AFFYMETRIX INC, 10-Q, 2000-08-14

AFFYMETRIX INC
10-Q, 2000-08-14
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-Q

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED
JUNE 30, 2000

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________ TO ____________.

Commission File No. 0-28218

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

AFFYMETRIX, INC.

(Exact name of Registrant as specified in its charter)

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

3380 CENTRAL EXPRESSWAY, 95051
SANTA CLARA, CALIFORNIA (Zip Code)
(Address of principal executive
offices)

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

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

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

COMMON SHARES OUTSTANDING ON JULY 31, 2000: 27,616,642

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AFFYMETRIX, INC.
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets at June 30,
2000 and December 31, 1999............................. 3

Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2000 and
1999.................................................. 4

Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2000 and 1999........... 5

Notes to Condensed Consolidated Financial
Statements............................................ 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9

Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................. 12

PART II. OTHER INFORMATION

Item 1. Legal Proceedings..................................... 12

Item 2. Changes in Securities and Use of Proceeds............. 15

Item 4. Submission of Matters to a Vote of Security Holders... 15

Item 5. Other Information..................................... 16

Item 6. Exhibits and Reports on Form 8-K...................... 22

SIGNATURES.................................................... 23
</TABLE>

<PAGE>

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 85,247 $ 12,677
Available-for-sale securities............................. 334,325 213,763
Accounts receivable....................................... 38,028 24,646
Inventories............................................... 17,011 12,792
Other current assets...................................... 1,785 4,159
--------- ---------
Total current assets.................................... 476,396 268,037
Net property and equipment.................................. 49,006 40,775
Acquired technology rights.................................. 10,433 8,965
Notes receivable from stockholders.......................... 1,022 1,074
Other assets................................................ 52,129 7,736
--------- ---------
$ 588,986 $ 326,587
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 36,360 $ 29,926
Deferred revenue.......................................... 9,700 6,468
Current portion of capital lease obligation............... 135 261
--------- ---------
Total current liabilities........................... 46,195 36,655
Obligation to Beckman Coulter, Inc.......................... 5,000 5,000
Convertible subordinated notes.............................. 375,000 150,000
Common stock purchase rights................................ 3,000 3,000
Stockholders' equity:
Common stock.............................................. 276 271
Additional paid-in-capital................................ 263,213 256,739
Accumulated deficit....................................... (136,564) (124,203)
Other..................................................... 32,866 (875)
--------- ---------
Total stockholders' equity.......................... 159,791 131,932
--------- ---------
$ 588,986 $ 326,587
========= =========
</TABLE>

Note: The balance sheet at December 31, 1999 has been derived from the
supplemental audited consolidated financial statements at that date
included in the Company's Form 8-K filed on April 7, 2000, but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.

See accompanying notes.

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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product.............................................. $ 40,182 $ 22,482 $ 76,855 $ 39,576
Research............................................. 440 1,872 2,874 4,316
License fees and royalties........................... 4,789 539 5,913 736
--------- --------- --------- ---------
Total revenue...................................... 45,411 24,893 85,642 44,628

Costs and expenses:
Cost of product revenue.............................. 17,211 10,801 30,717 17,140
Research and development............................. 12,952 10,120 25,160 20,651
Selling, general and administrative.................. 23,050 12,782 42,801 23,844
Merger related costs................................. - - 2,395 -
--------- --------- --------- ---------
Total costs and expenses........................... 52,213 33,703 101,073 61,635
--------- --------- --------- ---------

Loss from operations................................... (7,802) (8,810) (15,431) (17,007)

Interest income, net................................... 1,710 1,308 3,070 2,391
--------- --------- --------- ---------

Net loss............................................... (6,092) (7,502) (12,361) (14,616)

Preferred Stock dividends.............................. - (813) - (1,626)
--------- --------- --------- ---------

Net loss attributable to Common Stockholders........... $ (6,092) $ (8,315) $ (12,361) $ (16,242)
========= ========= ========= =========

Basic and diluted net loss per common share............ $ (0.22) $ (0.33) $ (0.46) $ (0.66)
========= ========= ========= =========

Shares used in computing basic and diluted net loss
per common share..................................... 27,495 25,162 27,163 24,706
========= ========= ========= =========
</TABLE>

Note: Certain prior year balances have been reclassified to conform with the
current year presentation.

See accompanying notes.

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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(IN THOUSANDS)

(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(12,361) $(14,616)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 4,781 4,009
Change in operating assets and liabilities:
Accounts receivable................................. (13,382) (9,075)
Inventories......................................... (4,219) (2,453)
Other current assets................................ 170 (413)
Other assets........................................ (10,665) (41)
Accounts payable and accrued liabilities............ 6,434 2,151
Deferred revenue.................................... 3,232 2,663
-------- --------
Net cash used in operating activities............. (26,010) (17,775)

Cash flows from investing activities:
Capital expenditures...................................... (12,984) (7,224)
Proceeds from the sale of available-for-sale securities... 287,108 34,449
Purchases of available-for-sale securities................ (405,197) (36,134)
Purchases of technology rights............................ (1,850) -
-------- --------
Net cash used in investing activities............. (132,923) (8,909)

Cash flows from financing activities:
Issuance of common stock.................................. 6,479 34,407
Issuance of convertible subordinated debt................. 225,000 -
Preferred Stock dividends paid............................ - (1,626)
Principal payments on capital lease obligations........... (126) (123)
Repayment of notes receivable from stockholders........... 150 -
-------- --------
Net cash provided by financing activities......... 231,503 32,658

Net increase in cash and cash equivalents................... 72,570 5,974

Cash and cash equivalents at beginning of period............ 12,677 5,666
-------- --------
Cash and cash equivalents at end of period.................. $ 85,247 $ 11,640
======== ========

Supplemental disclosure of noncash investing activities:

Unrealized gain on equity investment..................... $ 33,676 $ -
======== ========
</TABLE>

See accompanying notes.

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AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2000

(UNAUDITED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The consolidated financial statements include the accounts
of Affymetrix, Inc. ("Affymetrix" or the "Company") and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. In the opinion of management, all adjustments
(consisting of normal recurring entries) considered necessary for a fair
presentation have been included. Certain amounts in 1999 have been reclassified
to conform to the 2000 presentation.

Results for any interim period are not necessarily indicative of results
for any future interim period or for the entire year. The accompanying
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Form 8-K filed April 7, 2000,
which restates financial information for prior periods to reflect the
combined results of Affymetrix and Genetic MicroSystems, Inc. ("GMS").

In February 2000, all of the outstanding shares of GMS were acquired by
Affymetrix in a business combination accounted for as pooling of interests.
Accordingly, the financial data for prior periods has been restated to represent
the combined financial results of Affymetrix and GMS.

REVENUE RECOGNITION

Product revenues include sales of GeneChip-Registered Trademark-
instrumentation, Affymetrix scanners and arrayers, software and probe arrays
as well as the associated subscription fees earned under EasyAccess-TM-
agreements. Instrumentation and probe array revenues are recognized when
earned, which is generally upon shipment and transfer of title to the
customer. Software revenue is recognized upon completion of performance
obligations, which is generally upon installation. Reserves are provided for
anticipated returns and warranty expenses at the time the associated revenue
is recognized. Revenue from subscription fees earned under EasyAccess-TM-
agreements is recorded ratably over the term of the agreement subject to
adjustments for anticipated reductions provided for in certain agreements for
late delivery of probe arrays. Payments received in advance under these
arrangements are recorded as deferred revenue until earned.

Research revenue includes amounts earned, including milestones, from
services performed pursuant to commercial collaboration and supply agreements as
well as under government grants. Research revenue is recorded in the period in
which the costs are incurred or in which the revenue is earned as defined in the
related agreement. Direct costs associated with these contracts and grants are
reported as research and development expenses.

