10-Q 1 a2093177z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO

COMMISSION FILE NO. 0-28218

AFFYMETRIX, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		77-0319159 (I.R.S. Employer Identification Number)
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA (Address of principal executive offices)		95051 (Zip Code)

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

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

COMMON SHARES OUTSTANDING ON OCTOBER 31, 2002: 58,378,954

AFFYMETRIX, INC.

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)	3
		Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001	3
		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001	4
		Condensed Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2002 and 2001	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4.	Controls and Procedures	21
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	22
	Item 5.	Other Information	23
	Item 6.	Exhibits and Reports on Form 8-K	33
SIGNATURES			34

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

(UNAUDITED)

			September 30, 2002			December 31, 2001
						(Note 1)
ASSETS
Current assets:
	Cash and cash equivalents		$	158,769		$	58,795
	Available-for-sale securities			193,879			310,028
	Accounts receivable			57,535			44,812
	Inventories			27,292			28,812
	Prepaid expenses			4,167			2,937
	Other current assets			451			339

		Total current assets		442,093			445,723
Net property and equipment				72,932			72,728
Acquired technology rights				20,860			17,636
Goodwill				18,601			18,601
Other intangible assets				1,219			2,062
Notes receivable from employees				1,398			1,404
Other assets				21,730			21,861

			$	578,833		$	580,015

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued liabilities		$	51,164		$	53,428
	Deferred revenue			21,028			19,577

		Total current liabilities		72,192			73,005

Obligation to Beckman Coulter, Inc				5,000			5,000
Convertible subordinated notes				370,000			370,000
Common stock purchase rights				3,000			3,000
Stockholders' equity:
	Common Stock			583			580
	Additional paid-in capital			352,990			349,375
	Notes receivable from stockholders			(698	)		(634	)
	Deferred stock compensation			(8,797	)		(14,873	)
	Accumulated other comprehensive income			423			5,876
	Accumulated deficit			(215,860	)		(211,314	)

		Total stockholders' equity		128,641			129,010

			$	578,833		$	580,015

Note 1:

The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date included in the Company's Form 10-K for the fiscal year ended December 31, 2001.

See accompanying notes.

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2002			2001			2002			2001
Revenue:
	Product		$	62,934		$	47,283		$	178,790		$	139,742
	Revenue from Perlegen			4,868			3,063			16,454			5,928
	Research			2,560			1,333			5,596			3,765
	License fees and royalties			2,411			3,686			10,735			10,366

		Total revenue		72,773			55,365			211,575			159,801

Costs and expenses:
	Cost of product revenue			22,229			17,437			63,955			52,377
	Cost of Perlegen revenue			4,868			3,063			16,454			5,928
	Research and development			16,732			16,578			50,747			52,387
	Selling, general and administrative			24,929			21,598			71,414			67,253
	Amortization of deferred stock compensation (1)			1,966			3,152			7,607			9,508
	Amortization of purchased intangibles			282			1,550			844			4,688

		Total costs and expenses		71,006			63,378			211,021			192,141

Income (loss) from operations				1,767			(8,013	)		554			(32,340	)
Interest and other (expense) income, net (2)				(948	)		3,208			(4,499	)		7,865

Income (loss) before income taxes				819			(4,805	)		(3,945	)		(24,475	)
Income tax provision				(200	)		—			(601	)		(200	)

Net income (loss)			$	619		$	(4,805	)	$	(4,546	)	$	(24,675	)

Basic earnings (loss) per common share			$	0.01		$	(0.08	)	$	(0.08	)	$	(0.43	)

Diluted earnings (loss) per common share			$	0.01		$	(0.08	)	$	(0.08	)	$	(0.43	)

Shares used in computing basic earnings (loss) per common share				58,075			57,511			57,940			57,283

Shares used in computing diluted earnings (loss) per common share				59,539			57,511			57,940			57,283

(1): For the quarters ended September 30, 2002 and 2001 and for the nine months ended September 30, 2001, all stock compensation expense is related to research and development derived from the acquisition of Neomorphic, Inc. For the stock compensation expense recorded in the nine months ended September 30, 2002, $6.0 million was related to research and development and $1.6 million was related to selling, general and administration.
(2): For the quarter ended September 30, 2001 and for the nine months ended September 30, 2001, "interest and other (expense) income, net" includes a $1.7 million gain from the repurchase of convertible notes that was reclassified from extraordinary income in accordance with Financial Accounting Standard ("FAS") 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."

See accompanying notes.

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

					Nine Months Ended September 30,
					2002			2001
Cash flows from operating activities:
	Net loss				$	(4,546	)	$	(24,675	)
		Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization				16,267			11,432
		Amortization of intangible assets				2,794			4,688
		Gain from repurchase of convertible notes				—			(1,699	)
		Loss on disposal of equipment				38			—
		Amortization of investment premiums, net				1,952			3,408
		Stock compensation				7,681			9,508
		Non-cash write down of equity investment				4,418			—
		Realized loss on sales of investments				(4,336	)		(4,742	)
		Amortization of debt offering costs				1,324			1,338
		Accretion of interest on notes receivable from stockholders				(64	)		(363	)
		Changes in operating assets and liabilities:
			Accounts receivable			(12,723	)		12,500
			Inventories			1,520			(13,966	)
			Prepaid expenses			(1,150	)		(1,690	)
			Other current assets			(112	)		9
			Other assets			(821	)		(1,707	)
			Accounts payable and accrued liabilities			(2,053	)		(38,383	)
			Deferred revenue			1,451			3,016

				Net cash provided by (used in) operating activities		11,640			(41,326	)

Cash flows from investing activities:
	Purchases of non-marketable equity investments					(1,000	)		—
	Capital expenditures					(17,234	)		(25,894	)
	Purchases of available-for-sale securities					(328,925	)		(289,886	)
	Proceeds from the sales or maturities of available-for-sale securities					438,735			381,893
	Purchases of technology rights					(5,255	)		—
	Proceeds from sale of technology rights					—			1,600

				Net cash provided by investing activities		86,321			67,713

Cash flows from financing activities:
	Issuance of common stock					2,013			6,100
	Repurchase of convertible notes					—			(3,301	)
	Principal payments on capital lease obligations					—			(82	)
	Repayment of notes receivable from stockholders					—			718

				Net cash provided by financing activities		2,013			3,435

Net increase in cash and cash equivalents						99,974			29,822
Cash and cash equivalents at beginning of period						58,795			7,263

Cash and cash equivalents at end of period					$	158,769		$	37,085

See accompanying notes.

AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements include the accounts of Affymetrix, Inc. ("Affymetrix" or the "Company") and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Certain amounts in 2001 have been reclassified to conform to the 2002 presentation.

Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

Historically, the functional currency of Affymetrix' European subsidiaries ("European subsidiaries") was the U.S. dollar. Effective January 1, 2002, the Company changed the functional currency of its European subsidiaries to their respective local currencies due to the European subsidiaries' operations becoming more self-contained and integrated within Europe. As a result, the European subsidiaries' financial statements have been translated into U.S. dollars using the appropriate exchange rates with the resulting translation adjustments recorded directly to accumulated comprehensive income, a separate component of stockholders' equity. Prior to 2002, the functional currency translation adjustments that are included in operations have not been material.

Revenue Recognition

Product revenues include sales of GeneChip® instrumentation, Affymetrix scanners and arrayers, software and probe arrays as well as subscription fees earned under EasyAccess™ agreements. Instrumentation and probe array revenues are recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Reserves are provided for anticipated warranty expenses at the time the associated revenue is recognized. Revenue related to extended warranty arrangements is deferred and recognized over the applicable periods. Revenue from subscription fees earned under EasyAccess™ agreements is recorded ratably over the term of the agreement. Payments received in advance under these arrangements are recorded as deferred revenue until earned.

The Company also derives revenues from software licenses to end-users. The Company follows Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended. In accordance with the provisions of SOP 97-2 as amended, the Company records revenue from software licenses when a license agreement is signed by both parties, the fee is fixed or determinable, collection of the fee is probable and delivery of the product has occurred, which for certain products follows installation. If an element of the license agreement has not been delivered, revenue for the element is deferred based on vendor-specific objective evidence of fair value. If vendor-specific objective evidence of fair value does not exist, all revenue is deferred until sufficient objective evidence exists or all elements have been

delivered. Revenues from maintenance and support are deferred and recognized ratably over the term of the contract.

Research revenue is comprised of amounts earned from services performed pursuant to commercial collaboration agreements, including custom-mask design fees, as well as government grants. Research revenue is recorded in the period in which the costs are incurred or at the time the mask design is completed and the first lot of chips associated with a particular design are shipped. Payments received related to substantive at-risk milestones are recognized upon the occurrence or completion of the milestone events. 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. License revenues are generally recognized upon execution of the agreement unless the Company has continuing performance obligations, in which case the license revenue is recognized ratably over the period of expected performance. Royalty revenues are recognized under the terms of the related agreements generally upon manufacture or shipment of a product by a licensee.

