,469 $ 3,278
Payable to Affymax........................................... 254 89 12
Deferred revenue............................................. 837 2,340 2,153
Current portion of capital lease obligation.................. 169 187 192
--------- --------- -----------
Total current liabilities.................................. 2,306 5,085 5,635
Convertible note payable to Affymax............................ 6,000 -- --
Noncurrent portion of capital lease obligation................. 1,135 948 898
Advance from collaborative partner............................. 1,250 -- --
Commitments.................................................... --
Shareholders' equity:
Convertible preferred stock, no par value; 27,500,000 shares
authorized; 14,500,000 issued and outstanding at December
31, 1994, 23,166,666 at December 31, 1995 and March 31, 1996
(none pro forma); aggregate liquidation preference of
$70,625 at December 31, 1995 and March 31, 1996............. 31,283 70,439 70,439 $ --
Common stock, no par value; 50,000,000 shares authorized;
408,198 shares issued and outstanding at December 31, 1994,
536,267 at December 31, 1995 and 609,240 at March 31, 1996
(16,239,231 pro forma)...................................... 122 2,717 3,089 73,528
Notes receivable from officers............................... (84) (42) (41) (41)
Unrealized gain(loss) on available-for-sale securities....... (382) 281 1 1
Deferred compensation........................................ -- (2,360) (2,399) (2,399)
Deficit accumulated during development stage................. (21,769) (32,516) (36,437) (36,437)
--------- --------- ----------- -------------
Total shareholders' equity................................. 9,170 38,519 34,652 $ 34,652
--------- --------- ----------- -------------
-------------
$ 19,861 $ 44,552 $ 41,185
--------- --------- -----------
--------- --------- -----------
</TABLE>

See accompanying notes.

F-3
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- --------- THREE MONTHS PERIOD FROM
ENDED MARCH 31, INCEPTION
------------------------ (JANUARY 1,
1995 1996 1991)
----------- ----------- THROUGH
MARCH 31, 1996
(UNAUDITED) (UNAUDITED) ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Contract and grant revenue.......... $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 $ 9,071
Operating expenses:
Research and development.......... 6,566 9,483 12,420 2,274 4,177 38,328
General and administrative........ 577 2,303 3,833 777 1,649 9,205
--------- --------- --------- ----------- ----------- -------
Total operating expenses
(includes related-party expense
of $1,147, $1,647, $1,432,
$428, $364 and $4,590,
respectively).................. 7,143 11,786 16,253 3,051 5,826 47,533
--------- --------- --------- ----------- ----------- -------
Loss from operations................ (5,730) (10,212) (11,628) (2,197) (4,410) (38,462)
Interest income................... 211 575 1,301 183 517 2,607
Interest expense (includes
related-party expense of $320 in
1995 and $128 in the three months
ended March 31, 1995)............ (73) (43) (420) (160) (28) (582)
--------- --------- --------- ----------- ----------- -------
Net loss............................ $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) $ (36,437)
--------- --------- --------- ----------- ----------- -------
--------- --------- --------- ----------- ----------- -------
Pro forma net loss per share........ $ (0.61) $ (0.12) $ (0.22)
--------- ----------- -----------
--------- ----------- -----------
Shares used in computing pro forma
net loss per share................. 17,664 17,663 17,664
--------- ----------- -----------
--------- ----------- -----------
</TABLE>

See accompanying notes.

F-4
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1991) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONTRI-
CONVERTIBLE NOTES BUTIONS
PREFERRED COMMON RECEIVABLE FROM UNREALIZED DEFERRED
STOCK STOCK FROM OFFICERS AFFYMAX GAIN (LOSS) COMPENSATION
----------- ----------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 666 shares of common stock
for cash in March 1992 at $0.15 per
share................................ $ -- $ -- $ -- $ -- $ -- $ --
Contributions from Affymax (1991 and
1992)................................ -- -- -- 6,316 -- --
Net loss (1991 and 1992).............. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1992.......... -- -- -- 6,316 -- --
Contributions from Affymax through
September 1993....................... -- -- -- 4,309 -- --
Issuance of 6,000,000 shares of Series
A Senior convertible preferred stock
for cash in September 1993, at $3.50
per share, net of issuance costs of
$342................................. 20,658 -- -- -- -- --
Conversion of all contributions from
Affymax into 8,500,000 shares of
Series 1 Subordinated convertible
preferred stock in September 1993 at
$1.25 per share...................... 10,625 -- -- (10,625) -- --
Issuance of 66,666 shares of common
stock for cash upon exercise of stock
options in December 1993 at $0.30 per
share................................ -- 20 -- -- -- --
Issuance of 266,666 shares of common
stock for notes receivable upon
exercise of options in December 1993
at $0.30 per share................... -- 80 (80) -- -- --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1993.......... 31,283 100 (80) -- -- --
Issuance of 74,200 shares of common
stock for cash upon exercise of stock
options at $0.30 per share........... -- 22 -- -- -- --
Interest accrued on notes receivable
from officers........................ -- -- (4) -- -- --
Unrealized loss on available-for-sale
securities........................... -- -- -- -- (382) --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1994.......... 31,283 122 (84) -- (382) --
Issuance of 7,333,333 shares of Series
B Senior convertible preferred stock
for cash in August 1995, at $4.50 per
share, net of issuance costs of
$164................................. 32,836 -- -- -- -- --
Conversion of $6,000 note payable into
1,333,333 shares of Series B Senior
convertible preferred stock in August
1995, at $4.50 per share............. 6,000 -- -- -- -- --
Issuance of 62,749 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per
share................................ -- 23 -- -- -- --
Issuance of 65,320 shares of common
stock for financing commissions in
August 1995 at $0.675 per share...... -- 44 -- -- -- --

