AFFYMETRIX INC, 8-K, 2000-04-07

AFFYMETRIX INC
8-K, 2000-04-07
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 8-K

CURRENT REPORT

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

DATE OF REPORT: APRIL 7, 2000

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AFFYMETRIX, INC.
(Exact Name of Registrant as Specified in Charter)

<TABLE>
<S> <C> <C>
DELAWARE 0-28218 77-0319159
(State of Incorporation) (Commission File Number) (I.R.S. Employer Identification No.)
</TABLE>

3380 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
Address of Principal Executive Offices

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

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ITEM 5. OTHER EVENTS

On February 9, 2000, Genetic MicroSystems, Inc. ("GMS"), a Massachusetts
corporation, became a wholly-owned subsidiary of the registrant,
Affymetrix, Inc. ("Affymetrix"), as a result of the merger (the "Merger") of GMS
Acquisition, Inc. ("Merger Subsidiary"), a Massachusetts corporation and a
wholly-owned subsidiary of Affymetrix, with and into GMS pursuant to the
Agreement and Plan of Merger, dated as of September 10, 1999, among Affymetrix,
Merger Subsidiary, GMS and certain stockholders of GMS. The merger was accounted
for as a pooling of interests.

The merger agreement has previously been filed by Affymetrix on Form S-4, as
amended on January 11, 2000. Affymetrix is filing this Current Report on
Form 8-K in order to file, as Exhibit 99.1 hereto, its supplemental selected
consolidated financial data, management's discussion and analysis of financial
condition and results of operations, and audited supplemental consolidated
financial statements as of and for the periods listed therein, which have been
restated to reflect the combined results of Affymetrix and GMS.

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements of Business Acquired.

Not applicable.

(b) Pro Forma Financial Information.

Not applicable.

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<S> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors

27.1 Restated Financial Data Schedule at December 31, 1999

27.2 Restated Financial Data Schedule at December 31, 1998

27.3 Restated Financial Data Schedule at December 31, 1997

99.1 Affymetrix, Inc. Supplemental Selected Consolidated
Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations,
Supplemental Consolidated Financial Statements

Schedule II--Valuation and qualifying accounts for the years
ended December 31, 1999, 1998 and 1997
</TABLE>

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 hereunto duly authorized.

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<S> <C> <C>
AFFYMETRIX, INC.

Dated: April 7, 2000 By: /s/ VERN NORVIEL
----------------------------------------
Name: Vern Norviel
TITLE: SENIOR VICE PRESIDENT, GENERAL
COUNSEL AND CORPORATE SECRETARY
</TABLE>

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EXHIBIT INDEX

<TABLE>
<S> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors

27.1 Restated Financial Data Schedule at December 31, 1999

27.2 Restated Financial Data Schedule at December 31, 1998

27.3 Restated Financial Data Schedule at December 31, 1997

Schedule II--Valuation and qualifying accounts for the years
ended December 31, 1999, 1998 and 1997
</TABLE>

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EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-92577) and the related prospectus and in the Registration Statements
(Forms S-8 No. 333-11299, No. 333-35287 and No. 333-85575) pertaining to the
1993 Stock Option Plan, the 1996 Non-employee Directors Stock Option Plan and
the 1998 Stock Incentive Plan of Affymetrix, Inc., of our report dated
February 2, 2000, except for the third paragraph of Note 1 and Note 13 as to
which the date is February 9, 2000, with respect to the supplemental
consolidated financial statements of Affymetrix, Inc. included herein.

Our audits also included the supplemental consolidated financial statement
schedule of Affymetrix, Inc. included in Exhibit 99.1 herein. This schedule is
the responsibility of Affymetrix, Inc.'s management. Our responsibility is to
express an opinion based on our audits. In our opinion, the supplemental
consolidated financial statement schedule referred to above, when considered in
relation to the basic supplemental consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

Palo Alto, California

April 6, 2000

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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF AFFYMETRIX, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,677
<SECURITIES> 213,763
<RECEIVABLES> 25,656
<ALLOWANCES> (1,010)
<INVENTORY> 12,792
<CURRENT-ASSETS> 268,037
<PP&E> 57,668
<DEPRECIATION> (16,893)
<TOTAL-ASSETS> 326,587
<CURRENT-LIABILITIES> 36,655
<BONDS> 150,000
0
0
<COMMON> 271
<OTHER-SE> 131,661
<TOTAL-LIABILITY-AND-EQUITY> 326,587
<SALES> 98,168
<TOTAL-REVENUES> 109,074
<CGS> 42,219
<TOTAL-COSTS> 139,333
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,270)
<INCOME-PRETAX> (25,504)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,504)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,559)
<EPS-BASIC> (1.08)
<EPS-DILUTED> (1.08)

</TABLE>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,666
<SECURITIES> 79,267
<RECEIVABLES> 9,541
<ALLOWANCES> (408)
<INVENTORY> 3,698
<CURRENT-ASSETS> 100,035
<PP&E> 41,519
<DEPRECIATION> (10,049)
<TOTAL-ASSETS> 142,185
<CURRENT-LIABILITIES> 15,153
<BONDS> 0
0
49,857
<COMMON> 239
<OTHER-SE> 68,675
<TOTAL-LIABILITY-AND-EQUITY> 142,185
<SALES> 36,932
<TOTAL-REVENUES> 52,413
<CGS> 15,226
<TOTAL-COSTS> 85,299
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> (28,069)
<INCOME-TAX> 1,269
<INCOME-CONTINUING> (26,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,121)
<EPS-BASIC> (1.24)
<EPS-DILUTED> (1.24)

</TABLE>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,813
<SECURITIES> 68,312
<RECEIVABLES> 6,216
<ALLOWANCES> 0
<INVENTORY> 2,637
<CURRENT-ASSETS> 82,737
<PP&E> 19,183
<DEPRECIATION> 0
<TOTAL-ASSETS> 102,828
<CURRENT-LIABILITIES> 10,467
<BONDS> 0
0
0
<COMMON> 348
<OTHER-SE> 91,500
<TOTAL-LIABILITY-AND-EQUITY> 102,828
<SALES> 4,789
<TOTAL-REVENUES> 19,765
<CGS> 4,559
<TOTAL-COSTS> 47,905
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (85)
<INCOME-PRETAX> (22,950)
<INCOME-TAX> 170
<INCOME-CONTINUING> (22,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,780)
<EPS-BASIC> (1.01)
<EPS-DILUTED> (1.01)

</TABLE>

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EXHIBIT 99.1

SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA

The data set forth below have been restated to reflect the combined results
and financial position of Affymetrix and GMS and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Supplemental Consolidated Financial Statements and related
Notes included in this Report.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product................................... $ 98,168 $ 36,932 $ 4,789 $ 1,389 $ --
Research.................................. 8,059 14,522 14,976 10,583 4,625
License fees and royalties................ 2,847 959 -- -- --
--------- -------- -------- -------- --------
Total revenue........................... 109,074 52,413 19,765 11,972 4,625
--------- -------- -------- -------- --------
Cost and expenses:
Cost of product revenue................... 42,219 15,226 4,559 2,178 --
Research and development.................. 43,524 38,433 28,590 18,762 12,420
Selling, general and administrative....... 53,590 31,640 14,756 7,569 3,833
--------- -------- -------- -------- --------
Total costs and expenses.................. 139,333 85,299 47,905 28,509 16,253
--------- -------- -------- -------- --------
Loss from operations........................ (30,259) (32,886) (28,140) (16,537) (11,628)
Interest and other income, net.............. 4,755 4,817 5,190 4,310 881
--------- -------- -------- -------- --------
Loss before income tax benefit.............. (25,504) (28,069) (22,950) (12,227) (10,747)
Income tax benefit.......................... -- 1,269 170 -- --
--------- -------- -------- -------- --------
Net loss.................................... (25,504) (26,800) (22,780) (12,227) (10,747)
Preferred Stock dividends................... (2,055) (2,321) -- -- --
--------- -------- -------- -------- --------
Net loss attributable to Common
Stockholders.............................. $ (27,559) $(29,121) $(22,780) $(12,227) $(10,747)
========= ======== ======== ======== ========
Basic and diluted net loss per common
share(1).................................. $ (1.08) $ (1.24) $ (1.01) $ (0.61) $ (0.61)
Shares used in computing basic and diluted
net loss per common share(1).............. 25,585 23,466 22,647 20,131 17,664
BALANCE SHEET DATA:
Cash, cash equivalents, and
available-for-sale securities............. $ 226,440 $ 84,933 $ 73,125 $108,982 $ 38,883
Working capital............................. 231,382 84,883 72,270 107,668 36,070
Total assets................................ 326,587 142,185 102,828 118,900 44,594
Long-term obligations(2).................... 158,000 8,261 513 741 948
Convertible Redeemable Preferred Stock...... -- 49,857 -- -- --
Accumulated deficit......................... (124,203) (96,644) (67,523) (44,743) (32,516)
Total stockholders' equity.................. 131,932 68,915 91,848 112,533 38,561
</TABLE>

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(1) See Note 1 to the Supplemental Consolidated Financial Statements included in
this report.