License and royalty revenues include amounts earned from third parties
licensed under the Company's intellectual property and are recognized when
earned under the terms of the related agreements.

6
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In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 requires companies
to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with APB
Opinion No. 20, "Accounting Changes." In June 2000, the SEC issued Staff
Accounting Bulletin No. 101B which defers the effective date of SAB 101 until
no later than the fourth quarter of 2000. The Company is currently evaluating
SAB 101 to determine whether it would have any material impact on the
Company's results of operations.

NET LOSS PER SHARE

Basic loss per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted loss per share, which gives
effect to the dilutive effect of stock options and warrants (calculated based on
the treasury stock method), Convertible Redeemable Preferred Stock and
convertible debt (calculated on an if-converted method) is the same as basic
loss per share because the Company has recorded net losses for all periods
presented.

NOTE 2--CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES

As of June 30, 2000, debt securities held by the Company are comprised of
U.S. Government obligations and U.S. corporate debt securities. They are
classified as available-for-sale and are carried at fair value with unrealized
gains and losses reported in stockholders' equity.

NOTE 3--INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials......................................... $ 5,526 $ 5,247
Work in process....................................... 1,217 891
Finished goods........................................ 10,268 6,654
------- -------
Total............................................... $17,011 $12,792
======= =======
</TABLE>

NOTE 4--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following (in
thousands):

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Accounts payable...................................... $ 5,733 $11,488
Accrued compensation and related liabilities.......... 4,572 4,269
Accrued interest on convertible subordinated notes.... 5,983 2,221
Accrued sales and use tax............................. 2,108 1,170
Accrued warranty...................................... 1,673 1,752
Accrued legal......................................... 14,613 6,162
Other................................................. 1,678 2,864
------- -------
Total............................................... $36,360 $29,926
======= =======
</TABLE>

7
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NOTE 5--COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income/(loss) for the three and six
months ended June 30, 2000 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders.............. $ (6,092) $ (8,315) $(12,361) $(16,242)
Unrealized gain on equity investment...................... 33,676 - 33,676 -
Unrealized loss on debt securities........................ 1,584 (192) (141) (589)
-------- -------- -------- --------
Comprehensive gain/(loss)................................. $ 29,168 $ (8,507) $ 21,174 $(16,831)
======== ======== ======== ========
</TABLE>

Unrealized gain on equity investments related to the Company's holdings in
Orchid Biosciences, Inc. which completed its initial public offering in May
2000.

NOTE 6--FOREIGN CURRENCY TRANSLATION

The financial statements of Affymetrix, UK Ltd. are measured using the U.S.
dollar as the functional currency. Monetary assets and liabilities of this
subsidiary are translated at the rates of exchange at the balance sheet date.
Income and expense items are translated at average quarterly rates of exchange.
The resultant translation adjustments are included in the consolidated
statements of operations.

NOTE 7--CONVERTIBLE SUBORDINATED NOTES

On February 14, 2000, the Company completed the sale of $225 million
principal amount of 4.75% convertible subordinated notes due 2007 (the "4.75%
Notes"). The 4.75% Notes mature on February 15, 2007 and bear interest at a rate
of 4.75% per annum, which is payable semi-annually. The 4.75% Notes are
convertible, at any time prior to maturity or redemption, into shares of the
Company's common stock at a conversion price of $321.00 per share, subject to
adjustment. The Company can redeem some or all of the 4.75% Notes at any time
after February 20, 2003 and the debt holders have a right to require the Company
to purchase all or a portion of the 4.75% Notes upon a change in control. The
4.75% Notes are subordinated to all of the Company's existing and future senior
indebtedness. The Company has filed a registration statement for resale of
the 4.75% Notes and the shares of common stock issuable upon conversion of the
4.75% Notes within 90 days of the completion of the private placement.

NOTE 8--GENETIC MICROSYSTEMS, INC. ("GMS")

On February 9, 2000, Affymetrix completed a merger with GMS by acquiring all of
GMS' outstanding stock in a tax-free, stock-for-stock transaction. GMS
stockholders received 0.2815 of an Affymetrix share for each GMS share.
Affymetrix issued 969,899 shares in the merger and accounted for the transaction
as a pooling of interests. Accordingly, Affymetrix' consolidated financial
statements have been retroactively restated for prior periods to include the
combined financial results of Affymetrix and GMS and no adjustments were
necessary to conform the accounting practices of the two companies. The table
below represents the separate results for Affymetrix and GMS for the periods
prior to the merger and combined results after the merger (in thousands):

<TABLE>
<CAPTION>
AFFYMETRIX GMS TOTAL
------------ -------- --------
<S> <C> <C> <C>
Six months ended June 30, 2000
Revenues.......................... $ 84,234 $ 1,408 $ 85,642
Net loss.......................... (12,316) (45) (12,361)

Six months ended June 30, 1999
Revenues.......................... $ 39,514 $ 5,114 $ 44,628
Net loss.......................... (14,869) (1,373) (16,242)
</TABLE>

As a result of the GMS acquisition, Affymetrix incurred merger-related costs
that consisted of merger transaction costs, exit costs and employee severance
costs. Merger transaction costs consisted primarily of fees for attorneys,
accountants, consultants, filing fees and financial printing costs. In addition,
merger related costs included expenses associated with integrating the GMS
operations into Affymetrix.

NOTE 9--STOCKHOLDERS RIGHTS PLAN

On February 7, 2000, the Company's Board of the Directors approved an

8
<PAGE>

amendment to its stockholders rights plan initially adopted in 1998. The
amendment increases the exercise price of the Preferred Share Purchase Rights to
$1,250.00 and extends the expiration date of the plan to February 2010. Under
the amended plan, each Preferred Share Purchase Right entitles stockholders to
buy one one-thousandth of a share of Series B Junior Participating Preferred
Stock of the Company at the new exercise price of $1,250.00. The Rights will be
exercisable if a person or group acquires beneficial ownership of 15% or more of
the common stock of the Company or announces a tender offer for 15% or more of
the common stock.

NOTE 10--SUBSEQUENT EVENT - TWO-FOR-ONE STOCK SPLIT APPROVED

On July 20, 2000, the Company's Board of Directors approved a two-for-one
stock split of its outstanding shares of common stock. The stock split entitles
each stockholder of record at the close of business on August 10, 2000, to
receive a stock dividend of one additional share for every share of Affymetrix
Common Stock held on that date. The additional shares resulting from the stock
split will be distributed by the Company's transfer agent on August 21, 2000.
The Company currently has approximately 27.6 million shares outstanding. Upon
completion of the split, the number will increase to approximately 55.2 million
shares outstanding.

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

This Management's Discussion and Analysis of Financial Condition and Results
of Operations as of June 30, 2000 and for the three and six month periods ended
June 30, 2000 and 1999 should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Current Report on Form 8-K filed on April 7, 2000.

All statements in this quarterly report that do not discuss past results are
forward-looking statements. Forward-looking statements are based on management's
current expectations and are therefore subject to certain risks and
uncertainties, including those discussed under the section titled "Risk Factors"
included in this report. Specific uncertainties which could cause Affymetrix'
actual results to differ materially from those projected include: uncertainties
relating to technological approaches, product development, manufacturing and
market acceptance; uncertainties related to cost and pricing of Affymetrix'
products; dependence on collaborative partners; uncertainties relating to sole
source suppliers; uncertainties relating to FDA and other regulatory approvals;
competition; risks relating to intellectual property of others; and
uncertainties of patent protection.

Affymetrix expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in Affymetrix' expectations with regard thereto or
any change in events, conditions, or circumstances on which any such statements
are based.