<CAPTION>
DEFICIT TOTAL
ACCUMULATED SHAREHOLDERS'
DURING EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
------------- -------------
<S> <C> <C>
Issuance of 666 shares of common stock
for cash in March 1992 at $0.15 per
share................................ $ -- $ --
Contributions from Affymax (1991 and
1992)................................ -- 6,316
Net loss (1991 and 1992).............. (6,497) (6,497)
------------- -------------
Balance at December 31, 1992.......... (6,497) (181)
Contributions from Affymax through
September 1993....................... -- 4,309
Issuance of 6,000,000 shares of Series
A Senior convertible preferred stock
for cash in September 1993, at $3.50
per share, net of issuance costs of
$342................................. -- 20,658
Conversion of all contributions from
Affymax into 8,500,000 shares of
Series 1 Subordinated convertible
preferred stock in September 1993 at
$1.25 per share...................... -- --
Issuance of 66,666 shares of common
stock for cash upon exercise of stock
options in December 1993 at $0.30 per
share................................ -- 20
Issuance of 266,666 shares of common
stock for notes receivable upon
exercise of options in December 1993
at $0.30 per share................... -- --
Net loss.............................. (5,592) (5,592)
------------- -------------
Balance at December 31, 1993.......... (12,089) 19,214
Issuance of 74,200 shares of common
stock for cash upon exercise of stock
options at $0.30 per share........... -- 22
Interest accrued on notes receivable
from officers........................ -- (4)
Unrealized loss on available-for-sale
securities........................... -- (382)
Net loss.............................. (9,680) (9,680)
------------- -------------
Balance at December 31, 1994.......... (21,769) 9,170
Issuance of 7,333,333 shares of Series
B Senior convertible preferred stock
for cash in August 1995, at $4.50 per
share, net of issuance costs of
$164................................. -- 32,836
Conversion of $6,000 note payable into
1,333,333 shares of Series B Senior
convertible preferred stock in August
1995, at $4.50 per share............. -- 6,000
Issuance of 62,749 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per
share................................ -- 23
Issuance of 65,320 shares of common
stock for financing commissions in
August 1995 at $0.675 per share...... -- 44
</TABLE>

F-5
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1991) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONTRI-
CONVERTIBLE NOTES BUTIONS
PREFERRED COMMON RECEIVABLE FROM UNREALIZED DEFERRED
STOCK STOCK FROM OFFICERS AFFYMAX GAIN (LOSS) COMPENSATION
----------- ----------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of warrants in June, July,
and October 1995 for 202,441 of
Series 2 Subordinated convertible
preferred stock at $1.58 per share in
exchange for interest................ 320 -- -- -- -- --
Interest received on notes receivable
from officers........................ -- -- 2 -- -- --
Reclassification of notes receivable
from officers to other assets........ -- -- 40 -- -- --
Compensation from accelerated
options.............................. -- 40 -- -- -- --
Deferred compensation related to grant
of stock options..................... -- 2,488 -- -- -- (2,488)
Amortization of deferred
compensation......................... -- -- -- -- -- 128
Unrealized gain on available-for-sale
securities........................... -- -- -- -- 663 --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1995.......... 70,439 2,717 (42) -- 281 (2,360)
Issuance of 72,973 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per share
(Unaudited).......................... -- 46 -- -- -- --
Interest received on notes receivable
from officers (Unaudited)............ -- -- 1 -- -- --
Deferred compensation related to grant
of stock options (Unaudited)......... -- 326 -- -- -- (326)
Amortization of deferred compensation
(Unaudited).......................... -- -- -- -- -- 287
Unrealized loss on available-for-sale
securities (Unaudited)............... -- -- -- -- (280) --
Net loss (Unaudited).................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at March 31, 1996
(Unaudited).......................... $ 70,439 $ 3,089 $ (41) $ -- $ 1 $ (2,399)
----------- ----------- --- --------- ----- ------
----------- ----------- --- --------- ----- ------

<CAPTION>
DEFICIT TOTAL
ACCUMULATED SHAREHOLDERS'
DURING EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
------------- -------------
<S> <C> <C>
Issuance of warrants in June, July,
and October 1995 for 202,441 of
Series 2 Subordinated convertible
preferred stock at $1.58 per share in
exchange for interest................ -- 320
Interest received on notes receivable
from officers........................ -- 2
Reclassification of notes receivable
from officers to other assets........ -- 40
Compensation from accelerated
options.............................. -- 40
Deferred compensation related to grant
of stock options..................... -- --
Amortization of deferred
compensation......................... -- 128
Unrealized gain on available-for-sale
securities........................... -- 663
Net loss.............................. (10,747) (10,747)
------------- -------------
Balance at December 31, 1995.......... (32,516) 38,519
Issuance of 72,973 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per share
(Unaudited).......................... -- 46
Interest received on notes receivable
from officers (Unaudited)............ -- 1
Deferred compensation related to grant
of stock options (Unaudited)......... -- --
Amortization of deferred compensation
(Unaudited).......................... -- 287
Unrealized loss on available-for-sale
securities (Unaudited)............... -- (280)
Net loss (Unaudited).................. (3,921) (3,921)
------------- -------------
Balance at March 31, 1996
(Unaudited).......................... $ (36,437) $ 34,652
------------- -------------
------------- -------------
</TABLE>

See accompanyng notes.

