10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011 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 NUMBER 0-28218

AFFYMETRIX, INC.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)	77-0319159 (IRS Employer Identification Number)
3420 CENTRAL EXPRESSWAY SANTA CLARA, CALIFORNIA (Address of principal executive offices)	95051 (Zip Code)
(408) 731-5000 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class   Common Stock, $0.01 par value Preferred Stock Purchase Rights Name of Each Exchange on Which Registered   The Nasdaq Global Select Market The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant at June 30, 2011, based on the closing price of such stock on The Nasdaq Global Select Market on such date, was approximately $553 million. The number of shares of the registrant’s Common Stock outstanding on February 22, 2012 was 70,447,986.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the Proxy Statement to be filed in connection with the 2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K where indicated.

AFFYMETRIX, INC.

FORM 10-K

DECEMBER 31, 2011

TABLE OF CONTENTS

Item No.		Page
	PART I	3
1.	Business	3
1A.	Risk Factors	16
1B.	Unresolved Staff Comments	28
2.	Properties	28
3.	Legal Proceedings	28
4.	Mine Safety Disclosures	28
	PART II	28
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities	28
6.	Selected Financial Data	30
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
7A.	Quantitative and Qualitative Disclosures About Market Risk	40
8.	Financial Statements and Supplementary Data	42
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	74
9A.	Controls and Procedures	74
9B.	Other Information	76
	PART III	76
10.	Directors, Executive Officers and Corporate Governance	76
11.	Executive Compensation	76
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	76
13.	Certain Relationships and Related Transactions, and Director Independence	76
14.	Principal Accounting Fees and Services	76
	PART IV	77
15.	Exhibits and Financial Statement Schedules	77
	Signatures	82

PART I

ITEM 1.  BUSINESS

Forward-Looking Statements

All statements in this Annual Report on Form 10-K that are not historical are "forward-looking statements" within the meaning of the federal securities laws. These include statements regarding our "expectations," "beliefs," "hopes," "intentions," "strategies" or the like. Such statements are based on our current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. We cannot assure you that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, those discussed in "Risk Factors" contained in Item 1A of this Annual Report on Form 10-K. Unless required by law, we do not undertake 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 develop, manufacture and sell products and services for genetic analysis to the life science research and clinical healthcare markets. Researchers around the world use our technology to better understand the role that genes play in disease, the effectiveness and safety of therapies and many other biological factors that affect human well-being. We sell our products to some of the world’s largest pharmaceutical, diagnostic and biotechnology companies, as well as leading academic, government and not-for profit research institutions. Approximately 24,000 peer-reviewed papers have been published based on work using our products. We have almost 900 employees worldwide and maintain sales and distribution operations across the United States, Europe, Latin America and Asia.

We were incorporated in California in 1992 and reincorporated in Delaware in 1998. Our principal executive offices are located at 3420 Central Expressway, Santa Clara, CA 95051. Our telephone number is (408) 731-5000.

Pending Acquisition of eBioscience

On November 29, 2011, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire eBioscience Holding Company, Inc. (“eBioscience”) for approximately $330 million in cash, subject to certain adjustments as provided in the Merger Agreement. eBioscience is a privately-held San Diego, California-based company engaged in the development, manufacture and sale of flow cytometry and immunoassay reagents for immunology and oncology research and diagnostics. The merger is subject to customary closing conditions, including our receipt of financing for the merger.

In connection with the Merger Agreement, we entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not yet been satisfied and as a result, we will not be able to complete the eBioscience acquisition unless the terms of the acquisition and the financing are restructured. We are in discussions with financing sources and with eBioscience regarding the possibility of restructuring the committed financing, but no agreements or understandings have been reached.

We have waived eBioscience’s obligations under the non-solicitation provisions set forth in the Merger Agreement and we understand that eBioscience is considering alternatives to the merger. The Merger Agreement may be terminated by either party if the closing of the merger has not occurred by March 31, 2012, so long as a breach of the Merger Agreement by the party seeking to terminate has not been the proximate cause of or resulted in the failure of the merger to occur on or before such date.

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Our Strategy

Our objective is to be the leading provider of genetic analysis tools that service the needs of a growing base of research and clinical markets. The key elements of our strategy are:

·   Entering new markets and expanding our product lines. Our goal continues to be to expand our revenue base by entering new markets, growing our customer base and successfully commercializing our established and acquired technologies. In the future, we intend to continue to expand our focus to include the validation and routine testing markets which we believe offer attractive compound annual growth rates and opportunities for recurring revenue growth in the future. We seek to expand our product line with new products that combine automated instrumentation, powerful new biological assays, and new array designs and content.

·   Improving operating leverage. We remain focused on improving our operating leverage and were successful in lowering our operating expenses in 2011 as compared to 2010. Profitability in the future will depend on a number of factors, including but not limited to, increasing top-line revenue and sustained operating leverage.

Our Markets

The market for genetic analysis tools is large, growing and consists of several important end user segments. Traditionally, end users of our technologies and products have been scientific researchers located in major academic university research laboratories and within major pharmaceutical and biotechnology companies. Our products enable a research workflow that consists of several phases:

·   discovery – describing the differences between individuals,

·   exploration – seeking to further understand the biological relevance of a disease or process, and

·   validation and testing – identifying disease mechanisms and pathways.

Discovery and Exploration Markets

The main source of discovery funding comes from a variety of public and private sources, with the National Institute of Health being the largest. A primary end-point of these end users is peer-reviewed scientific publication and our technologies have been referenced in approximately 24,000 scientific publications. The required technologies generally must enable large-scale and highly complex analysis of genetic variation (genotyping) and biological function (gene expression). Our products for large scale genotyping and gene expression applications serve customers in the exploration markets which include academic research centers, government agencies, private research foundations, clinical and commercial reference laboratories and the research departments of pharmaceutical companies.

Validation and Testing Markets

As the adoption of genetic analysis has increased, new end users entered the markets that are downstream of the basic research markets described above. In particular, clinical researchers, molecular pathologists, oncologists and cytogeneticists have become increasingly engaged in applying genetic analysis technologies for the development of new clinical methods to be used in the diagnosis, monitoring and treatment of a wide variety of molecular based diseases. These end users are often located in diagnostic companies, commercial reference laboratories, clinical research departments within academic medical centers, major pharmaceutical, biotechnology companies and agricultural based companies focused on plant and animal breed testing. The required technology is used in a repetitive testing environment and must enable cost effective, flexible analysis of significantly fewer genetic and biological markers. We believe these new users are more likely to generate recurring revenue and the downstream markets are growing at a higher compound annual growth rate than the scientific research markets.

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Our genotyping products with diagnostic or copy number applications, our targeted genotyping products and our low- to mid-plex gene expression products target the needs of the new users.

We expect that the following factors, among others, will influence the size and development of the markets served by our technologies:

·   the availability of genomic sequence and sequence variation data for the human population and for other organisms;

·   technological innovation that increases throughput and lowers the cost of genomic and genetic analysis;

·   the development of new computational techniques to handle and analyze large amounts of genomic data;

·   the availability of government funding for basic and disease-related research;

·   the amount of capital and ongoing expenditures allocated to research and development and outsourced spending by biotechnology, pharmaceutical and diagnostic companies for products and services;

·   the application of genomics to new areas including molecular diagnostics, agriculture, human identity and consumer goods; and

·   the availability of genetic markers and signatures of diagnostic value.

Scientific Background

Introduction to the Genome and its Opportunity

In the years following the completion of the Human Genome Project in 2003, an explosion of research in genome structure, function and variation has led to an understanding that human genetic variation is common and takes on many structural forms. Among individual humans, genetic variation ranges from single nucleotide changes to gross alterations of entire chromosomes. Subsequent efforts to identify and catalog human genetic variation, including the HapMap Project and the 1000 Genomes Project, continue to generate tremendous amounts of information that is made freely and quickly available to the public. Genetic variation accounts for many of the differences between individuals, such as eye color and blood group, and also affects a person’s susceptibility to certain diseases including cancer, diabetes, stroke and Alzheimer’s disease. Genetic variation can also determine a person’s response to drug therapies. Further, many cancers are caused by genetic variations in individual cells. Understanding the genome helps us understand the inheritance of biological characteristics. We believe that this will lead to a new healthcare paradigm where disease is understood at the molecular level, allowing patients to be diagnosed according to genetic information and then treated with drugs designed to work on specific molecular targets.

All known genomes, including the human genome, are composed of either deoxyribonucleic acid (“DNA”) or ribonucleic acid (“RNA”). The instructions required for every living cell to develop its characteristic form and function are believed to be represented within discrete regions of the genome known as genes. DNA molecules consist of two long complementary strands held together by base pairs. Four nucleotide bases—adenine-A, cytosine-C, guanine-G and thymine-T form the chemical building blocks of DNA. The two DNA strands are held together by hydrogen bonds between nucleotide bases on one strand to complementary nucleotide bases on the other strand. Only certain pairs of the bases can form these complementary bonds: C pairs with G, and A pairs with T. Therefore, a single DNA strand containing bases in the sequence CGTACGGAT can form a bond with a DNA strand containing bases in the sequence GCATGCCTA. Such paired DNA strands are said to be "complementary" and can form a double helix structure in a process called "hybridization." Our technology uses the principle of hybridization to recognize the presence of specific gene sequences and to analyze genetic information.

Through the process of transcription RNA, copies of the DNA are made from the regions containing genes. Many copies of RNA can be made from each DNA region. The amount of RNA made from any given gene is a measure of the expression level of that gene. In the cell, RNA is typically single-stranded, while DNA is double-stranded. One type of RNA, the messenger RNA (mRNA) is central to protein synthesis. There are RNAs with other roles, such as regulating which genes are expressed and carrying genetic information of viruses.

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Genotyping

Genotyping is the process of determining the genetic constitution of a cell, organism or individual in order to determine how it is specialized or differs from a group. Typically, each cell in an individual contains a complete copy of its genome. In a population, individuals vary from one another because of differences in gene sequences which are inherited from each parent and sometimes through the introduction of sequence changes due to environmental damage or biological errors in processes like gene replication. Common forms of genetic variation include single-nucleotide polymorphisms, or SNPs, and copy number variations, or CNVs. A SNP is a variation in a single position in a DNA sequence and a CNV is a variation in the number of copies of a segment of the DNA.

Genotyping is a valuable tool for studying genetic contributions to diseases and the efficacy of drug therapies in specified patient populations. While, in some cases, genetic variations, or polymorphisms, have little detectable effect on the biology of the organism, in other cases they may result in a predisposition to disease or an altered biological response to the environment. By screening for these polymorphisms, researchers seek to identify those that might be implicated in specific diseases. Sometimes it is not a single SNP or CNV, but the combination of certain variations that lead to a diseased state. For this reason, researchers look at the patterns of these polymorphisms in a large number of healthy and diseased individuals in order to correlate specific variants with specific diseases or phenotypes. Large scale genotyping can be used, for example, in studies designed to elucidate the genetic contributions to disease and, in the case of clinical trials, to drug response.

Gene Expression Monitoring

Gene expression monitoring is the process of determining which genes are active in a specific cell or group of cells. Timing and level of gene expression is an important mechanism by which the fate and function of cells are regulated. Although most cells contain an organism's full set of genes, each cell expresses only a subset of genes at any given time and the level of expression also varies with the state of that cell. The expression pattern or profile of genes can be correlated with many human diseases such as cancer, as well as with the effectiveness of treatment in specific patient populations. By identifying genes that are differentially expressed in particular diseases or patient populations, novel molecular targets and treatments may be identified and validated. In addition, gene expression signatures may be identified that provide early identification of a predisposition to disease or allow the selection of treatments optimized for an individual.

Gene expression monitoring is a valuable tool for identifying correlations between genes, determining their biological functions and identifying patterns that might be useful in classifying diseases. To monitor gene expression, we design and manufacture arrays with single-stranded DNA molecules that are complementary to sequences within genes or exons of interest. By synthesizing specific probes for multiple genes or exons on a single probe array, we enable researchers to quickly, quantitatively and simultaneously monitor the expression of a large number of genes or exons of interest. By monitoring the expression of such genes under different conditions and at different times, researchers can use the arrays to understand the dynamic relationship between gene expression and biological activity. We believe such information will be an important tool in understanding gene function and for the development of new drugs and diagnostic tools. Increasingly, clinical research is showing that gene expression patterns in tissue samples, particularly those from cancerous tissues, can be used to characterize disease sub-types and hopefully to predict therapeutic responses and likely outcomes.

In order to understand the impact of genomics on health, disease and other aspects of the human condition, scientists must compare both the sequence variation and the gene expression patterns of healthy and diseased individuals, tissues and cells. The use of arrays to identify correlations of gene expression patterns and sequence variation with specific diseases is expected to become increasingly important for gene marker validation, exploration and routine testing for diagnosis of disease.

Our Technologies

Array Technology

Our array technology leverages semiconductor-based photolithographic fabrication techniques, which enables us to synthesize a large variety of predetermined DNA sequences simultaneously in predetermined locations on a small glass chip called an "array."

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Photolithography is a technique which uses light to create exposure patterns on the glass chip and to direct chemical reactions. The process begins by coating the chip with light-sensitive chemical compounds that prevent chemical coupling. These light-sensitive compounds are called "protecting groups." Lithographic masks, which consist of predetermined transparent patterns etched into a glass plate that block or transmit light, are used to selectively illuminate the glass surface of the chip. Only those areas exposed to light are deprotected, and thus activated for chemical coupling through removal of the light-sensitive protecting groups. The entire surface is then flooded with a solution containing the first in a series of DNA building blocks (A, C, G or T). Coupling only occurs in those regions that have been deprotected through illumination. The new DNA building block also bears a light-sensitive protecting group so that the cycle can be repeated.

This process of exposure to light and subsequent chemical coupling can be repeated many times on the same chip in order to generate a complex array of DNA sequences of defined length. The intricate illumination patterns allow us to build high-density arrays of many diverse DNA sequences in a small area. Unlike conventional synthesis techniques, which generally use a linear process to create compounds, our synthesis technique is combinatorial, in that the number of different compounds synthesized grows exponentially with the number of cycles in the synthesis. Currently, our commercial arrays contain over six million unique sequences. Each unique sequence is 25 to 50 nucleotides in length and is represented millions of times within a specified area of the array. Just as in the semiconductor industry, we manufacture arrays in a wafer format. Each wafer is approximately five inches square and can contain over 300 million unique probe sequences based on current technology. For our commercial array products, we can manufacture a large number of identical or different DNA probe arrays on a glass wafer, which is then diced into individual chips. The number of chips manufactured per wafer can be varied depending on the desired amount of information on each chip. The chips can be packaged individually, in our cartridge format, in our strip format or in our peg format. A strip format can have four arrays packaged together on a strip and a peg format can have up to 96 arrays packaged together for automated and parallel processing. Given the large amount of unique sequences represented in our arrays, our technology enables the efficient analysis of a multitude of DNA probes to analyze DNA or RNA sequences in a test sample.

The function of each single-stranded sequence on our array is to bind to its complementary single strand of DNA or RNA from a biological sample. Each unique feature on the array contains multiple copies of the same single strand of DNA. The nucleic acid (DNA or RNA) to be tested is isolated from a sample, such as blood, saliva or biopsy tissue, amplified and prepared for hybridization to the array. The test sample is then washed over the array, where the individual nucleic acid sequences that represent the genetic content or expressed genes of the sample hybridize to their complementary sequences bound on the array. The molecules in the test sample may be labeled with fluorescent dye either before or after hybridization. When scanned by a laser in the scanner instrument, the test sample generates a fluorescent signal. The locations where a fluorescent signal is detected by an optical detection system on the scanner instrument correspond to sequences complementary to the test sample. Sequence variation, or the quantification of specific sequences of nucleic acids in the sample, can be determined by detecting the relative strength of these signals since the sequence and position of each complementary DNA probe on the probe array is known. The combination of a particular array, together with an optimized set of reagents and a user protocol describing how to carry out the procedure, is referred to as an "assay."

bDNA Technology

We offer customers a suite of assay products for a wide variety of low- to mid-plex genetic, protein and cellular analysis applications using branched DNA, or bDNA, technology. These assays measure RNA levels directly from samples using a novel signal amplification method without the need for RNA purification, providing customers with improved accuracy, scale and workflow relative to traditional methods based on polymerase chain reaction, or PCR.

Our Products

Overview

We offer a comprehensive line of products for two principal applications: genotyping and gene expression. The majority of our product sales consist of sales of instruments and related consumables. We have three families of instrument systems, GeneChip®, GeneTitan® and GeneAtlasTM that include instruments, consumables and software. Our GeneChip® instruments run arrays packaged in cartridges and our GeneTitan® and GeneAtlasTM instruments run arrays packaged in a peg format for automated high throughput processing.

We also offer a variety of assays for gene expression targeting low- to mid-plex markets that are downstream of our whole genome arrays and a range of reagent kits that are compatible with our platforms as well as the products of other vendors.

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GeneChip® Family of Products

Our GeneChip® system provides an integrated solution for gene expression and genotyping analysis. It consists of instruments and consumables that provide for the robust preparation and analysis of samples using our GeneChip® cartridge arrays. The components of the GeneChip® system include (1) disposable probe arrays containing genetic information on a chip, (2) reagents for extracting, amplifying and labeling target nucleic acids, (3) a fluidics station for introducing the test sample to the probe arrays, (4) a hybridization oven for optimizing the binding of samples to the probe arrays, (5) a scanner to read the fluorescent image from the probe arrays, and (6) software to analyze and manage the resulting genetic information.

Our major GeneChip® instrument products include:

Product	Product Description
GeneChip® Scanner 3000	Instrument for scanning higher-density arrays, including SNP arrays with up to 900,000 SNPs, tiling arrays for transcription and all-exon arrays for whole-genome analysis.
GeneChip® Scanner 3000Dx	This instrument is a version of the GeneChip® Scanner 3000 that is cleared by the United States Food and Drug Administration as an in vitro diagnostic device (“IVD”).
GeneChip® Fluidics Station	Instrument for the wash and stain of GeneChip® arrays.
GeneChip® Hybridization Oven	This instrument provides temperature and rotation control to ensure the successful hybridization of cartridge arrays before scanning.

Our major GeneChip® array and reagent products include:

Genotyping Catalog Cartridge Arrays	·CytoScan™ HD Array – This array includes more than 2.6 million copy number markers and provides broad coverage for the detection of human chromosomal aberrations associated with genes related to constitutional and cancer cytogenetics. ·SNP 6.0 Array – This single chip array is a robust tool for studying variation. It enables genotyping of approximately 906,600 SNPs and assaying of approximately 946,000 non-polymorphic probes for detection of copy number. ·DMET™ Plus – This array features drug markers in FDA-validated genes and enables discovery and measurement of genetic variation associated with drug response.
Gene Expression Catalog Cartridge Arrays	·U133 – This array analyzes the expression level of over 47,000 transcripts and variants of the human genome. ·Other Arrays – We also offer a range of catalog expression arrays for the study of rat, mouse and other mammalian and model organisms.
Custom Arrays	·MyGeneChip™ and CustomSeq™ products are custom expression and sequence arrays designed by our customers to study organisms of interests to them.