OVERVIEW

Affymetrix, Inc. ("Affymetrix" or the "Company") is a leader in
developing and commercializing systems to acquire, analyze and manage complex
genetic information in order to improve the quality of life. The Company's
GeneChip-Registered Trademark- system consists of disposable DNA probe arrays
containing gene sequences on a chip, certain reagents for use with the probe
arrays, a scanner and other instruments to process the probe arrays, and
software to analyze and manage genetic information from the probe arrays. The
Company's spotted array system enables individual researchers to create and
analyze custom microarrays on an easy-to-use, cost efficient platform. The
Company commenced commercial sales of the GeneChip-Registered Trademark-
system for research use in April 1996 and currently sells its products to
pharmaceutical and biotechnology companies, academic research centers and
clinical reference laboratories primarily in the United States and Europe.

The business and operations of the Company were commenced in 1991 by Affymax
N.V. ("Affymax") and were initially conducted within Affymax. In March 1992, the
Company was incorporated as a California corporation and wholly owned subsidiary
of Affymax and in September 1998 was reincorporated as a Delaware corporation.

9
<PAGE>

In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), acquired Affymax,
including its ownership interest in Affymetrix. Beginning in September 1993, the
Company issued equity securities, including an initial public offering in June
1996, which diluted Affymax' and then Glaxo's ownership in Affymetrix. In April
1998, the Company completed the sale of 1,634,522 shares of Series AA
Convertible Redeemable Preferred Stock to Glaxo Wellcome Americas, Inc. (a
wholly owned subsidiary of Glaxo) for net proceeds of approximately $49.9
million and in August 1999, Glaxo elected to convert the Series AA Convertible
Redeemable Preferred Stock to 1,257,229 shares of Affymetrix common stock at a
conversion price of $40 per share. As of June 30, 2000, Glaxo's ownership
position was approximately 22%.

In February 2000, Affymetrix completed its acquisition of Genetic
MicroSystems, Inc. ("GMS"), a privately held instrumentation company
specializing in DNA array technology in Massachusetts. Under the terms of the
acquisition, the outstanding shares of GMS common and preferred stock were
converted into an aggregate of 969,899 shares of Affymetrix' common stock and
Affymetrix assumed all outstanding GMS options and warrants. The merger has been
accounted for as a pooling of interests and accordingly, the consolidated
financial statements discussed herein and all historical financial information
have been restated to reflect the combined operations of both companies.

The Company has incurred operating losses in each year since its inception,
including a loss attributable to Common Stockholders of approximately $27.6
million for the year ended December 31, 1999. The Company incurred an operating
loss of approximately $7.8 million for the quarter ended June 30, 2000 and, as
of such date, had an accumulated deficit of approximately $136.6 million. The
Company's losses have resulted principally from costs incurred in research and
development and manufacturing and from selling, general and administrative costs
associated with the Company's operations. These costs have exceeded the
Company's revenues and interest income, which to date have been generated
principally from product sales, royalties and license fees, technology access
fees, collaborative research and development agreements, government research
grants, and cash and investment balances. The Company expects to incur
additional operating losses for at least the near term as a result of
increases in development of its marketing and sales infrastructure, research and
product development, and general and administrative costs, including the
costs of patent litigation.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999

Product revenue was $40.2 million and $76.9 million for the three and six
months ended June 30, 2000, respectively, compared to $22.5 million and $40.0
million in the three and six months ended June 30, 1999. The increases in
product revenue resulted from increased sales of GeneChip-Registered
Trademark- probe arrays, increased placements of instruments (including the
GeneChip-Registered Trademark- system, the 417 Arrayer(TM) and 418/428
Scanner(TM)) and increases in subscription fees earned under EasyAccess(TM)
contracts. Research revenue was approximately $0.4 million and $2.9 million
for the three and six months ended June 30, 2000 respectively, compared to
$1.9 million and $4.3 million in the three and six months ended June 30,
1999. The decrease is primarily due to lower activity under government grants
primarily the grant from the Advanced Technology Program ("ATP"), which was
completed in January 2000. License fees and royalty revenue was $4.8 million
and $5.9 million for the three and six month periods ended June 30, 2000,
respectively, compared to $0.5 million and $0.7 million in the three and six
months ended June 30, 1999. The increase in license fees and royalty revenue
was attributed primarily to the fees recognized upon signing of new licenses
and the expansion of existing licensing arrangements.

Cost of product revenue was $17.2 million and $30.7 million for the three
and six month periods ended June 30, 2000, respectively, compared to $10.8
million and $17.1 million in the three and six months ended June 30, 1999.
The increase in cost of product revenue was correlated primarily to the
increase in product revenue. Historically the Company has experienced
variation in its manufacturing capacity and yield of its GeneChip-Registered
Trademark- products which has impacted the Company's ability to meet its
commitments to deliver certain products to its customers in a timely manner.
Although manufacturing yields have historically been the primary factor for
fluctuations in the Company's gross margin, it is expected that as
manufacturing yields have stabilized, future fluctuations in gross margin
will be driven by the variability of product mix and sales volumes.

10
<PAGE>

The Company also sells products in certain foreign countries and thus revenue
and margins may fluctuate due to changes in currency exchange rates.

Research and development expenses were $12.9 million and $25.2 million
for the three and six month periods ended June 30, 2000, respectively,
compared to $10.1 million and $20.6 million in the three and six months ended
June 30, 1999. The increase in research and development expenses was
attributable primarily to the hiring of additional research and development
personnel and increased internal utilization of DNA arrays and related
supplies. The Company expects research and development spending to increase
over the next several years as product development and core research efforts
continue to expand.

Selling, general and administrative expenses were $23.0 million and $42.8
million for the three and six month periods ended June 30, 2000,
respectively, compared to $12.8 million and $23.8 million in the three and
six months ended June 30, 1999. The increase in selling, general and
administrative expenses resulted primarily from the Company's expansion of
commercial activities and increased legal costs arising from ongoing patent
litigation. Selling, general and administrative expenses are expected to
continue to increase as the Company expands sales, marketing, and technical
support functions, increases headcount in management and administrative
functions, prosecutes and defends its intellectual property position and
defends against claims made by third parties in ongoing litigation. In
particular, based on current expectations for the respective trial dates for
ongoing litigation with Hyseq, Inc., Incyte Pharmaceuticals, Inc., Synteni,
Inc., and Oxford Gene Technology, Ltd., the Company expects legal costs will
remain at or increase from the current levels for at least the next three to
four quarters.

Merger related expenses of $2.4 million for the six months ended June 30,
2000 were associated with the GMS acquisition completed in February 2000.

Net interest income was $1.7 million and $3.1 million for the three and six
month periods ended June 30, 2000, respectively, compared to $1.3 million and
$2.4 million in the three and six months ended June 30, 1999. The fluctuations
in net interest income result principally from variations in the Company's
available-for-sale securities balances.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2000, the Company had cash, cash equivalents and
available-for-sale securities of $419.6 million compared to $226.4 million at
December 31, 1999. The increase is primarily attributable to net proceeds of
$218.0 million received in conjunction with the issuance of $225.0 million 4.75%
Notes issued in February 2000, offset by cash used to fund the Company's
operating loss and capital expenditures.

Net cash used in operating activities was $26.0 million for the six months
ended June 30, 2000, as compared to $17.8 million for the six months ended June
30, 1999. The increase in net cash used in operating activities was the result
of an increase in the Company's accounts receivable, due to increased product
sales, as well an increase in other assets partially offset by decreases in the
Company's net loss and accounts payable balances.

The Company's investing activities, other than purchases, sales and
maturities of available-for-sale securities, consisted of capital expenditures,
which totaled $13.0 million for the six months ended June 30, 2000, as compared
to $7.2 million for the six months ended June 30, 1999. The increase in capital
expenditures during the six months ended June 30, 2000 related primarily to
facilities and production equipment for the manufacturing facility in West
Sacramento, California and improvements to office and light manufacturing space
in Sunnyvale, California. The Company expects to continue to expand its
manufacturing and other operating facilities over the next few years.

