AFFYMETRIX INC, 10-Q, 2000-11-14

AFFYMETRIX INC
10-Q, 2000-11-14
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-Q

(MARK ONE)

<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE PERIOD ENDED SEPTEMBER 30, 2000

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
</TABLE>

FROM ______________ TO ______________ .

COMMISSION FILE NO. 0-28218

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AFFYMETRIX, INC.

(Exact name of Registrant as specified in its charter)

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

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

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 OCTOBER 31, 2000: 55,556,445

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<PAGE>
AFFYMETRIX, INC.

TABLE OF CONTENTS

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

Item 1. Financial Statements

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

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

Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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..................... 12

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................. 17

Item 2. Changes in Securities and Use of Proceeds......... 20

Item 5. Other Information................................. 21

Item 6. Exhibits and Reports on Form 8-K.................. 29

Signatures................................................ 31
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,770 $ 12,677
Available-for-sale securities............................. 425,292 213,763
Accounts receivable....................................... 47,697 24,646
Inventories............................................... 17,599 12,792
Other current assets...................................... 2,893 4,159
--------- ---------
Total current assets.................................... 497,251 268,037
Net property and equipment.................................. 52,730 40,775
Acquired technology rights.................................. 10,224 8,965
Notes receivable from stockholders.......................... 1,319 1,074
Other assets................................................ 47,759 7,736
--------- ---------
$ 609,283 $ 326,587
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 41,534 $ 29,926
Deferred revenue.......................................... 19,627 6,468
Current portion of capital lease obligation............... 68 261
--------- ---------
Total current liabilities............................... 61,229 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.............................................. 555 543
Additional paid-in-capital................................ 270,485 256,467
Accumulated deficit....................................... (136,269) (124,203)
Other..................................................... 30,283 (875)
--------- ---------
Total stockholders' equity.............................. 165,054 131,932
--------- ---------
$ 609,283 $ 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.

3
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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product............................................. $45,372 $26,137 $122,227 $ 65,713
Research............................................ 1,855 2,420 4,729 6,736
License fees and royalties.......................... 8,542 962 14,455 1,698
------- ------- -------- --------
Total revenue..................................... 55,769 29,519 141,411 74,147

Costs and expenses:
Cost of product revenue............................. 18,400 11,578 49,117 28,718
Research and development............................ 13,730 10,477 38,890 31,128
Selling, general and administrative................. 25,533 13,908 68,334 37,752
Merger related costs................................ -- -- 2,395 --
------- ------- -------- --------
Total costs and expenses.......................... 57,663 35,963 158,736 97,598
------- ------- -------- --------
Loss from operations.................................. (1,894) (6,444) (17,325) (23,451)
Interest income, net.................................. 2,189 1,105 5,259 3,496
------- ------- -------- --------
Net income (loss)..................................... 295 (5,339) (12,066) (19,955)
Preferred stock dividends............................. -- (429) -- (2,055)
------- ------- -------- --------
Net income (loss) attributable to common
stockholders........................................ $ 295 $(5,768) $(12,066) $(22,010)
======= ======= ======== ========
Basic earnings (loss) per common share................ $ 0.01 $ (0.11) $ (0.22) $ (0.44)
======= ======= ======== ========
Weighted-average shares used in computing basic
earnings (loss) per common share.................... 55,319 51,914 54,928 50,255
======= ======= ======== ========
Diluted earnings (loss) per common share.............. $ 0.00 $ (0.11) $ (0.22) $ (0.44)
======= ======= ======== ========
Weighted-average shares used in computing diluted
earnings (loss) per common share.................... 61,145 51,914 54,928 50,255
======= ======= ======== ========
</TABLE>

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

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

See accompanying notes.

4
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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(IN THOUSANDS)