GeneTitan® Family of Products

Our GeneTitan® family of products consists of the GeneTitan® instrument system that runs genotyping and gene expression array plates. The GeneTitan® family of products provides a hands-free, automated solution for monitoring gene expression and genome-wide SNP genotyping.

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Our GeneTitan® products include:

Product	Product Description
GeneTitan®	The GeneTitan® instrument automates array processing from target hybridization to data generation by combining a hybridization oven, fluidics processing and imaging device into a single bench-top instrument. It runs array plates and supports both gene expression and genotyping studies.
Axiom™ Genotyping Solution	The Axiom™ Genotyping Solution includes array plates with validated genomic content, complete reagent kits, data analysis tools and a fully automated workflow utilizing the GeneTitan®. ·Axiom™ Human Array Plates – these arrays are designed to maximize genomic coverage of common and novel SNPs and insertions and deletions in Caucasian, Asian and African populations. ·Axiom™ Custom Arrays – Customers can make custom arrays utilizing a proprietary database of validated genomic markers.
Gene Expression Array Plates	We offer a catalog of gene expression array plates similar to our catalog gene expression cartridge arrays to be used on the GeneTitan® instrument. These arrays are available for the study of human, rat, mouse and a broad range of other mammalian and model organisms.

Our GeneAtlasTM productsinclude:

Product	Product Description
GeneAtlasTM Personal Microarray System	The GeneAtlasTM is a lower-priced instrument for low-to-medium throughput.  The GeneAtlasTM utilizes the array strip format, with four arrays per strip, and provides simplified hybridization and simple array processing with common microwell-based labware.
Gene Expression Array Plates	We offer a catalog of gene expression array plates for the study of human, rat and mouse to be used on our GeneAtlasTM system.

Low- to Mid-plex Products

We also offer an extensive line of multiplex assays to serve both the discovery and the validation markets. Multiplex assays measure many different targets from the same sample. These products enable drug target identification through analysis of gene silencing, cell signaling and biomarker validation. Our QuantiGene line of products is based on bDNA technology and delivers quantitative gene expression analysis. These products are compatible with a wide variety of samples and tissues.

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Reagents

We offer researchers an extensive line of reagent kits, enzymes and biochemicals. Our reagents are complementary to our array portfolio, thus enabling us to provide our customers with whole product solutions. In addition, they can be applied to a broad variety of emerging technologies. Our reagents include:

·   ExoSAP-IT® For PCR Product Clean-Up, a reagent for the rapid clean-up of PCR products used in downstream applications, such as DNA sequencing or SNP analysis.

·   HotStart-IT® line of PCR reagents, reagents that utilize a novel primer binding protein to inhibit primer dimer formation, with results in sensitive and consistent amplification for real-time PCR.

Our Services

We offer high-throughput genotyping services for customers using our genotyping products. Our projects range in size from a few hundred samples to over 10,000 samples. We serve customers requiring quick turnaround times and suitably priced solutions to their large-scale academic and consortia genotyping studies.

Our Collaborative Partners

We collaborate with our partners to expand the applications of our technology and to acquire access to complementary technologies and resources. We collaborate with a number of instrumentation and reagent companies to develop and supply certain components of the user work flow. These companies include Beckman Coulter, Inc., CapitalBio Corporation, Life Technologies Corporation, Genisphere LLC, Takara Bio Inc., New England Biolabs, Inc., Luminex Corporation and Qiagen GmbH.

Through our Powered by Affymetrix™, or PbA Program, we permit commercial entities to license our technologies to develop custom product solutions based upon our arrays, instrumentation and software. Our PbA partners include F. Hoffman-La Roche Ltd., bioMerieux, Inc., Veridex, LLC, a Johnson & Johnson company, Signature Diagnostics and TessArae. We provide our PbA partners custom arrays. Our partners subsequently package these arrays into kits, seek regulatory approval and reimbursement for their diagnostic use, and sell them into the diagnostic markets using their sales channels. An example is the PathChip, a gene expression array used by our PbA partner Pathwork Diagnostics, Inc., in its Pathwork Tissue of Origin test. In July 2008, and again in January 2010, the U.S. Food and Drug Administration (“FDA”) cleared the version of the Pathwork Tissue of Origin test for marketing.

We also collaborate with certain academic, government, and commercial research groups to develop and validate new applications of our technologies. These include the Broad Institute of Harvard, the Massachusetts Institute of Technology and the National Genome Research Institute.

Sales and Distribution

We market and distribute our products directly to customers in North America, Japan and major European markets. In these markets, we have our own sales, service and application support personnel responsible for expanding and managing their respective customer bases. In other markets, such as Mexico, India, the Middle East and Asia Pacific, including the People’s Republic of China, we sell our products principally through third party distributors that specialize in life science supply. For molecular diagnostic and industrial applications market opportunities, we supply our partners with arrays and instruments, which they incorporate into diagnostic products and assume the primary commercialization responsibilities.

Manufacturing and Raw Materials

We manufacture our consumables, including our arrays and the majority of our reagents, and contract with third parties to manufacture our instruments. We manufacture our reagents in our Cleveland, Ohio facility and our arrays in our Singapore facility.

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Our array manufacturing process involves wafer preparation, probe synthesis, dicing of synthesized wafers into chips, assembly of chips and quality control. We have developed software programs that extensively automate the design of photolithographic masks used in array manufacturing and that control the array manufacturing lines. Glass wafers are prepared for synthesis through the application of chemical coatings. Arrays are synthesized on the wafers using our proprietary, combinatorial photolithographic process. The completed wafers can then be diced into chips. The chips can be packaged individually, in our cartridge format, in our strip format or in our peg format.

We offer a variety of reagents to our customers, including those that are manufactured in-house, those that are supplied by qualified third-party suppliers and a combination of the two.

Our Singapore and Ohio facilities are fully operational and have been certified to ISO 13485 standards. The Singapore and Ohio facilities operate under the strict standards of our corporate quality plan. Third parties who manufacture our instruments will have to meet our quality standards as part of the qualification process.

Key parts of our product lines, such as our GeneTitan® instrument and hybridization ovens, are available from single sources. Likewise, certain raw materials or components used in the synthesis of arrays or the assembly of instrumentation are currently available only from a single source or limited sources. Alternative sources of supply may be time consuming and expensive to qualify. In addition, we are dependent on our vendors to provide components of appropriate quality and reliability, and to meet applicable regulatory requirements. We take what we believe are appropriate measures to prevent the delay or interruption of supplies from these vendors and to ensure the appropriate quality for our customers, since any delay or interruption could delay our ability to deliver our products to our customers.

Research and Development

Our research and development effort is divided into the major areas of basic research, product research and development, and manufacturing technology development. Our product development efforts are focused primarily on the development of new array, assay and reagent products, improving the overall performance of our assays and simplifying highly complex assays. We are also actively engaged in research aimed at enhancing the manufacturing process currently employed in the production of our arrays.

Our research and development expenses for the years ended December 31, 2011, 2010 and 2009 were $63.6 million, $67.9 million and $77.4 million, respectively.

Intellectual Property

We rely on a combination of patent, copyright, and trade secret laws, know-how and licensing opportunities to establish and protect our proprietary technologies and products. Our success depends in part on our ability to obtain patent protection for our products and processes, to preserve our copyrights and trade secrets, to operate without infringing the proprietary rights of third parties and to acquire licenses related to enabling technology or products used with our technology.

We are pursuing a patent strategy designed to facilitate our research and development program and the commercialization of our current and future products. While no one patent is considered essential to our success, we aggressively seek to protect our patent rights as our patent portfolio as a whole is material to the success of the business.

There are a significant number of United States and foreign patents and patent applications in our areas of interest, and we believe that there will continue to be significant litigation in the industry regarding patent and other intellectual property rights. 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. It may be necessary for us to enter into litigation to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets or know-how owned by us or to determine the scope and validity of the proprietary rights of others. From time to time, to determine the priority of inventions, it may be necessary for us to participate in interference proceedings declared by the United States Patent and Trademark Office. Litigation or patent administrative proceedings could result in substantial costs to and distraction from our core business and our efforts in respect to such proceedings may not be successful. For further information regarding intellectual property litigation involving us, see “Item 8. Financial Statements and Supplementary Data—Note 12. Legal Proceedings” in this Annual Report on Form 10-K.

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We also rely upon copyright and trade secrets to protect our confidential and proprietary information. We seek to protect our proprietary technology and processes by confidentiality agreements with our employees and certain consultants and contractors. These agreements may be breached, we may not have adequate remedies for any breach and our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees or our consultants or contractors use intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.

We are party to various option, supply and license agreements with third parties which grant us rights to use certain aspects of our technologies. We take such measures as we believe are appropriate to maintain rights to such technology under these agreements. In addition, our academic collaborators have certain rights to publish data and information in which we have rights. There is considerable pressure on academic institutions to publish discoveries in the genetics and genomics fields. We take such steps as we believe are appropriate to ensure that such publication will not adversely affect our ability to obtain patent protection for information in which we may have a commercial interest.

Competition

The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition, new product introductions and strong price competition. We face significant competition as existing companies develop new or improved products, and as companies enter the market with new technologies, such as next-generation sequencing.

In the highly multiplexed genotyping and gene expression markets, existing competitive technologies include DNA sequencing, which we do not offer and is offered by companies such as Illumina, Inc., Life Technologies Corporation and Pacific Biosciences of California, Inc. Other companies developing or marketing competitive DNA array technology include Illumina, Inc., Agilent Technologies, Inc., BD Biosciences, CombiMatrix Corporation, MDS Analytic Technologies/Danaher, Nimblegen/Roche Diagnostics and NuGEN Technologies, Inc, some of which offer products directly competitive with our microarrays or reagents. In the low to midplex genotyping and gene expression markets, much of the existing low-plex competition comes from the supplier of realtime PCR products, including Life Technologies Corporation, who has a dominant position, Roche Diagnostics, Agilent Technologies, Inc. and BioRad Laboratories, Inc. In addition, there are new midplex technologies being offered by Fluidigm Corporation, Sequenom, Inc., High Throughput Genomics, Inc., Beckman Coulter, NanoString Technologies and Life Technologies Corporation (BioTrove). In order to compete against existing and emerging technologies, we will need to demonstrate that our products have superior throughput, cost and accuracy advantages over competing products.

In the molecular diagnostic field, competition is likely to 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. The market for molecular diagnostic products derived from gene discovery is highly competitive and has high barriers of entry, with several large corporations already having significant market share. Established diagnostic companies such as Beckman Coulter, Becton, Dickinson and Company, bioMérieux, Johnson & Johnson, Gen-Probe Incorporated and Roche Diagnostics 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 our system and could slow 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.

We will face increased competition in existing and potential markets as the cost of new technologies such as sequencing and other technologies improves. We expect new competitors and technologies to emerge. 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 themselves. We have significantly expanded our network of approved service providers in America, Japan, Europe, and China. While these companies expand the reach of Affymetrix technology and make its analytical power available to a wider base of users they may act as a substitute for outright purchase of instruments and arrays by those end users. In addition, we have several other third-party licensees that could offer products that compete with our product offerings.

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Government Regulation

Many of our products are labeled for research use only. Products intended for research use only are not subject to clearance or approval by the FDA. However, research use only products may fall under the FDA’s jurisdiction if these are used for clinical rather than research purposes.Even where a product is not otherwise subject to clearance or approval by the FDA, the FDA may impose restrictions as to the manner in which we can market and sell our products and/or the types of customers to which we can market and sell our products in order to limit sales to those who use the products for research only.

Our GeneChip® Scanner 3000Dx is cleared by the FDA to be used in conjunction with cleared medical devices such as the Roche Diagnostics AmpliChip CYP450 Test. We will continue to develop diagnostic products ourselves or with our collaborative partners that may require regulatory clearance or approval by governmental agencies. Commercially available in-vitro diagnostic test kits and the reagents and instrumentation used with in-vitro diagnostic tests are regulated as medical devices and are generally subject to rigorous testing and other pre-market review procedures by the FDA in the U.S. and by other regulatory agencies in other countries. The FDA's Quality System Regulations also apply in connection with our manufacture of arrays and systems as components for use in diagnostic products distributed outside of the research environment. Obtaining these clearances or approvals and the compliance with these regulations require the expenditure of substantial resources over a significant period of time, and we cannot assure you that any clearances or approvals will be granted on a timely basis, if at all. Once granted, a clearance or approval may place substantial restrictions on how the device is marketed or labeled or to whom it may be sold. In addition, various federal and state statutes and regulations govern or influence the manufacturing, safety, and storage of our products and components of our products as well as our record keeping.

The FDA, the U.S. Department of Health and Human Services, state authorities, and foreign government regulators are increasingly focused on genetic analysis tools, including the use of microarrays, which are labeled for research use only, by clinical laboratories in laboratory-developed tests offered by these laboratories, including labs certified under the Clinical Laboratory Improvement Amendments, or CLIA, or licensed under state laboratory regulations. We cannot predict the nature of future regulatory or policy initiatives with respect to the sale and use of arrays for the development of assays by CLIA-certified, state licensed laboratories, or the extent to which such initiatives will impact our business. If new regulations restrict our customers’ development of laboratory-developed tests using products labeled for research use only, or if we otherwise are required to obtain FDA premarket clearance or approval prior to commercializing products labeled as research use only, our ability to generate revenue from the sale of our products may be delayed or otherwise adversely affected. Moreover, our failure to comply with governmental rules and regulations related to our products could cause us to incur significant adverse publicity, or subject us to investigations and notices of non-compliance or lead to fines or restrictions upon our ability to sell our products. We also may be at risk for liability related to government reimbursement of tests involving the use of our products if it were determined that these tests require FDA-clearance or approval and no such clearance or approval has been obtained.

Medical device laws and regulations are also in effect in many countries, including countries in the European Union, ranging from comprehensive device approval requirements to requests for product data or certifications. The number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining our foreign regulatory approvals. In addition, the export by us of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA or other export restrictions.

We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. A failure to comply with these regulations might result in suspension of these contracts or administrative or other penalties, and could have a material adverse effect on our ability to compete for future government grants, contracts and programs.

Reimbursement

The design of our products and the potential market for their use may be directly or indirectly affected by U.S. and other government regulations governing reimbursement for clinical testing services. The availability of third-party reimbursement for our products and services may be limited or uncertain, particularly with respect to genetic tests and other clinical applications products.

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Third-party payers may deny reimbursement if they determine that an ordered health care product or service has not received appropriate FDA or other governmental regulatory clearances, is not used in accordance with cost-effective treatment methods as determined by the payer, or is deemed by the third-party payer to be experimental, unnecessary or inappropriate. Under Medicare rules, diagnostic tests must be ordered by a physician who is treating the beneficiary and who uses the test results in patient management. Under this rule, some Medicare contractors may deny coverage for a test, even if the test has been cleared or approved by the FDA, without proof, as determined sufficient by the contractor, that the test is useful in patient management.Furthermore, third-party payers are increasingly challenging the prices charged for health care products and services.

We are currently developing diagnostic and therapeutic products, including those with our collaborative partners which may be subject to reimbursement issues. The commercialization of such products may depend, in part, on the extent to which reimbursement for these products will be available under U.S. and foreign regulations governing reimbursement for clinical testing services by government authorities, private health insurers and other organizations.

In the United States, third-party payer price resistance, the trend towards managed health care, implementation of the Patient Protection and Affordable Care Act of 2010 and other legislative proposals to reform health care or reduce government insurance programs could reduce payment rates for health care products and services, adversely affect the profits of our customers and collaborative partners and thus reduce our future royalties and product sales.

Environmental Matters

We are dedicated to compliance and protection of the environment and individuals. Our operations require the use of hazardous materials (including biological materials) which subject us to a variety of federal, state and local environmental and safety laws and regulations. Some of the regulations under the current regulatory structure allow for "strict liability," holding a party potentially liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others', business operations should contamination of the environment or individual exposure to hazardous substances occur. We cannot predict how changes in these laws or development of new regulations will affect our business operations or the cost of compliance.

Employees

As of February 22, 2012, we had 875 full-time employees. The employee group includes chemists, engineers, computer scientists, mathematicians and molecular biologists with experience in the diagnostic products, medical products, semiconductor, computer software and electronics industries. None of our employees is represented by a collective bargaining agreement, nor have we experienced work stoppages. Our success depends in large part on our ability to attract and retain skilled and experienced employees.

Seasonality

Customer demand for probe arrays and instrumentation systems is typically highest in the fourth quarter of the calendar year as customers spend unused budget allocations before the end of the year.

Backlog

Because most customer orders are shipped in the quarter in which they are received, we believe that backlog at quarter end is typically not a material indicator of future sales. In addition, backlog may not result in sales because of cancellation of orders or other factors. On a few occasions we have experienced, and made public announcements about, short-term increases in backlog as a result of factors such as new product introductions or supply constraints.

Financial Information About Industry Segments

We operate in one business segment, for the development, manufacture, and commercialization of systems for genetic analysis in the life sciences and diagnostic industry. Our operations are treated as one segment as we only report operating information on a total enterprise level to our chief operating decision-maker. Further, resource allocations are also made at the enterprise level by our chief operating decision-maker.

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Financial Information About Geographic Areas

Our total revenue from customers outside of the United States for the years ended December 31, 2011, 2010 and 2009 was $125.0 million, $132.7 million and $136.8 million, or approximately 47%, 43% and 42%, respectively, of our total revenue. A summary of revenues from external customers attributed to each of our geographic areas for the years ended December 31, 2011, 2010 and 2009 is included in “Item 8. Financial Statements and Supplementary Data—Note 16. Segment and Geographic Information”.

Available Information

Our internet address is www.affymetrix.com. Information included on our website is not part of this Form 10-K. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, copies of our annual reports are available free of charge upon written request. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

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ITEM 1A. RISK FACTORS

Risks Related to the Growth of Our Business

If we do not continually develop and commercialize new or enhanced products and services, our business may not grow.

Our success depends in large part on our continual, timely development and commercialization of new or enhanced products and services that address evolving market requirements and are attractive to customers. The genetic analysis tools market, including the RNA/DNA probe array field, is characterized by rapid and significant technological changes, frequent new product introductions and enhancements, evolving industry standards and changing customer needs. Standardization of tools and systems for genetic research is still ongoing and we cannot assure you that our products will emerge as the standard for genetic research. Other companies may introduce new technologies, techniques, products or services that render our products or services obsolete or uneconomical. If we do not appropriately innovate and invest in new technologies, then our technologies will become dated and our customers could move to new technologies offered by our competitors.

As a result, we are continually looking to develop, license or acquire new or enhanced technologies, products and services to further broaden and deepen our offerings. Some of the factors affecting market acceptance of our products and services include:

· availability, quality and price as compared to competitive technologies, products and services;

· the functionality of new and existing products and services, and whether they address market requirements;

· the timing of introduction of our technologies, products and services as compared to competitive technologies, products and services;

· the existence of product defects;

· scientists’ and customers’ opinions of the utility of our products and services and our ability to incorporate their feedback into future products and services;

· citation of our products in published research; and

· general trends in life science research and life science informatics software development.

Our new or enhanced technologies, products or services may not be accepted by customers in our target markets. For example, once we have developed or obtained a new technology, we may fail to successfully commercialize new products and services based on that technology, particularly to the extent that our new products and services compete with established technologies or the products and services of more established competitors. Risks relating to product adoptions include the inability to accurately forecast demand and difficulties in managing different sales and support requirements due to the type or complexity of the new products.