Financing activities for the six months ended June 30, 2000 include net
proceeds of $218.0 million from the private placement of 4.75% Notes in February
2000. The 4.75% Notes are convertible, subject to adjustment in certain
circumstances, into Affymetrix common stock at a price equal to $321.00 per
share. Accrued interest on the 4.75% Notes is payable semi-annually. Affymetrix
may redeem the 4.75% Notes at any time on or after February 15, 2003.

11
<PAGE>

The Company anticipates that its existing capital resources will enable
it to maintain currently planned operations and planned capital expenditures
for the foreseeable future. However, this expectation is based on the
Company's current operating plan and capital expenditure plan, which may
change, and therefore the Company could require additional funding sooner
than anticipated. In addition, the Company expects its capital requirements
will remain substantial and may increase over the next several years as it
expands its facilities and acquires scientific equipment to support expanded
manufacturing and research and development efforts.

RECENT ACCOUNTING ANNOUNCEMENT

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to interest rate risk relates primarily to its
investment portfolio and its convertible subordinated notes. Fixed rate
securities and borrowings may have their fair market value adversely impacted
due to fluctuations in interest rates, while floating rate securities may
produce less income than expected if interest rates fall and floating rate
borrowings may lead to additional interest expense if interest rates increase.
Due in part to these factors, the Company's future investment income may fall
short of expectations due to changes in interest rates or the Company may suffer
losses in principal if forced to sell securities which have declined in market
value due to changes in interest rates.

The primary objective of the Company's investment activities is to preserve
principal while at the same time maximize yields without significantly
increasing risk. To achieve this objective, the Company invests its excess cash
in debt instruments of the U.S. Government and its agencies and high-quality
corporate issuers, and, by policy, restricts its exposure to any single
corporate issuer by imposing concentration limits. To minimize the exposure due
to adverse shifts in interest rates, the Company maintains investments at an
average maturity of generally less than two years.

The table below presents the principal amounts and weighted-average interest
rates by year of maturity for the Company's investment portfolio:

<TABLE>
<CAPTION>
FAIR VALUE AT
JUNE 30,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 2000
-------- -------- -------- --------- --------- ---------- -------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Available-for-sale
securities.............. $132,605 $215,948 $69,897 $ 8,400 $ -- $ -- $426,850 $428,064
Average interest rate..... 1.3% 5.4% 6.6% 5.8%
LIABILITIES:
5% convertible
subordinated notes due
2006.................... $ -- $ -- $ -- $ -- $ -- $150,000 $150,000 $222,195
Average interest rate..... 5.0%
4.75% convertible
subordinated notes due
2007.................... $ -- $ -- $ -- $ -- $ -- $225,000 $225,000 $173,565
Average interest rate..... 4.75%
</TABLE>

The Company is exposed to equity price risks on its investments in certain
marketable equity securities entered into to further its business and
strategic objectives. To date, the Company has not attempted to reduce or
eliminate its market exposure on these securities. As of June 30, 2000,
marketable equity investments related to Orchid Biosciences, Inc. amounted to
$38.2 million.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

GENERAL

Affymetrix is a party to significant litigation, which will consume
substantial financial and managerial resources and which could adversely
affect its business, financial condition and results of operations. If in any
pending or future intellectual property litigation Affymetrix or its
collaborative partners is found to have infringed the valid intellectual
property rights of third parties, Affymetrix or its collaborative partners
could be subject to significant liability for damages, could be required to
obtain a license from a third party, which may not be available on reasonable
terms or at all, or could be prevented from manufacturing and selling its
products. In addition, if Affymetrix is unable to enforce its patents and
other intellectual property rights against others, or if its patents are
found to be invalid, third parties may more easily be able to introduce and
sell probe array systems that compete with Affymetrix' GeneChip-Registered
Trademark- technology, and Affymetrix' competitive position could suffer.
Affymetrix may be required to devote substantial financial and managerial
resources to protect its

12
<PAGE>

intellectual property rights and to defend against the claims described below as
well as any future claims asserted against it. Further, because of the
substantial amount of discovery required in connection with any litigation,
there is a risk that confidential information could be compromised by
disclosure.

OXFORD GENE TECHNOLOGY LITIGATION

In June 1999, Oxford Gene Technology, Ltd. ("OGT") filed suit against
Affymetrix in the United States District Court for the District of Delaware
alleging infringement of United States Patent 5,700,637 and in the United
Kingdom alleging infringement of European Patent 0-373-203. OGT seeks an
injunction and damages through these actions. On or before June 4, 1999, an
asset transfer agreement with Beckman Coulter, Inc. ("Beckman") became
effective, which Affymetrix believes transferred Beckman's microarray
business, including licenses to United States Patent 5,700,637 and European
Patent 0-373-203. On June 17, 1999, Affymetrix filed a complaint in the
United States District Court for the Northern District of California asking
for, among other things, a declaration that Affymetrix has a valid license to
use the patents and that, in light of this license, Affymetrix is not
infringing these patents. This case has been transferred and consolidated
with the Delaware action. Discovery is proceeding in the Delaware action.
Affymetrix has moved to amend its answer to challenge the validity of United
States Patent 5,700,637 and has also moved to amend its answer to assert the
defense of patent misuse and has sought to assert counterclaims against OGT.
Trial has been set to commence on October 31, 2000. In the UK action,
Affymetrix has counterclaimed for revocation of the European patent and OGT
applied to amend the patent, and to seek a stay of the patent infringement
liability, validity and amendment issues. On April 19, 2000, the High Court
of Justice, Chancery Division, Patent Court denied OGT's request for a stay
of the patent infringement, validity and amendment issues in the UK action.
In addition, in the UK action the UK court determined that Beckman's work to
date with the arrays it had licensed from OGT did not constitute a "business"
within the meaning of the assignment clause in the Beckman license.
Therefore, the court held that Beckman did not sell an array business to
Affymetrix, and the patent license at issue, consequently, did not transfer
to Affymetrix. The court also held that the "Consortium Clause" in the
Beckman license did not obligate OGT to grant a license to Affymetrix for the
patents. In the Delaware action, OGT has moved for partial summary judgment
on Affymetrix' license defense, based upon the UK court's ruling. Affymetrix
has opposed that motion.

In the UK, the Court of Appeal has agreed to hear the appeal of the
judgment of the High Court of Justice regarding the transfer of Beckman's
license under the asset transfer agreement. That appeal has been expedited
and will be heard in mid-October 2000.

In addition, in the High Court of Justice, Chancery Division, Patents
Court, OGT has applied in the United Kingdom to revoke Affymetrix' EP (UK)
0-619-321 patent, relating to certain DNA arrays. This revocation action also
includes an application to revoke Affymetrix' related United Kingdom Patent
GB 2248840. Revocation and infringement actions typically are resolved in the
first instance in about twelve to eighteen months. The underlying patents can
be declared valid, invalid, or partially valid, often with claim amendments
submitted during the course of the proceedings.

Affymetrix believes that OGT's claims are without merit. However,
Affymetrix cannot be sure that it will prevail in this matter.

On June 21, 2000, Affymetrix and Beckman filed suit in the United States
District Court for the District of Delaware seeking to enjoin OGT from
terminating the license originally provided to Beckman. At a hearing on the
application for a temporary restraining order, OGT agreed not to terminate
the license agreement until the court rules on the request for preliminary
injunctive relief. A hearing on Affymetrix and Beckman's motion for a
preliminary injunction was heard on July 21, 2000. The court has not yet
decided that motion.