F-6
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH
------------------------------- 31,
1993 1994 1995 ------------------------
--------- --------- --------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 465 689 701 150 279
Amortization of investment premiums and discounts, net..... -- 148 (191) 165 (24)
Loss on disposal of equipment.............................. -- 417 188 -- --
Compensation due to accelerated vesting.................... -- -- 40 -- --
Amortization of deferred compensation...................... -- -- 128 -- 287
Interest payable exchanged for warrants.................... -- -- 320 -- --
Changes in operating assets and liabilities:
Contract and grant receivables........................... -- (90) (1,252) (675) 706
Inventories.............................................. -- -- (670) -- (799)
Other current assets..................................... (649) 575 (172) (19) (162)
Other assets............................................. 14 (15) (80) -- (2)
Accounts payable and other accrued liabilities........... 570 295 1,423 (196) 809
Payable to Affymax....................................... 1,574 (1,320) (165) (1) (77)
Deferred revenue......................................... 460 377 253 (150) (187)
Advance from collaborative partner....................... -- 1,250 -- -- --
--------- --------- --------- ----------- -----------
Net cash used in operating activities.................. (3,158) (7,354) (10,224) (2,900) (3,091)
--------- --------- --------- ----------- -----------
Cash flows from investing activities:
Capital expenditures....................................... (1,537) (1,207) (2,283) (580) (701)
Proceeds from the sale of available-for-sale securities.... -- 5,308 8,538 -- 1,466
Proceeds from maturities of available-for-sale
securities................................................ -- -- 5,485 -- 2,156
Purchases of available-for-sale securities................. (13,997) (2,990) (38,428) (2,007) (2,004)
--------- --------- --------- ----------- -----------
Net cash provided by/(used in) investing activities.... (15,534) 1,111 (26,688) (2,587) 917
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Contributions from Affymax................................... 4,309 -- -- -- --
Issuances of common stock.................................... 20 22 23 -- 46
Issuances of preferred stock, net............................ 20,658 -- 32,880 -- --
Proceeds from capital lease obligation....................... -- 1,307 -- -- --
Principal payments on capital lease obligation............... -- (3) (169) (41) (45)
Issuance of convertible note payable to Affymax.............. -- 6,000 -- -- --
Issuance of notes payable.................................... 333 -- -- -- --
Principal payments on notes payable.......................... (327) (819) -- -- --
--------- --------- --------- ----------- -----------
Net cash provided by (used in) financing activities.... 24,993 6,507 32,734 (41) 1
--------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........... 6,301 264 (4,178) (5,528) (2,173)
Cash and cash equivalents at beginning of period............... 94 6,395 6,659 6,659 2,481
--------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period..................... $ 6,395 $ 6,659 $ 2,481 $ 1,131 $ 308
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosure of noncash financing activities:
Issuance of common stock for note receivable from officers... $ 80 $ -- $ -- $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Conversion of note payable and contributions from
Affymax to preferred stock.................................. $ 10,625 $ -- $ 6,000 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Assets under capital lease obligation........................ -- $ 1,297 $ -- $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Issuance of common stock for financing commissions........... $ -- $ -- $ 44 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Issuance of warrants in exchange for interest payable........ $ -- $ -- $ 320 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid................................................ $ 73 $ 20 $ 122 $ 32 $ 28
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------

<CAPTION>
PERIOD FROM
(JANUARY 1,
1991)
THROUGH MARCH
31, 1996

<S> <C>
Cash flows from operating activities:
Net loss..................................................... $ (36,437)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 2,210
Amortization of investment premiums and discounts, net..... (67)
Loss on disposal of equipment.............................. 605
Compensation due to accelerated vesting.................... 40
Amortization of deferred compensation...................... 415
Interest payable exchanged for warrants.................... 320
Changes in operating assets and liabilities:
Contract and grant receivables........................... (636)
Inventories.............................................. (1,469)
Other current assets..................................... (422)
Other assets............................................. (98)
Accounts payable and other accrued liabilities........... 3,278
Payable to Affymax....................................... 12
Deferred revenue......................................... 903
Advance from collaborative partner....................... 1,250
--------------
Net cash used in operating activities.................. (30,096)
--------------
Cash flows from investing activities:
Capital expenditures....................................... (6,494)
Proceeds from the sale of available-for-sale securities.... 15,312
Proceeds from maturities of available-for-sale
securities................................................ 7,641
Purchases of available-for-sale securities................. (57,419)
--------------
Net cash provided by/(used in) investing activities.... (40,960)
--------------
Cash flows from financing activities:
Contributions from Affymax................................... 10,625
Issuances of common stock.................................... 111
Issuances of preferred stock, net............................ 53,538
Proceeds from capital lease obligation....................... 1,307
Principal payments on capital lease obligation............... (217)
Issuance of convertible note payable to Affymax.............. 6,000
Issuance of notes payable.................................... 1,146
Principal payments on notes payable.......................... (1,146)
--------------
Net cash provided by (used in) financing activities.... 71,364
--------------
Net increase (decrease) in cash and cash equivalents........... 308
Cash and cash equivalents at beginning of period............... --
--------------
Cash and cash equivalents at end of period..................... $ 308
--------------
--------------
Supplemental disclosure of noncash financing activities:
Issuance of common stock for note receivable from officers... $ 80
--------------
--------------
Conversion of note payable and contributions from
Affymax to preferred stock.................................. $ 16,625
--------------
--------------
Assets under capital lease obligation........................ $ 1,297
--------------
--------------
Issuance of common stock for financing commissions........... $ 44
--------------
--------------
Issuance of warrants in exchange for interest payable........ $ 320
--------------
--------------
Supplemental disclosure of cash flow information:
Interest paid................................................ $ 262
--------------
--------------
</TABLE>

See accompanying notes.