Basic and Diluted Earnings (Loss) Per Share

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

Shares used in computing basic and diluted earnings (loss) per share are as follows (in thousands):

		Three Months Ended September 30,				Nine Months Ended September 30,
		2002		2001		2002		2001
Weighted-average shares outstanding		58,247		57,834		58,134		57,661
Less: Weighted-average shares of common stock subject to repurchase		(172	)	(323	)	(194	)	(378	)

Weighted-average shares used in computing basic earnings (loss) per share		58,075		57,511		57,940		57,283
Weighted-average effect of dilutive securities:
	Options	1,436		—		—		—
	Warrants	29		—		—		—

Weighted-average shares used in computing diluted earnings (loss) per share		59,540		57,511		57,940		57,283

The following table sets forth the weighted average potential shares of common stock that are not included in the diluted earnings (loss) per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):

		Three Months Ended September 30,		Nine Months Ended September 30,
		2002	2001	2002	2001
Weighted-average effect of anti-dilutive securities:
	Options	6,103	9,874	7,925	8,491
	Warrants	37	66	66	66
	Convertible subordinated notes	3,810	3,810	3,810	3,810

Total anti-dilutive securities		9,950	13,750	11,801	12,367

Recent Accounting Pronouncements

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides a single accounting model for, and supersedes previous guidance on, accounting and reporting for the impairment/disposal of long-lived assets. SFAS 144 sets new criteria for the classification of assets held-for-sale and changes the reporting of discontinued operations. The adoption of SFAS 144 had no significant impact on the Company's consolidated financial statements.

In April 2002, the Financial Accounting Standards Board issued Financial Accounting Standard No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," ("SFAS 145") which the Company adopted during the three months ended September 30, 2002. The rescission of FAS 4, "Reporting Gains and Losses from Extinguishment of Debt," automatically defaults issuers to APB 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction," that is to distinguish transactions that are a part of an entity's recurring operations from those that are unusual and infrequent. The Company has concluded that these repurchases are not unusual or infrequent, and therefore are not extraordinary in nature. In accordance with the transition provisions of SFAS 145, the Company has reclassified the gain related to the repurchase of convertible notes to other income instead of an extraordinary gain from repurchase of convertible notes as it was originally reported for the three and nine months ended September 30, 2001, in the accompanying statements of operations.

In June 2002, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between SFAS 146 and Issue 94-3 relates to SFAS 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is

incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in this Statement is that an entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up front. The FASB decided that if the benefit arrangement requires employees to render future service beyond a "minimum retention period" a liability should be recognized as employees render service over the future service period even if the benefit formula used to calculate an employee's termination benefit is based on length of service. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged.

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

Cash equivalents and available-for-sale securities consist of U.S. Government obligations, U.S. corporate debt securities and equity securities. The investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income as a component of stockholders' equity.

NOTE 3—INVENTORIES

Inventories consist of the following (in thousands):

		September 30, 2002		December 31, 2001
Raw materials		$	5,201	$	8,942
Work-in-process			3,393		2,733
Finished goods			18,698		17,137

	Total	$	27,292	$	28,812

NOTE 4—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

		September 30, 2002		December 31, 2001
Accounts payable		$	9,516	$	9,621
Accrued compensation and related liabilities			16,196		11,769
Accrued interest on convertible subordinated notes			1,306		5,794
Accrued taxes			4,493		3,064
Accrued warranties			1,838		955
Accrued legal			2,349		6,293
Accrued royalties			11,321		5,980
Accrued legal settlements			—		5,850
Accrued facilities consolidation costs			1,062		2,064
Accrued distribution fees			1,393		—
Other			1,690		2,038

	Total	$	51,164	$	53,428

NOTE 5—COMPREHENSIVE INCOME (LOSS)

The components of comprehensive loss for the three and nine months ended September 30, 2002 and 2001 are as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Net income (loss)	$	619		$	(4,805	)	$	(4,546	)	$	(24,675	)
Foreign currency translation adjustment, net of tax		(160	)		—			(511	)		—
Non-cash write down of equity investment due to an other-than-temporary decline in fair value		607			—			3,796			—
Unrealized losses on equity investments		(607	)		(5,492	)		(4,811	)		(11,881	)
Unrealized (losses) gains on debt securities		(591	)		2,828			(3,927	)		3,785

Comprehensive loss	$	(132	)	$	(7,469	)	$	(9,999	)	$	(32,771	)

NOTE 6—PERLEGEN SCIENCES, INC.

In October 2000, Affymetrix formed Perlegen Sciences, Inc. ("Perlegen"), initially a wholly owned subsidiary. From Perlegen's inception through March 30, 2001 the operating results of Perlegen were consolidated into Affymetrix' financial statements. Affymetrix contributed to Perlegen certain intellectual property with no cost basis and has rights to use and commercialize certain data generated by Perlegen in the array field. If such data is used, the Company will pay Perlegen royalties based on array sales. No royalties have been paid to date.

On March 30, 2001, Perlegen completed a private financing with a group of investors raising approximately $100 million, which reduced Affymetrix' ownership position in Perlegen to approximately 53%. Two of these outside investors include trusts of which two of Affymetrix' current directors are trustees. The investments by these trusts represent less than $0.6 million of the total financing for Perlegen. The Company, and certain of its affiliates, including its chairman and chief executive officer Stephen P.A. Fodor, has placed a portion of its collective holdings (approximately 8%) into an irrevocable voting trust, relinquishing certain voting rights and, as such, has relinquished control of Perlegen. The trustee, State Street Bank and Trust Company of California, N.A., is required to vote the shares held in the trust on all matters subject to shareholder vote in proportion to the votes of all non-Affymetrix shareholders. The voting trust will remain in place until the Company and its affiliates cease to be the beneficial owners of 45% of the total voting power of all of the voting capital stock of Perlegen. Affymetrix has the right to designate three members of Perlegen's Board of Directors which shall consist of not more than seven members. The Company has appointed two out of three of its designees to the current six member Perlegen Board. Affymetrix' two current designees to Perlegen's Board, including Stephen P.A. Fodor, who serves as chairman of the Perlegen Board, are also members of Affymetrix' Board of Directors.

The Company accounts for its 53% ownership interest in Perlegen on the equity method as the Company and its affiliates collectively control less than 50% of the voting shares of Perlegen and also do not control the strategic, operating, investing and financing activities of Perlegen. As the Company's investment in Perlegen has no basis for accounting purposes under generally accepted accounting principles, Affymetrix has not recorded any proportionate share of Perlegen's operating losses in its financial statements since the completion of Perlegen's financing.

Pursuant to a supply agreement with Perlegen, the Company sells whole wafers to Perlegen for use in Perlegen's research and development activities at the Company's fully burdened cost of manufacturing. If Perlegen uses the wafers or arrays supplied by Affymetrix for the benefit of third parties, then Perlegen is obligated to make additional payments for such wafers so that Affymetrix will receive normal commercial margins on these wafers. At September 30, 2002, the amounts due from Perlegen were $7.4 million and have been included in accounts receivable in the accompanying condensed consolidated balance sheet. Amounts due from Perlegen are payable to Affymetrix on reasonable commercial terms.

Perlegen is currently seeking to arrange further financing from multiple sources including Affymetrix, other Perlegen stockholders and new investors. Affymetrix is considering whether and to what extent it might participate in such a financing. Affymetrix has no obligation to supply such financing nor does it guarantee or otherwise have liability for Perlegen's obligations. The market for private financing is currently very difficult. There can be no assurance that Perlegen will be able to obtain financing on favorable terms, if at all, or that any available funding will be sufficient to fund Perlegen's operations. If Perlegen were unable to obtain sufficient funding and were required to curtail or suspend operations, negative consequences to Affymetrix could include (i) reduction in the underlying value of its holdings in Perlegen (Affymetrix currently accounts for its interest in Perlegen on a zero basis in its financial statements), (ii) inability to collect accounts receivable ($7.4 million at September 30, 2002) arising under its wafer supply arrangement, and (iii) a decline in gross product

margins if Affymetrix' commercial volumes were not sufficient enough to offset any shortfall in volume from Perlegen.

NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In accordance with SFAS 142, the Company has reclassified $0.8 million of assembled workforce to goodwill and has ceased amortization of goodwill. The Company also has completed its review for potential impairment of its goodwill as of June 30, 2002, and had concluded there was no impairment of goodwill. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach.

At September 30, 2002, the Company had goodwill of $18.6 million, other intangible assets of $1.2 million, and acquired technology rights of $20.9 million subject to SFAS 142. The net impact on the consolidated statements of operations from the adoption of SFAS 142 was a reduction in amortization expense of $1.3 million and $3.9 million for the three and nine months ended September 30, 2002, respectively, compared to the three and nine months ended September 30, 2001.