HYSEQ, INC. LITIGATION

On March 3, 1997, Hyseq, Inc. ("Hyseq") filed a lawsuit in United States
District Court for the Northern District of California (San Jose Division)
alleging that Affymetrix' products infringe United States Patents 5,202,231,
or `231, and

13
<PAGE>

5,525,464, or `464. In addition, in December 1997, Hyseq filed a second
action claiming that Affymetrix' products infringe a related patent, United
States Patent 5,695,940, or `940. On August 18, 1998, Affymetrix filed a
lawsuit in United States District Court for the Northern District of
California against Hyseq alleging infringement of U.S. Patent Nos. 5,795,716,
or `716, and 5,744,305, or `305. On September 1, 1998, Affymetrix added its
U.S. Patent No. 5,800,992, or `992, to the complaint of infringement against
Hyseq. On October 26, 1999, Hyseq filed a third action in United States
District Court for the Northern District of California claiming that
Affymetrix' products infringe a related patent, United States Patent
5,972,619, or `619. The action also requests a declaration that the `716
patent is invalid based on the `619 patent. On November 23, 1998, Hyseq filed
an answer to Affymetrix' complaint, alleging that Affymetrix' three asserted
patents are invalid. On October 26, 1999, the United States District Court
for the Northern District of California issued a claims construction order
interpreting various terms of the `231, `464, and `940 patents. Following
Hyseq's motion for reconsideration of that claims construction order, the
United States District Court for the Northern District of California on July
28, 2000, issued a revised claims construction order interpreting various
terms of the `231, `464 and `940 patents. No trial dates have been set in
these cases. A claims construction hearing relating to the '992, '305 and
'716 patents has been set for November 29, 2000.

Affymetrix believes that Hyseq's claims are without merit. However,
Affymetrix cannot be sure that it will prevail in this matter.

INCYTE PHARMACEUTICALS AND SYNTENI LITIGATION AND PROCEEDINGS

On January 6, 1998, Affymetrix filed a patent infringement action in the
United States District Court for the District of Delaware alleging that
certain of Incyte Pharmaceuticals, Inc.'s ("Incyte") and Synteni, Inc.'s
("Synteni") products infringe United States Patent 5,445,934, or `934. On
September 1, 1998, Affymetrix filed a complaint against Incyte and Synteni in
United States District Court for the District of Delaware alleging
infringement of the `305 patent and the `992 patent. These actions were
transferred to the United States District Court for the Northern District of
California on November 18, 1998. The actions seek to enjoin commercial
activities of Incyte and Synteni relating to Affymetrix' patents and, in
regard to the `992 patent, sought a preliminary injunction. Incyte and
Synteni moved for summary judgment that certain claims of the `992 patent
were invalid. On May 4, 1999, the court denied Affymetrix' motion for
preliminary injunction and denied Incyte and Synteni's motion for summary
judgment.

On April 17, 1998, Incyte filed a response and counterclaim, asserting
that the `934 patent is invalid and not infringed. On April 17, 1998, Incyte
also filed a counterclaim alleging that a patent license agreement Affymetrix
entered into in December 1997 with Molecular Dynamics interfered with an
agreement between Incyte and Molecular Dynamics. In the counterclaim, Incyte
alleges that the terms of Affymetrix' patent license to Molecular Dynamics
prevented Molecular Dynamics from meeting its obligations to Incyte. Incyte
seeks damages from Affymetrix. On September 21, 1998, Incyte and Synteni
filed an answer asserting various defenses to the lawsuits in relation to the
`992 patent and the `305 patent, and asserted several counterclaims,
including:

- a request for declaration of non-infringement and invalidity;

- an assertion of unfair competition;

- a request for a declaration that Synteni and Dari Shalon, who was a
one-time employee of Synteni, have not misappropriated any of
Affymetrix' trade secrets;

- a claim of tortious interference with Incyte's and Synteni's economic
advantage; and

- a claim of slander of title of a patent and a claim of trade libel.

No trial dates have been set for these matters. A claims construction
hearing relating to the '934, '305 and '992 patents has been set for November
29, 2000.

Affymetrix believes that Incyte's claims are without merit. However,
Affymetrix cannot be sure that it will prevail in this matter.

14
<PAGE>

The United States Patent and Trademark Office, or USPTO, notified
Affymetrix that Stanford University presented claims that relate to
substantially the same subject matter as certain claims from the '992 patent
and all of the claims of the '305 patent. The Stanford application is alleged
to be exclusively licensed to Incyte. The USPTO notified Affymetrix on April
2, 1999 that it had declared an interference proceeding relating to these
patents and claims of patents. The USPTO conducted proceedings to determine
the priority of these claims and determined that Incyte and Synteni did not
meet the burden of proof required to establish a case that the claims should
be further evaluated in a full interference proceeding. Incyte and Synteni
have appealed this decision in the United States Court for the Northern
District of California.

In April 2000, Incyte indicated that it believed that Affymetrix should
be added as a defendant to a lawsuit filed by Incyte against Gene Logic, Inc.
On May 5, 2000, Incyte and Affymetrix entered into a stipulation that avoided
Affymetrix' joinder in that lawsuit, but preserved the rights of both sides
to institute separate litigation related to the claims asserted against Gene
Logic.

PE CORPORATION LITIGATION

On July 6, 2000, PE Corporation ("PE") filed a lawsuit in the United
States District Court for the District of Delaware alleging that certain
Affymetrix products infringe five PE patents related to reagents that
Affymetrix purchases from PE licensed vendors. No trial dates have been set.

Affymetrix believes that PE's claims are without merit. However,
Affymetrix cannot be sure that it will prevail in this matter.

ADMINISTRATIVE LITIGATION AND PROCEEDINGS

Affymetrix' intellectual property is expected to be subject to
significant additional administrative and litigation actions. For example, in
Europe and Japan, third parties are expected to oppose significant patents
owned or controlled by Affymetrix. Currently, OGT, Incyte, Multilyte Ltd. and
ProtoGene Laboratories, Inc. have filed oppositions against Affymetrix' EP
0-619-321 Patent in the European Patent Office. This procedure will result in
the patent being either upheld in its entirety, allowed to grant in amended
form in designated European countries, or revoked.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Rights Agreement

On February 7, 2000 the Company and American Stock Transfer & Trust
Company, as Rights Agent (the "Rights Agent"), entered into Amendment No. 1
(the "Amendment") to the Rights Agreement, dated October 15, 1998, between
the Company and the Rights Agent (the "Rights Agreement"). The Amendment
extends the expiration date of the Rights Agreement until February 7, 2010.
The Amendment also increases the purchase price for each one one-thousandth
of a share of Series B Preferred Stock purchasable upon the exercise of a
Right to $1,250. The effective date of the Amendment is February 7, 2000.

Charter Amendment

On June 12, 2000, the Company filed a Restated Certificate of Incorporation
with the Secretary of State of the State of Delaware increasing the number of
authorized shares of Common Stock of the Company from seventy-five million
(75,000,000) shares to two hundred million (200,000,000) shares.

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

(A) DATE OF MEETING

The Annual Meeting of the Stockholders of Affymetrix, Inc. was held on
June 8, 2000.

15
<PAGE>

<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
--- ------- --------
<S> <C> <C> <C>

1. To elect directors to serve until the next annual meeting
of stockholders or until their successors are elected.

Stephen P.A. Fodor, Ph.D............................. 23,094,139 0 61,312
Paul Berg, Ph.D...................................... 22,654,259 0 501,192
John D. Diekman, Ph.D................................ 23,130,399 0 25,052
Adrian Hennah........................................ 22,654,259 0 501,192
Vernon R. Loucks, Jr................................. 22,653,943 0 501,508
Barry C. Ross, Ph.D.................................. 23,127,097 0 28,352
David B. Singer...................................... 22,657,559 0 497,892
Lubert Stryer, M.D................................... 23,130,399 0 25,052
John A. Young........................................ 23,114,899 0 40,552
</TABLE>

<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
<S> <C> <C> <C> <C>

2. To ratify the appointment of Ernst & Young LLP 23,134,891 8,772 11,787 1
as independent auditors of the Company for
the fiscal year ending December 31, 2000

3. To approve and ratify the amendment of the 20,428,796 2,710,078 16,576 1
Company's Certificate of Incorporation to
increase the number of authorized shares of
Common Stock of the Company

4. To approve and ratify the Company's 2000 13,046,411 4,450,839 39,227 5,618,974
Equity Incentive Plan
</TABLE>

ITEM 5. OTHER INFORMATION

Risk Factors

An investment in the Company's common stock involves a high degree of risk.
The reader should carefully consider the risks described below before making an
investment decision.