F-7
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION, OWNERSHIP, AND BUSINESS

Affymetrix, Inc. ("Affymetrix") is a development stage company focused on
developing GeneChip-TM- based products and related technology for the
acquisition, analysis, and management of complex genetic data. The business and
operations of Affymetrix commenced in 1991 by Affymax N.V. and subsidiaries
("Affymax") and were initially conducted within Affymax. In March 1992,
Affymetrix was incorporated as a California corporation and became a wholly
owned subsidiary of Affymax. Beginning in September 1993, Affymetrix issued
equity securities which diluted Affymax' shareholding in Affymetrix. Affymax
owns approximately 46% of Affymetrix at December 31, 1995. In March 1995, Glaxo
plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax, including its then 65%
interest in Affymetrix. The accompanying financial statements include the
operations of Affymetrix from inception (January 1, 1991). The advances from
Affymax through September 1993 were recorded as capital contributions and
converted to convertible preferred shares in September 1993. Since September
1993, the financial statements reflect the operations of Affymetrix on a
stand-alone basis.

Affymetrix' success will depend in part on its ability to obtain and
maintain patent protection in the United States and other countries for its
technologies and products. The commercial success of Affymetrix also depends in
part on neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to Affymetrix' technologies and products.

USE OF ESTIMATES

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

INTERIM FINANCIAL INFORMATION

The financial information at March 31, 1996 and for the three-month periods
ended March 31, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which Affymetrix considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results for the March 31,
1996 period are not necessarily indicative of the results for the entire year.

REVENUE RECOGNITION

Contract and grant revenue is recorded as earned as defined within the
specific agreements. Payments received in advance under these arrangements are
recorded as deferred revenue until earned. Direct costs associated with these
contracts and grants are reported as research and development expense. Revenue
for the beta shipments are recorded as contract revenue pursuant to the
development agreements.

Revenue from customers representing 10% or more of total contract and grant
revenue during fiscal 1993, 1994, and 1995 is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Customer:
A -- -- 25%
B -- -- 23%
C -- -- 22%
D 49% 54% 17%
E 38% 29% --
</TABLE>

F-8
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT

Research and development expenses consist of costs incurred for internal,
contract and grant-sponsored research and development. These costs include
direct and research-related overhead expenses.

NET LOSS PER SHARE

Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (stock options, convertible notes
payable, convertible preferred stock, and warrants) issued during the 12 months
prior to the initial filing of the proposed offering at prices below the assumed
public offering price have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method for stock
options and warrants and the if-converted method for convertible preferred
stock).

Historical net loss per share information is as follows:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss per share...... $ (0.75) $ (1.24) $ (1.38) $ (0.28) $ (0.50)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Shares used in computing
net loss per share..... 7,422,000 7,801,000 7,812,000 7,811,000 7,812,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>

Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of Affymetrix' initial
public offering (using the if-converted method) from the original date of
issuance.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Effective January 1, 1994, Affymetrix adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The effect of adopting Statement 115 at January 1, 1994 was
immaterial.

Cash equivalents and short-term investments consist of debt securities.
Management determines the appropriate classification of debt securities at the
time of purchase. As of December 31, 1995, Affymetrix' debt securities are
classified as available-for-sale and are carried at fair value with unrealized
gains and losses reported in shareholders' equity. Affymetrix reports all liquid
securities with maturities at date of purchase of three months or less that are
readily convertible into cash and have insignificant interest rate risk as cash
equivalents. All other available-for-sale securities are recorded as short-term
investments. The cost of debt securities is adjusted for amortization of
premiums and discounts to maturity. This amortization is included in interest
income. Realized gains and losses on available-for-sale securities are included
in interest income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income. The fair values of
securities are based on quoted market prices.

F-9
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market and consist entirely of finished goods at December
31, 1995, and $256,000 of raw material and $1,213,000 of finished goods at March
31, 1996.

DEPRECIATION AND AMORTIZATION

The costs of property and equipment are depreciated for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets ranging from two to five years. Leasehold improvements are amortized over
the useful lives of the assets or the lease-term, whichever is shorter.
Expenditures for maintenance and repairs are expensed as incurred.

ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

Accounts payable and other accrued liabilities include the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Accounts payable......................................... $ 587 $ 1,088 $ 963
Accrued compensation..................................... 262 576 617
Collaborative research refund............................ -- 360 448
Accrued research......................................... 132 115 533
Legal.................................................... -- 222 351
Other.................................................... 65 108 366
--------- --------- -----------
$ 1,046 $ 2,469 $ 3,278
--------- --------- -----------
--------- --------- -----------
</TABLE>

STOCK BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued "Accounting
for Stock-Based Compensation" ("Statement No. 123") which is effective for
fiscal 1996. Under Statement No. 123, stock-based compensation expense is
measured using either the intrinsic-value method as prescribed in APB Opinion
No. 25 or the fair value method described in Statement No. 123. Affymetrix
intends to adopt the disclosure only alternative under Statement No. 123 and,
accordingly, Affymetrix will be required to disclose the pro forma net income or
loss and per share amounts in the notes to the financial statements using the
fair value based method. Affymetrix has not yet determined the impact of these
pro forma adjustments.

CONCENTRATIONS OF CREDIT RISK

Cash equivalents and investments are financial instruments which potentially
subject Affymetrix to concentrations of risk. Corporate policy restricts the
amount of credit exposure to any one issuer and to any one type of investment,
other than securities issued by the United States Government.

NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS
Affymetrix expects to collaborate with various partners to successfully
commercialize its technology. Total costs incurred under contract and grant
arrangements are approximately $1,412,000 in 1993, $1,499,000 in 1994,
$5,237,000 in 1995, $602,000 for the three months ended March 31, 1995,
$1,759,000 for the three months ended March 31, 1996 and $9,952,000 for the
period from inception through March 31, 1996.