(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (12,066) $ (19,955)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 3,414 5,481
Change in operating assets and liabilities:
Accounts receivable................................... (23,051) (10,321)
Inventories........................................... (4,807) (4,610)
Other current assets.................................. 1,266 127
Other assets.......................................... (10,434) (6,894)
Accounts payable and accrued liabilities.............. 11,608 3,399
Deferred revenue...................................... 13,159 4,563
--------- ---------
Net cash used in operating activities............... (20,911) (28,210)
Cash flows from investing activities:
Capital expenditures...................................... (19,501) (10,029)
Proceeds from the sale of available-for-sale securities... 367,494 61,152
Proceeds from maturities of available-for-sale
securities.............................................. 9,462 --
Purchases of available-for-sale securities................ (584,288) (172,620)
--------- ---------
Net cash used in investing activities............... (226,833) (121,497)
Cash flows from financing activities:
Issuance of common stock.................................. 14,030 37,403
Issuance of convertible subordinated debt................. 225,000 150,000
Preferred Stock dividends paid............................ -- (2,055)
Principal payments on capital lease obligations........... (193) (186)
--------- ---------
Net cash provided by financing activities........... 238,837 185,162
Net (decrease) increase in cash and cash equivalents........ (8,907) 35,455
Cash and cash equivalents at beginning of period............ 12,677 5,666
--------- ---------
Cash and cash equivalents at end of period.................. $ 3,770 $ 41,121
========= =========
Supplemental disclosure of noncash investing activities:
Unrealized gain on investment............................. $ 29,684 $ --
========= =========
</TABLE>

See accompanying notes.

5
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AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 Annual Report on Form 10-K for the year ended
December 31, 1999 and 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 instrumentation, Affymetrix
scanners and arrayers, software and probe arrays as well as the associated
subscription fees earned under EasyAccess-TM- supply 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 warranty expenses at the
time the associated revenue is recognized. Revenue from subscription fees earned
under EasyAccess-TM- supply 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, generally upon signing of
license agreements unless the Company has continuing performance obligations.

6
<PAGE>
AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS

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." The Company will adopt SAB 101 for the fourth quarter of
fiscal 2000. The Company is currently evaluating SAB 101 to determine whether
its implementation will have any material impact on the Company's financial
position, liquidity or results of operations.

In June 1998, the Financial Accounting Standards Board ("FASB") issued
statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Financial Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999, FASB issued Financial
Accounting Standards No. 137 which deferred the effective date of SFAS 133 to
fiscal years beginning after June 15, 2000. The adoption of SFAS 133 is not
anticipated to have an impact on the Company's results of operations or
financial condition when adopted as the Company holds no derivative financial
instruments and does not currently engage in hedging activities.

In March 2000, the FASB issued its Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation--an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 applies prospectively to new awards,
exchanges of awards in a business combination, modifications to outstanding
awards and changes in grantee status that occur on or after July 1, 2000, except
for the provisions related to repricings and the definition of an employee which
apply to awards issued after December 15, 1998. The adoption of FIN 44 did not
have a material impact on the Company's consolidated financial statements for
the period ended September 30, 2000.

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding during the period. Diluted earnings (loss)
per share gives effect to the dilutive effect of stock options and warrants
(calculated based on the treasury stock method) and convertible redeemable
preferred stock and convertible subordinated notes (calculated on an
if-converted method).

7
<PAGE>
AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
The following is a reconciliation of the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) attributable to
common stockholders.................. $ 295 $(5,768) $(12,066) $(22,010)
======= ======= ======== ========
Shares used in computation:
Weighted-average shares used in
computing basic earnings (loss) per
common share....................... 55,319 51,914 54,928 50,255
Weighted-average effect of dilutive
securities:
Options............................ 5,769 -- -- --
Warrants........................... 57 -- -- --
------- ------- -------- --------
Weighted-average shares used to
compute diluted earnings (loss) per
share.............................. 61,145 51,914 54,928 50,255
======= ======= ======== ========
Earnings (loss) per share:
Basic................................ $ 0.01 $ (0.11) $ (0.22) $ (0.44)
======= ======= ======== ========
Diluted.............................. $ 0.00 $ (0.11) $ (0.22) $ (0.44)
======= ======= ======== ========
</TABLE>

Shares issuable upon conversion of the convertible subordinated notes and
convertible redeemable preferred stock have been excluded from diluted earnings
per share as they have an anti-dilutive effect.

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

As of September 30, 2000, debt securities held by the Company were 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.

8
<PAGE>
AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 3--INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials....................................... $ 6,577 $ 5,247
Work in process..................................... 577 891
Finished goods...................................... 10,445 6,654
------- -------
Total............................................. $17,599 $12,792
======= =======
</TABLE>

NOTE 4--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Accounts payable.................................... $12,638 $11,488
Accrued compensation and related liabilities........ 4,946 4,269
Accrued interest on convertible subordinated
notes............................................. 1,378 2,221
Accrued sales and use tax........................... 2,510 1,170
Accrued warranty.................................... 1,348 1,752
Accrued legal....................................... 16,501 6,162
Other............................................... 2,213 2,864
------- -------
Total............................................. $41,534 $29,926
======= =======
</TABLE>

NOTE 5--COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) for the nine months ended
September 30, 2000 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net loss attributable to common stockholders............ $(12,066) $(22,010)
Unrealized gain on equity investment.................... 29,684 --
Unrealized gain (loss) on debt securities............... 1,239 (646)
-------- --------
Comprehensive income (loss)............................. $ 18,857 $(22,656)
======== ========
</TABLE>

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 quarter end rates of

9
<PAGE>
AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 6--FOREIGN CURRENCY TRANSLATION (CONTINUED)
exchange. The resultant transaction 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 $160.50 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.