The following table presents net loss for the periods before the adoption of SFAS 142, adjusted for the impact of SFAS 142 (in thousands, except per share amounts):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002		2001			2002			2001
Reported net income (loss)	$	619	$	(4,805	)	$	(4,546	)	$	(24,675	)
Add back: Goodwill amortization		—		1,162			—			3,522
Add back: Amortization of assembled workforce		—		108			—			323

Adjusted net income (loss)	$	619	$	(3,535	)	$	(4,546	)	$	(20,830	)

Basic earnings (loss) per share:
As reported	$	0.01	$	(0.08	)	$	(0.08	)	$	(0.43	)
Goodwill amortization		—		0.02			—			0.06
Amortization of assembled workforce		—		0.00			—			0.01

As adjusted basic earnings (loss) per share	$	0.01	$	(0.06	)	$	(0.08	)	$	(0.36	)

Diluted earnings (loss) per share:
As reported	$	0.01	$	(0.08	)	$	(0.08	)	$	(0.43	)
Goodwill amortization		—		0.02			—			0.06
Amortization of assembled workforce		—		0.00			—			0.01

As adjusted diluted earnings (loss) per share	$	0.01	$	(0.06	)	$	(0.08	)	$	(0.36	)

NOTE 8—LEGAL PROCEEDINGS

Applera Corporation Litigation

On July 5, 2000, Applera Corporation and related corporate plaintiffs ("Applera"), filed a lawsuit in the United States District Court for the District of Delaware alleging that certain of Affymetrix' products infringe five Applera patents related to processes for making oligonucleotides and reagents that Affymetrix purchases from Applera licensed vendors. Applera served Affymetrix with the complaint on October 16, 2000. On January 30, 2001, Affymetrix filed a motion to dismiss Applera's lawsuit pending in Delaware for lack of subject matter jurisdiction. On January 25, 2001, Affymetrix filed a declaratory judgment action against Applera in the United States District Court for the Southern District of New York seeking, among other things, a declaration that Affymetrix has not infringed any of Applera's subject patents, which lawsuit was stayed by the Court in New York pending the Delaware Court's ruling on the aforementioned motion to dismiss. On September 27, 2001, the District Court for the District of Delaware granted Affymetrix' motion to dismiss for lack of subject matter jurisdiction. On October 3, 2001, the New York Court restored the New York case to active status. Pre-trial discovery is presently proceeding in this action, however, no trial date has been set.

On April 17, 2002, the New York Court heard oral argument on Applera's motions to bifurcate or dismiss certain of Affymetrix' claims, including claims of breach of contract and antitrust violations by Applera. On May 24, 2002, the Court rejected Applera's motion to dismiss Affymetrix' breach of contract and antitrust claims and agreed to bifurcate and stay discovery on antitrust issues as well as on all damages issues. Following the Court's order, on June 6, 2002, Applera filed its counterclaim in the New York case alleging infringement of four of the five patents originally asserted in the Delaware action. In addition, Affymetrix also has pending a motion seeking a summary judgment that the last to expire of Applera's subject patents had in fact expired as a matter of law in 2001. The Court heard oral argument on this motion on October 22, 2002. Discovery in the case is ongoing. No trial date has yet been set.

Affymetrix believes that Applera's claims are without merit and that all of Applera's patents subject to this litigation have now expired. However, Affymetrix cannot be sure that it will prevail in these matters. Affymetrix' failure to successfully defend against Applera's allegations could result in a material adverse effect on Affymetrix' business, financial condition and results of operations.

Incyte Genomics/Stanford Litigation

In December 2001, Affymetrix entered into a Settlement Agreement with Incyte Genomics, Inc. ("Incyte") providing for the comprehensive settlement of the existing patent infringement litigation between the two companies that began in January 1998.

claims that Stanford has applied for that are alleged to be exclusively licensed to Incyte. In the interference, Incyte and Stanford had sought a finding that Stanford is entitled to receive patents on subject matter which is covered by some claims of Affymetrix' U.S. Patent No. 5,800,992 and all claims of Affymetrix' U.S. Patent No. 5,744,305. Affymetrix believes that Incyte's and Stanford's complaint is without merit; however, Affymetrix cannot be sure that it will prevail in this case. Affymetrix' failure to successfully defend against Incyte's and Stanford's complaint and any subsequent proceeding in the USPTO could result in a material adverse effect on Affymetrix' business, financial condition and results of operations.

NOTE 9—STOCK OPTION EXCHANGE OFFERING

On March 7, 2002, the Company filed a Schedule Tender Offer, as subsequently amended on April 4, 2002, with the Securities and Exchange Commission relating to an offer (the "Offer") to current employees (excluding officers as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) of the Company or its wholly owned subsidiaries, to exchange all of the options outstanding under the Affymetrix, Inc. Amended and Restated 1993 Stock Plan, Affymetrix, Inc. 1998 Stock Incentive Plan, Affymetrix/Genetic MicroSystems 1998 Stock Option Plan, Affymetrix/Neomorphic 1998 Stock Option Plan, and Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan (collectively, the "Plans") to purchase shares of the Company's common stock ("Common Stock"), for new options (the "New Options") to purchase shares of the Common Stock to be granted under the Plans, upon the terms and subject to the conditions described in an Offer to Exchange and related Letter of Transmittal. Following the expiration of the Offer on April 12, 2002, the Company accepted for exchange options to purchase 2,263,301 shares of its common stock (the "Tendered Options"), representing approximately 27.4% of the 8,269,774 options that were eligible to be tendered in the Offer. After a period of more than six months and a day from the expiration date of the Offer, on October 16, 2002 the Company granted New Options to purchase an aggregate of 1,318,077 shares of its common stock in exchange for the Tendered Options. The New Options were granted with exercise prices equal to $23.185 which was the fair value of the Company's common stock on October 16, 2002.

The number of shares of common stock subject to the New Options was equal to the number of shares of common stock subject to the Tendered Options that were accepted for exchange and canceled in accordance with the following exchange ratios:

Exercise Price of Option Tendered		Exchange Ratio
$44.99 or less		1 for 1
$45.00-$59.99		0.67 for 1
$60.00-$99.99		0.50 for 1
$100.00 or more		0.33 for 1

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

This Management's Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2002 and for the three and nine month periods ended September 30, 2002 and 2001 should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2001.

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

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

Overview

We have developed and intend to establish our GeneChip® system and related microarray technology as the platform of choice for acquiring, analyzing and managing complex genetic information. Our integrated GeneChip® platform 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. Our related microarray technology includes instrumentation, software and licenses for fabricating, scanning and collecting and analyzing results from low density microarrays. We commenced commercial sales of the GeneChip® system for research use in April 1996 and currently sell our products directly to pharmaceutical, biotechnology, agrochemical, diagnostics and consumer products companies as well as academic research centers, private foundations and clinical reference laboratories in the United States and Europe. We also sell some of our products through authorized distributors, principally in the Asia Pacific region.

We have incurred operating losses each year since our inception, including a loss of approximately $33.1 million for the year ended December 31, 2001. For the three months ended September 30, 2002, we reported a net income of $0.6 million. For the nine months ended September 30, 2002, we reported a net loss of $4.6 million and, as of such date, had an accumulated deficit of approximately $216 million. Our expenses are principally from costs incurred in research and development, manufacturing and from selling, general and administrative costs associated with our operations, including the costs of patent related litigation, and interest expense on our convertible bonds. These costs have generally exceeded our revenues and interest income, which to date have been generated principally from product sales, technology access and other license fees, royalties, collaborative research and development agreements, government funded grants and from interest earned on cash and investment balances. Our ability to generate significant revenues and sustain our profitability is dependent in large part on our ability to expand our customer base, increase sales of our products to existing customers, manage our expense growth, as well as our ability to enter into additional supply, license and collaborative arrangements and on our ability and that of our collaborative partners to successfully manufacture and commercialize products incorporating our technologies in new applications and in new markets.

Our operating results vary and depend on numerous factors. Revenues are principally impacted by the volume and price of product sales; the timing of orders and deliveries of products, design fees, royalties, license fees, and other research revenues under collaborative and licensing agreements. Expenses are principally impacted by the cost of goods for products, the magnitude and duration of research and development and sales and marketing and general and administrative expenses. General and administrative expenses are particularly subject to variation as a result of fluctuations in the intensity of legal activities associated with our intellectual property litigation.

Our operating results may also fluctuate significantly depending on other factors. To maintain or gain market acceptance of our products in the face of the introduction of new products by our competitors, we may have to reduce or discount the price of our products resulting in an adverse impact on revenues and gross margins. Other factors that may significantly impact our operating results include: the outcome of ongoing or future litigation; the need for additional royalty bearing licenses; adoption of new technologies; the cost, quality and availability of reagents and components.

Results of Operations

Three and Nine Months Ended September 30, 2002 and 2001

Product Revenue. Product sales increased to $62.9 million and $178.8 million for the three and nine months ended September 30, 2002, respectively, compared to $47.3 million and $139.7 million for the three and nine months ended September 30, 2001, respectively. The increase primarily resulted from growth in unit sales and an increase in the average sales price of our GeneChip® probe arrays and related supplies and growth in unit sales of our GeneChip® instrument platform. Revenue from sales of probe arrays and related supplies increased to $38.2 million from $25.1 million for the three months ended September 30, 2002 and 2001, respectively. Revenue from the sale of probe arrays and related supplies increased to $109.3 million from $73.0 million for the nine months ended September 30, 2002 and 2001, respectively. Revenue from sales of instruments increased to $12.7 million from $10.3 million for the three months ended September 30, 2002 and 2001, respectively. Revenue from sales of instruments increased to $35.4 million from $32.7 million for the nine months ended September 30, 2002 and 2001, respectively.