(2) In February 2000, the Company issued $225 million principal amount of 4.75%
convertible subordinated notes.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

All statements in this discussion that are not historical are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act, including statements regarding the Company's "expectations",
"beliefs", "hopes", "intentions", "strategies" or the like. Such statements are
subject to risks and uncertainties that could cause actual results to differ
materially for Affymetrix from those projected, including, but not limited to,
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 the uncertainties of patent protection and litigation. 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. 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 completed the sale of 1,634,522 shares of Series AA
Convertible Redeemable Preferred Stock to Glaxo Wellcome Americas, Inc. (a
wholly owned subsidiary of Glaxo) for net proceeds of approximately
$49.9 million and in August 1999, Glaxo elected to convert the Series AA
Convertible Redeemable Preferred Stock to 1,257,229 shares of Affymetrix common
stock at a conversion price of $40 per share. As of December 31, 1999, Glaxo's
ownership position is approximately 31%.

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

The Company has incurred operating losses in each year since its inception,
including a loss attributable to Common Stockholders of approximately
$27.6 million during the year ended December 31, 1999 and, as of such date, had
an accumulated deficit of approximately $124.2 million. The Company's losses
have resulted principally from costs incurred in research and development,
manufacturing and from

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selling, general and administrative costs associated with the Company's
operations. These costs have exceeded the Company's revenues and interest
income, which to date have been generated principally from product sales,
royalties and license fees and technology access fees, collaborative research
and development agreements, government research grants and from cash and
investment balances. The Company expects to incur additional operating losses
for at least the next year as a result of increases in its expenses for
expansion in its manufacturing, marketing and sales capabilities, research and
product development and general and administrative costs. The Company's
quarterly operating results will depend upon the volume and timing of orders
received for its products and the timing of deliveries made during the quarter,
variations in payments under collaborative agreements, including milestones,
design fees, royalties, license fees, and other research revenues, and the
timing of new product introductions by the Company. The Company's quarterly
operating results may also fluctuate significantly depending on other factors,
including the introduction of new products by the Company's competitors;
regulatory actions; market acceptance of the Company's products; the outcome of
on-going or future litigation; adoption of new technologies; manufacturing
capabilities; variations in gross margins of the Company's products;
competition; the cost, quality and availability of reagents and components; the
mix of products sold; changes in government funding; and third-party
reimbursement policies.

Affymetrix may have to reduce or discount the price of its products to gain
market acceptance, which could adversely affect gross margins. The Company's
future gross margins, if any, will be dependent on, among other factors, the
Company's ability to manufacture its products cost-effectively and successfully
market its products to pharmaceutical and biotechnology companies, academic
research centers and clinical reference laboratories. The amount of future
operating losses and time required by the Company to reach profitability are
uncertain. The Company's ability to generate significant revenues and become
profitable is dependent in large part on the ability of the Company to enter
into additional collaborative and supply arrangements and on the ability of the
Company and its collaborative partners to successfully manufacture and
commercialize products incorporating the Company's technologies. In addition,
delays in receipt of any necessary regulatory approvals by the Company or its
collaborators, or receipt of approvals by competitors, could adversely affect
the successful commercialization of the Company's technologies.

IMPACT OF YEAR 2000

Prior to January 1, 2000, the Company completed an assessment of Year 2000
compliance of its internal and embedded computer systems, certain third parties
suppliers and major customers and undertook certain remediative actions. The
Company has not experienced any material Year 2000 problems as a result of
operating on and after January 1, 2000. However, there can be no assurance that
the Company will not experience problems in the future with the operation of its
internal and embedded systems and those of its third party suppliers and
customers. Any such problems could result in the Company experiencing a business
interruption and being subject to certain litigation, which could have a
material adverse impact on the Company's business, results of operations and
financial condition.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998

PRODUCT REVENUE AND COST OF PRODUCT REVENUE. Product sales increased to
$98.2 million in 1999, up from $36.9 million in 1998. The increase primarily
resulted from growth in placements of instruments which include GeneChip
systems, Affymetrix 417 Arrayers (previously marketed under GMS) and Affymetrix
418 Scanners (previously marketed under GMS), sales of GeneChip probe arrays and
related products, subscription fees earned under EasyAccess-TM- contracts. Cost
of product revenue increased to $42.2 million in 1999, up from $15.2 million in
1998. The increase in cost of product revenue is due to the higher revenue base,
increased manufacturing costs from the start-up of the Company's West Sacramento
facility and variations in manufacturing capacity and yield. The Company has
experienced, and continues to experience, variation in manufacturing capacity
and yield of its GeneChip

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products which has impacted, and may continue to impact, the Company's ability
to meet its commitments to deliver certain products to its customers in a timely
manner. Difficulty in providing timely delivery of products adversely affects
the Company's relationships with its customers, its business, its financial
condition and results of operations. Margins have fluctuated, and will continue
to fluctuate significantly, as a result of variation in manufacturing yields. In
addition, margins will continue to fluctuate as the Company continues
development and expansion of its manufacturing capabilities and as the Company
incurs 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 will fluctuate due to changes in currency exchange
rates.

RESEARCH REVENUE. Research revenue includes custom probe array design fees,
milestones, FTE support and grant funding. Research revenue decreased to
$8.1 million for 1999 from $14.5 million for 1998. The decrease is primarily due
to timing of certain milestone payments and design fees and lower activity under
government grants including grants from the Advanced Technology Program ("ATP")
and the National Institutes of Health, National Center for Human Genome Project,
which was completed in 1998. The Company expects grant revenues to decline
substantially due to the completion of the ATP grant in January 2000.

LICENSE FEES AND ROYALTY REVENUES. License fees and royalty revenues
increased to $2.8 million in 1999, up from $1.0 million in 1998. The increase
was attributed primarily to the signing of additional licensees and the
expansion of existing licensing arrangements.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which
primarily consist of new technology, product and manufacturing process
development, increased to $43.5 million for 1999 compared to $38.4 million for
1998. The increase in research and development expenses was attributable
primarily to the hiring of additional research and development personnel and
associated purchases of research supplies. The Company expects research and
development spending to increase over the next several years as product
development and core research efforts continue to expand.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $53.6 million in 1999 compared to
$31.6 million for 1998. The increase in selling, general and administrative
expenses resulted primarily from the Company's expansion of commercial
activities and significantly increased legal costs arising from ongoing patent
litigations. 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./Synteni, Inc. and Oxford Gene
Technology, Ltd. approach their respective trial dates.

INTEREST AND OTHER INCOME, NET. Interest income was $7.0 million for 1999
compared to $4.9 million for 1998 due to higher cash investment balances from
the sale of common stock and convertible subordinated notes. Interest expense
increased to $2.3 million for 1999 compared to $0.1 million for 1998 primarily
due to the interest expense associated with the issuance of convertible
subordinated notes.

INCOME TAX BENEFIT. No income tax provision was recognized for 1999. Income
tax benefit of $1.3 million for 1998 resulted from the elimination of deferred
tax liabilities. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. Based
upon the weight of available evidence, which includes the historical operating
performance and the reported cumulative net losses in all prior years, at
December 31, 1999 the Company has provided a full valuation allowance against

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its net deferred tax assets. Management intends to evaluate the realizability of
the deferred tax assets on a quarterly basis.

YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997

PRODUCT REVENUE AND COST OF PRODUCT REVENUE. Product sales increased to
$36.9 million in 1998, up from $4.8 million in 1997. The increase primarily
resulted from growth in placements of GeneChip systems and sales of GeneChip
probe arrays and related products. Cost of product revenue increased to
$15.2 million in 1998, up from $4.6 million in 1997. The increase in cost of
product revenue was due to the cost of selling more GeneChip systems and probe
arrays and increased manufacturing costs arising from variations in
manufacturing capacity and yield.

RESEARCH REVENUE. Research revenue includes custom probe array design fees,
milestones, FTE support and grant funding. Research revenue for 1998 and 1997
was approximately $14.5 million and $15.0 million, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $31.6 million in 1998 compared to
$14.8 million for 1997. The increase in selling, general and administrative
expenses resulted primarily from the Company's development of its commercial
capabilities and increased legal costs arising from ongoing patent litigation.

INTEREST AND OTHER INCOME, NET. Interest income was $4.9 million for 1998
compared to $5.3 million for 1997. Interest expense of approximately
$0.1 million for both 1998 and 1997 was related to a capital equipment lease.

INCOME TAX BENEFIT. Income tax benefit of $1.3 million for 1998 and
$0.1 million for 1997 resulted from the elimination of deferred tax liabilities.
SFAS 109 provides for the recognition of deferred tax assets if realization of
such assets is more likely than not. Based upon the weight of available
evidence, which includes the historical operating performance and the reported
cumulative net losses in all prior years, the Company has provided a full
valuation allowance against its net deferred tax assets at December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations primarily through the sale of equity
and debt securities, government grants, collaborative agreements, interest
income and product sales. Proceeds raised through the sale of equity and debt
securities include net proceeds of $144.6 million from the private placement of
convertible subordinated notes issued in September 1999, $32.4 million from the
private placement of 1,000,000 shares of common stock in March 1999,
$49.9 million from the sales of Series AA Convertible Redeemable Preferred Stock
to Glaxo in April 1998, net proceeds of $85.1 million from the Company's initial
public offering in June 1996 and aggregate net proceeds of $53.6 million from
private placements in August 1995 and September 1993.

Net cash used in operating activities was $32.1 million in 1999 compared to
$21.9 million in 1998 and $21.6 million in 1997. The cash used for operations
was primarily to fund the Company's operating losses as well as the Company's
working capital requirements. The Company expects net cash used in operating
activities to increase in 2000 as the Company continues to expand its operating
activities.