F-10
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
Affymetrix began its collaboration with Genetics Institute ("GI") in
November 1994 to develop applications of the GeneChip system to the
identification of new genes and new uses of genes using expression monitoring.
Under this agreement, GI funded Affymetrix' research to determine the
feasibility of this application of GeneChip technology and agreed to make
milestone and royalty payments. Under certain circumstances, Affymetrix may pay
royalty payments to GI. If Affymetrix enters into similar agreements for gene
expression with third parties, Affymetrix may be required to refund a portion of
the development funding received from GI and future funding may be
proportionately reduced (see Note 9).

In December 1995, Affymetrix and GI expanded their relationship by entering
into a supply agreement in the field of genomics under which Affymetrix will
manufacture and supply additional custom probe arrays based on specific genes
identified and selected by GI. Unlike the 1994 agreement with GI, this agreement
does not provide research funding to Affymetrix. Pursuant to the agreement, GI
is obligated to purchase and Affymetrix is obligated to supply certain minimum
quantities of custom probe arrays developed for GI until the later of 2001 or
four years after development of specified probe arrays. Affymetrix will receive
fees for the design and delivery of the custom probe arrays, and may receive
milestone payments and royalties on therapeutic compounds if developed by GI
using these probe arrays. GI has exclusive rights to specific probe arrays
supplied by Affymetrix.

In October 1995, Affymetrix entered into a collaborative research and
development agreement with Roche Molecular Systems, Inc. ("Roche"). Under this
agreement, Roche agreed to fund certain research efforts for approximately one
year aimed at developing GeneChip based products designed to detect certain
genetic mutations. Roche is required to make additional payments if certain
milestones are reached. Under certain circumstances, Affymetrix may pay
royalties to Roche.

In August 1995, Affymetrix received a three-year grant from the National
Institutes of Health ("NIH") National Center for Human Genome Research for
approximately $6,000,000. Affymetrix has been awarded approximately $2,000,000
for the first year of the grant, and the remaining amounts are subject to yearly
appropriations by the NIH.

Affymetrix entered into a collaboration with Hewlett-Packard Company ("HP")
in November 1994 for HP to manufacture and supply a more advanced scanner for
the use with Affymetrix' GeneChip probe arrays and for Affymetrix to develop,
manufacture and supply certain probe arrays to HP for sale in certain markets.
In exchange for certain rights, Affymetrix received and will receive certain
payments, including milestones, as defined research and development objectives
are achieved. In addition, HP will fund certain research work at Affymetrix. The
collaborative agreement is for an initial five-year term and shall be extended
thereafter for consecutive three-year terms, unless either party terminates the
agreement upon six months notice. In November 1994, Affymetrix received a
license payment from HP that is classified as deferred revenue and as an advance
from collaborative partner in 1995 and 1994, respectively. The agreement
contains terms, expiring in November 1996, that allow the payment to be applied
towards the purchase of an equity position in Affymetrix upon agreement of both
parties. Affymetrix is required to pay royalties to HP on HP and Company
sponsored probe arrays sold by the Company pursuant to the agreement.

In October 1994, Affymetrix and Molecular Dynamics, Inc. were awarded a
five-year matching grant for a total of $31,500,000 under the Advanced
Technology Program within the National Institute of Standards and Technology to
develop a miniaturized DNA diagnostic device, of which approximately $10,700,000
will be available to Molecular Dynamics. The contract provides that Affymetrix
will receive funding for approximately

F-11
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
50% of its costs up to $20,800,000, some of which will be used to fund
activities at collaborating academic institutions. The award is subject to
yearly congressional authorization, which is uncertain. Affymetrix expects to
receive payments monthly based on costs incurred.

Affymetrix recognized revenues of approximately $1,412,000 in 1993,
$1,499,000 in 1994, $1,034,000 in 1995, and $212,000 and $51,000 for the three
months ended March 31, 1995 and 1996, respectively, pursuant to other contracts
and grants.

NOTE 3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of December
31, 1994 (in thousands):

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.................... $ 16,503 $ -- $ 382 $ 16,121
--------- --- --- -----------
--------- --- --- -----------
Amounts included in:
cash equivalents........................... $ 4,975 $ -- $ -- $ 4,975
short-term investments..................... 11,528 -- 382 11,146
--------- --- --- -----------
Total securities........................... $ 16,503 $ -- $ 382 $ 16,121
--------- --- --- -----------
--------- --- --- -----------
</TABLE>

The following is a summary of available-for-sale securities as of December
31, 1995 (in thousands):

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.................... $ 38,115 $ 309 $ 27 $ 38,397
--------- --- --- -----------
--------- --- --- -----------
Amounts included in:
cash equivalents........................... $ 1,995 $ -- $ -- $ 1,995
short-term investments..................... 36,120 309 27 36,402
--------- --- --- -----------
Total securities........................... $ 38,115 $ 309 $ 27 $ 38,397
--------- --- --- -----------
--------- --- --- -----------
</TABLE>

The gross realized gains and gross realized losses on sales of
available-for-sale securities were immaterial for the years ended December 31,
1994 and 1995.

The following is a summary of the amortized cost and estimated fair value of
available-for-sale securities at December 31, 1995, by contractual maturity (in
thousands):

<TABLE>
<CAPTION>
ESTIMATED FAIR
AMORTIZED COST VALUE
-------------- ------------------
<S> <C> <C>
Mature in one year or less................................ $ 14,184 $ 14,184
Mature after one year through three years................. 23,931 24,213
------- -------
Total................................................... $ 38,115 $ 38,397
------- -------
------- -------
</TABLE>

NOTE 4. RELATED PARTY TRANSACTIONS
In December 1994, Affymetrix issued a $6,000,000 subordinated convertible
promissory note to Affymax. In August of 1995, the note was converted into
1,333,333 shares of Series B Senior convertible preferred stock

F-12
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED)
issued at $4.50 per share. Affymetrix also exercised an option to satisfy
interest due on the note through July 1995, amounting to $319,856, by issuing
Affymax five-year warrants to purchase 202,441 shares of Series 2 Subordinated
convertible preferred stock at $5.50 per share.