THE MARKET PRICE OF THE COMPANY'S COMMON STOCK IS EXTREMELY VOLATILE, AND THE
VALUE OF ITS COMMON STOCK MAY DECREASE SUDDENLY.

For a number of reasons, the market price of the Company's common stock is
extremely volatile, and the value of its common stock may be significantly less
than the market value of that stock today. This extreme volatility also puts the
Company at risk for securities class action litigation, which would cause it to
divert both financial and managerial resources, which could reduce its profits.

To demonstrate the volatility of the Company's stock price, during the
period beginning June 30, 1999 through June 30, 2000, the volume of its common
stock traded on any given day has ranged from 90,900 to 5,372,400 shares, a
5,810% difference. Moreover, during that period, its common stock has traded as
low as $48.00 per share and as high as $324.125 per share, a 575% difference.
The market price of its common stock has changed as much as $39.625 per share in
a single day and its stock price has changed more than $20 in a single day 24
times in the last six months.

THE COMPANY HAS A HISTORY OF OPERATING LOSSES, EXPECTS TO INCUR FUTURE LOSSES
AND CANNOT BE CERTAIN THAT IT WILL BECOME A PROFITABLE COMPANY.

The Company has experienced significant operating losses each year since its
inception, and it expects these losses to continue. For example, it experienced
net losses of approximately $22.8 million in 1997, $26.8 million in 1998 and
$25.5 million in 1999. It had an accumulated deficit of approximately $96.6
million as of December 31, 1998 and approximately $124.2 million as of December
31, 1999. Its losses have resulted principally from costs incurred in research
and development and from general and administrative costs associated

16
<PAGE>

with its operations. These costs have exceeded revenues and interest income,
which, to date, have been generated principally from product sales and
technology access fees, collaborative research and development agreements,
government research grants and cash and investment balances. The Company expects
to incur additional operating losses as a result of increases in expenses for
manufacturing, marketing and sales capabilities, research and product
development and general and administrative costs. The Company may never achieve
profitability. Among other things, its ability to manage the transition to a
commercially successful company will depend upon its ability to:

- establish its commercial manufacturing capability for probe arrays and
consistently achieve acceptable yields from those capabilities;

- cost-effectively manufacture components of the GeneChip-Registered
Trademark- system;

- develop its marketing capabilities cost effectively;

- establish sales and distribution capabilities cost-effectively;

- enter into supply agreements with customers desiring to use its products;

- develop products that are accepted by the marketplace;

- create a product mix that is appealing to pharmaceutical and biotechnology
companies, academic research centers and clinical reference laboratories;

- avoid infringing on the intellectual property rights of others;

- enforce its intellectual property rights against others;

- obtain necessary regulatory approvals; and

- hire and retain qualified key personnel.

In addition, any delays in receipt of any necessary regulatory approvals or
any adverse developments with respect to its ability to enforce its intellectual
property relative to its competitors could seriously harm the successful
commercialization of its technologies and could have a material adverse effect
on its business, financial condition and results of operations.

THE COMPANY'S QUARTERLY RESULTS OF OPERATION HAVE HISTORICALLY FLUCTUATED
SIGNIFICANTLY PERIOD-TO-PERIOD, AND ITS STOCK MAY DECREASE IN VALUE
SIGNIFICANTLY FOLLOWING AN EARNINGS RELEASE.

Although the Company believes that period-to-period comparisons of its
results of operations are not a good indication of its future performance, its
operating results will likely be below the expectations of public market
analysts or investors in future quarters and the market price of its common
stock may fall significantly.

THE COMPANY HAS A LIMITED OPERATING HISTORY, HAS NEVER BEEN PROFITABLE AND MAY
NEVER ACHIEVE PROFITABILITY.

The Company is a relatively new company and, for the most part, its
technologies are still in the early stages of development. The Company has just
begun to incorporate its technologies into commercial products. The Company
needs to make significant investments to ensure its products perform correctly
and are cost-effective. In addition, the Company must obtain additional
regulatory approvals to sell its product for purposes other than research use.
Even if the Company develops its products for commercial use and obtains all
necessary regulatory approval, it may not be able to develop products that:

- are accepted by the research, diagnostic or other market places;

- are accurate and effective;

- meet applicable regulatory standards in a timely manner;

- are protected from competition by others;

- do not infringe the intellectual property rights of others;

17
<PAGE>

- can be manufactured in sufficient quantities or at a reasonable cost; or

- can be marketed successfully.

SALES OF THE COMPANY'S GENECHIP-Registered Trademark- PRODUCTS AND ITS
OPERATING RESULTS MAY FLUCTUATE UNPREDICTABLY FROM PERIOD TO PERIOD.

The Company expects that its customers' supply requirements and orders
will depend, among other things, on the frequency of experiments conducted by
them, their inventory of GeneChip-Registered Trademark- products and their
expectations as to how long it will take for the Company to fill future
orders. In addition, the Company expects that from time to time it will
receive relatively large orders with short lead times. As a result, its
revenues and operating results may fluctuate significantly from period to
period due in part to factors that are outside of its control and which it
cannot predict.

THE COMPANY MAY LOSE CUSTOMERS UNLESS IT IMPROVES ITS ABILITY TO MANUFACTURE ITS
PRODUCTS AND ENSURE THEIR PROPER PERFORMANCE.

The Company produces its GeneChip-Registered Trademark- products in an
innovative and complicated manufacturing process. It has experienced and may
continue to experience significant variability in the manufacturing yield of
its GeneChip-Registered Trademark- products which has reduced, and it may
continue to reduce, its gross margins and harm its business. The Company has
also experienced, and anticipates that it may continue to experience,
difficulties in meeting customer, collaborator and internal demand for some
of its probe array products. If the Company cannot deliver products in a
timely manner, it could lose customers, delay introduction of new products or
cause demand for the Company's products to decline. Furthermore, if the
Company cannot deliver products to its customers that consistently meet their
performance expectations, demand for its products will decline.

Because the Company has a limited manufacturing history, it does not fully
understand all of the factors that affect its manufacturing processes. As a
result, manufacturing and quality control problems have arisen and the Company
expects them to continue to arise as it attempts to increase the production rate
at its manufacturing facilities. The Company may not be able to increase
production rates at these facilities in a timely and cost-effective manner or at
commercially reasonable costs.

THE COMPANY'S SURVIVAL DEPENDS ON ITS ABILITY TO AVOID INFRINGING THE
INTELLECTUAL PROPERTY OF OTHERS AS WELL AS MAINTAINING, ENFORCING AND
OBTAINING INTELLECTUAL PROPERTY RIGHTS OF ITS OWN.