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 0.563 of an Affymetrix share for each GMS share.
Affymetrix issued 1,939,798 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
consolidated results of operations of the combined companies for the nine months
ended September 30, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
AFFYMETRIX GMS TOTAL
---------- -------- --------
<S> <C> <C> <C>
Nine months ended September 30, 1999
Revenues...................................... $ 65,715 $ 8,432 $ 74,147
Net loss...................................... (20,100) (1,910) (22,010)
</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 of $2.4 million. 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
amendment to its stockholders rights plan initially adopted in 1998. The
amendment increases the exercise price of the Preferred Share Purchase Rights to
$625.00 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

10
<PAGE>
AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 9--STOCKHOLDERS RIGHTS PLAN (CONTINUED)
the new exercise price of $625.00. 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--TWO-FOR-ONE STOCK SPLIT

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 entitled
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 were distributed by the Company's transfer agent on August 21, 2000. As of
September 30, 2000, the Company had approximately 55.5 million shares
outstanding. Accordingly, all share and per share amounts contained in this
Report have been retroactively adjusted to reflect this event.

NOTE 11--SUBSEQUENT EVENTS

ACQUISITION OF NEOMORPHIC, INC.

On October 30, 2000, Affymetrix finalized the acquisition of
Neomorphic, Inc. ("Neomorphic"), a privately-held, computational genomics
company. Under the terms of the merger agreement, Neomorphic became a wholly
owned subsidiary of the Company. In the merger, (i) each outstanding share of
Neomorphic common stock was converted into, and became exchangeable for the
right to receive 0.1552 of a share of Affymetrix common stock, subject to
adjustment under certain circumstances following the closing (the "Conversion
Ratio"), and (ii) each outstanding share of Neomorphic preferred stock was
converted into and became exchangeable for the right to receive shares of
Affymetrix common stock at the Conversion Ratio plus cash in the amount of
$3.84. In connection with the completion of the acquisition, the Company agreed
to register the resale of Affymetrix common stock issued in the merger following
the closing. At such time, the final Conversion Ratio may be increased or
decreased depending on the Company's stock performance prior to the effective
date of the registration statement. In lieu of any such increase in the
aggregate number of shares of Affymetrix common stock to be issued in the
transaction, the Company may have the option of paying cash in an aggregate
amount not to exceed $20 million. In addition, each option exercisable for
Neomorphic common stock issued and outstanding prior to the consummation of the
merger was converted into an option exercisable for shares of Affymetrix' common
stock at the Conversion Ratio, generally under the same terms and conditions as
existed for the original option. As a result of the merger, the Company issued,
in aggregate, approximately 1.4 million shares of Affymetrix common stock in
exchange for all of the outstanding shares of Neomorphic common and preferred
stock and the assumption of all of Neomorphic's stock options. The acquisition
will be accounted for as a purchase transaction. Accordingly, the Company will
allocate the purchase price, including liabilities assumed, to the tangible and
intangible assets acquired based on their fair values. The Company is in the
process of performing such allocation.

11
<PAGE>
NOTE 11--SUBSEQUENT EVENTS (CONTINUED)
FORMATION OF PERLEGEN SCIENCES, INC.

On October 3, 2000, Affymetrix announced that it formed a new genomics
subsidiary called Perlegen Sciences, Inc. The new company plans to use
Affymetrix' latest DNA scanning technology to become a source of information
about patterns of genetic variations between individuals and health and disease.
The agreements between Perlegen Sciences and Affymetrix are subject to final
documentation and the approval of the Board of Directors of Affymetrix.

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 September 30, 2000 and for the three and nine month periods
ended September 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 with the
Securities and Exchange Commission 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 intellectual
property litigation; 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") has developed and intends
to establish its GeneChip-Registered Trademark- 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, 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 commenced
commercial sales of the GeneChip 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.
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

12
<PAGE>
completed the sale of 3,269,044 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
2,514,458 shares of Affymetrix common stock at a conversion price of $20 per
share. As of September 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 1,939,798 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.