In December 1994, in connection with a lease agreement between Affymetrix
and a third party, Affymax, with approval of the third party lessor, agreed to
release Affymetrix of certain financial covenants to the third party. In
exchange for this release, Affymetrix issued a five-year warrant to Affymax to
purchase 103,382 shares of Series 2 Subordinated convertible preferred stock at
$5.50 per share.

Effective January 1, 1993, Affymetrix entered into a Technology License
Agreement with Affymax whereby Affymetrix was granted an exclusive worldwide
royalty-free license from Affymax, with the right to sublicense, to certain
technology and to certain future inventions for use in the diagnostic and
research supply markets including uses of DNA probe arrays. In exchange for the
Technology License Agreement and prior Affymax contributions, Affymetrix issued
Affymax 8,500,000 shares of Series 1 Subordinated convertible preferred stock
using a share price of $1.25, and agreed to share certain costs of developing
certain technology.

Two directors of Affymetrix are employees of a subsidiary of Glaxo.

Pursuant to a service agreement, Affymax provided certain general
administrative and legal services to Affymetrix from October 1, 1993 until
December 31, 1994. As of January 1, 1995, the agreement was amended to limit
those services. Amounts expensed by Affymetrix under this agreement are
approximately $787,000 in 1993, $806,000 in 1994, $291,000 in 1995, $150,000 for
the three months ended March 31, 1995, $37,000 for the three months ended March
31, 1996 and $1,921,000 for the period from inception through March 31, 1996.
General administrative and legal services were allocated to Affymetrix based on
time spent by Affymax employees exclusively on Affymetrix activities, at a rate
based on the salaries of the employees involved plus an overhead rate. Such
allocation was reasonable in the opinion of Affymetrix management.

Since January 1, 1993, Affymetrix has been occupying a research facility in
Santa Clara, California subleased from Affymax (See Note 7). Amounts expensed
under this agreement are approximately $275,000 in 1993, $472,000 in 1994,
$529,000 in 1995, $134,000 for the three months ended March 31, 1995, $134,000
for the three months ended March 31, 1996 and $1,410,000 for the period from
inception through March 31, 1996.

Affymetrix received legal services from Townsend and Townsend and Crew LLP
("Townsend") related to the intellectual property rights of Affymetrix. A
partner of Townsend was also an employee on a part time basis of Affymetrix.
Legal expenses related to services performed by Townsend are approximately
$85,000 in 1993, $369,000 in 1994, $612,000 in 1995, $144,000 for the three
months ended March 31, 1995, $193,000 for the three months ended March 31, 1996
and $1,259,000 for the period from inception through March 31, 1996.

In June 1993, the Board approved the issuance of secured loans to certain
officers for a total of $80,000 at an interest rate of 5.07% per year and
payable in full at the earlier of July 1, 1998 or upon termination of
employment. The loans were originally recorded as "notes receivable from
officers" in shareholders' equity. In June 1995, one loan for $40,000 was
reclassified to "other assets". In November 1994, the Board agreed to authorize
$117,000 as collateral to a bank for an officer's loan. In August 1995, the
Board approved the issuance of a five-year secured loan to an employee for a
total of $50,000 at an interest rate of 8% per year and payable in full at the
earlier of October 2, 2000 or upon termination of employment.

F-13
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 5. NOTES PAYABLE AND CREDIT ARRANGEMENTS

NOTES PAYABLE

In December 1994, Affymetrix issued a $6,000,000 subordinated convertible
promissory note to Affymax maturing on December 1, 1997, which was subsequently
converted into 1,333,333 shares of Series B Senior convertible preferred stock
in August 1995 at a conversion rate of $4.50 per share (See Note 4).

CREDIT ARRANGEMENTS

In December 1994, Affymetrix entered into a financing arrangement with a
leasing company for existing equipment. Under the terms of the lease, Affymetrix
received a single minimum aggregate lease payment of $1,307,000 at the inception
of the lease. The leaseback contract includes a five-year term expiring January
2, 2000, with an option to purchase the equipment at the greater of the residual
value or fair market value. Under certain provisions, the lease may be extended
for an additional year. The amount included in property and equipment related to
the lease is $1,761,000 with accumulated depreciation of $464,000 and $818,000
at December 31, 1994 and December 31, 1995, respectively. Amortization of this
property and equipment is included in depreciation expense. Future minimum lease
payments under the capital lease obligation at December 31, 1995 are as follows
(in thousands):

<TABLE>
<S> <C>
1996........................................................ $ 292
1997........................................................ 292
1998........................................................ 292
1999........................................................ 291
2000........................................................ 280
---------
Total minimum lease payments................................ 1,447
Less amount representing interest........................... (312)
---------
Present value of minimum lease payments..................... 1,135
Less current portion........................................ (187)
---------
Noncurrent obligation under capital lease................... $ 948
---------
---------
</TABLE>

NOTE 6. SHAREHOLDERS' EQUITY

PREFERRED SHARES

Affymetrix is authorized to issue 27,500,000 shares of preferred stock,
designated as follows: 6,000,000 for Series A Senior convertible preferred
stock; 8,666,666 for Series B Senior convertible preferred stock; 8,500,000 for
Series 1 Subordinated convertible preferred stock; 1,000,000 for Series 2
Subordinated preferred stock and 3,333,334 shares undesignated.