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The Company's investing activities, other than purchases, sales and
maturities of available-for-sale securities, consisted of capital expenditures,
which totaled $16.2 million in 1999, $17.2 million in 1998 and $16.1 million in
1997. Capital expenditures during 1999 and 1998 included investments in
facilities and production and laboratory equipment.

Net cash provided by financing activities was $189.1 million in 1999,
$54.4 million in 1998 and $150,000 in 1997. The 1999 cash flows from financing
activities are primarily the result of the issuance of $150.0 million of
convertible subordinated notes in September 1999 and the sale of 1,000,000
shares of common stock in a private placement, net of Preferred Stock dividends
of $2.1 million. The convertible subordinated notes bear interest at 5% per
annum and mature in 2006.

As of December 31, 1999, Affymetrix had cash, cash equivalents, and
available-for-sale securities of approximately $226.4 million. In
February 2000, the Company issued an additional $225 million of subordinated
convertible notes in a private placement. These notes bear interest at 4.75% and
mature in 2007. The Company anticipates that its existing capital resources will
enable it to maintain currently planned operations and planned capital
expenditures through at least 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. The Company's
long-term capital expenditure requirements will depend on numerous factors,
including: the development of commercial scale manufacturing capabilities; its
ability to maintain existing collaborative and customer arrangements and
establish and maintain new collaborative and customer arrangements; the progress
of its research and development programs; initiation or expansion of research
programs and collaborations; the costs involved in preparing, filing,
prosecuting, defending and enforcing intellectual property rights; the
effectiveness of product commercialization activities and arrangements; the
purchase of patent licenses; and other factors. The Company has no credit
facility or other committed sources of capital. To the extent capital resources
are insufficient to meet future capital requirements, the Company will have to
raise additional funds to continue the development of its technologies. There
can be no assurance that such funds will be available on favorable terms, or at
all. To the extent that additional capital is raised through the sale of equity
or convertible debt securities, the issuance of such securities could result in
dilution to the Company's stockholders. If adequate funds are not available, the
Company may be required to curtail operations significantly or to obtain funds
by entering into collaboration agreements on unattractive terms. The Company's
inability to raise capital would have a material adverse effect on the Company's
business, financial condition and results of operations.

As of December 31, 1999, Affymetrix had federal and state net operating loss
carryforwards for income tax purposes of approximately $119.4 million and
$8.6 million, respectively, which will expire at various dates beginning in 2000
through 2019, if not utilized. In addition, the Company has federal and state
research and development credit carryforwards of approximately $4.9 million and
$3.2 million, respectively, which expire at various dates beginning in 2007
through 2019, if not utilized. Utilization of the net operating loss and tax
credits carryforwards may be subject to substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. Management believes the effect of such limitations will not
result in the expiration of the net operating loss and tax credit carryforward
before utilization.

RECENT ACCOUNTING PRONOUNCEMENTS

9
<PAGE>
date of SFAS 133 to years beginning after June 15, 2000. The Company does not
anticipate SFAS 133 to have an impact on its results of operations or financial
condition when adopted.

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." Such changes, if necessary, are required to be made by
June 30, 2000. The Company is currently evaluating SAB 101 to determine whether
it would have any material impact on the Company's results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE 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
DECEMBER 31,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
(DOLLAR AMOUNTS IN THOUSANDS) -------- -------- -------- --------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Available-for-sale
securities................ $155,590 $48,866 $18,090 $ -- $ -- $ -- $222,546 $221,744
Average interest rate....... 1.7% 5.8% 6.2%
LIABILITIES:
5% convertible subordinated
notes due 2006............ $ -- $ -- $ -- $ -- $ -- $150,000 $150,000 $223,350
Average interest rate....... 5%
</TABLE>

10
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

AFFYMETRIX, INC.

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 12

Supplemental Consolidated Balance Sheets.................... 13

Supplemental Consolidated Statements of Operations.......... 14

Supplemental Consolidated Statements of Stockholders'
Equity.................................................... 15

Supplemental Consolidated Statements of Cash Flows.......... 16

Notes to Supplemental Consolidated Financial Statements..... 17
</TABLE>

11
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
Affymetrix, Inc.

We have audited the supplemental consolidated balance sheets of
Affymetrix, Inc. (formed as a result of the consolidation of Affymetrix, Inc.
and Genetic MicroSystems, Inc.) as of December 31, 1999 and 1998, and the
related supplemental consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. The supplemental consolidated financial statements give
retroactive effect to the merger of Affymetrix, Inc. and Genetic
MicroSystems, Inc. on February 9, 2000, which has been accounted for using the
pooling of interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial statements are
the responsibility of the management of Affymetrix, Inc. Our responsibility is
to express an opinion on these supplemental financial statements based on our
audits.

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

In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Affymetrix, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, after giving retroactive effect to the merger of
Genetic MicroSystems, Inc., as described in the notes to the supplemental
consolidated financial statements, in conformity with accounting principles
generally accepted in the United States.

ERNST & YOUNG LLP

Palo Alto, California,
February 2, 2000,

except for the third paragraph of Note 1 and Note 13

as to which the date is February 9, 2000

12
<PAGE>
AFFYMETRIX, INC.

SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 12,677 $ 5,666
Available-for-sale securities............................. 213,763 79,267
--------- --------
226,440 84,933
Accounts receivable, net of allowances for doubtful
accounts of $1,010 in 1999 and $408 in 1998............. 24,646 9,133
Inventories............................................... 12,792 3,698
Prepaid expenses.......................................... 4,159 2,271
--------- --------
Total current assets.................................... 268,037 100,035
Property and equipment, net................................. 40,775 31,470
Acquired technology rights, net of accumulated amortization
of $1,035 in 1999 and $375 in 1998 (Note 3)............... 8,965 9,625
Notes receivable from employees............................. 1,074 991
Other assets................................................ 7,736 64
--------- --------
$ 326,587 $142,185
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued liabilities.................. $ 29,926 $ 13,384
Deferred revenue.......................................... 6,468 1,517
Current portion of capital lease obligation............... 261 252
--------- --------
Total current liabilities............................... 36,655 15,153
Noncurrent portion of capital lease obligation.............. -- 261
Obligation to Beckman Coulter, Inc.......................... 5,000 5,000
Convertible subordinated notes.............................. 150,000 --
Common stock purchase rights (Note 8)....................... 3,000 3,000
Commitments and contingencies...............................
Convertible Redeemable Preferred Stock, $0.01 par value;
5,000,000 shares authorized; no and 1,634,522 Series AA
shares issued and outstanding at December 31, 1999 and
1998, respectively........................................ -- 49,857
Stockholders' equity:
Common stock, $0.01 par value; 75,000,000 shares
authorized; 27,150,527 and 23,953,920 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 271 239
Additional paid-in-capital................................ 256,739 165,386
Note receivable from stockholders......................... (150) (160)
Deferred compensation..................................... (119) (342)
Accumulated other comprehensive (loss) income............. (606) 435
Accumulated deficit....................................... (124,203) (96,644)
--------- --------
Total stockholders' equity.............................. 131,932 68,914
========= ========
$ 326,587 $142,185
========= ========
</TABLE>

See Accompanying Notes

13
<PAGE>
AFFYMETRIX, INC.

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Product................................................... $ 98,168 $ 36,932 $ 4,789
Research.................................................. 8,059 14,522 14,976
License fees and royalties................................ 2,847 959 --
-------- -------- --------
Total revenue........................................... 109,074 52,413 19,765
-------- -------- --------
COSTS AND EXPENSES:
Cost of product revenue................................... 42,219 15,226 4,559
Research and development.................................. 43,524 38,433 28,590
Selling, general and administrative....................... 53,590 31,640 14,756
-------- -------- --------
Total costs and expenses (includes related-party expense
of $448, $48 and $52, respectively)................... 139,333 85,299 47,905
-------- -------- --------
Loss from operations........................................ (30,259) (32,886) (28,140)
Interest and other income................................... 7,025 4,882 5,275
Interest expense............................................ (2,270) (65) (85)
-------- -------- --------
Loss before income tax benefit.............................. (25,504) (28,069) (22,950)
Income tax benefit.......................................... -- 1,269 170
-------- -------- --------
Net loss.................................................... (25,504) (26,800) (22,780)
Preferred Stock dividends................................... (2,055) (2,321) --
-------- -------- --------
Net loss attributable to Common Stockholders................ $(27,559) $(29,121) $(22,780)
======== ======== ========
Basic and diluted net loss per common share................. $ (1.08) $ (1.24) $ (1.01)
======== ======== ========
Shares used in computing basic and diluted net loss per
common share.............................................. 25,583 23,466 22,647
======== ======== ========
</TABLE>

See Accompanying Notes

14
<PAGE>
AFFYMETRIX, INC.