Further, many of our current and potential customers have limited budgets. Accordingly, we cannot assure you that the successful introduction of new or enhanced products or services will not adversely affect sales of our current products and services or that customers that currently purchase our products or services will increase their aggregate spending as a result of the introduction of new products and services.

The Merger Agreement pursuant to which we have agreed to acquire eBioscience may be terminated in accordance with its terms and the merger may not be completed.

On November 29, 2011, we entered into a Merger Agreement to acquire eBioscience for approximately $330 million in cash, subject to certain adjustments as provided in the Merger Agreement. The merger is subject to a number of conditions which must be fulfilled in order to complete the merger, including our receipt of financing for the merger.

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In connection with the Merger Agreement, we entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result we will not be able to complete the eBioscience acquisition unless the terms of the acquisition and the financing are restructured. We are in discussions with financing sources and with eBioscience but no agreements or understandings have been reached. We have waived eBioscience’s obligations under the non-solicitation provisions set forth in the Merger Agreement and we understand that eBioscience is considering alternatives to the merger. The Merger Agreement may be terminated by either party if the closing of the merger has not occurred by March 31, 2012, so long as a breach of the Merger Agreement by the party seeking to terminate has not been the proximate cause of or resulted in the failure of the merger to occur on or before such date.

If we cannot successfully reach agreement with the financing sources and eBioscience on a restructured merger, the Merger Agreement may be terminated under its terms. The failure of the merger to be completed may result in negative publicity and/or a negative impression of us in the investment community, may cause our stock price to decline and may adversely affect our relationship with employees, customers and other partners in the business community.

Uncertainty associated with the completion of the merger may cause substantial disruptions in our business and eBioscience’s business.

Uncertainty associated with the completion of the merger may cause substantial disruptions in our business and eBioscience’s business, which could have an adverse effect on our financial results. Among other things, such uncertainty may affect our relationships with customers, potential customers and suppliers and our ability to recruit prospective employees or to retain and motivate existing employees. eBioscience may face similar disruptions to its business, which could have an adverse effect on the combined business if the merger is completed. The adverse effect of such disruptions could be exacerbated by further delay in the completion of the merger or termination of the Merger Agreement.

Uncertainty about the completion of the merger also may impair our and eBioscience’s ability to attract, retain and motivate key personnel. Employee retention may be particularly challenging during the pendency of the merger as our employees and those of eBioscience may experience uncertainty about the completion of the merger or their future roles with the combined business if the merger is completed. If our key employees or those of eBioscience depart, we may have to incur significant costs in identifying, hiring and retaining replacements for departing employees, which could reduce our ability to realize the anticipated benefits of the merger.

We are not able to complete the merger unless the terms of the acquisition and the related financing are restructured. If the merger is completed, we may incur a substantial amount of indebtedness, which could adversely affect our business, or issue a significant amount of common stock or other equity securities, which would dilute our existing stockholders.

In connection with the Merger Agreement, we entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result we will not be able to complete the merger unless the terms of the acquisition and the financing are restructured. Although we are in discussions with financing sources and with eBioscience regarding the possibility of restructuring the committed financing, no agreements or understandings have been reached.

If the merger is completed, we may incur a substantial amount of indebtedness, which could adversely affect us, including by decreasing our business flexibility and increasing our borrowing costs. If we incur indebtedness in connection with the merger, we may significantly increase our interest expense, leverage and debt service requirements. Increased levels of indebtedness may reduce funds available for our investment in product development as well as capital expenditures and other activities, increase our borrowing costs and create competitive disadvantages for us relative to other companies with lower debt levels. In addition, we expect the financing agreements governing any debt financing to contain customary restrictive covenants imposing operating and financial restrictions on us, including restrictions that may limit our ability to finance future operations or capital needs or to engage in other business activities. If an event of default occurs under any debt financing agreement, we may be required to immediately repay all outstanding borrowings, together with accrued interest and other fees. We may not be able to repay all amounts due in the event these amounts are declared due upon an event of default.

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If we issue a significant amount of common stock or other equity securities in connection with the merger, our existing stockholders will be diluted, and the market price of our common stock may decline. In addition, such an issuance may require the approval of our stockholders, which would further delay the completion of the merger. There can be no assurance that stockholder approval, if required, would be obtained on a timely basis, or at all.

If the merger is completed, we will incur significant transaction and merger-related costs.

If the merger is completed, we expect to incur a number of non-recurring costs associated with combining the operations of the two companies. The substantial majority of non-recurring expenses resulting from the merger will be comprised of transaction costs related to the merger and financing arrangements and employment-related costs. We also will incur transaction fees and costs related to formulating and implementing integration plans. We continue to assess the magnitude of these costs and additional unanticipated costs may be incurred in the integration of the two companies’ businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

Our growth depends in part on our ability to acquire new businesses and technologies and successfully integrate acquisitions, which may absorb significant resources and may not be successful.

As part of our strategy to develop and identify new technologies, products and services, we have made and may continue to acquire new businesses and technologies. Our integration of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, manufacturing and finance. In particular, if our proposed acquisition of eBioscience is completed, its success will depend, in part, on our ability to successfully integrate eBioscience’s business and operations and fully realize the anticipated benefits and synergies from combining our businesses and eBioscience. If we are not able to achieve these objectives following the merger, the anticipated benefits and synergies of the merger may not be realized fully or at all or may take longer to realize than expected. Our efforts to successfully integrate acquisitions may result in additional expenses and divert significant amounts of management’s time from other projects.

Our failure to manage successfully and coordinate the growth of the combined company could also have an adverse impact on our business. In addition, there is no guarantee that some of the businesses we acquire will become profitable or remain so. If our acquisitions do not meet our initial expectations, we may record impairment charges.

Factors that will affect the success of our acquisitions include:

· our ability to retain key employees of the acquired company;

· the performance of the acquired business, technology, product or service;

· our ability to integrate operations, financial and other systems;

· the ability of the combined company to achieve synergies among its constituent companies, such as increasing sales of the combined company’s products and services, achieving expected cost savings and effectively combining technologies to develop new products and services;

· any disruption in order fulfillment or loss of sales due to integration processes;

· the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;

· any decrease in customer and distributor loyalty and product orders caused by dissatisfaction with the combined companies’ product lines and sales and marketing practices, including price increases; and

· our assumption of known contingent liabilities that are realized, known liabilities that prove greater than anticipated, or unknown liabilities that come to light, to the extent that the realization of any of these liabilities increases our expenses or adversely affects our business or financial position.

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Emerging market opportunities in molecular diagnostics may not develop as quickly as we expect and we depend on the efforts of our partners to be successful.

The clinical applications of our technologies for diagnosing and enabling informed disease management options in the treatment of disease is an emerging market opportunity in molecular diagnostics. At this time, we cannot be certain that molecular diagnostic markets will develop as quickly as we expect. Although we believe that there will be clinical applications of our technologies that will be utilized for diagnosing and enabling informed disease management options in the treatment of disease, there can be no certainty of the technical or commercial success our technologies will achieve in such markets.

Our success in the molecular diagnostics market depends in part on our collaborative relationships and the ability of our collaborative partners to achieve regulatory approval for such products in the United States and in overseas markets, and successfully market and sell products using our technologies.

Risks Related to Our Sales

We face significant competition, and our failure to compete effectively could adversely affect our sales and results of operations.

We compete with companies that develop, manufacture and market genetic analysis tools for the life science and clinical healthcare markets. We face significant competition as our competitors and new companies develop new, improved or more economical products, services and technologies.

The market for our products and services is highly competitive, has high barriers to entry and has several other large companies with significant market share. For example, companies such as Illumina, Inc., Agilent Technologies and Life Technologies Corporation have products for genetic analysis that are directly competitive with certain of our products. In addition, Illumina, Inc., Life Technologies Corporation and Complete Genomics, Inc. also offer DNA sequencing technology which we do not offer. As the costs of DNA sequencing fall, we will face increased competition in certain of our existing and potential markets. We also face competition from established diagnostic companies such as Beckman Coulter, Becton, Dickinson and Company, bioMérieux, Celera Diagnostics, Johnson & Johnson, Gen-Probe Incorporated and Roche Diagnostics, which have made strategic commitments to diagnostics, have financial and other resources to invest in new technologies, and have substantial intellectual property portfolios, substantial experience in new product development and regulatory expertise. In addition, our collaborative partners may compete with us.

Many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content.

Reduction or delay in research and development budgets and government funding may adversely impact our sales.

We expect that our revenue in the foreseeable future will be derived primarily from products and services provided to pharmaceutical and biotechnology companies, as well as a relatively small number of academic, governmental and other research institutions. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers.

Factors that could affect the spending levels of our customers include:

· changes in government programs that provide funding to companies and research institutions;

· weakness in the global economy and changing market conditions that affect our customers;

· changes in the extent to which the pharmaceutical industry may use genetic information and genetic testing as a methodology for drug discovery and development;

· changes in the regulatory environment affecting life science companies and life science research;

· impact of consolidation within the pharmaceutical industry; and

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· cost reduction initiatives of customers.

As we implement our strategy to expand into new markets, the size and structure of our current sales, marketing and technical support organizations may limit our ability to sell our products and services.

As we implement our strategy to expand into new markets, we may not be able to establish a sales, marketing and technical support organization sufficient to sell, market and support all of our new products, or to cover all of the regions that we target globally. To assist our sales and support activities, we have entered into distribution agreements through certain distributors, principally in markets outside of North America and Europe. In addition, we may enter into distribution arrangements with respect to some of our products that we believe will be better served in such arrangements than our current sales and marketing organizations. We have less control over other third parties on whom we rely for sales, marketing and technical support. In addition, these third parties may decide to develop and sell competitive products or otherwise become our competitors, which could harm our business.

Consolidation trends in both our market and many of our customers’ markets have increased competition.

There has been a trend toward industry consolidation in our markets for the past several years. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in operating results and could harm our business.

Additionally, there has been a trend toward consolidation in many of the customer markets we sell to, in particular the pharmaceutical industry. Consolidation in our customer markets results in increased competition for important market segments and fewer available accounts, and larger consolidated customers may be able to exert increased pricing pressure on companies in our market.

If we are unable to maintain our relationships with collaborative partners, we may have difficulty developing and selling our products and services.

Our commercial success depends in part on our ability to develop and maintain collaborative relationships with key companies as well as with key academic researchers. In particular, we depend on our collaborators for in-licensed technology and components for a variety of our product lines. We collaborate with a number of instrumentation and reagent companies, including Beckman Coulter, CapitalBio Corporation, Genisphere LLC, Life Technologies Corporation, Luminex Corporation, Siemens Medical Solutions Diagnostics, Takara Bio Inc., New England Biolabs, Inc. and Qiagen GmbH. Some of these collaborators, like Life Technologies Corporation, Takara Bio Inc., New England Biolabs, Inc. and Luminex Corporation, are currently sole suppliers of components of some of our reagent kits but they are also our competitors. Relying on our collaborative relationships is risky to our future success because:

· our partners may develop technologies or components competitive with our products and services;

· 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 terminate prematurely due to disagreements between us and our partners;

· our partners may not devote sufficient resources to the development and sale of our products and services;

· our partners may be unable to provide the resources required for us to progress in the collaboration on a timely basis;

· our collaborations may be unsuccessful; or

· some of our agreements have expired and we may not be able to negotiate future collaborative arrangements on acceptable terms.

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Risks Related to the Manufacturing of Our Products

We depend on a limited number of suppliers. We will be unable to launch or commercialize our products in a timely manner if our suppliers are unable to meet our requirements or if shipments from these suppliers are delayed or interrupted.

We outsource the manufacturing of our instruments to a limited number of suppliers. Some of our instruments and other key parts of our product lines, including components of our manufacturing equipment and certain raw materials used in the manufacture of our products are currently only available from a single supplier. Therefore, we depend on our suppliers to supply our instruments, or components of our products, in required volumes, at appropriate quality and reliability levels, and in compliance with regulatory requirements on a timely basis. If supplies from these vendors do not meet our requirements, or were delayed or interrupted for any reason, we would not be able to commercialize our products successfully or in a timely fashion, and our business could be adversely impacted.

Our business is dependent on our ability to forecast our needs for components and products in our product lines and our suppliers’ ability to deliver such components and products in time to meet critical manufacturing and product release schedules. Our business could be adversely affected, for example, if suppliers fail to meet product release schedules, if we experience supply constraints, if we fail to negotiate favorable pricing or if we experience any other interruption or delay in the supply chain which interferes with our ability to manufacture our products or manage our inventory levels.

We may lose customers or sales if we are unable to meet customer demand for our products on a timely and cost-effective basis, or if we are unable to ensure the proper performance and quality of our products.

We produce our products in an innovative and complicated manufacturing process which has the potential for significant variability in manufacturing yields. We have encountered, and may in the future encounter, difficulties in manufacturing our products and, due to the complexity of our products and our manufacturing process, we may experience delays in the manufacture of our products or fail to ensure their proper performance or quality. As we develop new and enhanced products, we must be able to resolve in a timely, cost-effective manner manufacturing issues that may arise from time to time.

We base our manufacturing capabilities on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which could adversely impact our financial results. Difficulties in meeting customer, collaborator and internal demand could also cause us to lose customers or require us to delay new product introductions, which could in turn result in reduced demand for our products.

We rely on internal quality control procedures to verify our manufacturing processes. Due to the complexity of our products and manufacturing process, however, it is possible that products that do not meet all of our performance specifications may not be identified before they are shipped. If our products do not consistently meet our customers’ performance expectations, demand for our products will decline. In addition, we do not maintain any backup manufacturing capabilities for the production of our products. Any interruption in our ability to continue operations at our existing manufacturing facilities could delay our ability to develop or sell our products, which could result in lost revenue and seriously harm our business, financial condition and results of operations.

We may need to adjust our manufacturing capacity based on business requirements or improvements made to our technological capabilities and there are risks associated with such adjustment.

If demand for our products is reduced or if we implement technologies that increase the density or yields of our wafers, our manufacturing capacity could be under-utilized and some of our long-lived assets, including facilities and equipment, may be impaired, which would increase our expenses. In addition, factory planning decisions may shorten the useful lives of long-lived assets including facilities and equipment, and cause us to accelerate depreciation. These changes in demand for our products, and changes in our customers’ product needs, could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenue, increase our costs, lower our gross margin percentage or require us to recognize impairments of our assets. In addition, if demand for our products is reduced or we fail to accurately forecast demand, we could be required to write down inventory since certain of our products have a limited shelf life, which would have a negative impact on our gross margin.

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We have in the past, and may in the future, adjust our manufacturing capacity based on business requirements, which may include the rationalization of our facilities, including the abandonment of long-lived manufacturing assets and additional charges related to a reduction in capacity. Manufacturing and product quality issues may arise as we launch new products in our Singapore and Ohio facilities and rely increasingly upon manufacturing by third parties. We may lose customers if we are unable to manufacture products or if we experience delays in the manufacture of our products as a result of this transition.

We may not be able to deliver acceptable products to our customers due to the rapidly evolving nature of genetic sequence information upon which our products are based.

The genetic sequence information upon which we rely to develop and manufacture our products is contained in a variety of databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of these databases and resulting genetic research is dependent on various scientific interpretations and it is not expected that global genetic research efforts will result in standardized genetic sequence databases for particular genomes in the near future.

Although we have implemented ongoing internal quality control efforts to help ensure the quality and accuracy of our products, the fundamental nature of our products requires us to rely on genetic sequence databases and scientific interpretations which are continuously evolving. As a result, these variables may cause us to develop and manufacture products that incorporate sequence errors or ambiguities. The magnitude and importance of these errors will depend upon multiple and complex factors that would be considered in determining the appropriate actions required to remedy any inaccuracies. Our inability to timely deliver acceptable products as a result of these factors would likely adversely affect our relationship with customers, and could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Operations

We may not achieve sustained profitability.

Prior to 2002, we incurred losses each year since our inception, and we reported losses in 2006, and from 2008 through 2011. As a result, we had an accumulated deficit of approximately $478.7 million as of December 31, 2011. Our ability to achieve sustained profitability will depend, in part, on the rate of growth, if any, of our revenue and on the level of our expenses. In 2011, our business was affected by a significant drop in the volume of sales and consumables to our academic and pharmaceutical customers, particularly in North America, which led to a decrease in revenue as compared to 2010. There can be no assurance that our revenue will not continue to decrease in future periods. We expect to continue incurring significant expenses related to research and development, sales and marketing efforts to commercialize our products, litigation and non-cash stock based compensation, and we expect to continue to experience fluctuations in our operating results. If our revenue grows more slowly than we anticipate, or if our operating expenses are above what we expect or cannot be reduced in the event of lower revenue, we may not become profitable on a sustained basis, or at all.

If we do not attract and retain key employees, our business could be impaired.

To be successful, we must attract and retain qualified scientific, engineering, manufacturing, sales, marketing and management personnel. 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 our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. For example, our stock price has been volatile in recent years, resulting in a significant number of stock options granted to our employees having a strike price that is higher than the current trading price of our common stock. If we are unable to hire, train and retain a sufficient number of qualified employees, we will not be able to expand our business or our business could be adversely affected.

We also 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.

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Due to the international nature of our business, political or economic changes or other factors could harm our business.

A significant amount of our revenue is currently generated from sales outside the United States. Although such transactions are denominated in both U.S. dollars and foreign currencies, our future revenue, gross margin, expenses and financial condition are still affected by such factors as changes in foreign currency exchange rates; unexpected changes in, or impositions of, legislative or regulatory requirements, including export and trade barriers and taxes; longer payment cycles and greater difficulty in accounts receivable collection.

We also are subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, potential hostilities, epidemics and changes in diplomatic and trade relationships. We cannot assure 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.

Our effective tax rate may vary significantly.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. Estimates and judgments are required in determining our worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

Changes in overall levels and the geographic mix of pretax earnings may adversely impact our effective tax rate. Certain jurisdictions have lower tax rates, and the amount of earnings in these jurisdictions may fluctuate. If we do not have profitable operations in these jurisdictions, our effective tax rate could be adversely impacted. Changes in tax laws, regulatory requirements, our treasury plans, and applicability of tax holidays and incentive programs in the countries in which we operate could have a material impact on our tax provision. Tax authorities may challenge the allocation of profits between our subsidiaries and conformance with requirements of tax holidays and incentive programs and we may not prevail in any such challenge. If we were not to prevail, we could be subject to higher tax rates or double tax.

Estimates are required in determining any valuation allowance to be recorded against our net deferred tax assets. Changes in the amount of valuation allowance required may significantly impact our financial results of operations.

In the normal course of business, we are subject to examination by taxing authorities in the U.S. and multiple foreign jurisdictions. During November 2011, the U.S. Internal Revenue Service completed its field examination of our federal income tax returns for the 2004, 2005, 2006, 2008 and 2009 tax years and issued a Revenue Agent’s Report, or RAR, with no proposed adjustments.

Failure in our information technology systems could disrupt our operations and cause the loss of customers or business opportunities.