Revenue From Perlegen Sciences, Inc. Revenue from the sale of wafers to Perlegen, an affiliated party, was $4.9 million for the three months ended September 30, 2002 compared to $3.1 million in the same period of 2001. The increase was due to increased sales of wafers to Perlegen. Revenue from Perlegen was $16.5 million for the nine months ended September 30, 2002 compared to $5.9 million in the same period of 2001. The increase was due to increased sales of wafers to Perlegen and the fact that Perlegen was a wholly owned subsidiary of Affymetrix until March 30, 2001 and therefore, its activities in the first quarter of 2001 were consolidated into the financial results of Affymetrix. In the future, the Company expects the level of revenue from the sale of wafers to Perlegen to decrease consistent with their contractual obligations.

Research Revenue. Research revenue includes custom probe array design fees, full-time-equivalent ("FTE") support for the Company's research collaborations, and grant funding. Research revenue was $2.6 million for the three months ended September 30, 2002 compared to $1.3 million in the same period of 2001. The increase was primarily due to an increase in custom probe array design fees. Research revenue was $5.6 million for the nine months ended September 30, 2002 compared to $3.8 million in the same period of 2001. The increase was primarily due to an increase in custom probe array design fees.

License Fees and Royalty Revenues. License fees and royalty revenues were $2.4 million for the three months ended September 30, 2002 compared to $3.7 million in the same period of 2001. The decrease in license and royalty revenue was primarily due the completion of a long-term contractual

arrangement, the cancellation of a license agreement, and a decrease in significant new license agreements. License fees and royalty revenues were $10.7 million in the nine month period ended September 30, 2002 compared to $10.4 million in the same period of 2001. Revenues were flat primarily due to the increase in revenue from the recognition of approximately $1.8 million of deferred revenue in the second quarter of 2002 related to the early completion of a long-term contractual arrangement under which we had no further obligations which was offset by the cancellation of a license agreement and a decrease in significant new license agreements.

Cost of Product Revenues and Gross Margins. Cost of product revenue increased to $22.2 million and $64.0 million for the three and nine months ended September 30, 2002, respectively, compared to $17.4 million and $52.4 million for the three and nine months ended September 30, 2001, respectively. The increase in cost of product revenues resulted principally from growth in product sales. Gross margins on product sales improved to 64.7% for the three months ended September 30, 2002 compared to 63.1% in the same period of 2001. For the nine months ended September 30, 2002, gross margins were 64.2% compared to 62.5% in the same period of 2001. Principal factors that favorably impacted gross margins in the three and nine month periods ended September 30, 2002 compared to 2001 included: favorable changes in product sales mix, increased production volumes of probe arrays and improved manufacturing yields, which were partially offset by increases in our inventory reserves, and severance costs associated with a reduction in force related to increased manufacturing efficiencies.

Research and Development Expenses. Research and development expenses, which primarily consist of research, product development and manufacturing process improvement, were $16.7 million for the three months ended September 30, 2002 compared to $16.6 million in the same period of 2001. Expenses were flat, however, the company has shifted its relative levels of spending in research and development from manufacturing technologies to new product development. Research and development expenses were $50.8 million for the nine months ended September 30, 2002 compared to $52.4 million in the same period of 2001. The decrease in research and development expenses was primarily due to $4.5 million of research and development expenses associated with Perlegen that were included in the results of the first quarter of 2001. Excluding costs associated with Perlegen, research and development costs increased for the nine months ended September 30, 2002. The increase was primarily due to expanded investments in new product development and basic research.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $24.9 million for the three months ended September 30, 2002 compared to $21.6 million in the same period of 2001. Selling, general and administrative expenses were $71.4 million for the nine months ended September 30, 2002 compared to $67.3 million in the same period of 2001. The increase in selling, general and administrative expenses in the three and nine months ended September 30, 2002 was primarily due to an increase in bad debt expense and increased investments in the worldwide sales, marketing, technical support, and administrative infrastructures partially offset by lower levels of litigation expense.

Stock Compensation Expense. We recorded stock compensation expense of $2.0 million for the three months ended September 30, 2002 compared to $3.2 million in the same period of 2001. Stock compensation expense was $7.6 million for the nine months ended September 30, 2002 compared to $9.5 million in the same period of 2001. Stock compensation expense relates principally to the amortization of deferred stock compensation resulting from the acquisition of Neomorphic, Inc. which occurred in November 2000.

Amortization of Purchased Intangibles. During the three months ended September 30, 2002, we incurred charges of $0.3 million for the amortization of purchased intangibles related to the acquisition of Neomorphic, Inc. compared to $1.6 million in the same period of 2001. Amortization of purchased intangibles was $0.8 million for the nine months ended September 30, 2002 compared to $4.7 million in the same period of 2001. The decrease in the three and nine months ended September 31, 2002 is due

to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is more fully discussed in Note 7 to the condensed consolidated financial statements.

Interest and Other (Expense) Income, Net. Interest and other (expense) income, net was a net expense of $1.0 million and $4.5 million for the three and nine months ended September 30, 2002, respectively, compared to net income of $3.2 million and $7.9 million for the three and nine months ended September 30, 2001, respectively. The change from net income to net expense for the three and nine months ended September 30, 2002, compared to 2001 was the result of three principal factors. First, in the three and nine months ended September 30, 2002, we recorded a $3.8 million write down related to an other-than-temporary decline in the value of our investment in Orchid Biosciences, Inc. Second, in the three and nine months ended September 30, 2002, we experienced lower returns on our cash and marketable securities portfolio. This decline in returns was partially offset by favorable currency variances during the second and third quarters of 2002. Third, in the three and nine months ended September 30, 2001, we recorded a $1.7 million gain from the repurchase of convertible notes. This amount was previously classified as an extraordinary gain but was reclassified to other income, which is more fully discussed in Note 1 to the condensed consolidated financial statements.

Income Tax Provision. The provision for tax was approximately $0.2 million for the three months ended September 30, 2002 and $0.6 million for the nine months ended September 30, 2002. No provision for tax was recorded for the three months ended September 30, 2001, however, the provision for tax was $0.2 million for the nine months ended September 30, 2001. For the three and nine months ended September 30, 2002, the provision consists of current taxes accrued on the profits attributable to our foreign operations and state taxes. For the nine months ended September 30, 2001, the provision consists of current taxes accrued on the profits attributable to our foreign operations. 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 September 30, 2002, we provided a full valuation allowance against our net deferred tax assets.

Liquidity and Capital Resources

We have financed our operations primarily through the sale of equity and debt securities, government grants, collaborative agreements, interest income, product sales and licensing of our technology. Our material future obligations are as follows (in thousands):

	Total		Remainder of 2002		2003-2004		2005-2006		After 2006
Convertible subordinated notes	$	370,000	$	—	$	—	$	150,000	$	220,000
BCI commitment (See Note 3 to our Consolidated Financial Statements from our Form 10-K for the fiscal year ended December 31, 2001)		5,000		—		—		5,000		—
Operating leases		62,800		1,661		13,550		10,956		36,633

Total contractual obligations	$	437,800	$	1,661	$	13,550	$	165,956	$	256,633

As of September 30, 2002, we had cash, cash equivalents and available-for-sale securities of $352.7 million compared to $368.8 million at December 31, 2001.

Net cash generated from operating activities was $11.6 million for the nine months ended September 30, 2002, as compared to net cash used in operating activities of $41.3 million for the nine

months ended September 30, 2001. The improvement in net cash flow from operating activities was primarily due to the decrease in our net loss and reduction of our payments related to legal settlements which occurred in the first half of 2001.

Our investing activities, other than purchases, sales and maturities of available-for-sale securities, consisted of capital expenditures and the purchase of technology rights of $17.2 million and $5.3 million, respectively, for the nine months ended September 30, 2002, as compared to capital expenditures of $25.9 million and proceeds from the sale of technology rights of $1.6 million for the nine months ended September 30, 2001. Capital expenditures during the nine months ended September 30, 2002 related primarily to investments in enterprise resource planning (ERP) and storage management systems, along with continued expansion in manufacturing and other operating facilities. The purchase of technology rights during the nine months ended September 30, 2002 related primarily to the expansion of an existing patent license arrangement.

Financing activities for the nine months ended September 30, 2002 included net proceeds of $2.0 million resulting from the exercise of stock options compared to $6.1 million for the nine months ended September 30, 2001.

We anticipate that our existing capital resources will enable us to maintain currently planned operations and planned capital expenditures for the foreseeable future. However, this expectation is based on our current operating plan and capital expenditure plan, which are expected to change, and therefore we could require additional funding sooner than anticipated.

Critical Accounting Policies

Certain accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Our significant accounting policies include:

Revenue Recognition

Revenue on product sales is recognized when all the following elements are present; persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers for a specified amount of product at a specified price and consider delivery to have occurred for most of our products at the time of shipment. We make estimates of warranty costs and of allowances for doubtful accounts based on historical experience, individual customer financial viability, and age of individual receivables.