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
NOTES ACCUMULATED
ADDITIONAL RECEIVABLE OTHER TOTAL
COMMON PAID-IN FROM DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL STOCKHOLDERS COMPENSATION INCOME DEFICIT EQUITY
-------- ---------- ------------ ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996..................... $158,687 $ -- $ -- $(1,460) $ 49 $ (44,743) $112,533
Comprehensive loss:
Unrealized loss on
available-for-sale
securities, net of
reclassification
adjustments for losses
included in net
income................. -- -- -- -- (566) -- (566)
Net loss................. -- -- -- -- -- (22,780) (22,780)
--------
Comprehensive loss......... (23,346)
--------
Issuance of common stock
upon exercise of stock
options.................. 237 -- -- -- -- -- 237
Contribution of
available-for-sale
securities to capital,
net of deferred taxes.... -- 1,708 -- -- -- -- 1,708
Amortization of deferred
compensation............. -- -- -- 716 -- -- 716
-------- -------- ----- ------- ------ --------- --------
Balance, December 31,
1997..................... 158,924 1,708 -- (744) (517) (67,523) 91,848
-------- -------- ----- ------- ------ --------- --------
Comprehensive loss:
Unrealized gain on
available-for-sale
securities, net of
reclassification
adjustments for gains
included in net loss... -- -- -- -- 952 -- 952
Net loss................. -- -- -- -- -- (26,800) (26,800)
--------
Comprehensive loss......... (25,848)
--------
Preferred stock
dividends................ -- -- -- -- -- (2,321) (2,321)
Reincorporation in
Delaware................. (158,696) 158,696 -- -- -- -- --
Issuance of common stock to
investors and upon
exercise of stock options
and warrants net of
repurchases.............. 11 4,532 (201) -- -- -- 4,342
Contribution of
available-for-sale
securities to capital,
net of deferred taxes.... -- 450 -- -- -- -- 450
Amortization of deferred
compensation............. -- -- -- 402 -- -- 402
Repayment of notes
receivable from
stockholders............. -- -- 41 -- -- -- 41
-------- -------- ----- ------- ------ --------- --------
Balance, December 31,
1998..................... 239 165,386 (160) (342) 435 (96,644) 68,914
-------- -------- ----- ------- ------ --------- --------
Comprehensive loss:
Unrealized loss on
available-for-sale
securities, net of
reclassification
adjustments for losses
included in net loss... -- -- -- -- (1,041) -- (1,041)
Net loss................. -- -- -- -- -- (25,504) (25,504)
--------
Comprehensive loss......... (26,545)
--------
Preferred stock
dividends................ -- -- -- -- -- (2,055) (2,055)
Compensation related to
non-employee stock
options.................. -- 119 -- -- -- -- 119
Issuance of common stock
upon exercise of stock
options and warrants, net
of repurchases........... 9 8,995 -- -- -- -- 9,004
Sale of common stock in
private placement........ 10 32,395 -- -- -- -- 32,405
Conversion of Series AA
Redeemable Preferred
Stock to common stock.... 13 49,844 -- -- -- -- 49,857
Amortization of deferred
compensation............. -- -- -- 223 -- -- 223
Repayment of notes
receivable from
stockholders............. -- -- 10 -- -- -- 10
-------- -------- ----- ------- ------ --------- --------
Balance, December 31,
1999..................... $ 271 $256,739 $(150) $ (119) $ (606) $(124,203) $131,932
======== ======== ===== ======= ====== ========= ========
</TABLE>

See Accompanying Notes

15
<PAGE>
AFFYMETRIX, INC.

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (25,504) $ (26,800) $(22,780)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 6,850 4,868 2,324
Amortization of acquired technology rights.............. 660 375 --
Amortization of investment premiums..................... (1,650) (270) 159
Non-cash stock compensation............................. 342 577 716
Deferred taxes.......................................... -- (1,269) (170)
Changes in operating assets and liabilities:
Accounts receivable................................... (15,513) (2,917) (4,328)
Inventories........................................... (9,094) (1,061) (736)
Prepaid expenses...................................... (1,888) (676) (236)
Accounts payable and other accrued liabilities........ 16,542 4,471 3,890
Deferred revenue...................................... 4,951 853 268
Other assets.......................................... (7,755) (83) (699)
--------- --------- --------
Net cash used in operating activities............... (32,059) (21,932) (21,592)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (16,155) (17,156) (16,110)
Payment to Beckman Coulter, Inc. for acquired technology
rights.................................................. -- (5,900) --
Proceeds from sale of available-for-sale securities....... 63,064 146,977 98,711
Proceeds from maturities of available-for-sale
securities.............................................. -- -- 12,183
Purchases of available-for-sale securities................ (196,951) (155,532) (82,673)
--------- --------- --------
Net cash provided by (used in) investing
activities........................................ (150,042) (31,611) 12,111
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net............................. 41,409 7,048 357
Issuance of Redeemable Preferred Stock, net............... -- 49,857 --
Preferred Stock dividends................................. (2,055) (2,321) --
Issuance of convertible subordinated debt................. 150,000 -- --
Repayment of note receivable from stockholders'........... 10 41
Principal payments on capital lease obligation............ (252) (228) (207)
--------- --------- --------
Net cash provided by financing activities........... 189,112 54,397 150
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 7,011 854 (9,331)
Cash and cash equivalents at beginning of year.............. 5,666 4,812 14,143
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 12,677 $ 5,666 $ 4,812
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Obligation to Beckman Coulter, Inc. for acquired
technology rights....................................... $ -- $ 5,000 $ --
--------- --------- --------
Conversion of Series AA Convertible Redeemable Preferred
Stock................................................... $ 49,857 $ -- $ --
--------- --------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 40 $ 65 $ 85
--------- --------- --------
</TABLE>

See Accompanying Notes

16
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1999

NOTE 1--NATURE OF OPERATION

Affymetrix, Inc. 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. The Company currently sells its products to pharmaceutical and
biotechnology companies, academic research centers and clinical reference
laboratories primarily in the United States and Europe.

In February 2000, Affymetrix completed its merger with Genetic
Microsystems, Inc. ("GMS"), a privately-held instrumentation company
specializing in DNA array technology in Woburn, Massachusetts. Under the terms
of the merger, all outstanding shares of GMS common and preferred stock were
converted into 969,899 shares of Affymetrix common stock at an exchange ratio of
0.2815 Affymetrix share for each GMS share. In addition, Affymetrix assumed all
outstanding GMS options and warrants. The merger will be accounted for as a
pooling of interests, and, accordingly, the Company's accompanying supplemental
consolidated financial statements have been restated to include the accounts and
operations of GMS since its inception.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the financial statements. These policies
are in conformity with generally accepted accounting policies. Certain amounts
for prior years have been reclassified to conform to the current year
presentation.

BASIS OF PRESENTATION

The supplemental consolidated financial statements include the accounts of
Affymetrix and its wholly-owned subsidiaries, Affymetrix, UK Ltd. and GMS. All
significant intercompany accounts and transactions have been eliminated.

The supplemental consolidated financial statements will become the
historical consolidated financial statements upon issuance of consolidated
financial statements for the period that includes the date of the merger.

17
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

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

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 returns and warranty
expenses at the time the associated revenue is recognized. Revenue from
subscription fees earned under EasyAccess 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 expense.

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.

RESEARCH AND DEVELOPMENT

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

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews
long-lived assets, including property and equipment and acquired technology
rights for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable.
Under SFAS 121, an impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount. Impairment, if any,
is assessed using discounted cash flow. Through December 31, 1999, there have
been no such losses.

18
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs were
$0.4 million for 1999 and 1998 and not material for 1997.

NET LOSS PER SHARE

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

Outstanding securities which could potentially dilute basic earnings per
share in the future but were excluded from the computation of diluted net loss
per share as their effect would have been anti-dilutive were as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Options and warrants................................... 4,095 3,361 3,155
Subordinated convertible notes......................... 1,220 -- --
Convertible Redeemable Preferred Stock................. -- 1,635 --
</TABLE>

CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES

Cash equivalents and available-for-sale securities consist of debt
securities. Management determines the appropriate classification of debt
securities at the time of purchase. As of December 31, 1999 and 1998,
Affymetrix' investments in debt securities are classified as available-for-sale
and are carried at fair value with unrealized gains and losses reported in
stockholders' equity. Affymetrix reports all liquid securities with maturities
at the date of purchase of three months or less that are readily convertible
into cash and have insignificant interest rate risk as cash equivalents. The
cost of debt securities is adjusted for amortization of premiums and discounts
to maturity. This amortization is included in interest income. Realized gains
and losses on available-for-sale securities are included in interest income. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest income. The fair values of securities are based on quoted market
prices.

COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") requires unrealized gains or losses on the
Company's available-for sale securities to be included in other comprehensive
income. Total comprehensive income/loss has been disclosed in the consolidated
statement of stockholders' equity.

19
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION

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

INVENTORIES

Inventories are stated at the lower of cost (as determined by the first-in,
first-out method) or market and consist of the following at December 31, 1999
and 1998 (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials.............................................. $ 5,247 $2,063
Work in process............................................ 891 172
Finished goods............................................. 6,654 1,462
------- ------
Total.................................................... $12,792 $3,698
======= ======
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment, including equipment under capital leases, are
recorded at cost and are depreciated for financial reporting purposes using the
straight-line method over the estimated useful lives of the assets ranging from
three to twenty-five years. Leasehold improvements are amortized over the useful
lives of the assets or the lease-term, whichever is shorter. The following table
summarizes the property and equipment balances:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Property and equipment:
Construction-in-progress.............................. $ 8,212 $ 9,512
Land.................................................. 1,310 1,310
Equipment and furniture............................... 25,697 17,368
Building and leasehold improvements................... 22,449 13,329
-------- --------
57,668 41,519
Less accumulated depreciation and amortization........ (16,893) (10,049)
-------- --------
Net property and equipment.......................... $ 40,775 $ 31,470
======== ========
</TABLE>

STOCK-BASED COMPENSATION

As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations, in accounting for
its employee and director stock option and stock incentive plan. Under APB 25,
if the exercise price of

20
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Company's stock options is not less than the market price of the underlying
stock on the date of grant, no compensation expense is recognized. Options
granted to non-employees are accounted for using the Black-Scholes method
prescribed by SFAS 123 and, in accordance with Emerging Issues Task Force
Consensus No. 96-18, the options are subject to periodic re-valuation over their
vesting terms.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities as of December 31, 1999 and 1998,
consist of the following (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accounts payable.......................................... $11,488 $ 7,587
Accrued compensation and related liabilities.............. 4,269 1,377
Accrued interest on convertible subordinated notes........ 2,221 --
Accrued sales and use tax................................. 1,170 --
Accrued warranty.......................................... 1,752 957
Accrued legal............................................. 6,162 2,727
Other..................................................... 2,864 736
------- -------
Total................................................... $29,926 $13,384
======= =======
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

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 hedging activities. In June 1999, FASB
issued Statement of Financial Accounting Standards No. 137 which defers the
effective date of SFAS 133 to years beginning after June 15, 2000. The Company
does not anticipate SFAS 133 to have an impact on its results of operations or
financial condition when adopted.