Information technology (“IT”) systems are used extensively in virtually all aspects of our business, including sales forecast, order fulfillment and billing, customer service, logistics and management of data from running samples on our products. Our success depends, in part, on the continued and uninterrupted performance of our IT systems. IT systems may be vulnerable to damage from a variety of sources, including telecommunications or network failures, human acts and natural disasters. Moreover, despite the security measures we have implemented, our IT systems may be subject to physical or electronic break-ins, computer viruses and similar disruptive problems. We also have taken precautionary measures to prevent unanticipated problems that could affect our IT systems. Nevertheless, we may experience damages to our systems, and system failures and interruptions.

If we experience systems problems, they may interrupt our ability to operate and adversely affect our reputation and result in a loss of customers and revenues.

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Risks Related to Our Investments

Our strategic equity investments may result in losses.

We periodically make strategic equity investments in various public and private 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. Other-than-temporary declines in the market price and valuations of the securities that we hold in other companies have required us to record losses relative to our ownership interest. This could result in future charges to our earnings. It is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.

Global credit and financial market conditions could negatively impact the value of our current portfolio of cash equivalents or investments and our ability to meet our financing objectives.

Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or investments since December 31, 2011, any significant deterioration in conditions of the global credit and financial markets may negatively impact our current portfolio of cash equivalents or investments or our ability to meet our financing objectives. Other-than-temporary declines in the market price and valuation of any of our investments would require us to adjust the carrying value of the investment through an impairment charge.

Risks Related to Government Regulation and Litigation

We and our customers are subject to various government regulations, and we may incur significant expenses to comply with, and experience delays in our product commercialization as a result of, these regulations.

The Food and Drug Administration (“FDA”) has jurisdiction over the commercialization of medical devices, including in-vitro diagnostic test kits and the reagents and instrumentation used in these tests. In-vitro diagnostic tests, reagents, and instruments may be subject to pre-market review and post-market controls by the FDA. Certain in-vitro diagnostic products must also be approved by the regulatory agencies of foreign governments or jurisdictions before the product can be sold outside the United States. Commercialization of our and our collaborative partners’ in-vitro diagnostic products outside of the research environment may depend upon successful completion of clinical trials. Clinical development is a long, expensive and uncertain process and we do not know whether we, or any of our collaborative partners, will be permitted to undertake clinical trials of any potential in-vitro diagnostic products. It may take us or our collaborative partners many years to complete any such testing, and failure can occur at any stage. Delays or rejections of potential products may be encountered based on changes in regulatory policy during the period of product development and regulatory agency review. Moreover, if and when our projects reach clinical trials, we, or our collaborative partners, may decide to discontinue development of any or all of these projects at any time for commercial, scientific or other reasons. Any of the foregoing matters could have a material adverse effect on our business, financial condition and results of operations.

Many of our products are labeled for “research use only”. Products intended for research use only are not subject to clearance or approval by the FDA. However, research use only products may fall under the FDA’s jurisdiction if these are used for clinical rather than research purposes. Even when a product is exempted from FDA clearance or approval, the FDA may impose restrictions as to the types of customers to which we can market and sell our products. Such restrictions may materially and adversely affect our business, financial condition and results of operations.

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The FDA, the U.S. Department of Health and Human Services and foreign government regulators are increasingly focused on genetic analysis tools, including the use of arrays, which are labeled for research use only, by clinical laboratories in laboratory-developed tests (“LDTs”) offered by these laboratories, including labs certified under the Clinical Laboratory Improvement Amendments (“CLIA”). We cannot predict the extent of the FDA’s future efforts in regulation and enforcement policies with respect to the sale and use of arrays for the development of LDTs by CLIA-certified laboratories. If regulations or enforcement policies restrict our customers’ development of LDTs using our products labeled for research use only, or if we otherwise are required to obtain FDA premarket clearance or approval prior to commercializing these products, our ability to generate revenue from the sale of our products may be delayed or otherwise adversely affected. Moreover, our failure to comply with governmental rules and regulations related to our products could cause us to incur significant adverse publicity, subject us to investigations and notices of non-compliance or lead to fines or restrictions upon our ability to sell our products. We also may be at risk for liability related to government reimbursement of tests involving the use of our products if it is determined that these tests require FDA-clearance or approval and no such clearance or approval has been obtained.

Medical device laws and regulations are also in effect in many countries, ranging from comprehensive device approval requirements to requests for product data or certifications. The number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining our foreign regulatory approvals. In addition, the export by us of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA or other export restrictions.

We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. A failure to comply with these regulations might result in suspension of these contracts or administrative or other penalties, and could have a material adverse effect on our ability to compete for future government grants, contracts and programs.

Healthcare reform and restrictions on reimbursements may limit our returns on molecular diagnostic products that we may develop with our collaborators.

We are currently collaborating with our partners to develop diagnostic and therapeutic products. The ability of our collaborators to commercialize such products may depend, in part, on the extent to which reimbursement for these products will be available under U.S. and foreign regulations that govern reimbursement for clinical testing services by government authorities, private health insurers and other organizations. In the United States, third-party payer price resistance, the trend towards managed health care and the implementation of the Patient Protection and Affordable Care Act of 2010 could reduce payment rates for health care products and services, adversely affecting the profits of our customers and collaborative partners and reducing our future royalties. Under Medicare rules, diagnostic tests must be ordered by a physician who is treating the beneficiary and who uses the test results in patient management. Under this rule, some Medicare contractors may deny coverage for a test, even if the test has been cleared or approved by the FDA, without proof, as determined sufficient by the contractor, that the test is useful in patient management.

We face risks related to handling of hazardous materials and other regulations governing environmental safety.

Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous and radioactive materials and the generation, transportation and storage of waste. We could discover that we or an acquired business is not in material compliance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.

We may be exposed to liability due to product defects.

The risk of product liability claims is inherent in the testing, manufacturing, marketing and sale of human diagnostic and therapeutic products and we may be subjected to such claims. We may seek to acquire additional insurance for clinical or product liability risks. We may not be able to obtain such insurance or general product liability insurance on acceptable terms or in sufficient amounts. A product liability claim or recall could have a serious adverse effect on our business, financial condition and results of operations.

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Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our products.

Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our molecular diagnostic products, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

We may be unable to effectively protect or enforce our intellectual property, which could harm our competitive position.

Maintaining a strong patent position is critical to our business. Patent law relating to the scope of claims in the technology fields in which we operate is uncertain, so we cannot be assured the patent rights we have or may obtain will be valuable. 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 may have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot be assured our patent applications will have priority over those filed by others. Also, our intellectual property may be subject to significant administrative and litigation proceedings such as opposition proceedings against our patents in Europe, Japan and other jurisdictions.

Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. We may or may not choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations.

In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements with our employees, consultants and third-parties, to protect our confidential and proprietary information. Such measures may not provide adequate protection for our proprietary information.

Litigation or other proceedings or third party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or impact our stock price.

Third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. As we launch new products and enter new markets, we expect that competitors will claim that our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. We are currently engaged in litigation with third parties who allege that we have infringed their intellectual property rights. See Note 12. “Legal Proceedings” to our Consolidated Financial Statements found elsewhere in this Annual Report on Form 10-K for further information. In addition, we are aware of third-party patents that may relate to our technology. We routinely receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. Third parties may have obtained, and may in the future obtain, patents allowing them to claim that the use of our technologies infringes these patents.

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We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a material adverse impact on our stock price, which may be disproportionate to the actual import of the ruling itself. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products. In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and maintain profitability.

Risks Related to Our Common Stock

The market price of our common stock has been volatile.

Our common stock traded as low as $3.68 and as high as $8.16 per share during the twelve-month period ending December 31, 2011. Our stock price may be affected by a number of factors, including those listed in these “Risk Factors” and other, unknown factors. Our stock price also may be affected by comments by securities analysts regarding our business or prospects, our issuance of common stock or other equity securities, our inability to meet analysts’ expectations, general fluctuations in the stock market or in the stock prices of our industry peers or our customers and general conditions and publicity regarding the genomics, biotechnology, pharmaceutical or life science industries.

Volatility in the stock price of other companies often has led to securities class action litigation against those companies. Any future 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.

Our quarterly results have historically fluctuated significantly and may continue to do so. Failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our stock price.

Our revenue and operating results may fluctuate significantly due in part to factors that are beyond our control and which we cannot predict. The timing of our customers’ orders may fluctuate from quarter to quarter. Historically, we have experienced customer ordering patterns for instrumentation and consumables in which the majority of the shipments occur in the last month of the quarter. These ordering patterns may limit management’s ability to accurately forecast our future revenue or product mix. Additionally, license revenue may also be unpredictable and may fluctuate due to the timing of payments of non-recurring licensing fees. Because our expenses are largely fixed in the short to medium term, any material shortfall in revenue may cause us to experience material losses.

Because of this difficulty in predicting future performance, our operating results may fall below our own expectations and the expectations of securities analysts or investors in some future quarter or quarters. Our failure in the past to meet these expectations has adversely affected the market price of our common stock and may continue to do so.

In addition to factors that affect the spending levels of our customers described above, additional factors could cause our operating results to fluctuate, including:

· competition;

· our inability to produce products in sufficient quantities and with appropriate quality;

· the frequency of experiments conducted by our customers;

· our customers’ inventory of 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.

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

Our corporate headquarters is located in Santa Clara, California, where we lease approximately 200,000 square feet and we have manufacturing facilities located in Singapore and Cleveland, Ohio, where we lease approximately 150,000 square feet and 15,000 square feet, respectively. We lease approximately 140,000 square feet of administrative and research and development space in California (Emeryville and Sunnyvale), Ohio (Cleveland and Maumee), China (Shanghai), Germany (Freiburg), Japan (Osaka and Tokyo) and the United Kingdom (Wooburn Green). We have also entered into agreements to sublease to third parties approximately 80,000 square feet of administrative and research and development space in Massachusetts (Bedford).

Additionally, we own a 170,000 square foot facility in West Sacramento, California that is currently vacant. In the fourth quarter of 2011, we entered into a non-binding letter of intent to sell the facility to a third-party. As of December 31, 2011, an executed purchase agreement has not been entered into and neither party has any binding obligations under the letter of intent.

We believe that our existing properties are in good condition and are suitable for the conduct of our business.

ITEM 3.  LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in “Item 8. Financial Statements and Supplementary Data—Note 12. Legal Proceedings” of this Annual Report on Form 10-K, and is incorporated by reference herein.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

Our common stock is traded on The Nasdaq Global Select Market under the symbol of AFFX. The following table sets forth on a per share basis, for the periods indicated, the low and high closing prices of our common stock as reported by The Nasdaq Global Select Market.

	Low		High
2011
First Quarter	$	4.45	$	5.53
Second Quarter	$	5.01	$	7.93
Third Quarter	$	4.14	$	8.06
Fourth Quarter	$	3.70	$	5.83
2010
First Quarter	$	5.28	$	7.98
Second Quarter	$	5.81	$	8.33
Third Quarter	$	3.80	$	5.86
Fourth Quarter	$	4.16	$	5.28

As of February 22, 2012, there were approximately 292 holders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (“DTC”). All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and therefore are considered to be held of record by Cede & Co. as one shareholder.

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No cash dividends have been paid on our common stock. We currently intend to retain all future earnings, if any, for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

No equity securities were sold during 2011 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). We did not repurchase any shares of our common stock during the fourth quarter of 2011.

For information regarding compensation plans under which equity securities were authorized for issuance, see the section of the Proxy Statement to be filed in connection with our 2012 Annual Meeting of Shareholders entitled “Equity Compensation Plan Information,” incorporated by reference into Item 12 of this Annual Report on Form 10-K.

Performance Graph

The graph below compares the cumulative total return* on our common stock for the period commencing on December 31, 2006 and ending December 31, 2011 compared to the CRSP Total Return Index for the Nasdaq National Market (U.S. companies) and the CRSP Total Return Index for the Nasdaq Pharmaceutical Stocks (SIC 283). The stock price performance shown on the graph below is not necessarily indicative of future price performance.

*Assumes $100 invested on December 31, 2006 in our common stock and in each index listed above. The total return for our common stock and the indices used assumes the reinvestment of dividends, even though dividends have never been declared on our common stock.

The information under the caption “Performance Graph” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of Affymetrix under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in such filings.

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ITEM 6.  SELECTED FINANCIAL DATA

The following selected historical consolidated financial information has been derived from our audited consolidated financial statements. The information below is not necessarily indicative of our future results of operations and should be read in conjunction with Item 1A, “Risk Factors,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K in order to fully understand the factors that may affect the comparability of the information presented below:

	Year Ended December 31,
	2011			2010			2009			2008			2007
Consolidated Statement of Operations Data:	(in thousands, except per share amounts)
Total revenue	$	267,474		$	310,746		$	327,094		$	410,249		$	371,320
(Loss) income from operations		(16,641	)		(5,167	)		(33,158	)		(242,539	)		6,080
Net (loss) income (1)	$	(28,161	)	$	(10,233	)	$	(23,909	)	$	(307,919	)	$	12,593
Basic net (loss) income per common share	$	(0.40	)	$	(0.15	)	$	(0.35	)	$	(4.49	)	$	0.18
Diluted net (loss) income per common share	$	(0.40	)	$	(0.15	)	$	(0.35	)	$	(4.49	)	$	0.17
Consolidated Balance Sheet Data:
Cash, cash equivalents, and available-for-sale securities	$	265,067		$	237,184		$	346,574		$	397,739		$	584,274
Working capital		259,961			159,932			345,486			420,768			583,067
Total assets (2)		438,015			460,785			630,950			713,310			1,133,591
Long-term obligations (3)(4)(5)		108,555			111,821			261,394			330,896			451,143

(1) During 2010 and 2009, we repurchased $151.7 million and $69.1 million, respectively, of our 3.50% senior convertible notes and the resulting gain is labeled as “Gain from repurchase of convertible notes” in a single line item in our Consolidated Statements of Operations (See (4) for further details):

·   In 2010, we recognized a net gain of $6.3 million on repurchases totaling $151.7 million in aggregate principal amount; and

·   In 2009, we recognized a net gain of $17.4 million on the repurchase of $69.1 million in aggregate principal amount.

In 2008, we recognized a goodwill impairment charge of $239.1 million that is presented in a single line item labeled “Goodwill impairment charges” in our Consolidated Statements of Operations as well as an income tax provision of $65.9 million primarily resulting from a full valuation allowance recorded against all U.S. deferred tax assets.

Additionally, we recognized $2.2 million, $43.7 million and $15.3 million in 2009, 2008 and 2007, respectively, of expense related to our restructuring plans that was presented in a single line item labeled “Restructuring charges” in our Consolidated Statements of Operations.

(2) In 2008, we completed the acquisitions of USB Corporation (“USB”), True Materials, Inc. (“TMI”), and Panomics, Inc. for aggregate cash consideration of $163.0 million.

(3) In 2007, we issued $316.3 million aggregate principal amount of 3.50% senior convertible notes.

(4) In 2010 and 2009, we partially repurchased our 3.50% convertible notes:

·   In 2010, a total of $151.7 million aggregate principal amount was purchased for cash consideration of $143.6 million, including accrued interest and transaction costs; and

·   In 2009, $69.1 million aggregate principal amount was purchased for cash consideration of $50.6 million, including accrued interest and transactions costs.

In 2008, a total of $119.9 million aggregate principal amount of our 0.75% senior convertible notes was redeemed for cash as investors exercised their put right. We repurchased an additional $0.1 million aggregate principal amount of such notes in 2009.

(5) On February 3, 2012, we commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of our Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. See “Item 8. Financial Statements and Supplementary Data—Note 20. Subsequent Events” in this Annual Report on Form 10-K.

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.

The purpose of the following discussion and analysis is to provide an overview of the business to help facilitate an understanding of significant factors influencing our historical operating results, financial condition and cash flows and also to convey our expectations of the potential impact of known trends, events, or uncertainties that may impact our future results. The discussion and analysis in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, strategies, objectives, expectations, intentions and adequacy of resources. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward looking statements. Words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking. Examples of forward-looking statements include, among others, statements regarding the integration of our acquired technologies with our existing technology, the commercial launch of new products and the duration which our existing cash and other resources is expected to fund our operating activities. This discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Item 1: Business”; “Item 1A: Risk Factors”; “Item 6: Selected Financial Data”; and “Item 8: Financial Statements and Supplementary Data.”

Overview

We develop, manufacture and sell products and services for genetic analysis to the life science research and clinical healthcare markets. Researchers around the world use our technology to better understand the role that genes play in disease, the effectiveness and safety of therapies and many other biological factors that affect human well-being. We sell our products to some of the world’s largest pharmaceutical, diagnostic and biotechnology companies, as well as leading academic, government and not-for-profit research institutions and more than 24,000 peer-reviewed papers have been published based on work using our products. We have almost 900 employees worldwide and maintain sales and distribution operations across the United States, Europe, Asia and Latin America.

We offer a comprehensive line of products for two principal applications: gene expression and genotyping. Our product sales consist primarily of sales of instruments and related consumables. We have three instrument systems, GeneTitan®, GeneChip® and GeneAtlas™, that include instruments, consumables and software. Our GeneChip® instruments run arrays packaged in cartridges and our GeneTitan® and GeneAtlasTM instruments run arrays packaged in a peg format.

We also offer a variety of assays for gene expression targeting low- to mid-plex markets that are downstream of our whole genome arrays and a range of reagent kits that are compatible with our platforms as well as the products of other vendors.

Overview of Fiscal Year 2011 and Strategic Initiatives

In 2011, our business was affected by a significant drop in the volume of sales of consumables to our academic and pharmaceutical customers, particularly in North America, which led to a decrease in revenue as compared to the same period in 2010. Primarily due to lower revenues from product sales, we incurred a net loss of $28.2 million for the year. Despite the lower revenues, we were able to generate cash flows from operations of almost $40 million in 2011.

Our focus remains on carrying out the following strategic initiatives:

Entering new markets and expanding our product lines. Our goal continues to be to expand our revenue base by entering new markets, growing our customer base and successfully commercializing our established and acquired technologies. In the future, we intend to continue to expand our focus to include the validation and routine testing markets which we believe offer attractive compound annual growth rates and opportunities for more recurring revenue growth in the future. We seek to expand our product line with new products that combine automated instrumentation, powerful new biological assays, and new array designs and content.

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Improving operating leverage. We remain focused on improving our operating leverage and were successful in lowering our operating expenses in 2011 as compared to 2010. Profitability in the future will depend on a number of factors, including but not limited to, increasing top-line revenue and sustained operating leverage.

CRITICAL ACCOUNTING POLICIES & ESTIMATES

General

The following section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“US GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are fully described in “Item 8. Financial Statements and Supplementary Data—Note 2. Summary of Significant Accounting Policies.” However, certain accounting policies are particularly important to the reporting of our financial position and results of operations and require the application of significant judgment by our management. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the consolidated financial statements.

REVENUE RECOGNITION

We enter into contracts to sell our products and, while the majority of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the value of the arrangement should be allocated among the deliverable elements, when and how to recognize revenue for each element, and the period over which revenue should be recognized.

INVENTORIES

We enter into inventory purchases and commitments so that we can meet future shipment schedules based on forecasted demand for our products. The business environment in which we operate is subject to rapid changes in technology and customer demand. We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues. Based on this analysis, we record adjustments to inventory for potentially excess, obsolete or impaired goods, when appropriate, in order to report inventory at net realizable value. These inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates. Any such adjustments would result in a charge to our results of operations.