On September 29, 2000, the Company entered into a definitive merger
agreement to acquire Neomorphic, Inc. ("Neomorphic"), a privately-held
computational genomics company. The transaction closed on October 30, 2000.
Under the terms of the agreement, Neomorphic common and preferred stockholders
received an aggregate of approximately 1.4 million shares of Affymetrix common
stock and Neomorphic preferred stockholders received an additional amount of
cash in the amount of $3.84 per share of Neomorphic preferred stock in exchange
for all of Neomorphic's outstanding shares and the assumption of all of
Neomorphic's outstanding stock options. The transaction will be accounted for as
a purchase transaction and accordingly, the aggregate purchase price, including
liabilities assumed, will be allocated to the tangible and intangible assets
acquired based on their fair values. The Company is in the process of
determining the allocation of the purchase price but anticipates that a
significant portion will be allocated to goodwill and deferred stock
compensation which will be amortized to operating expenses over future periods.
Affymetrix agreed to register the resale of the Affymetrix common stock issued
in the transaction following the closing. The number of shares of Affymetrix
common stock issued in the transaction may be increased or decreased depending
on Affymetrix' stock performance prior to the effective date of the registration
statement. In lieu of any such increase in the number of shares of Affymetrix
stock to be issued in the transaction, Affymetrix has the option of paying cash
in an aggregate amount not to exceed $20 million.

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. For the first time, the
Company reported a net income, for the quarter ended September 30, 2000, of $0.3
million. For the nine months ended September 30, 2000, the Company incurred a
net loss of $12.1 million and at that date the Company had an accumulated
deficit of approximately $135.8 million. The Company's expenses are from costs
incurred in research and development and manufacturing and from selling, general
and administrative costs associated with the Company's operations. Prior to the
quarter ended September 30, 2000, these costs have exceeded the Company's
revenues and interest income, which have been generated principally from product
sales, royalties and license fees and technology access fees, collaborative
research and development agreements, government research grants and cash and
investment balances.

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RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

Product revenue was $45.4 million and $122.2 million for the three and nine
months ended September 30, 2000, respectively, compared to $26.1 million and
$65.7 million in the three and nine months ended September 30, 1999. The
increases in product revenue resulted from increased sales of
GeneChip-Registered Trademark- probe arrays, increased placements of instruments
(including the GeneChip system, the 417 Arrayer-TM- and 418/428 Scanner-TM-) and
related increases in subscription fees earned under EasyAccess-TM- contracts.
Research revenue was approximately $1.9 million and $4.7 million for the three
and nine months ended September 30, 2000 respectively, compared to $2.4 million
and $6.7 million in the three and nine months ended September 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 $8.5 million and
$14.5 million for the three and nine month periods ended September 30, 2000,
respectively, compared to $1.0 million and $1.7 million in the three and nine
months ended September 30, 1999. The increase in license fees and royalty
revenue was attributed primarily to the signing of additional licenses and the
extension of existing licensing arrangements for internal use by others of
certain of the Company's technology.

Cost of product revenue was $18.4 million and $49.1 million for the three
and nine month periods ended September 30, 2000, respectively, compared to
$11.6 million and $28.7 million in the three and nine months ended
September 30, 1999. The increase in cost of product revenue was attributed
primarily to the increase in product revenue. Margins have fluctuated, and may
continue to fluctuate significantly, as a result of variation in manufacturing
yields. In addition, margins will continue to fluctuate as the Company continues
to incur costs associated with the expansion of its West Sacramento facility
throughout 2000. Margins also fluctuate as a result of changes in the mix of
products sold. The Company also sells products in certain foreign countries and
thus revenue and margins may fluctuate due to changes in currency exchange
rates. The Company does not presently hedge its foreign currency risks.

Research and development expenses were $13.7 million and $38.9 million for
the three and nine month periods ended September 30, 2000, respectively,
compared to $10.5 million and $31.1 million in the three and nine months ended
September 30, 1999. The increase in research and development expenses was
attributable primarily to the hiring of additional research and development
personnel, and early stage research activities associated with Perlegen
Sciences, Inc. 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 $25.5 million and
$68.3 million for the three and nine month periods ended September 30, 2000,
respectively, compared to $13.9 million and $37.8 million in the three and nine
months ended September 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, the
Company expects legal costs to increase as on-going patent litigation with
Hyseq, Inc., Incyte Pharmaceuticals, Inc. and Synteni, Inc. approach their
respective trial dates and the ongoing patent litigation with Oxford Gene
Technology, Ltd. completes the remaining phases of trial.