CONCENTRATIONS OF RISK

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

The Company has not experienced any significant credit losses from its
accounts receivable, from grants or from collaborative research agreements, and
none are currently expected. Affymetrix performs a

21
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
regular review of its customer activity and associated credit risks and does not
require collateral from its customers.

Certain key parts of the GeneChip system, such as the scanner, certain
reagent kits and lithographic masks as well as certain raw materials used in the
synthesis of probe arrays, are currently available only from a single source or
limited sources. No assurance can be given that scanners, reagents, lithographic
masks or other components of the GeneChip system will be available in commercial
quantities at acceptable costs. If the Company is required to seek alternative
sources of supply, it could be time consuming and expensive. In 1998, the
Company entered into an agreement with Agilent Technologies, Inc. ("Agilent
Technologies") under which Agilent Technologies is required to supply all of the
Company's forecasted requirements for scanners until February 2003 and the
Company is required to purchase a minimum number of scanners from Agilent
Technologies each year during the same period.

In addition, the Company is dependent on its vendors to provide components
of appropriate quality and reliability and to meet applicable regulatory
requirements. Consequently, in the event that supplies from these vendors are
delayed or interrupted for any reason, the Company's ability to develop and
supply its products could be impaired, which could have a material adverse
effect on the Company's business, financial condition and results of operations.

NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS

The Company has agreements with several entities to develop and test probe
arrays for the detection of certain gene sequences, mutations or organisms.
Under such agreements, the Company may receive a development fee and may receive
milestone payments upon achievement of certain technical goals. The Company also
has research agreements with several universities and research organizations.
The Company generally obtains rights to intellectual property arising from these
agreements. If a project is successful, generally the Company and the
third-party collaborator would negotiate the right to commercialize products
resulting from such project.

AMERSHAM PHARMACIA BIOTECH, LTD. ("AMERSHAM PHARMACIA BIOTECH") AND AMERSHAM
PHARMACIA BIOTECH, KK ("AMERSHAM PHARMACIA BIOTECH KK")

In December 1997, the Company entered into a non-exclusive sales
representation agreement with Amersham Pharmacia Biotech, Ltd. ("Amersham
Pharmacia Biotech"). Under the agreement, Amersham Pharmacia Biotech's sales
representatives solicit orders for Affymetrix' products from prospective
customers in the pharmaceutical and biotechnology industries and the academic
research community in North America and Western Europe. The Company pays
Amersham Pharmacia Biotech transaction processing fees as well as a percentage
of product sales up to a maximum annual amount as a sales agency fee. In July
and December 1999 the Company terminated its sales representation agreement with
Amersham Pharmacia Biotech in North America and Western Europe, respectively.

In October 1998, the Company entered into a non-exclusive distribution
agreement with Amersham Pharmacia Biotech, KK ("Amersham Pharmacia Biotech KK")
for the marketing and sale of the Company's products in Japan. Under this
agreement, Amersham Pharmacia Biotech KK purchases GeneChip technology directly
from the Company and is responsible for marketing and selling the technology to
its customers in Japan.

22
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
BECKMAN COULTER, INC. ("BECKMAN")

In July 1998, the Company entered into a series of agreements with Beckman
that gave Beckman licenses to commercialize probe arrays manufactured using
certain technologies other than light directed synthesis, and an original
equipment manufacturer ("OEM") supply agreement for products that use the
Company's GeneChip technology. Beckman will pay Affymetrix transfer prices and
royalties on sales of these products as specified in the agreements. The
agreements also provided Affymetrix with a path to obtain a license to
commercialize DNA arrays under certain patents, including patents covering
inventions by Professor Edwin Southern of Oxford University. In June 1999, the
Company purchased the array business of Beckman that included a license to the
Southern DNA array patents owned by Oxford Gene Technology ("OGT") of Oxford,
England. OGT is contesting the transfer of this license (See "Legal
Proceedings").

Under the agreements, Affymetrix made a $5.9 million payment to Beckman and
agreed to provide an additional $5.0 million in services, cash or stock to
Beckman over the next seven years. The payments and obligations to Beckman were
accounted for as the purchase of an intangible asset which will be amortized on
a straight-line basis over its estimated useful life of 15 years.

BIOMERIEUX VITEK, INC. ("BIOMERIEUX")

In September 1996, bioMerieux and Affymetrix entered into a five year
collaborative development agreement and associated supply agreement to develop
and commercialize DNA probe arrays using the Affymetrix GeneChip technology for
clinical diagnostic kits for bacterial identification and antibiotic resistance
analysis. The agreement provides for certain research funding, license and
milestone payments. bioMerieux is also funding certain research activities at
Affymetrix for a minimum of three years. Research revenue under this contract
were approximately $0.6 million, $1.2 million and $3.4 million for the years
ended December 31, 1999, 1998 and 1997, respectively. The associated research
costs incurred approximated revenue for each of the years presented.
Additionally, a manufacturing agreement was signed under which Affymetrix will
manufacture GeneChip probe arrays for sale to bioMerieux. The agreement provides
for royalties to Affymetrix on bioMerieux' sales of GeneChip probe arrays. In
December 1997 and January 1998, bioMerieux and the Company expanded their
collaboration to include the development of DNA probe arrays using the
Affymetrix GeneChip technology for clinical diagnostics tests in the fields of
HIV and food and industrial testing.

GENETICS INSTITUTE ("GI")

In December 1995, Affymetrix and GI entered into a supply agreement in the
field of genomics under which Affymetrix manufactures and supplies custom probe
arrays based on specific genes identified and selected by GI. Pursuant to the
agreement, GI is obligated to purchase and Affymetrix is obligated to supply
certain minimum quantities of custom probe arrays developed for GI until the
later of 2001 or four years after development of specified probe arrays.
Affymetrix receives fees for the design and delivery of the custom probe arrays,
and may receive milestone payments and royalties on any therapeutic compounds
developed by GI using these probe arrays. GI has exclusive rights to specific
probe arrays supplied by Affymetrix.

23
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)

In January 1998, the Company and GI entered into a three-year EasyAccess
supply agreement under which the Company will supply GI with custom and standard
probe arrays and related technical support on preferential terms in return for
expected annual subscription fees, custom design fees and revenue from the sale
of probe arrays. In February 1998, this EasyAccess agreement was expanded to
include GI's parent, American Home Products, Inc.

F. HOFFMANN-LA ROCHE LTD. ("ROCHE")

In August 1997, the Company and Roche entered into a three-year EasyAccess
supply agreement under which the Company will supply Roche with custom and
standard probe arrays and related technical support on preferential terms in
return for annual subscription fees, custom design fees and revenue from the
sale of probe arrays.

Prior to the 1997 agreement, the Company had entered into two agreements
with Roche. In October 1996, the Company signed a demonstration agreement with
Roche for the development and supply of a single custom probe array containing
bacterial genes. In December 1996, the Company signed a pilot agreement with
Roche Bioscience, a division of Syntex (U.S.A.) Inc., for the development and
supply of a single custom probe array containing human, rat and mouse genes. The
milestones of these agreements were met and the agreements have been concluded.

In February 1998, the Company entered into collaboration with Roche
Molecular Systems, Inc., a subsidiary of Roche, for the development of
diagnostic products utilizing the Company's array technology. Under the terms of
the agreement, the Company and Roche will co-develop mutually agreed upon
products, Affymetrix will manufacture arrays for use in the products and Roche
will market and sell the products. Under the terms of the agreement Roche and
the Company are funding their respective work efforts as mutually agreed and
will share revenues and profits based on specified terms in the agreement.

ORCHID BIOSCIENCES, INC. ("ORCHID")

In December 1999, Affymetrix and Orchid entered into an agreement to develop
and commercialize single nucleotide polymorphism (SNP) genotyping assays that
combine Orchid's proprietary GBA-Registered Trademark- primer extension
technology with Affymetrix' new GenFlex-Registered Trademark- Tag array product
offering from Arrymetrix.

The first products to be commercialized by the alliance will include reagent
kits for use with Affymetrix'GenFlex Tag array designed to perform thousands of
user-defined SNP analyses. Orchid will develop and manufacture GBA primer
extension reagent kits that are directed to defined sets of SNPs and that can be
customized by the end user. Affymetrix will develop and manufacture the GenFlex
Tag arrays. Affymetrix will distribute and provide marketing, sales and
technical support for the standard and universal genotyping assays. Orchid will
manufacture, supply and support custom kits for use on GenFlex Tag arrays
developed and sold by Affymetrix. As part of the agreement, Affymetrix received
a promissory note from Orchid in the principal amount of $2.5 million, which is
convertible, under certain circumstances, into Orchid Series E Convertible
Preferred Stock, par value $.001 per share. In January 2000, the promissory note
was converted into shares of Orchid Preferred Stock and Affymetrix purchased an
additional $2.5 million of Series E Convertible Preferred Stock of Orchid.