NON-MARKETABLE EQUITY SECURITIES

As part of our strategic efforts to gain access to potential new products and technologies, we invest in equity securities of certain private biotechnology companies. These investments are included in other assets in our Consolidated Balance Sheets and are carried at cost. We also invest in a limited partnership investment fund that is accounted for under the equity method. We periodically review our investments for impairment; however, the impairment analysis requires significant judgment in identifying events or circumstances that would likely have significant adverse effect on the fair value of the investment. The analysis may include assessment of the investee’s (i) revenue and earnings trend, (ii) business outlook for its products and technologies, (iii) liquidity position and the rate at which it is using its cash, and (iv) likelihood of obtaining subsequent rounds of financing. If an investee obtains additional funding at a valuation lower than our carrying value, we presume that the investment is other than temporarily impaired. We have experienced impairments in our portfolio due to the decline in the value of certain of our non-marketable investments over the past few years.

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INCOME TAXES

Income tax expense is based on pretax financial accounting income. Under the asset and liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We must assess the likelihood that the resulting deferred tax assets will be realized. To the extent we believe that realization is not more likely than not, we establish a valuation allowance. Significant estimates are required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our deferred tax assets. Some of these estimates are based on interpretations of existing tax laws or regulations. We believe that our estimates are reasonable and that our reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in overall levels, character, or geographical mix of pretax earnings, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of our deferred tax assets or liabilities, future levels of research and development spending, nondeductible expenses, applicability of tax holidays, and ultimate outcomes of income tax audits.

The total amount of unrecognized tax benefits as of December 31, 2011 was approximately $16.5 million. If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $2.7 million. As of December 31, 2011, we do not anticipate any material changes to the amount of unrecognized tax benefit during the next twelve months.

We classify interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2011, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.2 million for a total cumulative amount of $0.7 million of non-current income taxes payable as of December 31, 2011.

We file U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. During November 2011, the U.S. Internal Revenue Service completed its field examination of our federal income tax returns for the 2004, 2005, 2006, 2008 and 2009 tax years and issued a Revenue Agent’s Report, or RAR, with no proposed adjustments. We consider all tax positions taken in the 2004, 2005, 2006, 2008 and 2009 tax years to be effectively settled, because the U.S. Internal Revenue Service has completed its examination procedures and we believe that there is a remote possibility that the U.S. Internal Revenue Service will re-examine the settled positions. As a result, we have released reserves of approximately $5.8 million related to uncertain tax positions for those periods and recorded a full valuation allowance against these deferred tax assets. However, the federal and California statute of limitations on assessment still remain open for the tax years 1992 through 2011. In significant foreign jurisdictions, the 2006 through 2011 tax years generally remain subject to examination by their respective tax authorities.

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 which may change in the future due to new developments in each matter.

ACCOUNTING FOR SHARE-BASED COMPENSATION

We account for employee share-based compensation by estimating the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected term, volatility and forfeiture rates of the awards. The expected stock price volatility assumption was determined using a combination of historical and implied volatility of our common stock. We determined that blended volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee share-based awards granted in future periods.

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US GAAP requires that employee share-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. Accordingly, in 2011, we recognized employee share-based compensation of $8.8 million, which consisted of $1.1 million in cost of product sales, $1.9 million in research and development expense and $5.8 million in selling, general and administrative expenses. As of December 31, 2011, $16.0 million of total unrecognized compensation cost related to non-vested employee stock awards is expected to be recognized as future cost of sales and operating expenses over a weighted-average period of 2.7 years.

RESULTS OF OPERATIONS

The following discussion compares the historical results of operations for the years ended December 31, 2011, 2010 and 2009.

PRODUCT SALES

The components of product sales are as follows:

Dollars in thousands							Dollar						Percentage
	Year ended December 31,						change from						change from
	2011		2010		2009		2010			2009			2010			2009
Consumables	$	224,972	$	252,165	$	255,660	$	(27,193	)	$	(3,495	)		(11	)%		(1	)%
Instruments		16,301		25,578		23,526		(9,277	)		2,052			(36	)		9
Total product sales	$	241,273	$	277,743	$	279,186	$	(36,470	)	$	(1,443	)		(13	)		(1	)

Total product sales decreased in 2011 as compared to 2010 primarily due to volume decreases. Chip volumes shipped were lower across all products while overall average selling price remained flat. Reagent revenue decreased primarily due to lower volume Genechip® shipments combined with lower average selling price caused by a shift in product mix. Instruments were lower due to fewer GeneTitan® sales partially offset by increased sales of the lower-priced GeneAtlas™.

Total product sales decreased $1.4 million or 1% in 2010 as compared to 2009. Consumables sales decreased primarily due to a decrease in the sales of our RNA reagents partially offset by an increase in sales of our DNA reagents. In both areas, sales of our lower price products have increased as a percentage of the total mix. Instrument sales grew in 2010 as compared to 2009, primarily due to the increased adoption of GeneTitan® and introduction of GeneAtlasTM families of instruments, which were introduced in late 2009 and early 2010, respectively, partially offset by declines in the volume of sales of older instruments.

SERVICES

Dollars in thousands							Dollar						Percentage
	Year ended December 31,						change from						change from
	2011		2010		2009		2010			2009			2010			2009
Services	$	20,158	$	20,565	$	39,563	$	(407	)	$	(18,998	)		(2	)%		(48	)%

Total services revenue remained consistent in 2011 as compared to 2010 which was in line with our expectations.

Total services revenue decreased in 2010 as compared to 2009, primarily due to the completion in late 2009 of several genotyping projects that began in the fourth quarter of 2008, including the Wellcome Trust Case Consortium and the National Institutes of Health projects.

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ROYALTY AND OTHER REVENUE

Dollars in thousands							Dollar					Percentage
	Year ended December 31,						change from					change from
	2011		2010		2009		2010			2009		2010			2009
Royalties and other revenue	$	6,043	$	12,438	$	8,345	$	(6,395	)	$	4,093		(51	)%		49	%

Royalties and other revenue in 2010 was higher as compared to 2011 and 2009 primarily due to the receipt of a non-recurring $4.8 million license payment that was received in the fourth quarter of 2010. In addition to the non-recurring license payment, royalties and other revenue was lower in 2011 as compared to 2010 due to lower royalties and research activity.

PRODUCT AND SERVICES GROSS MARGINS

Dollars in thousands										Dollar/Point
	Year ended December 31,									change from
	2011			2010			2009			2010			2009
Total gross margin on product sales	$	143,458		$	160,359		$	152,809		$	(16,901	)	$	7,550
Total gross margin on services		7,021			4,743			15,614			2,278			(10,871	)
Product gross margin as a percentage of product sales		59	%		58	%		55	%		1			3
Service gross margin as a percentage of services		35	%		23	%		39	%		12			(16	)

Despite lower product sales in 2011, product gross margin as a percentage of product sales increased during the year as compared to 2010 primarily due to a mix shift to higher margin products along with lower material, warranty and excess and obsolescence costs in 2011 as well as plant consolidation costs that occurred in 2010. These cost improvements were partially offset by lower cost absorption due to higher production levels in 2010. We note a downward trend in product gross margin within 2011 when comparing quarterly results driven by increased absorption cost due to lower sales.

Product gross margin increased in 2010 as compared to 2009 primarily due to a reduction in plant consolidation costs from $9.4 million in 2009 to $1.6 million in 2010, as the majority of the West Sacramento manufacturing facility closure took place in 2009. Additionally, favorable pricing and absorption in chips contributed to the increased product margin. These increases were partially offset by higher excess and obsolescence costs for products with finite lives.

Service gross margin increased in 2011 as compared to 2010 primarily due to costs associated with the West Sacramento manufacturing facility closure that was completed in the second quarter of 2010. Service gross margin was lower in 2010 as compared to 2009 primarily as a result of the Wellcome Trust Case Consortium and National Institutes of Health projects which had higher margins and were completed in 2009.

RESEARCH AND DEVELOPMENT EXPENSES

Dollars in thousands							Dollar						Percentage
	Year ended December 31,						change from						change from
	2011		2010		2009		2010			2009			2010			2009
Research and development	$	63,591	$	67,934	$	77,358	$	(4,343	)	$	(9,424	)		(6	)%		(12	)%

Research and development expenses decreased in 2011 and 2010 as compared to 2009 primarily due to savings in head count-related expenses and variable compensation of $3.2 million and $5.7 million, respectively and decreased spending on supplies of $2.6 million and $2.2 million, respectively as a result of cost-control measures. This was partially offset by an increase in facilities expenses primarily due to a one-time expense of $1.2 million related to the plant consolidation activities of our Oakmead facility in Santa Clara during the third quarter of 2011.

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Dollars in thousands							Dollar						Percentage
	Year ended December 31,						change from						change from
	2011		2010		2009		2010			2009			2010			2009
Selling, general and administrative	$	109,572	$	114,773	$	130,838	$	(5,201	)	$	(16,065	)		(5	)%		(12	)%

Selling, general and administrative expenses decreased in 2011 as compared to 2010 primarily due to lower legal expenses of $4.2 million as a result of a litigation settlement at the end of 2010. Other cost savings include variable compensation adjustments of $1.6 million, lower spending on consulting and other services of $1.5 million and advertising expenses of $0.8 million. These savings were partially offset by one-time severance benefits provided to our former chief executive officer of $1.4 million, rent expense of $1.8 million primarily due to the acceleration of future lease payments as a result of the plant consolidation activities of our Oakmead facility in Santa Clara and acquisition costs of $2.9 million incurred on the anticipated eBioscience transaction.

In 2010, selling, general and administrative expenses decreased as compared to 2009 primarily due to lower compensation and benefits expenses of $11.0 million as a result of lower headcount and decreased variable compensation. Additionally, legal expenses decreased by $2.1 million primarily due to timing of legal proceedings with third-parties, consulting and purchased services decreased by $1.8 million as a result of various general and administrative cost reductions, and rent expense decreased by $1.4 million due primarily to the relocation of our Japan office and other site consolidation efforts.

INTEREST INCOME AND OTHER, NET

The components of interest income and other, net, are as follows:

Dollars in thousands										Dollar						Percentage
	Year ended December 31,									change from						change from
	2011			2010			2009			2010			2009			2010			2009
Interest income	$	2,627		$	2,845		$	4,455		$	(218	)	$	(1,610	)		(8	)%		(36	)%
Realized loss on equity investments, net		(2,251	)		(4,342	)		(916	)		2,091			(3,426	)		48			(374	)
Currency loss, net		(2,483	)		(48	)		(2,800	)		(2,435	)		2,752			(5,073	)		98
Other		(4,195	)		58			1,850			(4,253	)		(1,792	)		(7,333	)		(97	)
Total interest income and other, net	$	(6,302	)	$	(1,487	)	$	2,589		$	(4,815	)	$	(4,076	)		324			(157	)

Interest income and other, net decreased in 2011 as compared to 2010 due to the following:

·   Realized loss on equity investments decreased in 2011 as compared to 2010 as we recognized fewer other-than-temporary impairments (“OTTI”). In 2011, we recognized $2.1 million in OTTI on our non-marketable investment in a limited partnership investment fund, a non-marketable investment in a private biotechnology company and an investment classified as available-for-sale in a publicly-traded company. In 2010, we recognized $5.6 million in OTTI on two non-marketable investments;

·   Currency loss, net, increased primarily due to the weakening of the U.S. dollar against the Euro in 2011 as compared to 2010; and

·   Other changed in 2011 due to a $2.2 million provision against a note receivable from a private biotechnology company and a $1.7 million impairment charge recorded against our West Sacramento facility during 2011.

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Interest income and other, net changed by $4.1 million in 2010 as compared to 2009 due to the following:

·   Interest income decreased by $1.6 million in 2010 as compared to 2009 due to lower average cash and investment balances as a result of the repurchase of a portion of our 3.50% convertible notes during 2010, partially offset by higher effective interest rates in 2010;

·   Realized loss in equity investments increased by $3.4 million in 2010 as we recognized $5.6 million of other-than-temporary impairment expense, largely as a result of our recognition of impairment charges on two non-marketable investments. This was partially offset by a net realized gain from our investment in a limited partnership investment fund of $1.3 million. In 2009, we recognized a net realized loss of $0.9 million primarily due to OTTI on our non-marketable investment in a limited partnership investment fund;

·   Currency loss decreased in 2010 by $2.8 million due to favorable currency movements in 2010; and

·   Other income decreased primarily due to a nonrecurring sale of equipment in 2009 totaling $0.9 million.

INTEREST EXPENSE

Dollars in thousands							Dollar						Percentage
	Year ended December 31,						change from						change from
	2011		2010		2009		2010			2009			2010			2009
Interest expense	$	3,813	$	7,706	$	10,945	$	(3,893	)	$	(3,239	)		(51	)%		(30	)%

Interest expense decreased in 2011 as compared to 2010 and 2009 primarily due to a lower aggregate principal balance of our 3.50 % convertible notes as a result of our repurchases totaling $151.7 million in aggregate principal amount during 2010. There were no further purchases in 2011.

INCOME TAX PROVISION (BENEFIT)

Dollars in thousands								Dollar					Percentage
	Year ended December 31,							change from					change from
	2011		2010		2009			2010			2009		2010			2009
Income tax provision (benefit)	$	1,405	$	2,170	$	(158	)	$	(765	)	$	2,328		(35	)%		(1,473	)%

The income tax provision was approximately $1.4 million and $2.2 million in 2011 and 2010, respectively, which consisted primarily of foreign taxes. The income tax benefit in 2009 of $0.2 million consisted of foreign taxes similar to 2011 and 2010 offset by refundable U.S. credits.

Deferred tax assets are recognized if realization of such assets is more likely than not. As of December 31, 2011, we provided for a valuation allowance of $154.1 million against our net deferred tax assets. As a result of negative evidence based on our cumulative net loss position, we have placed a full valuation allowance on U.S. and certain foreign deferred tax assets. We intend to maintain the valuation allowance until sufficient positive evidence exists to assure realization of these tax benefits through future taxable income.

As of December 31, 2011, we had total net operating loss carryforwards of $288.6 million, comprised of $162.0 million for U.S. federal purposes, which expire in the years 2021 through 2031 if not utilized, and $126.6 million for state purposes, the majority of which expire in the years 2012 through 2031 if not utilized. Utilization of net operating loss carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of the net operating loss before utilization.

During 2011, due to potential future transactions that would require cash outflows, we changed our assertion such that foreign earnings are no longer intended to be permanently reinvested. As a result, we recorded a net deferred tax liability of approximately $0.8 million related to the foreign undistributed earnings, which was offset by a reduction in our valuation allowance against our deferred tax assets.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Historically, we have financed our operations primarily through product sales; sales of equity and debt securities such as our 3.50% convertible notes in 2007, collaborative agreements; interest income; licensing of our technology; and, when necessary, financing arrangements with third party creditors.

Our cash outflows have generally been as follows: cash used in operating activities such as research and development programs, sales and marketing activity, compensation and benefits of our employees and other working capital needs; cash paid for acquisitions; cash paid for litigation activity and settlements; and cash used for our debt repurchases and repurchases of our convertible notes as well as interest payments on our convertible notes obligations.

As of December 31, 2011, we had cash, cash equivalents, and available-for-sale securities of approximately $265.1 million. We anticipate that our existing capital resources along with the cash to be generated from operations will enable us to maintain currently planned operations, debt repayments or repurchases, and capital expenditures, for the foreseeable future.

These expectations are based on our current operating and financing plans, which are subject to change, and therefore we could require further funding. Factors that may cause us to require additional funding may include, but are not limited to: financing arrangements that we may enter into in connection with our acquisition of eBioscience or future acquisitions; a decline in cash generated by sales of our products and services; our ability to maintain existing collaborative and customer arrangements and establish and maintain new collaboration and customer arrangements; the progress of our research and development programs; initiation or expansion of research programs and collaborations; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the effectiveness of product commercialization activities and arrangements; the purchase of patent licenses; and other factors.

On November 29, 2011, we entered into a Merger Agreement to acquire eBioscience for approximately $330 million in cash, subject to certain adjustments as provided in the Merger Agreement. The merger is subject to customary closing conditions, including our receipt of financing for the merger.

In connection with the Merger Agreement, we entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result, we will not be able to complete the eBioscience acquisition unless the terms of the acquisition and the financing are restructured. We are in discussions with financing sources and with eBioscience regarding the possibility of restructuring the committed financing but no agreement or understandings have been reached. We have waived eBioscience’s obligations under the non-solicitation provisions set forth in the Merger Agreement and we understand that eBioscience is considering alternatives to the merger. The Merger Agreement may be terminated by either party if the closing of the merger has not occurred by March 31, 2012, so long as a breach of the Merger Agreement by the party seeking to terminate has not been the proximate cause of or resulted in the failure of the merger to occur on or before such date.

On December 29, 2011, we received notice that Tang Capital Partners, LP, a holder of our 3.50% Senior Convertible Notes Due 2038 (the "Notes"), had commenced class action litigation against us in the Superior Court of California, County of Santa Clara. The complaint alleged a variety of claims relating to our proposed acquisition of eBioscience, including that the acquisition would constitute a Fundamental Change under the indenture governing the Notes. The complaint sought unspecified damages, temporary and permanent injunctive relief against completion of the eBioscience acquisition, and other remedies. On January 21, 2012, we entered into an agreement to settle the purported class action litigation. As part of the settlement, we agreed to commence a tender offer to repurchase the entire aggregate outstanding principal amount of Notes at par plus accrued interest. Tang Capital Partners, LP, which owned approximately $78.3 million principal amount of the Notes, agreed to tender all of its Notes into the offer.

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As of December 31, 2011, we have no credit facility or other committed sources of capital. To the extent capital resources are insufficient to meet future capital requirements; we will have to raise additional funds to continue the development of our technologies. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our stockholders. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into collaboration agreements on unattractive terms. Our inability to raise capital would have a material adverse effect on our business, financial condition and results of operations.

From time to time, we may seek to retire, repurchase or exchange convertible securities or common stock in open market purchases, privately negotiated transactions dependent on market conditions, liquidity, and contractual obligations and other factors. We did not retire, repurchase or exchange any of our common stock or remaining outstanding convertible securities during the year ended December 31, 2011. As noted above, on February 3, 2012, we commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of our Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes, to, but not including, the settlement date for the tender offer. See “Item 8. Financial Statements and Supplementary Data—Note 20. Subsequent Events” in this Annual Report on Form 10-K.

Cashflow (in thousands)

	Year ended December 31,
	2011			2010			2009
Net cash provided by operating activities	$	39,337		$	47,975		$	9,329
Net cash provided by (used in) investing activities		127,634			66,211			(7,190	)
Net cash used in financing activities		(486	)		(144,759	)		(50,073	)
Effect of foreign currency translation on cash and cash equivalents		(32	)		415			284
Net increase (decrease) in cash and cash equivalents	$	166,453		$	(30,158	)	$	(47,650	)

Operating Activities

Net cash provided by operating activities for the year ended December 31, 2011 was comprised of a net loss of $28.2 million, net of non-cash charges of $49.7 million and a $17.8 million increase in working capital. Adjustments for non-cash expenses include depreciation and amortization expense of $32.3 million, a net realized loss on investments of $4.8 million, which included other-than-temporary impairment charges totaling $2.1 million, a provision against a notes receivable from a private biotechnology company of $2.2 million, an impairment charge on property and equipment of $1.7 million and share-based compensation expense of $8.8 million.