For sales of software licenses, we defer revenue for the undelivered elements based on vendor-specific evidence of fair value, which is determined from our list price and actual transactions.

Research revenue is comprised of amounts earned from services performed pursuant to commercial collaboration agreements, including custom-mask design fees, as well as government grants. Research revenue is recorded in the period in which the costs are incurred or at the time the mask design is completed. Payments received related to substantive at-risk milestones are recognized upon the occurrence or completion of the milestone events. Direct costs associated with these contracts and grants are reported as research and development expense. While milestone events are specified in our contracts, we must apply judgment in determining whether a milestone was substantially at risk and

therefore justify the recognition of related revenue as the culmination of a separate earnings process. To date, milestone revenue has not been a significant portion of our research revenues.

License and royalty revenues include amounts earned from third parties licensed under our intellectual property. License revenues are recognized when earned under the terms of the related agreements, generally upon execution of the agreement unless we have continuing performance obligations, in which case the license revenue is recognized ratably over the period of expected performance. Royalty revenues are recognized under the terms of the related agreements generally upon manufacture or shipment of a product by a licensee.

A portion of our sales and accounts receivable are denominated in foreign currencies. We have not historically hedged our foreign currency exposure.

Equity Accounting

We account for our 53% ownership interest in Perlegen on the equity method as we have determined that we do not control its operations. Factors we considered in determining our level of control in Perlegen include the fact that we and certain of our affiliates have put approximately 8% of our voting rights into an irrevocable voting trust which is required to vote in proportion to the votes of the other shareholders, we have no ability to terminate or modify the trust unilaterally, we have the right to appoint only three out of seven seats on Perlegen's board and we have no commitment to provide additional funding to Perlegen. See Note 6 to the condensed consolidated financial statements for further discussion of the Company's accounting related to Perlegen.

Inventories

We carry our inventories at the lower of cost or market, cost being determined on the first-in, first-out method. We apply judgment in determining the provisions for slow moving, excess and obsolete inventories based on historical experience and anticipated product demand.

Accounting for Goodwill and Intangible Assets

Our intangible assets are comprised principally of technology rights. We apply judgment in determining the useful lives of our intangible assets and whether such assets are impaired. Factors we consider include the life of the underlying patent, the expected period of benefit from the use of the technology, existence of competing technology and potential obsolescence. To date, we have not experienced any impairment to our intangible assets. See Note 7 to the condensed consolidated financial statements for further discussion of our adoption of SFAS 142 "Goodwill and Other Intangible Assets."

Contingencies

We are subject to legal proceedings principally related to intellectual property matters. Based on the information available at the balance sheet dates, we assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. If losses are probable and reasonably estimable, we will record a reserve in accordance with SFAS 5, "Accounting for Contingencies." Any reserves recorded may change in future periods due to new developments in each matter.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to interest rate risk relates primarily to our investment portfolio and our 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, our future investment income may fall short of expectations due to changes in interest rates or we 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 our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. Government and our agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three years.

The table below presents the principal amounts and weighted-average interest rates by year of maturity for our investment portfolio subject to interest rate risk:

	2002			2003			2004			2005		2006			Thereafter			Total		Fair Value at September 30, 2002
	(Dollar amounts in thousands)
ASSETS:
Available-for-sale debt securities	$	174,813		$	47,388		$	109,406		$		$	—		$	—		$	331,607	$	333,307
Average interest rate		1.99	%		4.21	%		3.74	%		—		—			—
Loan receivable	$	—		$	—		$	—		$	—	$	4,000		$	—		$	4,000	$	4,000
Average interest rate		—			—			—			—		7.5	%		—
LIABILITIES:
5% convertible subordinated notes due 2006	$	—		$	—		$	—		$	—	$	150,000		$	—		$	150,000	$	128,625
Average interest rate		—			—			—			—		5.0	%		—
4.75% convertible subordinated notes due 2007	$	—		$	—		$	—		$	—	$	—		$	220,000		$	220,000	$	172,436
Average interest rate		—			—			—			—		—			4.75	%

We derive a portion of our revenues in foreign currencies, predominantly in Europe and Japan. We also have subsidiaries in Europe, Japan and Singapore. To date we have not used derivative financial instruments to mitigate this foreign exchange exposure. However, we expect to begin hedging certain foreign exchange risks through the use of currency forwards and swaps in 2003.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

General

Although we settled three significant lawsuits in 2001 with Oxford Gene Technology, Hyseq, Inc. and Incyte Genomics, Inc., we continue to be a party to litigation, which has consumed and may in the future consume substantial financial and managerial resources and which could adversely affect our business, financial condition and results of operations. If in any pending or future intellectual property litigation involving us or our collaborative partners, we are found to have infringed the valid intellectual property rights of third parties, we, or our collaborative partners, could be subject to significant liability for damages, could be required to obtain a license from a third party, which may not be available on reasonable terms or at all, or could be prevented from manufacturing and selling our products. In addition, if we are unable to enforce our patents and other intellectual property rights against others, or if our patents are found to be invalid or unenforceable, third parties may more easily be able to introduce and sell DNA array technologies that compete with our GeneChip® technology, and our competitive position could suffer. We expect to devote substantial financial and managerial resources to protect our intellectual property rights and to defend against the claims described below as well as any future claims asserted against us. Further, because of the substantial amount of discovery required in connection with any litigation, there is a risk that confidential information could be compromised by disclosure.

Applera Corporation Litigation

On July 5, 2000, Applera Corporation and related corporate plaintiffs ("Applera"), filed a lawsuit in the United States District Court for the District of Delaware alleging that certain of our products infringe five Applera patents related to processes for making oligonucleotides and reagents that we purchase from Applera licensed vendors. Applera served us with the complaint on October 16, 2000. On January 30, 2001, we filed a motion to dismiss Applera's lawsuit pending in Delaware for lack of subject matter jurisdiction. On January 25, 2001, we filed a declaratory judgment action against Applera in the United States District Court for the Southern District of New York seeking, among other things, a declaration that we have not infringed any of Applera's subject patents, which lawsuit was stayed by the Court in New York pending the Delaware Court's ruling on the aforementioned motion to dismiss. On September 27, 2001, the District Court for the District of Delaware granted our motion to dismiss for lack of subject matter jurisdiction. On October 3, 2001, the New York Court restored the New York case to active status. Pre-trial discovery is presently proceeding in this action, however, no trial date has been set.

On April 17, 2002, the New York Court heard oral argument on Applera's motions to bifurcate or dismiss certain of our claims, including claims of breach of contract and antitrust violations by Applera. On May 24, 2002, the Court rejected Applera's motion to dismiss our breach of contract and antitrust claims and agreed to bifurcate and stay discovery on antitrust issues as well as on all damages issues. Following the Court's order, on June 6, 2002, Applera filed its counterclaim in the New York case alleging infringement of four of the five patents originally asserted in the Delaware action. In addition, we also have pending a motion seeking a summary judgment that the last to expire of Applera's subject patents had in fact expired as a matter of law in 2001. The Court heard oral argument on this motion on October 22, 2002. Discovery in the case is ongoing. No trial date has yet been set.

We believe that Applera's claims are without merit and that all of Applera's patents subject to this litigation have now expired. However, we cannot be sure that we will prevail in these matters. Our failure to successfully defend against Applera's allegations could result in a material adverse effect on our business, financial condition and results of operations.

Incyte Genomics/Stanford Litigation

In December 2001, we entered into a Settlement Agreement with Incyte Genomics, Inc. ("Incyte") providing for the comprehensive settlement of the existing patent infringement litigation between the two companies that began in January 1998.

The two companies have not resolved Incyte's and Stanford University's ("Stanford") complaint of dissatisfaction with decisions of the United States Patent and Trademark Office Board of Patent Appeals and Interferences (USPTO) that is pending in Incyte Pharmaceuticals, Inc. et al. v. Affymetrix, Inc., Case No. C 99-21111 JF (N.D. Cal.). In this case, Incyte and Stanford claim that the USPTO incorrectly found that Incyte and Stanford did not come forward with enough evidence to warrant a full interference proceeding in the USPTO against certain claims of our U.S. Patent No. 5,800,992 and all claims of our U.S. Patent No. 5,744,305 with respect to certain patent claims that Stanford has applied for that are alleged to be exclusively licensed to Incyte. In the interference, Incyte and Stanford had sought a finding that Stanford is entitled to receive patents on subject matter which is covered by some claims of our U.S. Patent No. 5,800,992 and all claims of our U.S. Patent No. 5,744,305. We believe that Incyte's and Stanford's complaint is without merit; however, we cannot be sure that we will prevail in this case. Our failure to successfully defend against Incyte's and Stanford's complaint and any subsequent proceeding in the USPTO could result in a material adverse effect on our business, financial condition and results of operations.

Administrative Litigation and Proceedings

The Company's intellectual property is expected to be subject to significant additional administrative and litigation actions. For example, in Europe and Japan, third parties are expected to oppose significant patents that we own or control. Currently, Multilyte Ltd. and ProtoGene Laboratories, Inc. are parties that have filed oppositions against our EP 0-619-321 Patent in the European Patent Office, and PamGene B.V. has filed an opposition against our EP 0 728 520. Also, Abbott Laboratories, Applera, Clondiag, Combimatrix and Roche Diagnostics filed oppositions against our EP 0 834 575. These procedures will result in the patent being either upheld in its entirety, allowed to issue in amended form in designated European countries, or revoked.