24
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 3--COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
GOVERNMENT GRANT

In October 1994, Affymetrix and Molecular Dynamics, Inc. ("Molecular
Dynamics") were awarded a five-year matching grant for a total of $31.5 million
under the Advanced Technology Program ("ATP") within the National Institute of
Standards and Technology to develop a miniaturized DNA diagnostic device, of
which approximately $10.7 million is available to Molecular Dynamics. Under the
contract Affymetrix receives matching funding up to $20.8 million, some of which
is used to fund activities at collaborating academic institutions and commercial
partners. Affymetrix is to receive payments monthly based on costs incurred and
has recognized revenue of $17.4 million through December 31, 1999. The ATP grant
expired in January 2000 and is subject to audit by the granting authorities.

NOTE 4--AVAILABLE-FOR-SALE SECURITIES

The following is a summary of available-for-sale securities as of
December 31, 1999 (in thousands):

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government obligations and U.S.
Government agency securities...... $ 28,049 $ -- $(252) $ 27,798
U.S. Corporate securities........... 194,300 24 (378) 193,946
-------- --------- ----- --------
Total securities.................. $222,349 $ 24 $(630) $221,744
======== ========= ===== ========

Amounts included in:
Cash equivalents.................. $ 7,976 $ 4 $ -- $ 7,980
Available-for-sale securities..... 214,373 20 (630) 213,763
-------- --------- ----- --------
$222,349 $ 24 $(630) $221,744
======== ========= ===== ========
</TABLE>

The following is a summary of available-for-sale securities as of
December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government obligations and U.S.
Government agency securities........ $45,321 $324 $ (2) $45,643
U.S. Corporate securities............. 33,511 127 (14) 33,624
------- ---- ---- -------
Total securities.................... $78,832 $451 $(16) $79,267
======= ==== ==== =======

Amounts included in:
Available-for-sale securities....... $78,832 $451 $(16) $79,267
======= ==== ==== =======
</TABLE>

The realized gains and losses on sales of available-for-sale securities were
immaterial for the years ended December 31, 1999, 1998, and 1997.

25
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 4--AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
The following is a summary of the cost and estimated fair value of
available-for-sale securities at December 31, 1999 and 1998, by contractual
maturity (in thousands):

<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Mature in one year or less........... $154,616 $154,444 $15,949 $16,037
Mature in one to three years......... 67,733 67,300 62,883 63,230
-------- -------- ------- -------
Total.............................. $222,349 $221,744 $78,832 $79,267
======== ======== ======= =======
</TABLE>

NOTE 5--RELATED PARTY TRANSACTIONS

GLAXO

As mentioned in Note 1, Glaxo has a significant ownership interest in the
Company. Pursuant to a Governance Agreement, Glaxo is entitled to appoint a
specified number of directors to the Board of the Company depending on its
ownership position. The Company has entered into research and supply agreements
with Glaxo, resulting in revenue of $0.1 million in 1999, $0.5 million in 1998
and $1.7 million in 1997. In 1999, two Glaxo employees served as members of the
Company's Board of Directors.

EOS BIOTECHNOLOGY, INC. ("EOS")

In April 1998, the Company entered into a series of agreements with Eos
under which Eos became an EasyAccess supply customer of the Company. In return
for granting Eos access to certain technology and licenses, the Company received
3,750,000 shares of Series C Preferred Stock and the right to name one director
of Eos. In September 1999, the Company purchased an additional 76,923 shares of
Series D Preferred Stock for approximately $0.1 million (at December 31, 1999,
Affymetrix owns approximately 9% of EOS' outstanding equity). The shares
received were recorded at zero value as Eos is a development stage entity and
realization of this investment is uncertain. The shares are subject to
repurchase by Eos in the event the Company does not fulfill its obligations
under the EasyAccess supply agreement. For the years ended December 31, 1999 and
1998, the Company earned revenue of $0.3 million and $0.6 million, respectively,
from EOS under the EasyAccess supply agreement.

NOTE 6--COMMITMENTS AND CONTINGENCIES

CAPITAL LEASE

In December 1994, Affymetrix entered into a financing arrangement with a
leasing company for existing equipment. Under the terms of the lease, Affymetrix
received a single payment of $1.3 million at the inception of the lease. The
leaseback contract includes a five-year term expiring January 2, 2000, with an
option to purchase the equipment at the greater of the residual value or fair
market value. Under certain provisions, the lease may be extended for an
additional year. The amount included in property and equipment related to the
lease is $1.2 million and was fully depreciated as of December 31, 1996.

26
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES

Affymetrix leases laboratory, office and manufacturing facilities, and
equipment under noncancelable operating leases which expire at various times
through 2004. Rent expense related to operating leases was approximately
$2.5 million in 1999, $1.9 million in 1998 and $1.4 million in 1997.

Future minimum lease obligations at December 31, 1999 under all leases are
as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
2000....................................................... $ 280 $ 3,646
2001....................................................... -- 3,395
2002....................................................... -- 3,371
2003....................................................... -- 2,271
2004....................................................... -- 1,121
----- -------
Total minimum lease payments............................... 280 $13,804
=======
Less amount representing interest.......................... (19)
-----
Present value of minimum lease payments.................... 261
Less current portion....................................... (261)
-----
Noncurrent obligation under capital lease.................. $ --
=====
</TABLE>

LITIGATION

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. Further, because of
the substantial amount of discovery required in connection with any such
litigation, there is a risk that confidential information could be compromised
by disclosure.

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, "940. On August 18, 1998, Affymetrix filed a lawsuit in
United States District Court for the Northern District of California (San
Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos.
5,795,716, or "716, and 5,744,305, or "305. On September 1, 1998, Affymetrix
added its U.S. Patent No. 5,800,992, or "992, to the complaint of infringement
against Hyseq. On October 26, 1999, Hyseq filed a third action in United States
District Court for the Northern District of California (San Francisco Division)
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.

27
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
On June 4, 1999, Oxford Gene Technology, Ltd. ("OGT") filed suit against
Affymetrix in the United States District Court for the District of Delaware and
in the United Kingdom alleging infringement of United States Patent 5,700,637
and European Patent 0-373-203, respectively. On June 4, 1999, an asset transfer
agreement with Beckman became effective, giving Affymetrix access to 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 on
these patents. This case has been consolidated with the Delaware action. In the
UK action, Affymetrix has counterclaimed for revocation of this patent and OGT
has applied to amend the patent. The patent infringement issues have been stayed
pending resolution of whether Affymetrix and Affymetrix UK Limited have a
license under the patent as a result of the purchase of Beckman's microarray
business. In February, 2000, the High Court of Justice, Chancery Division,
Patent Court held a hearing on the issue of whether Affymetrix UK had a valid
license. A decision on this hearing is anticipated shortly. In addition, in
February 2000, OGT asserted that Affymetrix and Beckman were in breach of this
license.

The Hyseq and the OGT actions seek damages based on the sale of Affymetrix'
products and processes and seek to enjoin commercial activities relating to
those products and processes. In addition to subjecting Affymetrix to potential
liability for damages, these actions, and any other similar legal actions
against Affymetrix or its collaborative partners, could require Affymetrix or
its collaborative partners to obtain a license in order to continue to
manufacture, market or use the affected products and processes. While Affymetrix
believes that the Hyseq and OGT complaints are without merit, Affymetrix may not
prevail in these actions and Affymetrix or its collaborative partners may not
prevail in any other related action. Moreover, in the event Affymetrix does not
prevail in the Hyseq and OGT actions and Affymetrix, its partners or its
customers are required to obtain a license to continue to manufacture, market or
use the affected products and processes, Affymetrix, its partners or its
customers may not be able to obtain such a license on commercially acceptable
terms, if at all. Furthermore, Affymetrix has expended and is likely to continue
to expend substantial financial and managerial resources in defending against
the claims filed by Hyseq and OGT.

On January 6, 1998, Affymetrix filed a patent infringement action in the
United States District Court for the District of Delaware (No. 98-6) 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
Federal District Court in 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, as case
numbers C98-4507 and C98-4508, respectively. 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/Synteni's motion for summary judgment.

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
(related to certain DNA arrays). This revocation action also includes an
application to revoke Affymetrix's related United Kingdom Patent GB

28
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 may not prevail in asserting its patent rights against Hyseq,
Incyte, Synteni or others. Affymetrix has expended and is likely to continue to
expend substantial financial and managerial resources in asserting its patent
rights against Hyseq, Incyte, Synteni and others. Affymetrix' failure to
successfully enforce its patent rights or the loss of these patent rights or
others would remove a legal obstacle to competitors in designing probe array
systems with similar competitive advantages to Affymetrix' GeneChip technology.
The removal of such barriers could have a material adverse effect on Affymetrix'
business, financial condition and results of operations.

On April 17, 1998, Incyte filed a response and counterclaim to case number
C98-4507, 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 (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.