Intellectual property rights are essential to the Company's business. The
Company is engaged in significant litigation with its competitors regarding
its intellectual property rights. On January 6, 1998, the Company filed a
patent infringement action against Incyte Pharmaceuticals and Synteni Inc. to
protect its U.S. Patent No. 5,445,934. In addition, Hyseq has filed three
patent infringement actions against the Company and on August 18, 1998, the
Company filed suit against Hyseq to protect its U.S. Patent Nos. 5,795,716
and 5,744,305. On September 1, 1998, the Company amended its complaint
against Hyseq to protect its U.S. Patent No. 5,800,992 and its complaint
against Incyte to protect its U.S. Patent Nos. 5,800,992 and 5,744,305. In
addition, Oxford Gene Technology filed patent infringement suits against the
Company, and Oxford Gene Therapy Limited applied to revoke its EP (UK)
0-619-321 Patent, related to DNA arrays, in the United Kingdom. In connection
with the Oxford Gene Technology suit, on April 7, 2000, a United Kingdom
court held that the Company's 1999 purchase of Beckman Coulter's array
business was not sufficient to transfer Beckman Coulter's license to certain
patents held by Oxford Gene Technology. The Company plans to appeal this
decision. In addition, on July 6, 2000, PE Corporation ("PE") filed a patent
infringement action against the Company alleging that certain Affymetrix
products infringe five PE patents related to reagents that Affymetrix
purchases from PE licensed vendors. For a discussion of the Company's
intellectual property--related litigation (See Part II, Item 1. "Legal
Proceedings").

All of these cases are pending and consume, and will continue to consume,
substantial portions of the Company's financial and managerial resources. A loss
of a significant litigation could prevent the Company from producing its current
products or developing new ones and could also result in the payment of
significant penalties and royalties, which could make it too costly to produce
some or all of its products. If it cannot maintain, enforce or obtain

18
<PAGE>

intellectual property rights, competitors can design probe array systems with
similar competitive advantages to its GeneChip-Registered Trademark-
technology without paying it royalties. In order to continue its current
business, the Company must successfully:

- defend against third parties asserting that it infringes their
intellectual property rights;

- enforce its intellectual property rights against third parties infringing
its rights;

- meet applicable regulatory standards in a timely manner;

- obtain licenses to the intellectual property it needs to continue or
expand its business;

- obtain enforceable patent rights to its product and process innovations;
and

- defend the scope of its existing or pending patents in administrative
proceedings, such as oppositions or interferences.

Moreover, even if the Company defends and enforces its intellectual property
rights, others may independently develop similar or alternative technologies,
duplicate any of its technologies, or design around or invalidate its patented
technologies. These developments would reduce the value of the Company's
intellectual property assets.

IF THE COMPANY CANNOT CONTINUOUSLY DEVELOP AND INTRODUCE NEW PRODUCTS IT WILL
NOT BE ABLE TO COMPETE SUCCESSFULLY IN ITS HIGHLY COMPETITIVE AND RAPIDLY
CHANGING MARKET.

The Company competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing and many of its current and potential
competitors have significantly greater financial, technical, marketing and other
resources. In addition, many current and potential competitors have greater name
recognition, more extensive customer bases and access to proprietary genetic
content. The Company cannot survive if it fails to respond quickly to new or
emerging technologies and changes in customer requirements.

Currently, the Company's principal competition comes from existing DNA
probe array and other technologies that are used to perform many of the same
functions for which the Company markets its GeneChip-Registered Trademark-
products. In order to compete against existing and newly developed
technologies and maintain pricing and gross margins, the Company needs to
successfully demonstrate to potential customers that its GeneChip-Registered
Trademark- products provide improved performance and capabilities. A large
number of publicly traded and privately held companies including Agilent
Technologies, Inc., Corning, Inc., CuraGen, Inc., Gene Logic, Inc., General
Scanning, Inc., Genome Solutions, Inc., Hitachi, Ltd., Illumina, Inc., Incyte
Pharmaceuticals, Inc./Synteni, Inc., Lynx Therapeutics, Inc., Motorola, Inc.
and Sequenome, Inc. also are developing or have developed DNA probe based
assays or other products and services, some of which may be competitive with
the Company's.

THE COMPANY DEPENDS ON A LIMITED NUMBER OF SUPPLIERS AND IT WILL BE UNABLE TO
MANUFACTURE ITS PRODUCTS IF SHIPMENTS FROM THESE SUPPLIERS ARE DELAYED OR
INTERRUPTED.

Key parts of the Company's GeneChip-Registered Trademark- product line,
as well as various equipment and raw materials used in the synthesis of probe
arrays, are currently available only from a single source or a limited number
of sources. The Company relies on Agilent Technologies to manufacture,
install and service its scanners and on Enzo Diagnostics, Inc. to manufacture
key substances used with probe arrays and various labeling kits needed to
process samples. In addition, components of the Company's manufacturing
equipment are available from one of only a few suppliers. In the event that
supplies from these vendors were delayed or interrupted for any reason, the
Company would not be able to get manufacturing equipment, scanners or other
components for its GeneChip-Registered Trademark- product in a timely fashion
or in sufficient quantities or under acceptable terms.

Even if alternative sources of supply are available, it could be time

19
<PAGE>

consuming and expensive for the Company to qualify new vendors. In addition, it
is dependent on its vendors to provide components of appropriate quality and
reliability and to meet applicable regulatory requirements. Consequently, in the
event that supplies from these vendors were delayed or interrupted for any
reason, the Company could be delayed in its ability to develop and deliver
products to its customers.

IF THE COMPANY IS UNABLE TO MAINTAIN ITS RELATIONSHIPS WITH COLLABORATIVE
PARTNERS, IT MAY HAVE DIFFICULTY SELLING ITS PRODUCTS AND SERVICES.

The Company believes that its success in penetrating its target markets
depends in part on its ability to develop and maintain collaborative
relationships with key companies as well as with key academic researchers. The
Company's collaborative partners, however, may not be able to perform their
obligations as expected or devote sufficient resources to the development,
clinical testing, supply or marketing of its potential products developed under
these collaborations.

Currently, the Company's significant collaborative partners include Agilent
Technologies in the making of its scanners, Amersham Pharmacia Biotech KK in
distributing its products in Japan, and Roche Molecular Systems and bioMerieux
in the development of its diagnostic chip products. Relying on these or other
collaborative relationships is risky to the Company's future success because:

- its partners may develop technologies or components competitive with its
GeneChip-Registered Trademark- product such as Agilent Technologies,
which is developing a DNA based array;

- its existing collaborations may preclude it from entering into additional
future arrangements;

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

- some of its agreements may prematurely terminate due to disagreements
between it and its partners;

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

- its partners may be unable to supply products to it on a timely basis;

- its collaborations may be unsuccessful; or

- it may not be able to negotiate future collaborative arrangements on
acceptable terms.

THE COMPANY'S CURRENT SALES, MARKETING AND TECHNICAL SUPPORT ORGANIZATION MAY
LIMIT ITS ABILITY TO SELL ITS PRODUCTS.

The Company currently has limited sales, marketing and technical support
services. To assist its sales and support activities, the Company entered
into a nonexclusive distribution agreement covering Japan with Amersham
Pharmacia Biotech KK and a service agreement for its GeneArray scanner with
Agilent Technologies. In addition, the Company also has in place with several
third parties a series of distribution agreements associated with the GMS
Acquisition. These and other third parties, such as Amersham Pharmacia
Biotech KK and Agilent Technologies, on whom the Company relies for sales,
marketing and technical support may decide to develop and sell competitive
products or otherwise become its competitors, which could harm its business.
For instance, Agilent Technologies is currently developing a DNA probe based
array. Although the Company has invested significant other resources to
expand its direct sales force and its technical and support staff, it may not
be able to establish a sufficiently sized sales, marketing or technical
support organization to sell, market or support its products.

THE LOSS OF A KEY CUSTOMER COULD SUBSTANTIALLY REDUCE THE COMPANY'S REVENUES AND
BE PERCEIVED AS A LOSS OF MOMENTUM IN THE COMPANY'S BUSINESS.