Further, in the United States, we expect that third parties will continue to "copy" the claims of our patents in order to provoke interferences in the United States Patent & Trademark Office, and Affymetrix may copy the claims of others. These proceedings could result in our patent protection being significantly modified or reduced, and could result in significant costs and consume substantial managerial resources.

ITEM 5. OTHER INFORMATION

RISK FACTORS

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

WE HAVE A HISTORY OF OPERATING LOSSES AND MAY INCUR FUTURE LOSSES.

We have experienced significant operating losses each year since our inception. For example, we experienced net losses of approximately $25.5 million in 1999, $54.0 million in 2000, $33.1 million in 2001 and $4.6 million for the nine months ended September 30, 2002. We had an accumulated deficit of approximately $215.9 million as of September 30, 2002. Our losses have resulted principally from costs incurred in research and development and from general and administrative costs associated with our operations. Historically, these costs have exceeded revenues and interest income, which, to date, have been generated principally from product sales and technology access fees, license fees and

royalties, collaborative research and development agreements, government research grants and cash and investment balances.

WE MAY NEVER ACHIEVE SUSTAINED PROFITABILITY.

We incurred a net loss of $33.1 million for the year ended December 31, 2001, a net loss of $4.6 million for the nine months ended September 30, 2002 and net income of $0.6 million for the three months ended September 30, 2002 and cannot guarantee continued profitability. Among other things, our ability to achieve sustained profitability will depend upon our ability to:

•: convince prospective customers of the benefits of our technology as an alternative to other technologies;
•: resist competitive pressure and effectively enforce our intellectual property rights;
•: continue improvement of our products and maintain continued scientific acceptance of expression approach;
•: maintain our commercial manufacturing capability for probe arrays and consistently achieve acceptable yields from those capabilities;
•: maintain customer satisfaction with performance and reliability of our products;
•: develop products that are accurate and effective;
•: cost-effectively manufacture components of the GeneChip® system;
•: develop our marketing capabilities cost-effectively;
•: establish sales and distribution capabilities cost-effectively;
•: establish administrative capabilities and systems that cost-effectively support our business;
•: enter into sufficiently profitable supply agreements with customers desiring to use our products;
•: develop products that are accepted by the marketplace;
•: create a product mix that is appealing to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories;
•: avoid infringing on the intellectual property rights of others;
•: obtain necessary regulatory approvals in a timely manner; and
•: hire and retain qualified key personnel.

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

OUR QUARTERLY RESULTS OF OPERATIONS HAVE HISTORICALLY FLUCTUATED SIGNIFICANTLY PERIOD-TO-PERIOD AND MAY CONTINUE TO FLUCTUATE UNPREDICTABLY, WHICH COULD CAUSE OUR STOCK TO DECREASE IN VALUE.

Our revenues and operating results may fluctuate significantly from period to period due in part to factors that are outside of our control and which we cannot predict. Some of the factors that could cause our operating results to fluctuate from period to period include:

•: weakness in the global economy and changing market conditions;

•: general economic conditions affecting the industries into which we sell our products;
•: changes in the attitude of the pharmaceutical industry towards the use of genetic information and genetic testing as a methodology for drug discovery; and
•: consolidation in the pharmaceutical industry.

In particular, the revenue growth, profitability and operating results of our business depend on sales of our GeneChip® products. Some of the factors that could cause sales for our GeneChip® products to fluctuate from period to period include:

•: the frequency of experiments conducted by our customers;
•: our customers' inventory of GeneChip® products;
•: the receipt of relatively large orders with short lead times; and
•: our customers' expectations as to how long it takes us to fill future orders.

Each of these factors have impacted, and may in the future impact, the demand for our products and our quarterly operating results. Although we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance, our operating results may fall below the expectations of public market analysts or investors in future quarters and the market price of our common stock may fall significantly.

PERLEGEN, WITH WHICH WE HAVE A CUSTOMER, INVESTMENT AND TECHNOLOGY RELATIONSHIP, IS A DEVELOPMENT STAGE COMPANY.

Perlegen operates as an independent company, and its results are not consolidated with those of Affymetrix. There are, however, significant ongoing relationships between the two companies, in the form of our approximate 53% ownership interest, our supply of wafers to Perlegen, and our technology cross-licensing arrangement. Our affiliates also have relationships with Perlegen. Our chairman and chief executive officer, Stephen P.A. Fodor, holds Perlegen common stock and serves as the chairman of the Perlegen Board of Directors. Two of our outside directors serve as trustees of trusts that invested in Perlegen. Another of our directors also serves on the Perlegen Board with Dr. Fodor. Perlegen is a development stage company. There can be no assurance that it will achieve commercial success.

Perlegen is currently seeking to arrange further financing from multiple sources including Affymetrix, other Perlegen stockholders and new investors. We are considering whether and to what extent we might participate in such a financing. We have no obligation to supply such financing nor do we guarantee or otherwise have liability for Perlegen's obligations. The market for private financing is currently very difficult. There can be no assurance that Perlegen will be able to obtain financing on favorable terms, if at all, or that any available funding will be sufficient to fund Perlegen's operations. If Perlegen were unable to obtain sufficient funding and were required to curtail or suspend operations, negative consequences to Affymetrix could include (i) reduction in the underlying value of our holdings in Perlegen (we currently account for our ownership interest in Perlegen on a zero basis in our financial statements), (ii) inability to collect accounts receivable ($7.4 million at September 30, 2002) arising under our wafer supply arrangement, and (iii) a decline in gross product margins if our commercial volumes were not sufficient enough to offset any shortfall in volume from Perlegen.

OUR STRATEGIC EQUITY INVESTMENTS IN PUBLICLY TRADED AND NON-PUBLICLY TRADED COMPANIES MAY RESULT IN LOSSES AND AS A RESULT MAY HAVE A NEGATIVE IMPACT ON OUR EARNINGS.

We periodically make strategic equity investments in various publicly traded and non-publicly traded companies with businesses or technologies that may complement our business. The market values of these strategic equity investments may fluctuate due to market conditions and other conditions over which we have no control. Fluctuations in the market price and valuations of the securities that we hold in other companies may require us to record losses related to our ownership interest and may result in an impairment in the value of the securities underlying our investment. This could result in future charges on our earnings and as a result, it is uncertain whether or not we will realize any long term benefits associated with these strategic investments.

WE MAY LOSE CUSTOMERS IF WE ARE UNABLE TO MANUFACTURE OUR PRODUCTS AND ENSURE THEIR PROPER PERFORMANCE OR QUALITY.

We produce our GeneChip® products in an innovative and complicated manufacturing process. Due to the complexity of these products, we may experience in the future significant variability in the manufacturing yield of our GeneChip® products, which may reduce our gross margins and harm our business. We may experience difficulties in meeting customer, collaborator and internal demand for some of our probe array products. If we cannot deliver products in a timely manner, we could lose customers or be required to delay introduction of new products, and demand for our products could decline. Furthermore, if we cannot deliver products to our customers that consistently meet their performance expectations, demand for our products will decline. Because we have a relatively limited production history, we cannot be sure we fully understand all of the factors that affect our manufacturing processes or product performance. As a result, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility and launch new products. We have a quality control system in place, including a product inquiry and complaint process, under which we have observed a variety of product performance issues at low frequency, including problems aligning software grids with array images, speckling on some arrays, and fluorescent haze in a variety of patterns on array images. As with any new technology, there can be no assurance that we will be able to fully resolve any or all of the root causes of these inquiries or that new product quality or performance issues will not arise.

IF WE CANNOT CONTINUOUSLY DEVELOP AND INTRODUCE NEW PRODUCTS AND KEEP PACE WITH THE LATEST TECHNOLOGICAL CHANGES WE WILL NOT BE ABLE TO COMPETE SUCCESSFULLY IN OUR HIGHLY COMPETITIVE AND RAPIDLY CHANGING MARKET; IF WE CANNOT COMPETE EFFECTIVELY, OUR REVENUES MAY DECLINE.

We compete in markets that are new, intensely competitive, highly fragmented and rapidly changing, and many of our current and potential competitors have significantly greater financial, technical, marketing and other resources. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content. We may not survive and our revenues may decline if we fail to respond quickly to new or emerging technologies and changes in customer requirements.

Currently, our principal competition comes from existing DNA probe array manufacturers and other technologies that are used to perform many of the same functions for which we market our GeneChip® products. In order to compete against existing and newly developed technologies and maintain pricing and gross margins, we need to successfully demonstrate to current and potential customers that our GeneChip® products provide superior performance and capabilities at an acceptable price. A large number of publicly traded and privately held companies, including Abbott Laboratories, Agilent Technologies, Inc., Applied Biosystems, Axon Instruments, Inc., Amersham

Biosciences, BD Biosciences Clontech, CombiMatrix Corporation, Digital Gene Technologies, Inc., febit ag, Illumina, Inc., Lynx Therapeutics, Inc., Nanogen, Inc., NimbleGen Systems, Inc. and Perkin Elmer, Inc. also are developing or have developed DNA probe based assays or other products and services, some of which may be competitive with our products.