Affymetrix believes that the counterclaims are without merit. However,
Affymetrix has expended and is likely to continue to expend significant
financial and managerial resources defending against these and any other
counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to
successfully enforce its patent rights or defend against counterclaims of
Incyte, Synteni, or others could result in a material adverse effect on
Affymetrix' business, financial condition and results of operations.

The United States Patent and Trademark Office, or USPTO, notified Affymetrix
that Stanford University presented claims that relate to substantially the same
subject matter as certain claims from the "992 Patent and all of the claims of
the "305 Patent. The Stanford application is alleged to be exclusively licensed
to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared
an interference proceeding relating to these patents and claims of patents. The
USPTO conducted proceedings to determine the priority of these claims and
determined that Incyte/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/Synteni has appealed this decision. In United
States District Court for the Northern District of California (case number
C99-2111). Affymetrix has expended, and expects in the future to continue to
expend, substantial financial and managerial resources as a result of these
proceedings. Moreover,

29
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Affymetrix may not prevail in such proceedings or in similar proceedings
relating to those or other patents. Affymetrix may not prevail in the appeal of
the Incyte/Synteni interference proceedings. A failure to prevail could result
in Affymetrix' inability to commercialize its products and also would enable
others to copy aspects of Affymetrix' products.

Affymetrix' intellectual property outside of the United States 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. 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.

Affymetrix expects in the future to expend substantial financial and
managerial resources as a result of these proceedings. A failure to prevail
could result in an inability to commercialize its products and also would enable
others to copy aspects of its products.

NOTE 7--CONVERTIBLE SUBORDINATED NOTES

On September 22, 1999, the Company completed the sale of $150 million
principal amount of 5% convertible subordinated notes due 2006 (the "5% Notes").
The 5% Notes mature on October 1, 2006 and bear interest at a rate of 5% per
annum, which is payable semi-annually on April 1 and October 1. The 5% Notes are
convertible, at any time prior to maturity or redemption, into shares of the
Company's common stock at a conversion price of $123.00 per share, subject to
adjustment. The Company can redeem some or all of the 5% Notes at any time after
October 7, 2002, and the debt holder has a right to require the Company to
purchase all or a portion of the 5% Notes upon a change in control. The 5% Notes
are subordinated to all of the Company's existing and future senior
indebtedness. The fair value of the 5% Notes at December 31, 1999 was
$223.3 million, based on the market value in the PORTAL market where the 5%
Notes are traded.

NOTE 8--COMMON STOCK PURCHASE RIGHTS

In August 1998, the Company entered into an agreement with Takara Shuzo
Co. Ltd. (Takara) under which the Company's microarray instruments will be
distributed by Takara and Takara will sell microarray manufacturing services
utilizing the Company's equipment, provided a 5% royalty is paid to the Company
for the sale of these services. The agreement also provides for the purchase,
subject to certain requirements, of the Company's shares by Takara through an
advance payment of $3.0 million, which has been included in the caption of
common stock purchase rights in the accompanying consolidated financial
statements. The number of shares issuable will be based on the fair market value
of the Company's Common Stock on August 19, 2003.

In no event is the number of common shares issued to Takara to exceed 10% of
the total shares of outstanding Common Stock of the Company on August 19, 2003.
In the event that the Company's Common Stock issuable to Takara is valued at
less than $3.0 million, the Company will pay Takara the difference between the
value of the Company's common stock and $3.0 million.

30
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 8--COMMON STOCK PURCHASE RIGHTS (CONTINUED)

In connection with the agreement, the Company granted an employee warrants
to purchase 10% of the Common Stock ultimately issued to Takara at the fair
market value of the Common Stock on the date the shares are issued.

NOTE 9--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

SALE OF COMMON STOCK

On March 15, 1999, the Company completed the private placement of 1,000,000
shares of common stock for an aggregate purchase price of $32.5 million to the
Growth Fund of America, Inc., which is managed by Capital Research and
Management Company. The Company filed a registration statement with respect to
these shares on July 12, 1999.

CONVERTIBLE REDEEMABLE PREFERRED STOCK

On August 5, 1999, Glaxo elected to convert its 1,634,522 shares of Series
AA Convertible Redeemable Preferred Stock purchased in April 1998 into 1,257,229
shares of Affymetrix common stock at the original conversion price of
approximately $40 per share.

COMMON STOCK WARRANTS

During 1999, outstanding warrants to purchase 203,881 shares of common stock
at $8.25 per share and 12,542 shares at $25.00 per share were exercised in full.
At December 31, 1999, there were warrants outstanding to purchase 14,075 shares
of Common Stock at $7.10 per share and 9,771 shares of Common Stock at $30.20
per share. The warrants expire in 2008.

STOCKHOLDER RIGHTS PLAN

On October 15, 1998, the Board of Directors of the Company declared a
dividend of (i) one preferred share purchase right (a "Right") for each
outstanding share of common stock of the Company, and (ii) a number of Rights
for each share of Series AA Preferred Stock of the Company equal to the number
of shares of common stock into which such share of Series AA Preferred Stock was
convertible. The dividend is payable on October 27, 1998 (the "Record Date") to
the stockholders of record on that date. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of Series B
Junior Participating Preferred Stock, par value $.01 per share, of the Company
(the "Series B Preferred Stock") at a price of $125.00 per one one-thousandth of
a share of Series B Preferred Stock, subject to adjustment. The Rights will be
exercisable if a person or group hereafter 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. The Board of Directors will be entitled to redeem
the Rights at one cent per Right at any time before any such person hereafter
acquires beneficial ownership of 15% or more of the outstanding common stock. If
a person or group hereafter acquires 15% or more of the outstanding common stock
of the Company, each Right will entitle its holder to purchase, at the Right's
exercise price, a number of shares of common stock having a market value at that
time of twice the Right's exercise price. Rights held by the 15% holder will
become void and will not be exercisable to purchase shares at the bargain
purchase price. If the Company is acquired in a merger or other business
combination transaction after a person acquires 15% or more of the Company's
common stock, each Right will entitle its holder to purchase, at

31
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 9--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(CONTINUED)
the Right's then-current exercise price, a number of the acquiring company's
common shares having a market value at that time of twice the Right's exercise
price. Glaxo, which currently owns in excess of 15% of the aggregate voting
power of the common stock will not become an "Acquiring Person" until it
acquires beneficial ownership of additional shares of common stock. The Rights
will expire in ten years. In February 2000, this plan was amended (See
"Subsequent Events").

STOCK OPTION AND BENEFIT PLANS

In 1993, the Board adopted the Affymetrix 1993 Stock Plan (the "Stock Plan")
under which incentive stock options, nonqualified stock options and purchase
rights may be granted to employees and outside consultants. Options granted
under the Stock Plan expire no later than ten years from the date of grant. The
option price shall be at least 100% of the fair value on the date of grant (110%
in certain circumstances), as determined by the Board of Directors. Options may
be granted with different vesting terms from time to time but not to exceed five
years from the date of grant. As of December 31, 1999, a total of 5,200,000
shares of common stock have been reserved for issuance under the Stock Plan and
no shares were subject to repurchase by the Company.

In March 1996, the Board adopted the 1996 Nonemployee Directors Stock Option
Plan (the "Directors Plan"). There are 300,000 shares of common stock reserved
for issuance under the Directors Plan. Only nonemployee directors of the Company
are eligible to participate in the Directors Plan and only nonstatutory stock
options can be granted.

On September 29, 1998, the Board of Directors of the Company adopted a Stock
Incentive Plan for employees by providing for awards in the form of restricted
shares or nonqualified stock options. The aggregate number of options and
restricted shares shall not exceed 1,000,000.

In 1998, the GMS Board adopted the 1998 Stock Option Plan, now the
GMS/Affymetrix 1998 Stock Option Plan ("GMS Stock Plan") under which incentive
stock options and nonqualified stock options may be granted to employees and
outside consultants. Options granted under the GMS Stock Plan expire no later
than ten years from the date of grant. The option price shall be at least 100%
of the fair value on the date of grant (110% in certain circumstances), as
determined by the Board of Directors. Options may be granted with different
vesting terms from time to time. As of December 31, 1999, a total of 97,642
Affymetrix equivalent shares were authorized for grant and 63,835 options were
outstanding under the GMS Stock Plan. All outstanding options at the time of
merger were assumed by Affymetrix and will convert into 0.2797 shares of
Affymetrix common stock upon exercise.

32
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 9--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(CONTINUED)
Activity under the stock plans through December 31, 1999 is as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
WEIGHTED
NUMBER OF AVERAGE EXERCISE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1996....................... 2,231,943 $ 0.60
Options granted.................................. 1,000,000 29.40
Options exercised................................ (253,074) 0.93
Options canceled................................. (27,560) 8.58
---------

Balance at December 31, 1997....................... 2,951,309 11.26
Options granted.................................. 909,790 25.87
Options exercised................................ (230,464) 1.21
Options canceled................................. (510,158) 28.07
---------

Balance at December 31, 1998....................... 3,120,477 13.51
Options granted.................................. 1,841,207 48.19
Options exercised................................ (704,947) 9.38
Options canceled................................. (185,487) 22.57
---------
Balance at December 31, 1999....................... 4,071,250 $29.49
=========
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL LIFE EXERCISE PRICE EXERCISE PRICE
EXERCISE PRICES NUMBER (IN YEARS) PER SHARE NUMBER PER SHARE
- --------------------- --------- ----------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.30 - 3.02 1,049,794 5.76 $ 0.74 763,190 $ 0.66
4.80 - 25.37 674,471 7.85 21.94 117,593 19.91
25.66 - 35.87 954,783 8.16 30.06 140,091 29.97
36.01 - 48.87 1,155,750 9.46 47.55 -- --
49.44 - 79.50 76,533 9.54 65.40 315 77.44
82.00 - 187.37 159,919 9.80 98.95 -- --
--------- ---------
4,071,250 7.95 $29.49 1,021,189 $ 6.93
========= =========
</TABLE>

For options granted through June 6, 1996, Affymetrix recognized an aggregate
of $3.2 million as deferred compensation for the excess of the deemed fair value
for financial statement presentation purposes of the common stock issuable on
exercise of such options over the exercise price. The deferred compensation
expense is being recognized over the vesting period of the options.