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

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<PAGE>
Net interest income was $2.2 million and $5.3 million for the three and nine
month periods ended September 30, 2000, respectively, compared to $1.1 million
and $3.5 million in the three and nine months ended September 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 September 30, 2000, the Company had cash, cash equivalents and
available-for-sale securities of $429.1 million compared to $226.4 million at
December 31, 1999. The increase is primarily attributable to net proceeds of
$218.0 million received from the issuance of $225.0 million in principal amount
of the Company's 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 $20.9 million for the nine months
ended September 30, 2000, as compared to $28.2 million for the nine months ended
September 30, 1999. The decrease in net cash used in operating activities was
the result of a decrease in the Company's net loss as well as an increase in
working capital requirements.

The Company's investing activities consisted of a net investment of its
surplus cash in available-for-sale securities and capital expenditures. Capital
expenditures totaled $19.5 million for the nine months ended September 30, 2000,
as compared to $10.0 million for the nine months ended September 30, 1999. The
increase in capital expenditures during the nine months ended September 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 nine months ended September 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 into Affymetrix common stock at a
price equal to $160.50 per share subject to adjustment in certain circumstances.
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.

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 is expected to
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 DEVELOPMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Financial Instruments and for Hedging

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<PAGE>
Activities" ("SFAS 133") which provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. In
June 1999, FASB issued Financial Accounting Standards No. 137 which deferred the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The
adoption of SFAS 133 is not anticipated to have an impact on the Company's
results of operations or financial condition when adopted as the Company holds
no derivative financial instruments and does not currently engage in hedging
activities.

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
SEPTEMBER 30,
2000 2001 2002 2003 THEREAFTER TOTAL 2000
-------- -------- -------- -------- ---------- -------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Available-for-sale
securities.................. $4,127 $267,835 $144,930 $8,400 $ -- $425,292 $425,292
Average interest rate......... 4.5% 4.6% 6.6% 6.1%
LIABILITIES:
5% convertible subordinated
notes due 2006.............. $ -- $ -- $ -- $ -- $150,000 $150,000 $148,320
Average interest rate......... 5.0%
4.75% convertible subordinated
notes due 2007.............. $ -- $ -- $ -- $ -- $225,000 $225,000 $133,740
Average interest rate......... 4.75%
</TABLE>

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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 DNA array technologies 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
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 (the "Delaware action")
and in the United Kingdom alleging infringement of European Patent 0-373-203
(the "U.K. action"). OGT seeks an injunction and damages through these actions.
The Company believes that on or before June 5, 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 was
transferred and consolidated with the Delaware action. Affymetrix moved to amend
its answer to challenge the validity of United States Patent 5,700,637 and to
amend its answer to assert the defense of patent misuse and to assert
counterclaims against OGT in the Delaware action.

On November 6, 2000, the Delaware court issued an order construing terms in
certain of the patent claims at issue following a Markman hearing in OGT's
patent infringement case against the Company. The first phase of the trial in
this case began on November 6, 2000 on the issue of whether the Company
infringed or willfully infringed OGT's U.S. Patent No. 5,700,637. The
infringement/willful infringement phase of the trial was completed on
November 8, 2000 and on November 10, 2000, the jury returned its verdict that
Affymetrix did not literally or willfully infringe OGT's U.S. Patent
No. 5,700,637. The jury did find, however, infringement under the "doctrine of
equivalents." The Delaware court is considering motions that, if granted, would
eliminate the jury's verdict of infringement under the "doctrine of
equivalents." The Delaware court has indicated that, if necessary, issues
relating to the Company's defenses and damages will be heard at a future date to
be determined by the court. The defenses to be tried include invalidity (prior
art and non-enablement), patent misuse, and unenforceability as a result of
inequitable conduct and antitrust violations. In the event that Affymetrix'
motions are denied and its defenses are rejected by the court, Affymetrix may be
obligated to pay damages to OGT arising from sales of certain products during
the period beginning on the date of the issuance of the '637 patent and ending
on the date that Affymetrix acquired Beckman's

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<PAGE>
microarray business that included a license to the OGT patents at issue. The
Company believes any such damages should be limited and should not have a
material impact on its future business or operations.

In the U.K. 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 U.K.
action. In addition, in the U.K. action the U.K. High 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. Affymetrix appealed the U.K. High Court's ruling.