If we are unable to develop the enhancements to our technology necessary to compete successfully with newly emerging technologies and competitors, or if we are unable to develop products based on these technologies, our business, financial condition and results of operations will suffer. Moreover, to maintain or gain market acceptance of our products in the face of new products introduced by our competitors, we may have to reduce or discount the price of our products resulting in an adverse impact on revenues and gross margins.

WE EXPECT TO FACE INCREASING COMPETITION IN THE FUTURE.

Future competition in existing and potential markets will likely come from existing competitors as well as other companies seeking to develop new technologies for sequencing and analyzing genetic information. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs.

In the clinical genomics field, competition will likely come from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases and other companies conducting research on new technologies to ascertain and analyze genetic information.

Established diagnostic companies could compete with us by developing new products. Companies such as Abbott Laboratories, Becton Dickinson, Bayer AG, Celera Diagnostics, Roche Diagnostics, Johnson & Johnson, bioMerieux and Beckman Coulter have the strategic commitment to diagnostics, the financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. Established diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which are not compatible with the GeneChip® system and could deter acceptance of our products. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests.

AS WE CONTINUE TO SCALE UP MANUFACTURING OF OUR PRODUCTS, WE MAY ENCOUNTER PROBLEMS DUE TO A RELATIVELY LIMITED MANUFACTURING HISTORY, THE COMPLEXITY OF OUR PRODUCTS AND AMBIGUITIES IN GENETIC SEQUENCE DATABASES UPON WHICH OUR PRODUCTS ARE BASED.

The GeneChip® system is a complex set of products and includes DNA probe arrays, which are produced in an innovative and complicated manufacturing process. We test only selected probe arrays from each wafer and only selected probes on such probe arrays. Therefore, we rely on internal quality control procedures to verify the correct completion of the manufacturing process. Also, we and our customers rely on the accuracy of genetic sequence information contained in databases upon which our products are based. It is therefore possible that probe arrays that do not meet all of our performance specifications may not be identified before they are shipped. Due to the complexity of these products, we have from time to time experienced technical problems. We have plans to continue to invest substantial resources to ensure the accuracy of the sequence information used to design our probe arrays prior to the commercial release of our products but there can be no assurance that additional technical problems will not occur. We believe our acquisition of Neomorphic, Inc. in 2000 will further enable us to refine and ensure the accuracy of the public domain sequence databases. Despite these

efforts, because of the rapidly evolving nature of the public domain sequence databases, sequence errors and ambiguities may not be found prior to the commercial release of a product. The magnitude and importance of these errors depends on multiple and complex factors that we consider in determining appropriate actions to meet customer needs.

For example, in the first quarter of 2001 we discovered ambiguities in the UniGene U74 database build that was used in the design of the Murine Genome U74 Set of GeneChip® arrays. As a result, we redesigned these arrays and had discussions with our affected customers to address their individual needs and to offer replacement arrays to these customers. We evaluated the financial impact of providing these replacement arrays and recorded these charges in 2000 and the first quarter of 2001. In addition, due to customer concern over the accuracy of the probe sequences on our arrays, sales of the Murine Genome U74 set of arrays as well as other products were affected. Our inability to timely deliver acceptable products would likely adversely affect our relationship with our customers, and could have a material adverse effect on our business, financial condition and results of operations.

WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS AND WE WILL BE UNABLE TO MANUFACTURE OUR PRODUCTS IF SHIPMENTS FROM THESE SUPPLIERS ARE DELAYED OR INTERRUPTED.

Key parts of the GeneChip® product line, such as the scanner, hybridization oven, 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. We rely on Agilent Technologies to manufacture our scanners and on Enzo Diagnostics, Inc. to manufacture various labeling kits recommended for the processing of samples for use with probe arrays in expression analysis applications. Agilent has publicly announced that it is commercializing its own DNA array technology. There can be no assurance that Agilent's commercial activity will not adversely impact our sales and supply agreements. In addition, Agilent has a life sciences instrumentation business, providing it with an existing sales and support infrastructure. There can be no assurance that Agilent's commercial activities will not adversely impact the market potential for Affymetrix' or other genetic analysis technologies. In addition, components of our manufacturing equipment and certain raw materials used in the synthesis of probe arrays are available from one of only a few suppliers. In the event that supplies from these vendors were delayed or interrupted for any reason, we would not be able to get manufacturing equipment, produce probe arrays, or sell scanners or other components for our GeneChip® product in a timely fashion or in sufficient quantities or under acceptable terms.

Even if alternative sources of supply are available, it could be time consuming and expensive for us to qualify new vendors. In addition, we are dependent on our vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these vendors were delayed or interrupted for any reason, we could be delayed in our ability to develop and deliver products to our customers.

PATENT POSITIONS IN OUR INDUSTRY ARE GENERALLY UNCERTAIN AND LITIGATION IS PREVALENT.

The patent positions of pharmaceutical and biotechnology companies are generally uncertain and involve complex legal and factual questions. In addition, we believe that there will continue to be litigation in the industry regarding patent and other intellectual property rights. As a result, we cannot guarantee any of the following:

•: that any of our pending patent applications will result in issued patents;
•: that we will develop additional technologies that are patentable;

•: that any patents issued to us or our strategic partners will provide a basis for commercially viable products;
•: that any patents issued to us or our strategic partners will be enforceable on a cost effective basis or otherwise provide us with any competitive advantages;
•: that any patents issued to us or our strategic partners will not be challenged by third parties; or
•: that the patents of others will not have an adverse effect on our ability to do business.

In addition, patent law relating to the scope of claims in the technology fields in which we operate is still evolving and the extent of future protection for our proprietary rights and the rights of third parties is highly uncertain.

Others may independently develop similar or alternative technologies, duplicate any of our technologies, or design around or invalidate our patented technologies. In addition, we have incurred and may in future periods incur substantial costs in litigation to defend against patent suits brought by third parties and when we initiate such suits. In addition, administrative proceedings such as "interferences," in the United States Patent and Trademark Office could substantially impact the scope of our patent protection as well as result in the expenditure of substantial funds in legal fees.

Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, we will have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial cost. We cannot assure investors that any such patent applications will not have priority over our patent applications.

Moreover, even if we defend and enforce our intellectual property rights, others may develop similar or alternative technologies, duplicate our technologies, or design around or invalidate our patented technologies. These developments would reduce the value of our intellectual property assets.

WE MAY BE EXPOSED TO LIABILITY DUE TO PRODUCT DEFECTS.

Our business exposes us to potential product liability claims that are inherent in the testing, manufacturing, marketing and sale of human diagnostic and therapeutic products. We intend to acquire additional insurance, should it be desirable, for clinical liability risks. We may not be able to obtain such insurance or general product liability insurance on acceptable terms or at reasonable costs. In addition, such insurance may not be in sufficient amounts to provide us with adequate coverage against potential liabilities. A product liability claim or recall could have a serious adverse effect on our business, financial condition and results of operations.

WE ARE ENGAGED IN LITIGATION REGARDING OUR INTELLECTUAL PROPERTY RIGHTS AND OUR SURVIVAL DEPENDS ON OUR ABILITY TO AVOID INFRINGING THE INTELLECTUAL PROPERTY OF OTHERS.

Intellectual property rights are essential to our business. We are engaged in litigation regarding our intellectual property rights. Although we settled three significant lawsuits with Oxford Gene Technology, Hyseq, Inc. and Incyte Genomics, Inc. in 2001, we continue to be engaged in litigation regarding our intellectual property rights with Stanford University and Applera Corporation.

These cases are pending and consume, and may continue to consume, substantial portions of our financial and managerial resources. A loss of a significant litigation could prevent us from producing our current products or developing new ones and could also result in the payment of significant penalties and royalties, which could make it too costly to produce some or all of our products. See Part II, Item 1. "Legal Proceedings."

OUR SURVIVAL DEPENDS ON OUR ABILITY TO MAINTAIN, ENFORCE AND OBTAIN INTELLECTUAL PROPERTY RIGHTS NECESSARY TO CONTINUE OR EXPAND OUR BUSINESS; IF WE ARE SUBJECT TO ADDITIONAL LITIGATION CLAIMS ON OUR INTELLECTUAL PROPERTY RIGHTS, THEY COULD BE COSTLY AND DISRUPT OUR BUSINESS.

If we cannot obtain, maintain or enforce intellectual property rights, competitors can design probe array systems similar to our GeneChip® technology. In order to continue our current business, we must successfully:

•: defend against third parties asserting that we infringe their intellectual property rights;
•: enforce our intellectual property rights against third parties infringing our rights;
•: obtain licenses to the intellectual property we need to continue or expand our business;
•: obtain enforceable patent rights to our product and process innovations; and
•: defend the scope of our existing or pending patents in administrative proceedings, such as oppositions or interferences.