Investing Activities

We liquidated a number of investments during the fourth quarter of 2011 to fund the anticipated eBioscience acquisition that resulted in a net inflow from investing activities from the purchase, sales and maturities of available-for-sale securities totaling $136.2 million during 2011. Our investing activities further included capital expenditures of $5.8 million and purchased technology rights of $3.2 million in 2011.

Financing Activities

Our financing activities generally consist of stock option exercise activity under our employee stock plan. Cash used in the issuance of stock under our employee stock plan, net of treasury shares withheld for taxes, was $0.7 million for the year ended December 31, 2011.

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

As of December 31, 2011, we had no off-balance sheet arrangements. The impact that our contractual obligations as of December 31, 2011 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):

	Total		2012		2013-2014		2015-2016		After 2016
Senior convertible notes (1)	$	95,469	$	95,469	$	-	$	-	$	-
Interest payments (1)		557		557		-		-		-
Operating leases		65,420		8,315		14,621		10,622		31,862
Purchase commitments (2)		3,153		3,153		-		-		-
Total contractual obligations	$	164,599	$	107,494	$	14,621	$	10,622	$	31,862

(1)   Our 3.50% senior convertible notes are due in 2038. However, holders may require us to repurchase all or a portion of their notes on January 15, 2013, 2018 and 2028. On February 3, 2012, we commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of our Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. See “Item 8. Financial Statements and Supplementary Data—Note 20. Subsequent Events” in this Annual Report on Form 10-K.

(2)   Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding on Affymetrix and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

The above table does not reflect unrecognized tax benefits of approximately $16.5 million, the timing of which is uncertain. Refer to “Item 8. Financial Statements and Supplementary Data—Note 15. Income Taxes” for additional discussion on unrecognized tax benefits.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks that could impact our financial position and results of operations. Our risk management strategy with respect to these three market risks may include the use of derivative financial instruments. We use derivative contracts only to manage existing underlying exposures of Affymetrix. Accordingly, we do not use derivative contracts for speculative purposes. Our risks, risk management strategy and a sensitivity analysis estimating the effects of changes in fair values for each of these exposures are outlined below.

Actual gains and losses in the future may differ materially from the sensitivity analyses based on changes in the timing and amount of interest rate, foreign currency exchange rate and equity price movements and our actual exposures and hedges.

Interest Rate Risk

Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities 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. 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 its 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 less than three years.

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	Periods of Maturity														Fair Value at
	2012			2013			2014			Thereafter			Total		December 31, 2011
ASSETS:
Available-for-sale securities	$	7,821		$	25,616		$	18,179		$	10,248		$	61,864	$	62,438
Average interest rate		1.2	%		3.0	%		3.5	%		3.5	%
LIABILITIES:
3.50% senior convertible notes due 2038 (1)	$	-		$	95,469		$	-		$	-		$	95,469	$	95,469
Average interest rate					3.50	%

(1) In 2013, the security holders of our 3.50% senior convertible notes have the option to require us to repurchase the notes at a price equal to 100% of the outstanding principal amount plus accrued interest. On February 3, 2012, we commenced a cash tender offer to repurchase the remaining aggregate outstanding principal amount of our Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. See “Item 8. Financial Statements and Supplementary Data—Note 20. Subsequent Events” in this Annual Report on Form 10-K.

	Periods of Maturity														Fair Value at
	2011			2012			2013			Thereafter			Total		December 31, 2010
ASSETS:
Available-for-sale securities	$	73,490		$	45,556		$	60,549		$	28,573		$	208,168	$	207,517
Average interest rate		2.2	%		2.2	%		2.6	%		3.8	%
LIABILITIES:
0.75% senior convertible notes due 2014	$	-		$	-		$	3		$	-		$	3	$	3
Average interest rate								0.75	%
3.50% senior convertible notes due 2038	$	-		$	-		$	95,469		$	-		$	95,469	$	84,493
Average interest rate								3.50	%

Foreign Currency Exchange Rate Risk

We transact business in various foreign currencies and have significant international revenues, as well as costs denominated in foreign currencies. This exposes us to the risk of fluctuations in foreign currency exchange rates. We purchase foreign exchange option contracts to reduce the volatility of cash flows related to forecasted revenues denominated in certain foreign currencies. The objective of the foreign exchange contracts is to better ensure that the U.S. dollar-equivalent cash flows are not adversely affected by changes in the U.S. dollar or foreign currency exchange rates. These contracts are designated as cash flow hedges. The gain or loss on the effective portion of a cash flow hedge is initially reported as a component of accumulated Other Comprehensive Income (“OCI”) and subsequently reclassified into revenues when the hedged revenues are recorded or as interest and other income, net, if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge is de-designated or related to an ineffective portion of a hedge is recognized as interest and other income, net, immediately.

The following table summarizes the notional amounts, weighted-average currency exchange rates and fair values of our unsettled foreign currency exchange forward contracts at December 31, 2011. We had no unsettled hedging contracts at December 31, 2010. All contracts have maturities of 12 months or less. Weighted-average rates are stated in terms of the amount of U.S. dollars per foreign currency. Fair values represent estimated settlement amounts at December 31, 2011 (notional amounts and fair values in U.S. dollars and in thousands):

			Weighted-
			Average
	Notional		Settlement		Fair
	Amount		Price		Value
Currency
Euro		11,850		1.39		816
Japanese Yen		7,007		79.62		(216	)
British Pound		4,459		1.59		123
Total		23,316				723

41

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AFFYMETRIX, INC.

	Page No.
Report of Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets	44
Consolidated Statements of Operations	45
Consolidated Statements of Comprehensive Loss	46
Consolidated Statements of Stockholders’ Equity	47
Consolidated Statements of Cash Flows	48
Notes to Consolidated Financial Statements	49

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Affymetrix, Inc.

We have audited the accompanying consolidated balance sheets of Affymetrix, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Affymetrix, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Affymetrix, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

February 28, 2012

43

AFFYMETRIX, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	December 31,			December 31,
	2011			2010
ASSETS:
Current assets:
Cash and cash equivalents	$	201,937		$	35,484
Restricted cash		692			287
Available-for-sale securities—short-term portion		7,937			67,223
Accounts receivable, net		44,021			52,281
Inventories		42,851			49,373
Deferred tax assets—short-term portion		364			1,071
Property and equipment, net—held for sale		9,000			-
Prepaid expenses and other current assets		7,785			9,422
Total current assets		314,587			215,141
Available-for-sale securities—long-term portion		54,501			134,190
Property and equipment, net		30,583			54,177
Acquired technology rights, net		29,525			38,858
Deferred tax assets—long-term portion		450			4,894
Other long-term assets		8,369			13,525
Total assets	$	438,015		$	460,785
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable and accrued liabilities	$	44,774		$	44,259
Deferred revenue—short-term portion		9,852			10,950
Total current liabilities		54,626			55,209
Deferred revenue—long-term portion		3,959			4,601
Other long-term liabilities		9,127			11,748
Convertible notes (1)		95,469			95,472
Stockholders’ equity:
Convertible redeemable preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued and outstanding at December 31, 2011 and 2010		-			-
Common stock, $0.01 par value; 200,000 shares authorized; 70,454 and 70,578 shares issued and outstanding at December 31, 2011 and 2010, respectively		704			706
Additional paid-in capital		750,332			742,206
Accumulated other comprehensive income		2,492			1,376
Accumulated deficit		(478,694	)		(450,533	)
Total stockholders’ equity		274,834			293,755
Total liabilities and stockholders’ equity	$	438,015		$	460,785

(1) See “Note 20. Subsequent Events” for further information.

See Accompanying Notes

44

AFFYMETRIX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Year Ended December 31,
	2011			2010			2009
REVENUE:
Product sales	$	241,273		$	277,743		$	279,186
Services		20,158			20,565			39,563
Royalties and other revenue		6,043			12,438			8,345
Total revenue		267,474			310,746			327,094
COSTS AND EXPENSES:
Cost of product sales		97,815			117,384			126,377
Cost of services and other		13,137			15,822			23,949
Research and development		63,591			67,934			77,358
Selling, general and administrative		109,572			114,773			130,838
Restructuring charges		-			-			2,180
Goodwill impairment adjustment		-			-			(450	)
Total costs and expenses		284,115			315,913			360,252
Loss from operations		(16,641	)		(5,167	)		(33,158	)
Interest income and other, net		(6,302	)		(1,487	)		2,589
Interest expense		3,813			7,706			10,945
Gain from repurchase of convertible notes		-			6,297			17,447
Loss before income taxes		(26,756	)		(8,063	)		(24,067	)
Income tax provision (benefit)		1,405			2,170			(158	)
Net loss	$	(28,161	)	$	(10,233	)	$	(23,909	)
Basic and diluted net loss per common share	$	(0.40	)	$	(0.15	)	$	(0.35	)
Shares used in computing basic and diluted net loss per common share		70,877			68,856			68,722

See Accompanying Notes

45

AFFYMETRIX, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

	Year Ended December 31,
	2011			2010			2009
Net loss	$	(28,161	)	$	(10,233	)	$	(23,909	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		79			415			284
Unrealized gains (losses) on available-for-sale and non-marketable securities		2,271			(4,093	)		6,979
Reclassification adjustment for realized (losses) gains recognized in net loss		(2,060	)		1,003			(916	)
Unrealized gains on cash flow hedges		826			-			-
Net change in other comprehensive income (loss), net of tax		1,116			(2,675	)		6,347
Comprehensive loss	$	(27,045	)	$	(12,908	)	$	(17,562	)

See Accompanying Notes

46

AFFYMETRIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

	Year Ended December 31,
	2011			2010			2009
Convertible redeemable preferred stock:
Balance, beginning of year	$	-		$	-		$	-
Balance, end of year		-			-			-
Common stock:
Balance, beginning of year		706			710			703
Common stock issued upon exercise of stock options and restricted
stock, net of tax withholding related to vesting of restricted stock units		(2	)		(4	)		7
Balance, end of year		704			706			710
Additional paid-in capital:
Balance, beginning of year		742,206			733,378			721,641
Common stock issued upon exercise of stock options and restricted
stock, net of tax withholding related to vesting of restricted stock units		(681	)		(1,178	)		(820	)
Share-based compensation expense		8,771			9,910			11,148
Income tax benefit from share-based compensation		36			96			1,409
Balance, end of year		750,332			742,206			733,378
Accumulated other comprehensive gain (loss):
Balance, beginning of year		1,376			4,051			(2,296	)
Unrealized gain (loss) on investments, net of tax		211			(3,090	)		6,063
Unrealized gain on hedging contracts, net of tax		826			-			-
Foreign currency translation adjustment, net of tax		79			415			284
Balance, end of year		2,492			1,376			4,051
Accumulated deficit:
Balance, beginning of year		(450,533	)		(440,300	)		(416,391	)
Net loss		(28,161	)		(10,233	)		(23,909	)
Balance, end of year		(478,694	)		(450,533	)		(440,300	)
Total stockholders' equity	$	274,834		$	293,755		$	297,839
Number of shares of common stock
Balance, beginning of year		70,578			71,000			70,267
Common stock issued upon exercise of stock options and restricted
stock, net of tax withholding related to vesting of restricted stock units (shares)		(124	)		(422	)		733
Balance, end of year		70,454			70,578			71,000

See Accompanying Notes

47

AFFYMETRIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,
	2011			2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(28,161	)	$	(10,233	)	$	(23,909	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		32,309			35,460			45,125
Amortization of investment premiums, net		-			-			1,219
Excess tax benefits for share-based compensation		(200	)		(416	)		(1,409	)
Share-based compensation		8,771			9,910			11,148
Unrealized gain on hedging instruments		(826	)		-			-
Unrealized gain on investments		(211	)		-			-
Realized loss (gain) on debt and equity investments		2,717			(970	)		(204	)
Other-than-temporary impairment on securities		2,121			5,617			1,121
Provision for note receivable		2,151			-			-
Deferred tax assets		415			(73	)		1,358
Amortization of debt offering costs		408			841			1,207
Gain from repurchase of convertible notes		-			(6,297	)		(17,447	)
Loss (gain) on disposal of property and equipment		342			784			(231	)
Impairment of property and equipment		1,710			348			-
Changes in operating assets and liabilities:
Accounts receivable, net		8,260			12,599			(2,207	)
Inventories		6,522			5,117			(3,157	)
Prepaid expenses and other assets		3,297			10,802			4,115
Accounts payable and accrued liabilities		(448	)		(12,801	)		(5,374	)
Deferred revenue		(1,740	)		(2,881	)		(1,349	)
Other long-term liabilities		1,900			168			(677	)
Net cash provided by operating activities		39,337			47,975			9,329
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(5,779	)		(7,726	)		(10,249	)
Purchases of available-for-sale securities		(86,252	)		(453,138	)		(381,560	)
Proceeds from sales of available-for-sale securities		189,440			417,981			261,029
Proceeds from maturities of available-for-sale securities		32,982			110,477			124,090
Proceeds from sale of property and equipment		493			-			-
Purchase of technology rights		(3,250	)		(1,383	)		(500	)
Net cash provided by (used in) investing activities		127,634			66,211			(7,190	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net		(683	)		(1,182	)		(813	)
Repurchase of convertible notes		(3	)		(143,993	)		(50,669	)
Excess tax benefits for share-based compensation		200			416			1,409
Net cash used in financing activities		(486	)		(144,759	)		(50,073	)
Effect of exchange rate changes on cash and cash equivalents		(32	)		415			284
Net increase (decrease) in cash and cash equivalents		166,453			(30,158	)		(47,650	)
Cash and cash equivalents at beginning of year		35,484			65,642			113,292
Cash and cash equivalents at end of year	$	201,937		$	35,484		$	65,642
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	3,341		$	9,284		$	9,963
Cash paid for income taxes	$	633		$	1,450		$	144

See Accompanying Notes

48

AFFYMETRIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

NOTE 1—NATURE OF OPERATIONS

Affymetrix, Inc. (“Affymetrix” or the “Company”) is engaged in the development, manufacture, sale and service of consumables and systems for genetic analysis in the life sciences and clinical healthcare markets. Affymetrix has developed its GeneChip® system and related microarray technology as the platform of choice for acquiring, analyzing and managing complex genetic information. The Company’s integrated GeneChip® microarray platform includes: disposable DNA probe arrays (chips) consisting of nucleic acid sequences set out in an ordered, high density pattern, certain reagents for use with the probe arrays, a scanner and other instruments used to process the probe arrays, and software to analyze and manage genomic or genetic information obtained from the probe arrays. Related microarray technology also offered by Affymetrix includes licenses for fabricating, scanning, collecting and analyzing results from complementary technologies. The Company currently sells its products directly to pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies as well as academic research centers, government research laboratories, private foundation laboratories and clinical reference laboratories in North America and Europe. The Company also sells some of its products through life science supply specialists acting as authorized distributors in Latin America, India, the Middle East and Asia Pacific regions, including China.

On November 29, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire eBioscience Holding Company, Inc. (“eBioscience”) for approximately $330 million in cash, subject to certain adjustments as provided in the Merger Agreement. eBioscience is a privately-held San Diego, California-based company engaged in the development, manufacture and sale of flow cytometry and immunoassay reagents for immunology and oncology research and diagnostics. The merger is subject to customary closing conditions, including the receipt of financing for the merger.

In connection with the Merger Agreement, the Company entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result we will not be able to complete the eBioscience acquisition unless the terms of the acquisition and the financing are restructured. The Company is in discussions with financing sources and with eBioscience regarding the possibility of restructuring the committed financing but no agreements or understandings has been reached. The Company has waived eBioscience’s obligations under the non-solicitation provisions set forth in the Merger Agreement and understands that eBioscience is considering alternatives to the merger. The Merger Agreement may be terminated by either party if the closing of the merger has not occurred by March 31, 2012, so long as the breach of the Merger Agreement by the party seeking to terminate has not been the proximate cause of or resulted in the failure of the merger to occur on or before such date.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

Certain prior year amounts on the Company’s Consolidated Statements of Comprehensive Loss and Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.

USE OF ESTIMATES

The preparation of the consolidated financial statements is in conformity with U.S. generally accepted accounting principles (“US GAAP”) which require management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

49

FOREIGN CURRENCY

Assets and liabilities of non-U.S. subsidiaries that use the local currency as their functional currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income (loss) within stockholders’ equity. Income and expense accounts are translated at average exchange rates during the year. Foreign currency transaction gains and losses are recognized, net of hedging activity, in interest income and other, net and were comprised of net losses of $2.5 million, less than $0.1 million and $2.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.

CASH EQUIVALENTS, AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS

Restricted Cash

The Company’s restricted cash balances consist primarily of outstanding letters of credits that are fully cash collateralized and reserves for value added tax in foreign locations.

Marketable Securities

The Company’s investments consist of marketable equity and debt securities, including U.S. government notes and bonds; corporate notes, bonds and asset-backed securities; mortgage-backed securities, municipal notes and bonds; and publicly traded equity securities. The Company reports all securities with maturities at the date of purchase of 90 days or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. The Company’s investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity. The cost of its marketable securities is adjusted for the amortization of premiums and discounts to maturity. This amortization is included in interest income and other, net. Realized gains and losses, as well as interest income, on available-for-sale securities are also included in interest income and other, net. The cost of securities sold is based on the specific identification method. The fair values of securities are based on quoted market prices. The Company includes its available-for-sale securities that have an effective maturity of less than twelve months as of the balance sheet date in current assets and those with a maturity greater than twelve months as of the balance sheet date in non-current assets.

Non-marketable Securities

As part of the Company’s strategic efforts to gain access to potential new products and technologies, it invests in equity securities of certain private biotechnology companies. These investments are included in other assets in the Consolidated Balance Sheets and are carried at cost. The Company also owns approximately 6% interest in a limited partnership investment fund that is accounted for under the equity method.

Other-than-temporary Impairment

All of the Company’s marketable and non-marketable securities are subject to quarterly reviews for impairment that is deemed to be other-than-temporary (“OTTI”). An investment is considered other-than-temporarily impaired when its fair value is below its amortized cost and (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis or (3) the present value of expected cash flows is not expected to recover the entire amortized cost basis. Below is a summary of the Company’s analysis:

● Marketable securities –As part of its review, the Company is required to take into consideration current market conditions, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities and other factors when evaluating for the existence of OTTI in its securities portfolio. OTTI is separated into credit-related losses, which exist when amortized cost basis is not expected to be fully recovered, and non-credit related losses, which are the result of all other factors, such as illiquidity. Any credit-related OTTI is recognized in earnings while noncredit-related OTTI is recorded in other comprehensive income (loss) (“OCI”). During the year ended December 31, 2011, the Company recorded an impairment charge of $0.8 million due to OTTI of its investment in a publicly-traded company. Refer to Note 5. “Financial Instruments – Investments in Debt and Equity Securities” for further information.