The following table describes information with respect to the various series
of convertible preferred stock outstanding as of December 31, 1994:

<TABLE>
<CAPTION>
TOTAL
SHARES ISSUED ISSUANCE PRICE LIQUIDATION
AND OUTSTANDING PER SHARE PREFERENCE
--------------- --------------- -------------
<S> <C> <C> <C>
Series A...................................... 6,000,000 $ 3.50 $ 21,000,000
Series 1...................................... 8,500,000 1.25 10,625,000
--------------- -------------
14,500,000 $ 31,625,000
--------------- -------------
--------------- -------------
</TABLE>

F-14
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
The following table describes information with respect to the various series
of convertible preferred stock outstanding as of December 31, 1995 and March 31,
1996:

<TABLE>
<CAPTION>
TOTAL
SHARES ISSUED ISSUANCE PRICE LIQUIDATION
AND OUTSTANDING PER SHARE PREFERENCE
--------------- --------------- -------------
<S> <C> <C> <C>
Series A...................................... 6,000,000 $ 3.50 $ 21,000,000
Series B...................................... 8,666,666 4.50 39,000,000
Series 1...................................... 8,500,000 1.25 10,625,000
--------------- -------------
23,166,666 $ 70,625,000
--------------- -------------
--------------- -------------
</TABLE>

The Series A and Series B Senior and Series 1 and Series 2 Subordinated
convertible shares represent convertible noncumulative preferred shares.
Dividends for Series A and B are payable at $.28 and $.36 per share,
respectively, in preference to payment of any dividends on the Series 1
Subordinated preferred shares, Series 2 Subordinated preferred shares and common
stock, when and if declared by the Board. Dividends for Series 1 and 2 are
payable at $.10 and $.44 per share, respectively. In the event of liquidation,
dissolution, or winding up of Affymetrix, the Series A and Series B Senior
preferred shares will have a liquidation preference over the Series 1
Subordinated preferred shares, Series 2 Subordinated preferred shares and common
stock. Each share of preferred stock is entitled to the number of votes equal to
the number of shares of common stock into which such share of preferred stock
could be converted. Each share of preferred stock is convertible, at the
holder's option, into 0.6667 share of common stock subject to anti-dilution
adjustment upon the issuance of additional shares of common stock as defined in
Affymetrix' Articles of Incorporation (See Note 9).

The Series A Senior preferred shares, Series B Senior preferred shares,
Series 1 Subordinated preferred shares and Series 2 Subordinated preferred
shares will be automatically converted (i) upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
common stock to the public at an aggregate offering price of at least
$7,500,000; (ii) immediately upon receipt by Affymetrix of a written request for
conversion of at least 60% of the then outstanding shares of that series; or
(iii) upon the conversion of at least 60% of the shares of that series ever
outstanding.

STOCK WARRANTS

At December 31, 1995, the following warrants to purchase Affymetrix'
preferred stock were outstanding:

<TABLE>
<CAPTION>
EXERCISE NUMBER OF EXPIRATION
PRICE SHARES ISSUE DATE DATE
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Series 2 Subordinated convertible preferred.............. $ 5.50 103,382 1994 1999
Series 2 Subordinated convertible preferred.............. $ 5.50 202,441 1995 2000
</TABLE>

STOCK OPTION AND BENEFIT PLANS

In 1993, the Board adopted the Affymetrix 1993 Stock Plan (the "Stock Plan")
under which incentive stock options, nonqualified stock options and purchase
rights may be granted to employees and outside consultants.

Options granted under the Stock Plan expire no later than ten years from the
date of grant. The option price shall be at least 100% of the fair value on the
date of grant (110% in certain circumstances), as determined by the Board of
Directors. Options may be granted with different vesting terms from time to time
but not to exceed five years from the date of grant.

F-15
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
Activity under the Stock Plan through March 31, 1996 is as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------
NUMBER OF PRICE PER AGGREGATE
SHARES SHARE PRICE
---------- ------------ ------------
<S> <C> <C> <C>
Options granted............................................... 714,081 $ 0.30 $ 214,224
Options exercised............................................. (333,332) 0.30 (100,000)
---------- ------------ ------------
Balance at December 31, 1993................................ 380,749 0.30 114,224
Options granted............................................... 634,238 0.30-0.675 331,547
Options exercised............................................. (74,200) 0.30 (22,260)
Options canceled.............................................. (38,799) 0.30 (11,640)
---------- ------------ ------------
Balance at December 31, 1994................................ 901,988 0.30-0.675 411,871
Options granted............................................... 1,423,917 0.675 961,144
Options exercised............................................. (62,749) 0.30-0.675 (22,524)
Options canceled.............................................. (104,032) 0.30-0.675 (56,597)
---------- ------------ ------------
Balance at December 31, 1995................................ 2,159,124 0.30-0.675 1,293,894
Options granted............................................... 107,500 0.675-4.80 173,281
Options exercised............................................. (72,973) 0.30-0.675 (45,627)
Options cancelled............................................. (2,133) 0.30-0.675 (690)
---------- ------------ ------------
Balance at March 31, 1996................................... 2,191,518 $ 0.30-4.80 $ 1,420,858
---------- ------------ ------------
---------- ------------ ------------
</TABLE>

At December 31, 1995 and March 31, 1996, options for the purchase of 219,446
and 158,490 shares were exercisable, respectively, and 148,889 shares were
subject to repurchase.