In accordance with the provisions of SFAS 123, the Company is disclosing pro
forma information regarding net loss and net loss per share as if the Company
had accounted for its stock based compensation plans under the fair value method
of SFAS 123.

The fair value of options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1999, 1998
and 1997: risk free interest rate of 6.5%, 4.7% and

33
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 9--CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(CONTINUED)
5.4%, respectively; a dividend yield of zero; volatility factors of the market
price of the Company's common stock price of 0.58, 0.54 and 0.55, respectively;
and a weighted average expected option term of one year from vested date.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

Based on this calculation, the weighted average fair value of options
granted during 1999, 1998 and 1997 was $23.62, $11.22 and $14.01, respectively.
For purposes of pro forma disclosures the estimated fair value of the options in
excess of the expense recognized in conjunction with the amortization of
deferred compensation is amortized to expense over the options' vesting period,
generally five years. The Company's pro forma information as of December 31,
1999, 1998 and 1997 is as follows (in thousands except per share amounts):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss attributable to Common
Stockholders................................. $(41,488) $(33,141) $(26,769)
Pro forma basic and diluted net loss per common
share........................................ $ (1.62) $ (1.41) $ (1.18)
</TABLE>

The pro forma information above is not representative of the effects on
potential pro forma effects on results for future years.

RESERVED SHARES

At December 31, 1999, shares reserved for future issuance are as follows:

<TABLE>
<S> <C>
Stock option plans:
Options outstanding....................................... 4,071,250
Options available for future grants....................... 623,493
Convertible subordinated notes............................ 1,219,515
Warrants.................................................. 23,846
---------
5,938,104
=========
</TABLE>

NOTE 10--INCOME TAXES/BENEFITS

Due to operating losses and the Company's inability to recognize an income
tax benefit from these losses, there is no provision for income taxes for 1999.
The income tax benefit of $1,269,000 in 1998 and $170,000 in 1997 represent the
elimination of the deferred tax liabilities originally recognized for capital

34
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 10--INCOME TAXES/BENEFITS (CONTINUED)
contributions of marketable equity securities by certain stockholders where the
book basis exceeded the tax basis, but which are no longer payable due to
operating losses incurred in 1998 and 1997.

The difference between the provision for income taxes and the amount
computed by applying the Federal statuory income tax rate (35%) to income before
taxes is explained as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at Federal statutory rate..................... $(8,926) $(9,824) $(8,032)
Loss for which no tax benefit is currently
recognizable.................................... 8,926 8,555 7,862
------- ------- -------
Total provision/(benefit)......................... $ -- $(1,269) $ (170)
======= ======= =======
</TABLE>

Significant components of the Company's deferred tax assets as of
December 31, 1999 and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $41,100 $26,600
Tax credit carryforwards................................ 7,500 3,000
Capitalized research and development.................... 4,300 2,400
Deferred revenue........................................ 2,700 1,000
Other--net.............................................. 5,800 3,600
------- -------
Total deferred tax assets................................. 61,400 36,600
Valuation allowance for deferred tax assets............... (61,400) (36,600)
------- -------
Net deferred tax assets................................... $ -- $ --
======= =======
</TABLE>

SFAS No. 109, "Accounting for Income Taxes," provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. Based
upon the weight of available evidence, which includes the Company's historical
operating performance and the reported cumulative net losses in all prior years,
the Company has provided a full valuation allowance against its net deferred tax
assets. The valuation allowance increased by $24.8 million, $10.9 million and
$11.0 million during 1999, 1998 and 1997, respectively. Included in the
valuation allowance balance is $15.3 million related to the exercise of stock
options, which are not reflected as an expense for financial reporting purposes.
Accordingly, any future reduction in the valuation allowance relating to this
amount will be credited directly to equity and not reflected as an income tax
benefit in the statement of operations.

As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $119.4 million and $8.6 million,
respectively, which will expire at various dates beginning in 2000 through 2019,
if not utilized. In addition, the Company has federal and state research and
development credit carryforwards of approximately $4.9 million and
$3.2 million, respectively, which expire at various dates beginning in 2007
through 2019, if not utilized. Utilization of the net operating loss and tax
credits carryforwards may be subject to substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code and similar
provisions. Management believes the effect

35
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 10--INCOME TAXES/BENEFITS (CONTINUED)
of such limitations will not result in the expiration of the net operating loss
and tax credit carry forwards before utilization.

NOTE 11--GEOGRAPHIC SALES AND SIGNIFICANT CUSTOMERS

The Company has determined that, in accordance with Statement of Financial
Accounting Standards No. 133, it operates in one segment as it only reports
profit and loss information on an aggregate basis to chief operating decision
makers of the Company. The Company had product sales by region as follows for
the years ended December 31, 1999, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Customer location:
United States..................................... $62,551 $27,099 $4,710
Europe............................................ 25,284 7,774 79
Other............................................. 10,333 2,059 --
------- ------- ------
Total............................................. $98,168 $52,413 $4,789
======= ======= ======
</TABLE>

Revenue from customers representing 10% or more of total revenue during
1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CUSTOMER:
A................................................. -- -- 23%
B................................................. 10% 16% 10%
C................................................. -- -- 17%
D................................................. -- -- 17%
E................................................. 12% 20% --
</TABLE>

NOTE 12--401(K) PLAN

The Company maintains a defined-contribution savings plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
full-time U.S. employees. Participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Beginning in 1998, the Company matched employee contributions according to a
specified formula. The Company's matching contributions totaled $0.9 million in
1999, $0.6 million in 1998 and none in 1997. Company contributions vest to
employees ratably over five years.

NOTE 13--BUSINESS COMBINATION

In February 2000, Affymetrix completed its merger with GMS, a privately-held
instrumentation company specializing in DNA array technology in Woburn,
Massachusetts. Under the terms of the merger, all outstanding shares of GMS
common and preferred stock were converted into 969,899 shares of the Company's
common stock at an exchange ratio of 0.2815 Affymetrix share for each GMS share.
In addition, Affymetrix assumed all outstanding GMS options and warrants. At the
date of consummation, GMS had an aggregate of 100,101 Affymetrix equivalent
options and warrants outstanding.

36
<PAGE>
AFFYMETRIX, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

NOTE 13--BUSINESS COMBINATION (CONTINUED)
The merger will be for as a pooling of interests, and, accordingly, the
Company's financial statements and financial data have been restated in 2000 to
include the accounts and operations of GMS since inception. The table below
presents the separate results of operations for Affymetrix and GMS prior to the
merger:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Affymetrix................................................ $ 96,855 $ 52,025 $ 19,765
GMS....................................................... 12,219 388 --
-------- -------- --------
$109,074 $ 52,413 $ 19,765
======== ======== ========
Net loss available to common stockholders:
Affymetrix................................................ $(25,140) $(25,451) $(22,526)
GMS....................................................... (2,419) (3,670) (254)
-------- -------- --------
$(27,559) $(29,121) $(22,780)
======== ======== ========
</TABLE>

NOTE 14--SUBSEQUENT EVENTS (UNAUDITED)

STOCKHOLDER RIGHTS PLAN

In February 2000, the Company's Board of the Directors approved an amendment
to its to stockholder rights plan initially adopted in 1998. The amendment
increases the exercise price of the Preferred Share Purchase Rights to $1,250.00
and extends the expiration date of the plan to February 2010. Under the amended
plan, each Preferred Share Purchase Right entitles stockholders to buy one
one-thousandth of a share of Series B Junior Participating Preferred Stock of
the Company at the new exercise price of $1,250.00. The Rights will be
exercisable if a person or group acquires beneficial ownership of 15% or more of
the common stock of the Company or announces a tender offer for 15% or more of
the common stock.

CONVERTIBLE SUBORDINATED NOTES

In February 2000, the Company completed the sale of $225 million principal
amount of 4.75% convertible subordinated notes due 2007 (the "4.75% Notes"). The
4.75% Notes mature on February 15, 2007 and bear interest at a rate of 4.75% per
annum, which is payable semi-annually. The 4.75% Notes are convertible, at any
time prior to maturity or redemption, into shares of the Company's common stock
at a conversion price of $321.00 per share, subject to adjustment. The Company
can redeem some or all of the 4.75% Notes at any time after February 20, 2003
and the debt holder has 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 existing and future senior indebtedness.

37
<PAGE>
AFFYMETRIX, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
Allowance for doubtful accounts........ $408 $602 $ -- $ -- $1,010
---- ---- ---- ---- ------
Year Ended December 31, 1998:
Allowance for doubtful accounts........ $300 $108 $ -- $ -- $ 408
---- ---- ---- ---- ------
Year Ended December 31, 1997:
Allowance for doubtful accounts........ $ -- $300 $ -- $ -- $ 300
---- ---- ---- ---- ------
</TABLE>