On October 16 and 17, 2000, the U.K. Court of Appeal heard the appeal of the
judgment of the High Court of Justice regarding the transfer of Beckman's
license under the asset transfer agreement. On November 2, 2000, the U.K. Court
of Appeal unanimously held that Affymetrix' purchase of the Beckman microarray
business transferred to Affymetrix a license to what have been called the
"Southern Patents" which include United States Patent numbers 5,700,637,
6,054,270, 5,436,327, European Patent numbers 0-373-203, 0-386-229 as well as
other related and unrelated U.S. and foreign patents. The decision reversed the
April 2000 finding of the U.K. High Court. The U.K. Court of Appeal also denied
OGT's request that it be granted leave to appeal to the House of Lords. It is
expected that OGT will further attempt to appeal the decision to the House of
Lords.

As a result of the U.K. action, the Delaware court has confirmed that
Affymetrix holds a valid license to OGT's U.S. Patent No. 5,700,637.

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 these matters and cannot be certain as to
the timing of the proceedings.

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 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,

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<PAGE>
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. On November 2,
2000, Hyseq was granted permission to file a supplemental complaint in United
States District Court for the Northern District of California alleging that
Affymetrix' products infringe an additional related patent, United States Patent
6,018,041, or '041. 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 29-30, 2000. The parties are briefing claim construction issues on
the '619 patent; no hearing relating to the '619 patent has been scheduled.

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

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.

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<PAGE>
On August 11, 2000, Incyte and Synteni asserted that the '934, '305 and '992
patents are unenforceable. 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 29-30, 2000.

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

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 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.

On August 17, Incyte filed a lawsuit against Affymetrix in the United States
District Court for the Northern District of California alleging infringement of
U.S. Patent Nos. 5,716,785 and 5,891,636 and asserting various state law claims.
On September 6, 2000, Affymetrix filed its answer in this lawsuit and also filed
counterclaims against Incyte alleging infringement of Affymetrix' U.S. Patent
Nos. 6,040,193 or '193 and 5,871,928 or '928. In response to Affymetrix'
counterclaims, Incyte has filed various state law counterclaims against
Affymetrix and requests for declaration that the '193 and '928 patents are not
infringed, are invalid and are unenforceable. No trial dates have been set.
Affymetrix believes that Incyte's claims are without merit. However, Affymetrix
cannot be sure that it will prevail in this matter.

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. PE served Affymetrix with the complaint on
October 16, 2000. Affymetrix' response to the complaint is due on December 11,
2000. 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

20
<PAGE>
Series B Preferred Stock purchasable upon the exercise of a Right to $625. 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 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 September 30, 1999 through September 30, 2000, the volume of
its common stock traded on any given day has ranged from 91,200 to 5,372,400
shares, a 5,791% difference. Moreover, during that period, its common stock has
traded as low as $38.50 per share and as high as $160.25 per share, a 316%
difference. The market price of its common stock has changed as much as $19.813
per share in a single day and its stock price has changed more than $10 in a
single day 26 times in the last twelve months.

THE COMPANY HAS A HISTORY OF OPERATING LOSSES, MAY INCUR FUTURE LOSSES AND
CANNOT BE CERTAIN THAT IT WILL ACHIEVE SUSTAINABLE PROFITABILITY.

The Company has experienced significant operating losses each year since its
inception. 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 with its operations. Historically,
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. Although the quarter ended September 30, 2000
marked the first profitable quarter in the Company's history, the Company
incurred a net loss of $12.1 million for the nine months ended September 30,
2000 and cannot guarantee future profitability. Among other things, its ability
to maintain the transition to a commercially successful company will depend upon
its ability to:

- maintain 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;

21
<PAGE>
- 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 REPORTED ONLY ONE PROFITABLE
QUARTER AND MAY NEVER ACHIEVE SUSTAINED 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;

- 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

22
<PAGE>
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
experience in the future significant variability in the manufacturing yield of
its GeneChip-Registered Trademark- products which has reduced, and may reduce in
the future, 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 or be required to delay introduction of new products, and demand
for the Company's products could 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 the Company's 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. This decision was subsequently reversed by the U.K. Court of Appeal
on November 2, 2000. On November 6, 2000, the Delaware court issued an order
construing terms in certain of the patent claims at issue following a Markman
hearing in OGT's patent infringement case against the Company. The first phase
of the trial in this case began on November 6, 2000 on the issue of whether the
Company infringed or willfully infringed OGT's U.S. Patent No. 5,700,637. The
infringement/willful infringement phase of the trial was completed on November
8, 2000 and on November 10, 2000, the jury returned its verdict that Affymetrix
did not literally or willfully infringe OGT's U.S. Patent No. 5,700,637. The
jury did find, however, infringement under the "doctrine of equivalents." 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").