50

● Non-marketable securities – The Company periodically monitors the liquidity and financing activities of its non-marketable securities to determine if any impairment exists and accordingly writes down, to the extent necessary, the carrying value of the non-marketable equity securities to their estimated fair values. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook of the issuer for the company, including key operational and cash flow metrics, current market conditions; and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in estimated fair value. During the year ended December 31, 2011, the Company recorded impairment charges totaling $1.3 million, primarily related to its investment in a limited partnership investment fund. Refer to Note 5. “Financial Instruments – Non-Marketable Securities” for further information.

ACCOUNTS RECEIVABLE

Trade accounts receivable are recorded at net invoice value. The Company considers amounts past due based on the related terms of the invoice. The Company reviews its exposure to amounts receivable and provides an allowance for specific amounts if collectability is no longer reasonably assured. The Company also provides an allowance for a percentage of the gross trade receivable balance (excluding any specifically reserved amounts) based on its collection history. The allowance for doubtful accounts was not material at December 31, 2011 and 2010.

DERIVATIVE INSTRUMENTS

The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges must be adjusted to fair value through earnings at each reporting date.

For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the Company measures the effectiveness of the derivative instruments by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. The effective portion of the gain or loss on the derivative instrument is reported as a component of OCI in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. Refer to Note 5. “Financial Instruments – Derivative Financial Instruments” for further information.

INVENTORIES

Inventory cost is computed on an adjusted standard basis (which approximates actual cost on a first-in, first-out basis). Provisions for slow moving, potentially excess and obsolete inventories are provided based on estimated demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets or the lease term, whichever is shorter. Equipment and furniture is depreciated over useful lives generally ranging from 3 to 7 years and leasehold improvements are depreciated over the shorter of the expected life of the asset or lease terms generally ranging from 3 to 15 years. Maintenance and repair costs are expensed as incurred. The Company reassesses the useful life on its property and equipment on a periodic basis and may adjust the lives accordingly.

In the fourth quarter of 2011, the Company entered into a non-binding letter of intent to sell its facility located in West Sacramento, California to a third-party. As a result of the letter of intent, the Company reclassified the facility from long-lived assets held and used to held-for-sale and recognized an impairment charge of $1.7 million to bring the carrying value of the facility to its estimated fair market value, which is the anticipated selling price under the non-binding letter of intent. As of December 31, 2011, an executed purchase agreement has not been entered into and neither party has any binding obligations under the letter of intent.

51

ACQUIRED TECHNOLOGY RIGHTS

Acquired technology rights are carried at cost less accumulated amortization and are comprised of licenses to technology covered by patents held by third parties or acquired by the Company. Purchased intangible assets other than goodwill are required to be amortized over their useful lives unless these lives are determined to be indefinite. Amortization is recorded over the estimated useful life of the underlying patents, which has historically ranged from one to thirteen years. In 2011 and 2010, the Company did not identify any indicators of impairment during its annual test on the acquired technology rights and did not recognize any impairment losses. Refer to Note 8, “Acquired Technology Rights”, for further information.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. For the years ended December 31, 2011 and 2010, the Company recognized $1.7 million and $0.3 million, respectively, of impairment charges on its long-lived assets. No impairment was recorded for the year ended December 31, 2009.

INCOME TAXES

Income tax expense is based on pre-tax financial accounting income. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. To the extent the Company believes that realization of the deferred tax assets is not more likely than not, the Company establishes a valuation allowance. Significant estimates are required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance to be recorded against net deferred tax assets. Some of these estimates are based on interpretations of existing tax laws or regulations. The Company believes that its estimates are reasonable and that its reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on the Company’s future effective tax rate. These factors include, but are not limited to, changes in overall levels of characterization and geographical mix of pretax earnings (losses), changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of deferred tax assets or liabilities, future levels of research and development spending, nondeductible expenses, applicability of tax holidays and ultimate outcomes of income tax audits. Relative to uncertain tax positions, the Company only recognizes the tax benefit if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Company’s financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

CONTINGENCIES

The Company is subject to various legal proceedings principally related to intellectual property matters. Based on the information available at the most recent balance sheet date, the Company assesses the likelihood of any material adverse judgments or outcomes that may result from these matters, as well as the range of possible or probable loss, if any. If losses are probable and reasonably estimable, the Company will record a reserve. Any reserves recorded may change in the future due to new developments in each matter.

REVENUE RECOGNITION

Overview

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or system is required or performance obligations remain, revenue is deferred until all the acceptance criteria or performance obligations have been met.

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The Company derives the majority of its revenue from product sales of probe arrays, reagents, and related instrumentation that may be sold individually or combined with any of the products, services or other sources of revenue. When a sale combines multiple elements upon delivery or performance of multiple products, services and/or rights to use assets, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value.

Effective January 1, 2010, the Company adopted Auditing Standards Update (“ASU”) No. 2009-13, Revenue Recognition (ASC Topic 605) – Multiple-Deliverable Revenue Arrangements on a prospective basis, which establishes the relative selling price method whereby the Company is required to allocate consideration to all deliverables at the inception of the arrangement based on their relative selling prices. This change in accounting principle did not have a material impact on the Company’s financial results.

Product Sales

Product sales include sales of probe arrays, reagents and related instrumentation. Probe array, reagent and instrumentation revenue is recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.

Services

Services revenue includes equipment service revenue; scientific services revenue, which includes associated consumables; and revenue from custom probe array design fees. Revenue from equipment service contracts are recognized ratably over the life of the contract.

Revenue from scientific and DNA analysis services are recognized upon shipment of the required data to the customer.

Revenue from custom probe array design fees associated with the Company’s GeneChip® CustomExpress™ and CustomSeq™ products are recognized when the associated products are shipped.

Royalties and Other Revenue

Royalties and other revenue include license revenue; royalties earned from third party license agreements; milestones and royalties earned from collaborative product development and supply agreements; subscription fees earned under GeneChip® array access programs; research revenue, which mainly consists of amounts earned under government grants.

License revenue is generally recognized upon the execution of an agreement or is recognized ratably over the period of expected performance.

Revenue from royalties is recognized under the terms of the related agreement.

The Company enters into collaborative arrangements which generally include a research and product development phase and a manufacturing and product supply phase. These arrangements may include up-front nonrefundable license fees, milestones, the rights to royalties based on the sale of final product by the partner, product supply agreements and distribution arrangements.

Any up-front, nonrefundable payments from collaborative product development agreements are recognized ratably over the research and product development period, and at-risk substantive based milestones are recognized when earned. Any payments received which are not yet earned are included in deferred revenue.

Transactions with Distributors

The Company recognizes revenue from transactions with distributors when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectability is reasonably assured. The Company’s agreements with distributors do not include rights of return.

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RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist of costs incurred for internal, collaborative and grant-sponsored research and development. Research and development expenses include salaries, contractor fees, building costs, utilities and allocations of shared corporate services. In addition, the Company funds research and development at other companies and research institutions under agreements which are generally cancelable. All such costs are charged to research and development expense as incurred.

SOFTWARE DEVELOPMENT COSTS

Development Costs of Software to Be Sold, Leased or Marketed

Certain software development costs subsequent to the establishment of technological feasibility are capitalized. The Company’s software is deemed to have achieved technological feasibility at the point a working model of the software product is developed. For the years ended December 31, 2011 and 2010, the Company did not capitalize any software development costs. Amortization costs for the years ended December 31, 2011 and 2010 on software development costs previously capitalized were $0.7 million for both years and $1.1 million for the year ended December 31, 2009. The costs of developing routine software enhancements are expensed as research and development when incurred because of the short time between the determination of technological feasibility and the date of general release of the related products.

Internal-Use Software

For the year ended December 31, 2011, the Company did not capitalize any costs associated with internal-use software. For the year ended December 31, 2010, the Company capitalized approximately $0.7 million. All costs associated with software developed for internal use will be amortized from the time at which the software is ready for its intended use. As of December 31, 2011, the Company had recognized total cumulative amortization costs of $0.5 million.

ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs recorded for the years ended December 31, 2011, 2010 and 2009 were $0.6 million, $1.2 million and $0.9 million, respectively.

SHARE-BASED COMPENSATION

The Company estimates the fair value of its stock options using the Black-Scholes-Merton (“BSM”) option pricing model. This model requires the use of certain estimates and assumptions such as the expected term of options, estimated forfeitures, expected volatility of the Company’s stock price, expected dividends and the risk-free interest rate at the grant date to determine the fair value of the stock options. The fair value of its restricted stock and restricted stock units, collectively referred to as restricted stock awards (“RSAs”), is based on the market price of the Company’s common stock on the grant date. The Company recognizes the fair value of its share-based compensation as expense on a straight-line basis over the requisite service period of each award, generally four years. Refer to Note 14, “Stockholders’ Equity and Share-Based Compensation Expense” for further information.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on the Company’s available-for-sale securities that are excluded from net loss, unrealized gains and losses on cash flow hedges and foreign currency translation adjustments. Total comprehensive income (loss) has been disclosed in the Company’s Consolidated Statements of Comprehensive Loss.

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At December 31, 2011 and 2010, the components of accumulated other comprehensive income, net of tax, are as follows (in thousands):

	2011		2010
Foreign currency translation adjustment	$	821	$	742
Unrealized gains on available-for-sale and non-marketable securities		845		634
Unrealized gains on cash flow hedges		826		-
Accumulated other comprehensive income, net of tax	$	2,492	$	1,376

NET LOSS PER COMMON SHARE

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

Diluted earnings per share, if any, include certain potential dilutive securities from common stock subject to repurchase, outstanding stock options (on the treasury stock method), shares purchased under the employee stock purchase plan and convertible notes (on the as-if-converted basis). The potentially dilutive securities excluded from diluted earnings per common share because their effect would have been anti-dilutive, on an actual outstanding basis, were as follows (in thousands):

	Year Ended December 31,
	2011		2010		2009
Employee stock options		6,276		6,636		6,216
Restricted stock and restricted stock units		2,597		1,953		2,154
Employee stock purchase plan		64		-		-
Convertible notes		3,169		3,169		8,207
Total		12,106		11,758		16,577

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted this guidance on a retrospective basis and the adoption did not have a material effect on its consolidated financial statements.

In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this standard in the first quarter of 2012 and the adoption will not have a material impact on its financial statements and disclosures.

NOTE 3—CONCENTRATIONS OF RISK

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

The Company has not experienced significant credit losses from its accounts receivable. Affymetrix performs a regular review of its customer activity and associated credit risks and does not require collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable.

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Certain raw materials or components used in the synthesis of probe arrays or the assembly of instrumentation are currently available only from a single source or limited sources. No assurance can be given that these raw materials or other components of the GeneChip® system will be available in commercial quantities at acceptable costs from other vendors should the need arise. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive.

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

For the years ended December 31, 2011, 2010 and 2009, approximately 47%, 43% and 42%, respectively, of the Company’s total revenue was generated from sales outside the United States. The Company’s results of operations are affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns and changes in regional or worldwide economic or political conditions. The risks of the Company’s international operations are mitigated in part by the extent to which its sales are geographically distributed.

NOTE 4—FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

A fair value hierarchy was established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are as follows:

● Level 1: quoted prices in active markets for identical assets or liabilities;

● Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

● Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

The fair values of the Company’s Level 1 and Level 2 available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities—short-term portion and available-for-sale securities—long-term portion on the Company’s Consolidated Balance Sheets based on the maturity of the securities. As of December 31, 2011 and 2010, the Company had no financial assets or liabilities requiring Level 3 classification, including those that have unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets and liabilities.

The fair value of the Company’s foreign currency derivative assets and liabilities is determined based on the estimated consideration the Company would pay or receive to terminate these agreements on the reporting date. The foreign currency derivative assets and liabilities are located in other current assets and accrued expenses, respectively, in the Company’s Consolidated Balance Sheets.

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The fair value of the Company’s convertible notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for the convertible notes of the same remaining maturities. As of December 31, 2011 and 2010, the estimated fair value of the convertible notes was $95.5 million.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010 (in thousands):

			Significant
	Quoted Prices		Other
	In Active		Observable
	Markets		Inputs
	(Level 1)		(Level 2)		Total
December 31, 2011:
Assets:
U.S. government obligations and agency securities*	$	-	$	19,598	$	19,598
U.S. corporate debt*		-		25,100		25,100
Non-U.S. government obligations and agency securities		-		2,810		2,810
Non-U.S. corporate debt and equity securities		105		14,825		14,930
Total	$	105	$	62,333	$	62,438
Foreign currency derivative assets	$	-	$	940	$	940
Liabilities:
Foreign currency derivative liabilities	$	-	$	217	$	217
December 31, 2010:
Assets:
U.S. government obligations and agency securities*	$	-	$	52,056	$	52,056
U.S. corporate debt*		-		103,192		103,192
U.S. and non-U.S. money market funds		-		3,634		3,634
Non-U.S. government obligations and agency securities		-		8,106		8,106
Non-U.S. corporate debt and equity securities		804		39,725		40,529
Total	$	804	$	206,713	$	207,517

* As of December 31, 2011, the Company had no investments in mortgage-backed securities in its portfolio. As of December 31, 2010, approximately 4% of the Company’s total portfolio was in mortgage-backed investments.

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NOTE 5—FINANCIAL INSTRUMENTS

Investments in Debt and Equity Securities

The following is a summary of available-for-sale securities as of December 31, 2011 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government obligations and agency securities*	$	19,421	$	177	$	-		$	19,598
U.S. corporate debt*		24,942		259		(101	)		25,100
Non-U.S. government obligations and agency securities		2,805		6		(1	)		2,810
Non-U.S. corporate debt and equity securities		15,157		41		(268	)		14,930
Total available-for-sale securities	$	62,325	$	483	$	(370	)	$	62,438
Amounts mature in:
Less than one year								$	7,937
One to two years									25,785
More than two years									28,716
Total available-for-sale securities								$	62,438

* As of December 31, 2011, the Company had no investments in mortgage-backed securities in its portfolio.

The following is a summary of available-for-sale securities as of December 31, 2010 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government obligations and agency securities*	$	52,047	$	85	$	(76	)	$	52,056
U.S. corporate debt*		103,601		275		(684	)		103,192
U.S. and Non-U.S. money markets		3,642		-		(8	)		3,634
Non-U.S. government obligations and agency securities		8,155		24		(73	)		8,106
Non-U.S. corporate debt and equity securities		40,724		48		(243	)		40,529
Total securities	$	208,169	$	432	$	(1,084	)	$	207,517
Amounts included in:
Cash equivalents								$	6,103
Available-for-sale securities									201,414
Total securities								$	207,517
Amounts mature in:
Less than one year								$	73,326
One to two years									45,690
More than two years									88,501
Total available-for-sale securities								$	207,517

* As of December 31, 2010, approximately 4% of the Company’s total portfolio was in mortgage-backed investments.

Realized gains for the years ended December 31, 2011 and 2010 were $0.6 million and $0.8 million, respectively. For the years ended December 31, 2011 and 2010, realized losses were $1.6 million and $0.3 million, respectively. Realized gains and losses are included in interest income and other, net in the Company’s Consolidated Statements of Operations. The gross unrealized losses as of December 31, 2010 were primarily related to a mortgage-backed security with a carrying value of $0.6 million that was impacted by the weakening of the global economy caused by a lack of liquidity in the credit markets which had not fully recovered. The mortgage-backed security was sold in 2011 for a realized loss of $0.3 million. During the year ended December 31, 2011, an equity security that experienced a decline in fair value was deemed other-than-temporarily impaired and impairment charges totaling $0.8 million was recorded. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company’s other securities.

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Non-Marketable Securities

As of December 31, 2011 and 2010, the carrying amounts of the Company’s non-marketable securities, totaling $5.0 million and $6.8 million, respectively, equaled their estimated fair values. Their estimated fair values were based on liquidation and net realizable values. During the year ended December 31, 2011, the Company recorded impairment charges on its non-marketable securities totaling $1.3 million primarily related to its limited partnership investment fund. During the year ended December 31, 2010, the Company recorded impairment charges on its non-marketable securities totaling $5.6 million, primarily due to declines in the estimated fair values of two of its investments in private biotechnology companies that were determined to be other-than-temporary as a result of the respective price per share paid by investors in the most recent round of financing for each company which, in each case, was significantly lower than the carrying value of the Company’s investment. Net investment losses are included in interest income and other, net in the Company’s Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment portfolio in the future.

Derivative Financial Instruments

The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets are held in the nonfunctional currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company’s foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on the Company’s Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in OCI until the hedged item is recognized in operations. As of December 31, 2011, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount related to the Company’s derivatives currently recorded in OCI and expected to be recognized into earnings over the next 12 months is a net gain of $0.8 million. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in other comprehensive income (loss) associated with such derivative instruments are reclassified immediately into operations through other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during 2011.

As of December 31, 2011, the total notional values of the Company’s foreign currency forward contracts that mature within 12 months are as follows (in thousands):

	Contracts
	Qualifying
	as Hedges
December 31, 2011:
Euro	$	11,851
Japanese yen		7,008
British pound		4,459
Total	$	23,318

As of December 31, 2010, the Company did not have any unsettled foreign currency contracts in place.

As a result of the use of derivative instruments, the Company is exposed to the risk that the counterparties may be unable to meet the terms of the agreements. To mitigate the risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred, however, no losses as a result of counterparty defaults are expected. The Company does not require and is not required to pledge collateral for these financial instruments. The Company does not enter into foreign currency forward contracts for trading or speculative purposes and is not party to any leveraged derivative instruments.

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The following table shows the Company’s foreign currency derivatives measured at fair value as reflected on the Company’s Consolidated Balance Sheets as of December 31, 2011 (in thousands):

				Fair Value of
		Fair Value of		Derivatives Not
		Derivatives		Qualifying or
	Balance Sheet	Designated as		Designated as		Total
	Location	Hedge Instruments		Hedge Instruments		Fair Value
December 31, 2011:
Derivative assets:
Foreign exchange contracts	Other current assets	$	940	$	-	$	940
Derivative liabilities:
Foreign exchange contracts	Accrued expenses		217		-		217

The Company did not have any foreign currency derivatives as of December 31, 2010.

The following table shows the pre-tax effect of the Company’s derivative instruments on OCI for the years ended December 31, 2011 and 2010 (in thousands):

	Amount of Gain (Loss) Recognized
	in OCI (Effective Portion)
	Year Ended December 31,
	2011		2010
Derivatives designated as cash flow hedges
Foreign exchange contracts	$	826	$	-

There were no amounts classified from OCI into operations during the year ended December 31, 2011.

The following table shows the pre-tax effect of the Company’s derivative instruments on the Company’s Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 (in thousands):

	Amount of Gain (Loss) Recognized
	in Statements of Operations
	(Amount Excluded from
	Effectiveness Testing)
	Year Ended December 31,					Location of Gain (Loss) Recognized
	2011			2010		in Statements of Operations
Derivatives designated as cash flow hedges
Foreign exchange contracts	$	(103	)	$	-	Interest Income and Other, Net
Derivatives not designated as hedging instruments
Foreign exchange contracts		(1,720	)		957	Interest Income and Other, Net

NOTE 6—INVENTORIES

Inventories consist of the following at December 31, 2011 and 2010 (in thousands):

	2011		2010
Raw materials	$	8,635	$	15,477
Work-in-process		10,554		9,235
Finished goods		23,662		24,661
Total	$	42,851	$	49,373

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NOTE 7—PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of December 31, 2011 and 2010 (in thousands):

	2011			2010
Property and equipment:
Construction-in-progress	$	837		$	1,013
Equipment and furniture		113,690			147,493
Building and leasehold improvements		96,390			99,206
Land		1,310			1,310
		212,227			249,022
Less: accumulated depreciation and amortization		(172,645	)		(194,845	)
Net property and equipment (1)	$	39,582		$	54,177

(1) Included in the balance as of December 31, 2011 was the Company’s West Sacramento facility that was reclassified to held-for-sale on the Company’s Consolidated Balance Sheets. The facility had an estimated fair value of

$9.0 million at December 31, 2011.