Moreover, even if we defend and enforce our intellectual property rights, others may independently develop similar or alternative technologies, duplicate any of our technologies, or design around or invalidate our patented technologies. These developments would reduce the value of our intellectual property assets. Additional litigation regarding our intellectual property rights could consume substantial portions of our financial and managerial resources.

RISKS ASSOCIATED WITH EXPORT SALES AND OPERATIONS.

We intend to continue to expand our international presence in order to increase our export sales. Export sales to international customers entail a number of risks, including:

•: unexpected changes in, or impositions of, legislative or regulatory requirements;
•: delays resulting from difficulty in obtaining export licenses for certain technology, and tariffs, quotas and other trade barriers and restrictions;
•: longer payment cycles and greater difficulty in accounts receivable collection;
•: potentially adverse taxes;
•: currency exchange fluctuations;
•: the burdens of complying with a variety of foreign laws; and
•: other factors beyond our control.

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

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

Although we have expanded our customers base, our revenues are generated from a small number of pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. We expect that these customers will in aggregate continue to account for a substantial portion of revenues for the foreseeable future.

IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH COLLABORATIVE PARTNERS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS AND SERVICES.

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

Currently, our significant collaborative partners include Agilent Technologies in the making of our scanners, Amersham Biosciences K.K. and Takara Shuzo Co., Ltd. in distributing our products in Japan, Millennium Pharmaceuticals, Inc. in the development of GeneChip® technology applications for use in drug discovery and development, Hyseq, Inc. in the development and commercialization of a DNA sequencing chip, and Roche Molecular Systems and bioMerieux in the development of our diagnostic chip products. Relying on these or other collaborative relationships is risky to our future success because:

•: our partners may develop technologies or components competitive with our GeneChip® product such as Agilent Technologies, which has announced that it is commercializing a competing DNA array technology platform;
•: our existing collaborations may preclude us from entering into additional future arrangements;
•: our partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;
•: some of our agreements may prematurely terminate due to disagreements between us and our partners;
•: our partners may not devote sufficient resources to the development and sale of our products;
•: our partners may be unable to supply products to us on a timely basis;
•: our collaborations may be unsuccessful; or
•: we may not be able to negotiate future collaborative arrangements on acceptable terms.

OUR CURRENT SALES, MARKETING AND TECHNICAL SUPPORT ORGANIZATION MAY LIMIT OUR ABILITY TO SELL OUR PRODUCTS.

We currently have limited international sales, marketing and technical support services. To assist our sales and support activities, we entered into distribution agreements through certain distributors, principally in the Asia Pacific region. In addition, we also have in place with several third parties a series of distribution agreements covering our spotted array instruments product line that was acquired in the GMS acquisition. These and other third parties on whom we rely for sales, marketing and technical support in parts of Asia may decide to develop and sell competitive products or otherwise become our competitors, which could harm our business. Although we have invested significant other resources to expand our direct sales force and our technical and support staff, we may not be able to

establish a sufficiently sized global sales, marketing or technical support organization to sell, market or support our products globally.

BECAUSE OUR BUSINESS IS HIGHLY DEPENDENT ON KEY EXECUTIVES AND SCIENTISTS, OUR INABILITY TO RECRUIT AND RETAIN THESE PEOPLE COULD HINDER OUR BUSINESS EXPANSION PLANS.

We are highly dependent on our officers and our senior scientists and engineers, including scientific advisors. Our product development and marketing efforts could be delayed or curtailed if we lose the services of any of these people.

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

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

FUTURE ACQUISITIONS MAY DISRUPT OUR BUSINESS AND DISTRACT OUR MANAGEMENT.

We have previously engaged in acquisitions and expect to continue to do so in order to exploit technology or market opportunities. If we acquire another company, we may not be able to successfully integrate the acquired business into our existing business in a timely and non-disruptive manner or at all. Furthermore, an acquisition may not produce the revenues, earnings or business synergies that we anticipate. If we fail to integrate the acquired business effectively or if key employees of that business leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital management and other resources spent on an acquisition that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected. In addition, acquisitions can involve non-recurring charges and amortization of significant amounts of goodwill and deferred stock compensation that could adversely affect our results of operations.

THE MARKET PRICE OF OUR COMMON STOCK IS EXTREMELY VOLATILE, AND THE VALUE OF OUR COMMON STOCK MAY DECREASE SUDDENLY.

The market price of our common stock is extremely volatile, and the value of our common stock may be significantly less than the market value of that stock today. To demonstrate the volatility of our stock price, during the twelve-month period ending on September 30, 2002, the volume of our common stock traded on any given day has ranged from 17,659,500 to 453,300 shares, a 3,796% difference. Moreover, during that period, our common stock has traded as low as $13.80 per share and as high as $41.95 per share, a 204% difference. Based on the reported high and low prices, the market price of our common stock has changed as much as $5.81 per share in a single day and its market price has changed more than $5 per share 3 times in a single day during the twelve-month period ending September 30, 2002.

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): EXHIBITS:

Exhibit Number		Description of Document
3.1(1	)	Restated Certification of Incorporation.
3.2(2	)	Bylaws.
3.3(3	)	Amendment No. 1 to the Bylaws dated as of April 25, 2001.
4.1(4	)	Rights Agreement dated October 15, 1998 between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
4.2(5	)	Indenture dated as of September 22, 1999, between Affymetrix, Inc. and The Bank of New York, as Trustee.
4.3(6	)	Amendment No. 1 to Rights Agreement, dated as of February 7, 2000, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
4.4(7	)	Indenture, dated as of February 14, 2000 between Affymetrix, Inc. and The Bank of New York, as Trustee.
4.5(8	)	Registration Rights Agreement, dated as of February 14, 2000, between Affymetrix, Inc. and certain purchasers listed on the signature page thereto.

(1)

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

(2)

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

(3)

Incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-Q as filed on May 15, 2001 (File No. 000-28218).

(4)

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

(5)

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

(6)

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

(7)

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

(8)

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

(b): REPORTS ON FORM 8-K.

No reports on Form 8-K were filed for the three month period ended September 30, 2002.

SIGNATURES

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

	AFFYMETRIX, INC.

	By:	/s/ GREGORY T. SCHIFFMAN
	Name:	Gregory T. Schiffman
	Title:	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

November 14, 2002

Certification

I, Stephen P.A. Fodor, Ph.D., Chairman and Chief Executive Officer, certify that:

1.

I have reviewed this Form 10-Q for the period ended September 30, 2002 of Affymetrix, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.: designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b.: evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c.: presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.: all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b.: any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ STEPHEN P.A. FODOR, PH.D.

Name: Stephen P.A. Fodor, Ph.D.
Title: Chairman and Chief Executive Officer

Certification

I, Gregory T. Schiffman, Chief Financial Officer, certify that:

1.

I have reviewed this Form 10-Q for the period ended September 30, 2002 of Affymetrix, Inc.;

2.

3.

4.

a.: designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b.: evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c.: presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

a.: all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b.: any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ GREGORY T. SCHIFFMAN

Name: Gregory T. Schiffman
Title: Chief Financial Officer

AFFYMETRIX, INC.

EXHIBIT INDEX

SEPTEMBER 30, 2002

Exhibit Number		Description of Document
3.1(1	)	Restated Certification of Incorporation.
3.2(2	)	Bylaws.
3.3(3	)	Amendment No. 1 to the Bylaws dated as of April 25, 2001.
4.1(4	)	Rights Agreement dated October 15, 1998 between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
4.2(5	)	Indenture dated as of September 22, 1999, between Affymetrix, Inc. and The Bank of New York, as Trustee.
4.3(6	)	Amendment No. 1 to Rights Agreement, dated as of February 7, 2000, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
4.4(7	)	Indenture, dated as of February 14, 2000 between Affymetrix, Inc. and The Bank of New York, as Trustee.
4.5(8	)	Registration Rights Agreement, dated as of February 14, 2000, between Affymetrix, Inc. and certain purchasers listed on the signature page thereto.

(1): Incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K as filed on June 13, 2000 (File No. 000-28218).
(2): Incorporated by reference to Appendix C to the Registrant's definitive proxy statement on Schedule 14A as filed on April 29, 1998 (File No. 000-28218).
(3): Incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-Q as filed on May 15, 2001 (File No. 000-28218).
(4): Incorporated by reference to Exhibit 1 to the Registrant's Form 8-A as filed on October 16, 1998 (File No. 000-28218).
(5): Incorporated by reference to Exhibit 4.2 to the Registrant's registration statement on Form S-4 as filed on October 14, 1999 (File No. 333-88987).
(6): Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-A/A as filed on March 29, 2000 (File No. 000-28218).
(7): Incorporated by reference to Exhibit 4.4 to the Registrant's registration statement on Form S-3 as filed on May 11, 2000 (File No. 333-36790).
(8): Incorporated by reference to Exhibit 4.3 filed with Registrant's registration statement on Form S-3 as filed on May 11, 2000 (File No. 333-36790).

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AFFYMETRIX, INC. TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
AFFYMETRIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
AFFYMETRIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
AFFYMETRIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED)

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES
Certification
Certification
AFFYMETRIX, INC. EXHIBIT INDEX SEPTEMBER 30, 2002