23
<PAGE>
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
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 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.

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<PAGE>
Even if alternative sources of supply are available, it could be time
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 covering the Affymetrix 417 and 428
instruments product line that was acquired in 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.

25
<PAGE>
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
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 17% of the Company's outstanding common stock. 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.

FUTURE ACQUISITIONS MAY DISRUPT THE COMPANY'S BUSINESS AND DISTRACT COMPANY
MANAGEMENT.

The Company has recently engaged in acquisitions and expects to continue to
do so. The Company may not be able to identify suitable acquisition candidates,
and if the Company does identify suitable candidates, it may not be able to make
such acquisitions on commercially acceptable terms or at all. If the Company
acquires another company, the Company may not be able to successfully integrate
the acquired business into the Company's existing business in a timely and
non-disruptive manner or at all.

26
<PAGE>
The Company may have to devote a significant amount of time and resources to do
so. Even with this investment of time and resources, an acquisition may not
produce the revenues, earnings or business synergies that the Company
anticipates. If the Company fails to integrate the acquired business effectively
or if key employees of that business leave, the anticipated benefits of the
acquisition would be jeopardized. The time, capital management and other
resources spent on an acquisition that fails to meet the Company's expectations
could cause the Company's business and financial condition to be materially and
adversely affected. In addition, acquisitions can involve non-recurring charges
and amortization of significant amounts of goodwill and deferred stock
compensation that could adversely affect the Company's results of operations.

THE COMPANY MAY NOT BE ABLE TO REALIZE THE BENEFITS OF RECENT ACQUISITIONS.

The Company acquired Genetic MicroSystems, Inc., a privately held
instrumentation company specializing in DNA array technology in February, 2000
and Neomorphic, Inc., a privately-held, computational genomics company in
October, 2000. These transactions may not be as beneficial to the Company as it
expects.

PERLEGEN SCIENCES, INC. MAY NOT BE ABLE TO RAISE THIRD PARTY FINANCING ON
FAVORABLE TERMS, IF AT ALL.

Affymetrix formed Perlegen Sciences, Inc. ("Perlegen"), a genomics
subsidiary that plans to use Affymetrix' latest DNA array technology to read 50
genomes and identify the millions of genetic variations between individuals and
find pattern in those variations that Perlegen believes will be marketable to
pharmaceutical companies in testing the viability of drugs. There is no
guarantee, however, that Perlegen will be able to obtain third party financing
on favorable terms or that the funding from outside sources will be sufficient
to fund Perlegen's operation or enable Affymetrix to account for Perlegen under
the equity method. Affymetrix cannot assure the success of Perlegen and if
Perlegen is unable to obtain sufficient funding from outside sources, Affymetrix
may decide to abandon the Perlegen project or bear the costs of financing
Perlegen itself. This may divert Affymetrix' resources from other potential uses
and also require Affymetrix to recognize Perlegen's operating losses in its
consolidated results.

OTHER EVENTS

TWO-FOR-ONE STOCK SPLIT

FORMATION OF PERLEGEN SCIENCES, INC.

On October 3, 2000, Affymetrix announced that it formed a new genomics
subsidiary called Perlegen Sciences, Inc. The new company plans to employ
approximately $100 million in third party financing and Affymetrix' latest DNA
scanning technology to become a source of information about patterns of genetic
variations between individuals and health and disease. The agreements between
Perlegen Sciences and Affymetrix are subject to final documentation and the
approval of the Board of Directors of Affymetrix.

AMENDMENT OF GLAXO WELLCOME PLC GOVERNANCE AGREEMENT

On October 18, 2000, Affymetrix and Glaxo Wellcome PLC ("Glaxo Wellcome")
entered into an amendment ("Amendment No. 3") to the Governance Agreement dated
as of July 6, 1995, by and

27
<PAGE>
between Affymetrix and Glaxo Wellcome, as amended in the Amendment to Governance
Agreement entered into on April 14, 1998 and the Amendment No. 2 to Governance
Agreement entered into on September 8, 1998. Under the terms of Amendment
No. 3, Glaxo Wellcome agreed that it is no longer entitled to designate two
nominees to serve on the Board of Directors of Affymetrix. Concurrently with the
execution of Amendment No. 3, Glaxo Wellcome's two designees serving on the
Board of Directors of Affymetrix, Inc., Adrian Hennah and Barry C. Ross, offered
their resignations from the Affymetrix Board and the Affymetrix Board accepted
such resignations effective as of October 18, 2000.