For options granted through December 31, 1995, Affymetrix recognized an
aggregate of $2,488,000 as deferred compensation for the excess of the deemed
fair value for financial statement presentation purposes of the common stock
issuable on exercise of such options over the exercise price. Deferred
compensation related to options granted during the three months ended March 31,
1996 was $326,000. The deferred compensation expense is being recognized over
the vesting period of the options.

Affymetrix employees have participated in the Affymax stock option and
benefit plan. The Affymax stock option plan, employees stock purchase plan, and
investment savings plan have had no impact on the financial statements of
Affymetrix.

NOTE 7. OPERATING LEASE COMMITMENTS
Since January 1, 1993, Affymetrix has been occupying a research facility in
Santa Clara, California leased by Affymax. In February 1994, Affymetrix entered
into a noncancelable operating sublease agreement with Affymax for a 21 month
period. Affymetrix obtained an extension through October 1996. The underlying
lease contains an option to renew the lease for an additional term of 82 months.

In December 1994, Affymetrix entered into a noncancelable five-year lease
for the rental of a manufacturing facility in Sunnyvale, California. Affymetrix
has options to renew the lease for two additional three-year terms.

F-16
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 7. OPERATING LEASE COMMITMENTS (CONTINUED)
In October 1995, Affymetrix entered into a four-year lease, and a
noncancelable 17 month sublease, for the rental of a research and development
facility in Sunnyvale, California.

Future minimum rental payments under noncancelable operating leases at
December 31, 1995 are as follows (in thousands):

<TABLE>
<S> <C>
1996........................................................ $ 1,102
1997........................................................ 1,042
1998........................................................ 1,039
1999........................................................ 1,099
2000........................................................ 688
Thereafter.................................................. 1,664
---------
Total minimum rental payments............................... $ 6,634
---------
---------
</TABLE>

Rent expense related to operating leases was approximately $275,000 in 1993,
$472,000 in 1994, $664,000 in 1995 and $2,005,000 for the period from inception
through December 31, 1995.

Affymetrix entered into certain noncancelable obligations for the purchase
of GeneChip equipment and supplies. The maximum commitment under the contracts
at December 31, 1995 is $1,735,000, which will be paid as units are received in
1996.

NOTE 8. INCOME TAXES
As of December 31, 1995, Affymetrix has net operating loss carryforwards of
approximately $22,000,000, which will expire at various dates beginning on 2008
through 2010, if not utilized.

Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.

Significant components of Affymetrix deferred tax assets as of December 31
are as follows (in thousands):

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Net operating loss carryforwards.............................. $ 1,733 $ 4,284 $ 8,063
Research credits.............................................. 346 708 1,167
Deferred revenue.............................................. 156 710 1,041
Other-net..................................................... 7 209 532
--------- --------- ---------
Total deferred tax assets..................................... 2,242 5,911 10,803
Valuation allowance for deferred tax assets................... (2,242) (5,911) (10,803)
--------- --------- ---------
Net deferred tax assets....................................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>

The valuation allowance increased by $2,163,000, $3,669,000, and $4,892,000
during 1993, 1994, and 1995, respectively.

NOTE 9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995
On March 7, 1996, the Board of Directors approved a two-for-three reverse
stock split of its common stock through an amendment to its Articles of
Incorporation. The reverse stock split was effective on May 20, 1996. All

F-17
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)

NOTE 9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995 (CONTINUED)
common share and per share amounts have been retroactively adjusted to reflect
this event. The conversion rates for the various issues of preferred stock have
also been retroactively adjusted to reflect the reverse stock split as well as
the anti-dilution adjustment. As of the effective date of the offering it is
estimated that each share of Series A, Series B and Series 1 preferred stock
will convert into approximately 0.6823, 0.6667, and 0.6775 shares of common
stock, respectively.

In addition, on March 7, 1996, the Board authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
Affymetix to sell shares of its common stock to the public. If the offering is
consummated under the terms presently anticipated, all of the currently
outstanding preferred stock will automatically convert into 15,629,991 shares of
common stock and the warrants will be exercisable for 203,881 shares of common
stock at $8.25 per share. Unaudited pro forma shareholders' equity, as adjusted
for the conversion of the preferred stock, is set forth in the accompanying
balance sheets.

In April 1996, Affymetrix entered into an agreement with Incyte
Pharmaceuticals, Inc. to explore potential uses of DNA probe arrays in the area
of gene expression. As a result of this agreement, Affymetrix is required to
refund 30% of the development funding received from GI, and future funding from
GI will be proportionally reduced. The Company has recorded an accrued liability
for this refund. (See Notes 1 and 2).

In May 1996, Affymetrix entered into an agreement with Glaxo to design, test
and supply probe arrays to demonstrate use of the arrays in detecting
polymorphisms in specific genes. Glaxo and Affymetrix will design and test a
probe array containing genes specified by Glaxo. If successfully developed,
Affymetrix will supply Glaxo's requirements of such probe arrays for research
purposes.

F-18
<PAGE>
Affymetrix GeneChip Probe Array Manufacturing
- -----------------------------------

<TABLE>
<S> <C>
Combinationatorial [PICTURE]
Synthesis
Affymetrix is able to
synthesize tens of
thousands of different
DNA probes in parallel. A
robotic arm is shown
transporting a wafer on a
synthesizer.

[PICTURE] Photolithography
Affymetrix manufactures wafers of
GeneChip probe arrays using a high
resolution photolithographic
fabrication process adapted from the
semiconductor industry. A wafer is
shown being exposed to ultraviolet
light through a lithographic mask.

Wafer-Scale Production [PICTURE]
Affymetrix achieves manufacturing
efficiencies by simultaneously
synthesizing many probe arrays on a
single wafer. A wafer, diced into
individual probe arrays, is shown being
packaged into cartridges.
</TABLE>

<PAGE>
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