The Company's customers are concentrated in a small number of pharmaceutical
and biotechnology companies, academic research centers and clinical reference
laboratories. The Company expects that a small number of customers, such as
Aventis Pharma, Ltd., F. Hoffman-La Roche, Ltd., Genetics Institute, Gene

20
<PAGE>

Logic, Inc. and other key customers, will continue to account for a substantial
portion of revenues for the foreseeable future. If the Company loses a major
customer, its revenues may be substantially reduced and investors may perceive
this as a loss of momentum in its business. Moreover, if consolidation in the
pharmaceutical and biotechnology industries continues, the Company's current and
potential customer base could decrease, reducing aggregate sales and shrinking
its target market.

BECAUSE THE COMPANY'S BUSINESS IS HIGHLY DEPENDENT ON KEY EXECUTIVES AND
SCIENTISTS, ITS INABILITY TO RECRUIT AND RETAIN THESE PEOPLE COULD HINDER ITS
BUSINESS EXPANSION PLANS.

The Company is highly dependent on its executive officers and its senior
scientists and engineers, including scientific advisors. The Company's product
development and marketing efforts will be delayed or curtailed if it loses the
services of any of these people.

The Company relies on its scientific advisors and consultants to assist it
in formulating its research, development and commercialization strategy. All of
these individuals are engaged by employers other than the Company and have
commitments to other entities that may limit their availability to the Company.
Some of them also consult for companies that may be competitors of the
Company's. A scientific advisor's other obligations may prevent him or her from
assisting the Company in developing its technical and business strategies.

To expand its research, product development and sales efforts the Company
needs additional people skilled in areas such as bioinformatics, organic
chemistry, information services, regulatory affairs, manufacturing, sales,
marketing and technical support. Competition for these people is intense and
their turnover rate is high. The Company will not be able to expand its business
if it is unable to hire, train and retain a sufficient number of qualified
employees.

BECAUSE GLAXO WELLCOME OWNS A SUBSTANTIAL PORTION OF THE COMPANY'S OUTSTANDING
CAPITAL STOCK, GLAXO MAY BE ABLE TO INFLUENCE THE OUTCOME OF STOCKHOLDER VOTES
OR THE MARKET PRICE OF THE COMPANY'S STOCK.

Glaxo Wellcome plc, ("Glaxo") and its affiliates currently beneficially own
approximately 22% of the Company's outstanding common stock as of June 30, 2000,
and have the right to designate two of the nine members of the Company's Board
of Directors. Accordingly, Glaxo may be able to exercise significant influence
over the Company's business and over matters subject to stockholder votes,
including votes concerning the election of directors, adoption of amendments to
the Company's certificate of incorporation and bylaws and approval of mergers
and other significant corporate transactions. Moreover, the Company's stock
price may drop if Glaxo or any of its affiliates sells a significant amount of
the Company's stock or if investors interpret any sale of the Company's stock by
Glaxo or any of its affiliates as a sign of weakness in the Company's business.

Subsequent Event - Two-For-One Stock Split

21
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<S> <C>

2.1(1) Agreement and Plan of Merger, dated as of September 10,
1999, among Affymetrix, Inc., GMS Acquisition, Inc. and
certain shareholders.
3.1(2) Restated Certificate of Incorporation.
3.2(3) Bylaws.
4.1(4) Rights Agreement dated October 15, 1998 between Affymetrix,
Inc. and American Stock Transfer & Trust Company, as
Rights Agent.
4.2(5) Indenture dated as of September 22, 1999, between
Affymetrix, Inc. and The Bank of New York, as Trustee.
4.3(6) Amendment No. 1 to Rights Agreement, dated as of February 7,
2000, between Affymetrix, Inc. and American Stock Transfer
& Trust Company, as Rights Agent.
4.4(7) Indenture, dated as of February 14, 2000 between Affymetrix,
Inc. and The Bank of New York, as Trustee.
4.5(8) Registration Rights Agreement, dated as of
February 14, 2000, between Affymetrix, Inc. and
certain purchasers listed on the signature page
thereto.
10.1(9) Affymetrix, Inc. 2000 Equity Incentive Plan
27 Financial data schedule.

</TABLE>
------------------------

(1) Incorporated by reference to Appendix A of the Registrant's registration
statement on Form S-4 as filed on October 14, 1999 (File No. 333-88987).

(2) Incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K as
filed on June 13, 2000 (File No. 000-28218).

(3) Incorporated by reference to Appendix C of the Registrant's definitive proxy
statement on Schedule 14A as filed on April 29, 1998 (File No. 000-28218)

(4) Incorporated by reference to Exhibit 1 of the Registrant's Form 8-A as filed
on October 16, 1998 (File No. 000-28218).

(5) Incorporated by reference to Exhibit 4.2 of the Registrant's registration
statement on Form S-4 as filed on October 14, 1999 (File No. 333-88987).

(6) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-A/A as
filed on March 29, 2000 (File No. 000-28218).

(7) Incorporated by reference to Exhibit 4.4 of the Registrant's registration
statement on Form S-3 as filed on May 11, 2000 (File No. 333-36790).

(8) Incorporated by reference to Exhibit 4.3 of the Registrant's registration
statement on Form S-3 as filed on May 11, 2000 (File No. 333-36790).

(9) Incorporated by reference to Appendix B of the Registrant's definitive proxy
statement on Schedule 14A as filed on May 2, 2000 (File No. 000-28218).

(b) Reports on Form 8-K.

On April 7, 2000, the Company filed a Report on Form 8-K to report under
Item 5 (Other Events) the filing as an exhibit, its supplemental selected
consolidated financial data, management's discussion and analysis of financial
condition and resolutions of operations, and audited supplemental consolidated
financial statements which have been restated to reflect the combined results of
the Company and Genetic MicroSystems, Inc.

22
<PAGE>

On April 11, 2000, the Company filed a Report on Form 8-K to report under
Item 5 (Other Events) a ruling issued by a United Kingdom court with respect to
preliminary issues in a patent infringement action brought against the Company
by Oxford Gene Technology Limited ("OGT") in June 1999 (the "OGT Action").

On April 27, 2000, the Company filed a Report on Form 8-K to report under
Item 5 (Other Events) a ruling issued by a United Kingdom court in connection
with the OGT Action denying OGT's request for a stay of the patent infringement,
validity and amendment issues in the OGT Action.

On June 13, 2000, the Company filed a Report on Form 8-K to report under
Item 5 (Other Events) the approval by the Company's stockholders of an amendment
to the Company's Certificate of Incorporation at the annual meeting of the
stockholders of the Company held on June 8, 2000.

SIGNATURES

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

August 14, 2000 AFFYMETRIX, INC.

By: /s/ EDWARD M. HURWITZ
-----------------------------
Edward M. Hurwitz
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER

<PAGE>

AFFYMETRIX, INC.
EXHIBIT INDEX
JUNE 30, 2000

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<S> <C>
2.1(1) Agreement and Plan of Merger, dated as of September 10,
1999, among Affymetrix, Inc., GMS Acquisition, Inc. and
certain shareholders.
3.1(2) Restated Certificate of Incorporation.
3.2(3) Bylaws.
4.1(4) Rights Agreement dated October 15, 1998 between Affymetrix,
Inc. and American Stock Transfer & Trust Company, as
Rights Agent.
4.2(5) Indenture dated as of September 22, 1999, between
Affymetrix, Inc. and The Bank of New York, as Trustee.
4.3(6) Amendment No. 1 to Rights Agreement, dated as of February 7,
2000, between Affymetrix, Inc. and American Stock Transfer
& Trust Company, as Rights Agent.
4.4(7) Indenture, dated as of February 14, 2000 between Affymetrix,
Inc. and The Bank of New York, as Trustee.
4.5(8) Registration Rights Agreement, dated as of
February 14, 2000, between Affymetrix, Inc. and
certain purchasers listed on the signature page
thereto.
10.1(9) Affymetrix, Inc. 2000 Equity Incentive Plan
27 Financial data schedule.
</TABLE>
------------------------