ACQUISITION OF NEOMORPHIC, INC.

On October 30, 2000, Affymetrix finalized the acquisition of
Neomorphic, Inc. ("Neomorphic"), a privately-held, computational genomics
company. Under the terms of the merger agreement, Neomorphic became a wholly
owned subsidiary of the Company. In the merger, (i) each outstanding share of
Neomorphic common stock was converted into, and became exchangeable for the
right to receive 0.1552 of a share of Affymetrix common stock, subject to
adjustment under certain circumstances following the closing (the "Conversion
Ratio"), and (ii) each outstanding share of Neomorphic preferred stock was
converted into and became exchangeable for the right to receive shares of
Affymetrix common stock at the Conversion Ratio plus cash in the amount of
$3.84. In connection with the completion of the acquisition, the Company agreed
to register the resale of Affymetrix common stock issued in the merger following
the closing. At such time, the final Conversion Ratio may be increased or
decreased depending on Affymetrix' stock performance prior to the effective date
of the registration statement. In lieu of any such increase in the aggregate
number of shares of Affymetrix common stock to be issued in the transaction, the
Company may have the option of paying cash in an aggregate amount not to exceed
$20 million. In addition, each option exercisable for Neomorphic common stock
issued and outstanding prior to the consummation of the merger was converted
into an option exercisable for shares of Affymetrix' common stock at the
Conversion Ratio, generally under the same terms and conditions as existed for
the original option. As a result of the merger, Affymetrix issued, in aggregate,
approximately 1.4 million shares of Affymetrix common stock in exchange for all
of the outstanding shares of Neomorphic common and preferred stock and the
assumption of all of Neomorphic's stock options. The acquisition will be
accounted for as a purchase transaction. Accordingly, the Company will allocate
the purchase price, including liabilities assumed, to the tangible and
intangible assets acquired based on their fair values. The Company is in the
process of performing such allocation.

28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
2.1(1) Agreement and Plan of Merger, dated as of September 10,
1999, among Affymetrix, Inc., GMS Acquisition, Inc. and
certain shareholders.
2.2(2) Agreement and Plan of Merger, dated as of September 29,
2000, among Affymetrix, Inc., Nautilus Acquisition Corp.
and Neomorphic, Inc.
3.1(3) Restated Certificate of Incorporation.
3.2(4) Bylaws.
4.1(5) Rights Agreement dated October 15, 1998 between Affymetrix,
Inc. and American Stock Transfer & Trust Company, as
Rights Agent.
4.2(6) Indenture dated as of September 22, 1999, between
Affymetrix, Inc. and The Bank of New York, as Trustee.
4.3(7) 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(8) Indenture, dated as of February 14, 2000 between Affymetrix,
Inc. and The Bank of New York, as Trustee.
4.5(9) Registration Rights Agreement, dated as of February 14,
2000, between Affymetrix, Inc. and certain purchasers
listed on the signature page thereto.
10.1(10) Amendment No. 3 to Governance Agreement, dated as of October
18, 2000, by and between Affymetrix, Inc. and Glaxo
Wellcome PLC.
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 2.1 of the Registrant's Form 8-K as
filed on November 13, 2000 (File No. 000-28218).

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

(4) 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)

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

(6) 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).

(7) 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).

(8) 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).

(9) 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).

(10) Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K as
filed on October 20, 2000 (File No. 000-28218).

29
<PAGE>
(b) REPORTS ON FORM 8-K:

On July 6, 2000, the Company filed a Report on Form 8-K to report under Item
5 (Other Events) that PE Corporation filed suit against the Company in the
Federal District Court in Delaware based on several patents related to reagents
the Company purchases from PE licensed vendors.

On July 21, 2000, the Company filed a Report on Form 8-K to report under
Item 5 (Other Events) that its Board of Directors approved a two-for-one stock
split of the Company's outstanding shares of Common Stock to be effected in the
form a 100% stock dividend.

On August 21, 2000, the Company filed a Report on Form 8-K to report under
Item 5 (Other Events) the issuance of a press release responding to the
announcement by Incyte Genomics, Inc. that Incyte filed suit in the U.S.
District Court for the Northern District of California alleging infringement of
U.S. Patent Nos. 5,716,785 and 5,891,636.

30
<PAGE>
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.

<TABLE>
<S> <C> <C>
November 14, 2000 AFFYMETRIX, INC.

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

31
<PAGE>
AFFYMETRIX, INC.
EXHIBIT INDEX
SEPTEMBER 30, 2000