For the years ended December 31, 2011, 2010 and 2009, the Company recorded depreciation expense of $19.0 million, $22.2 million and $29.6 million, respectively.

For the year ended December 31, 2011, the Company recognized $1.7 million of impairment charges on its facility in West Sacramento, California.

NOTE 8—ACQUIRED TECHNOLOGY RIGHTS

Acquired technology rights, with a gross carrying value of $113.7 million, are comprised of customer relationships, licenses to technology covered by patents owned by third parties or patents acquired by the Company and are amortized over the expected useful lives of these assets, which range from two to fifteen years. At December 31, 2011 and 2010, accumulated amortization of these rights amounted to $84.2 million and $71.6 million, respectively.

During the years ended December 31, 2011 and 2010, the Company concluded that here were no indicators of impairment during its annual impairment test of its acquired technology rights and the remaining balance at December 31, 2011 is expected to be recoverable.

The expected future annual amortization expense of the Company’s acquired technology rights is as follows (in thousands):

	Amortization
For the Year Ending December 31,	Expense
2012	$	11,092
2013		8,617
2014		6,736
2015		1,332
2016		421
Thereafter		1,327
Total	$	29,525

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NOTE 9—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities as of December 31, 2011 and 2010 consist of the following (in thousands):

	2011		2010
Accounts payable	$	15,629	$	12,897
Accrued compensation and related liabilities		12,169		14,840
Accrued interest		1,531		1,531
Accrued taxes		5,067		6,860
Accrued legal		1,808		518
Accrued warranties		1,500		1,493
Other		7,070		6,120
Total	$	44,774	$	44,259

NOTE 10—COMMITMENTS

Operating Leases

The Company leases laboratory, office and manufacturing facilities under non-cancelable operating leases that expire at various times through 2023. Some of these leases contain renewal options ranging from two to five years and escalation clauses. Rent expense related to operating leases for the years ended December 31, 2011, 2010 and 2009 was approximately $11.0 million, $9.7 million and $10.2 million, respectively. In connection with some of these facility leases, the Company has made security deposits totaling $1.8 million, which are included in long-term other assets in the Company’s Consolidated Balance Sheets.

Future minimum lease obligations, net of sublease income, at December 31, 2011 under all non-cancelable operating leases are as follows (in thousands):

For the Year Ending December 31,	Amount
2012	$	8,315
2013		8,344
2014		6,277
2015		6,204
2016		4,418
Thereafter		31,862
Total	$	65,420

Sublease income is expected to be approximately $0.9 million and $0.7 million for the years ended December 31, 2012 and 2013, respectively, and $0 thereafter.

Non-Cancelable Supply Agreements

As of December 31, 2011, the Company had approximately $1.3 million of non-cancelable inventory supply agreements that are in effect through 2012.

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Indemnifications

From time to time the Company has entered into indemnification provisions under certain of its agreements with other companies in the ordinary course of business, typically with business partners, customers, and suppliers. Pursuant to these agreements, the Company generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties on a case by case basis for losses suffered or incurred by the indemnified parties in connection with any U.S. patent or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification provisions is generally perpetual from the time of the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. In addition, the Company has entered into indemnification agreements with its officers and directors. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As of December 31, 2011, the Company had not accrued a liability for this guarantee, because the likelihood of incurring a payment obligation in connection with this guarantee is remote.

NOTE 11—WARRANTIES

The Company provides for anticipated warranty costs at the time the associated revenue is recognized. Product warranty costs are estimated based upon the Company’s historical experience and the warranty period. The Company periodically reviews the adequacy of its warranty reserve and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. In 2010, the Company experienced more warranty claims for instruments than expected. Information regarding the changes in the Company’s product warranty liability for the years ended December 31, 2011 and 2010 is as follows (in thousands):

	Amount
Balance at December 31, 2009	$	1,685
Additions charged to cost of product sales		2,673
Repairs and replacements		(3,509	)
Adjustments		644
Balance at December 31, 2010	$	1,493
Additions charged to cost of product sales		879
Repairs and replacements		(872	)
Balance at December 31, 2011	$	1,500

NOTE 12—LEGAL PROCEEDINGS

The Company has been in the past, and continues to be, a party to litigation which has consumed, and may continue to consume, substantial financial and managerial resources. While the results of any litigation or any other legal proceedings are uncertain, the Company does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on the Company’s financial position or results of operations.

Illumina Lawsuit

On May 4, 2009 and November 3, 2009, the Company was named as a defendant in complaints filed by plaintiff Illumina, Inc., in the United States District Court for the Western District of Wisconsin (the “District Court”). In the complaints, plaintiff alleged that the Company is infringing Patent Nos. 7,510,841 and 7,612,020 (the “Patents”) by making and selling certain of the GeneChip® products. In December 2010, the District Court granted the Company’s motion for summary judgment that it did not infringe the patents held by Illumina. Illumina appealed the District Court’s decision in August 2011 and the Court of Appeals for the Federal Circuit affirmed the District Court’s decision.

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E8 Pharmaceuticals LLC

On July 1, 2008, the Company was named as a defendant in a complaint filed by plaintiffs E8 Pharmaceuticals LLC and Massachusetts Institute of Technology ("MIT") in the United States District Court of Massachusetts. In the complaint, the plaintiffs allege that the Company is infringing one patent owned by MIT and licensed to E8 Pharmaceuticals by making and selling the Company’s GeneChip® products to customers and teaching its customers how to use the products. The plaintiffs seek a permanent injunction enjoining the Company from further infringement, unspecified monetary damages, enhanced damages pursuant to 35 U.S.C. §284, costs, attorneys’ fees and other relief as the court deems just and proper. The Company will vigorously defend against plaintiffs’ claims. There is no trial date set in this matter.

Enzo Litigation

On October 28, 2003, Enzo Life Sciences, Inc., a wholly-owned subsidiary of Enzo Biochem, Inc. (collectively “Enzo”), filed a complaint against the Company that is pending in the United States District Court for the Southern District of New York for breach of contract, injunctive relief and declaratory judgment. The Enzo complaint relates to a 1998 distributorship agreement with Enzo under which the Company served as a non-exclusive distributor of certain reagent labeling kits supplied by Enzo. In its complaint, Enzo seeks monetary damages and an injunction against the Company from using, manufacturing or selling Enzo products and from inducing collaborators and customers to use Enzo products in violation of the 1998 agreement. Enzo also seeks the transfer of certain Affymetrix patents to Enzo. In connection with its complaint, Enzo provided the Company with a notice of termination of the 1998 agreement effective on November 12, 2003.

On November 10, 2003, the Company filed a complaint against Enzo in the United States District Court for the Southern District of New York for declaratory judgment, breach of contract and injunctive relief relating to the 1998 agreement. In its complaint, the Company alleges that Enzo has engaged in a pattern of wrongful conduct against it and other Enzo labeling reagent customers by, among other things, asserting improperly broad rights in its patent portfolio, improperly using the 1998 agreement and distributorship agreements with others in order to corner the market for non-radioactive labeling reagents, and improperly using the 1998 agreement to claim ownership rights to the Company’s proprietary technology. The Company seeks declarations that it has not breached the 1998 agreement and that nine Enzo patents that are identified in the 1998 agreement are invalid and/or not infringed by it. The Company also seeks damages and injunctive relief to redress Enzo’s alleged breaches of the 1998 agreement, its alleged tortuous interference with the Company’s business relationships and prospective economic advantage, and Enzo’s alleged unfair competition. The Company filed a notice of related case stating that its complaint against Enzo is related to the complaints already pending in the Southern District of New York against eight other former Enzo distributors. The Company’s case has been related to complaints previously pending in the Southern District of New York against eight other former Enzo distributors. There is no trial date in the actions between Enzo and the Company.

Noteholder Litigation

On December 29, 2011, Tang Capital Partners, LP, a holder of the Company's 3.50% Senior Convertible Notes Due 2038 (the "Notes"), commenced class action litigation against the Company in the Superior Court of California, County of Santa Clara. The complaint alleges a variety of claims relating to the Company's proposed acquisition of eBioscience Holding Company, Inc., including that the acquisition would constitute a Fundamental Change under the indenture governing the Notes. The complaint seeks unspecified damages, temporary and permanent injunctive relief against completion of the eBioscience acquisition, and other remedies. On January 21, 2012, the Company entered into an agreement to settle the purported class action litigation. As part of the settlement, the Company agreed to commence a tender offer to repurchase the entire aggregate outstanding principal amount of Notes at par plus accrued interest. Tang Capital Partners, LP, which owns approximately $78.3 million principal amount of the Notes, agreed to tender all of its Notes into the offer. Refer to Note 20, “Subsequent Events” for further discussion.

Administrative Proceedings

The Company’s intellectual property is subject to a number of significant administrative actions. These proceedings could result in the Company’s patent protection being significantly modified or reduced, and the incurrence of significant costs and the consumption of substantial managerial resources. For the year ended December 31, 2011, the Company had not incurred significant costs in connection with administrative proceedings.

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NOTE 13—SENIOR CONVERTIBLE NOTES

On November 13, 2007, the Company issued $316.3 million principal amount of 3.50% Senior Convertible Notes (the “Notes”) due January 15, 2038. The net proceeds after issuance costs from the Notes offering were approximately $309.4 million. The Notes bear interest of 3.50% per year on the principal amount payable semi-annually in arrears on January 15 and July 15 of each year. The Company incurred underwriter discount and issuance costs of approximately $6.9 million, which are being amortized over the effective life of the Notes which is five years, the period up to the first date that the holders of the Notes (the “Holders”) can require the Company to repurchase the Notes.

The Notes are convertible into 33.1991 shares of Affymetrix common stock per $1,000 principal amount of Notes which equates to 10,499,215 shares of common stock, or a conversion price equivalent of $30.12 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of the following specified events:

• issuing shares of the Company’s common stock as a dividend or distribution of the Company’s common stock;

• effecting a stock split or stock combination;

• issuing to all or substantially all Holders of the Company’s common stock any rights or warrants under certain circumstances and with certain entitlements;

• distributing shares of the Company’s common stock, evidences of indebtedness or other assets or property, to all or substantially all Holders of the Company’s common stock, with certain exceptions;

• making cash distributions to all or substantially all Holders of the Company’s common stock; or

• should the Company or any of its subsidiaries purchase shares of its common stock pursuant to a tender offer at a premium to market.

Holders may convert their Notes into shares of Affymetrix stock at any time at their option at the initial conversion rate, subject to adjustment, prior to the close of business on the business day prior to the maturity date.

On January 15, 2013, 2018 and 2028, the security holders have the option to require the Company to repurchase the Notes at a price equal to 100% of the principal amount of the Notes plus accrued interest. Additionally, on or after January 15, 2013, Affymetrix has the option of redeeming for cash at 100% of the principal amount all or part of the then outstanding Notes plus accrued interest.

The Notes are unsecured and rank equally with the Company’s other existing and future senior indebtedness. The Notes are structurally subordinated to any current or future indebtedness and other liabilities of the Company’s subsidiaries.

There were no purchases of Notes in 2011. In 2010 and 2009, the Company repurchased a total of $220.8 million of aggregate principal amount of the Notes for total cash consideration of $194.2 million, including accrued interest of $2.4 million. The recognized gain on debt repurchase of $23.7 million is net of transaction costs of $1.3 million and accelerated amortization of deferred financing costs of $2.4 million.

As of December 31, 2011, the balance remaining on the Notes was $95.5 million.

On February 3, 2012, the Company commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of its Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. Refer to Note 20, “Subsequent Events” for further information.

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NOTE 14—STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION EXPENSE

Convertible Preferred Stock

The Company’s Board of Directors has authorized 5.0 million shares of convertible redeemable preferred stock, $0.01 par value. At December 31, 2011 and 2010, there were no such shares issued or outstanding.

Share-based Compensation Plans

The Company has a share-based compensation program that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and RSAs, granted under various stock plans. Stock options are issued at a price of at least 100% of the fair value of the Company’s common stock on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options generally expire 7 to 10 years from the grant date and may be granted with different vesting terms from time to time as determined by the Board of Directors, usually over a period of four years on each anniversary of the grant date. In general, RSAs vest on an annual basis over a period of four years on each anniversary of the grant date, are subject to the employees’ continued employment and are paid upon vesting in shares of the Company’s common stock on a one-for-one basis. As of December 31, 2011, the Company had approximately 4.9 million shares of common stock reserved for future issuance under its share-based compensation plans. New shares are issued as a result of stock option exercises, restricted stock units vesting and restricted stock award grants. A more detailed description of the Company’s current share-based compensation plans follows below.

In 1998, the Board of Directors adopted the Affymetrix 1998 Stock Incentive Plan (the “1998 Stock Plan”) under which nonqualified stock options and restricted stock may be granted to employees and outside consultants, except that members of the Board of Directors and individuals who are considered officers of the Company under the rules of the National Association of Securities Dealers shall not be eligible. Options granted under the 1998 Stock Plan expire no later than ten years from the date of grant. A total of 3.6 million shares of common stock are authorized for issuance under the 1998 Stock Plan.

In 2000, the Board of Directors adopted the Amended and Restated 2000 Equity Incentive Plan (the “2000 Stock Plan”), which was amended and restated in 2001, under which RSAs, stock options, performance-based shares and stock appreciation rights may be granted to employees, outside directors and consultants. In the second quarter of 2010, 4.5 million shares of common stock were added under the 2000 Stock Plan bringing the total shares of common stock authorized for issuance under the 2000 Stock Plan to 16.2 million.

The following table sets forth the total share-based compensation expense resulting from stock options and RSAs included in the Company’s Consolidated Statements of Operations (in thousands):

	Year Ended December 31,
	2011		2010		2009
Costs of sales	$	1,143	$	994	$	1,677
Research and development		1,850		2,136		2,207
Selling, general and administrative		5,778		6,780		7,264
Total share-based compensation expense	$	8,771	$	9,910	$	11,148

As of December 31, 2011, $16.0 million of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2015. The weighted-average term of the unrecognized share-based compensation expense is 2.7 years.

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Stock Options

The fair value of options was estimated at the date of grant using the BSM option pricing model with the following weighted-average assumptions:

	Year Ended December 31,
	2011			2010			2009
Risk free interest rate		1.5	%		1.1	%		1.7	%
Expected dividend yield		0.0	%		0.0	%		0.0	%
Expected volatility		67	%		76	%		70	%
Expected option term (in years)		4.5			4.1			4.1

The risk free interest rate for periods within the contractual life of the Company’s stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company’s historical exercise trends over ten years. The expected volatility for the years ended December 31, 2011 and 2010 is based on a blend of historical and market-based implied volatility. Using the assumptions above, the weighted-average grant date fair value of options granted during the years ended December 31, 2011, 2010 and 2009 was $2.86, $2.66 and $3.03, respectively.

Activity under the Company’s stock plans for the year ended December 31, 2011 is as follows (in thousands, except per share amounts):

				Weighted-Average		Weighted-Average		Aggregate
				Exercise Price		Remaining		Intrinsic
	Shares			Per Share		Contractual Terms		Value
						(in years)
Outstanding at December 31, 2010		6,636		$	12.44
Grants		1,952			5.31
Exercises		(180	)		3.29
Forfeitures or expirations		(2,132	)		15.63
Outstanding at December 31, 2011		6,276		$	9.41		4.69	$	520,725
Exercisable at December 31, 2011		2,722		$	14.32		3.31	$	253,898
Vested and expected to vest at December 31, 2011		5,548		$	9.95		4.51	$	490,116

The following table summarizes information concerning currently outstanding and exercisable options at December 31, 2011:

		Options Outstanding						Options Exercisable
				Weighted-Average		Weighted-Average				Weighted-Average
				Remaining		Exercise Price				Exercise Price
Range of Exercise Prices		Number		Contractual Life		Per Share		Number		Per Share
		(in thousands)		(in years)				(in thousands)
$	1.32 - 4.09		593		4.62	$	3.21		236	$	3.02
$	4.22 - 4.22		975		5.50	$	4.22		253	$	4.22
$	4.26 - 4.85		820		6.54	$	4.75		46	$	4.61
$	4.88 - 5.74		941		5.59	$	5.39		231	$	5.50
$	5.78 - 8.29		1,120		5.37	$	7.40		362	$	7.83
$	8.71 - 11.30		844		3.14	$	10.33		664	$	10.35
$	12.11 - 25.67		459		2.71	$	20.15		406	$	20.31
$	25.68 - 57.08		524		1.54	$	33.92		524	$	33.92
Total			6,276		4.69	$	9.41		2,722	$	14.32

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The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of its fourth quarter of 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. The amount changes based on the fair market value of the Company’s common stock. For the years ended December 31, 2011, 2010 and 2009, total intrinsic value of options exercised was $0.4 million, $0.2 million and less than $0.1 million, respectively.

Reserved Shares

At December 31, 2011, the Company has shares reserved for future issuance as follows (in thousands):

Options outstanding	6,276
Options available for future grants	4,878
Convertible subordinated notes	3,169
	14,323

Restricted Stock

The following table summarizes the Company’s RSAs activity for the year ended December 31, 2011 (in thousands, except per share amounts):

	Number			Weighted-Average
	of Shares			Grant Date Fair Value
Restricted stock awards
Non-vested stock outstanding at December 31, 2010		1,248		$	8.14
Granted		-		$	-
Vested		(467	)	$	9.63
Forfeited		(241	)	$	7.09
Non-vested stock outstanding at December 31, 2011		540		$	7.32
Restricted stock units
Non-vested stock outstanding at December 31, 2010		705		$	4.47
Granted		1,688		$	5.39
Vested		(169	)	$	4.79
Forfeited		(167	)	$	4.48
Non-vested stock outstanding at December 31, 2011		2,057		$	5.20

For the years ended December 31, 2011 and 2010, total fair value of RSAs vested was $14.6 million and $13.3 million, respectively.

Performance-Based Awards

In 2011, the Compensation Committee approved a grant of performance-based restricted stock units (“PRSUs”) under the Plan to an executive officer that is earned annually in four equal tranches (the “Performance Period”). The PRSUs entitle the executive to receive a certain number of shares of the Company’s common stock based on the Company’s satisfaction of certain financial and strategic performance goals as set and approved by the Board of Directors annually during the first quarter of the specific performance period. Based on the achievement of the performance conditions during the Performance Period, the final settlement of the PRSU award will vest twelve months following the end of the Performance Period. The PRSU award will be forfeited if the performance goals are not met or if the executive officer is no longer employed at the vest date.

The number of shares underlying the PRSUs that were granted to the executive officer during the year ended December 31, 2011 totaled 240,000 shares and had a grant date fair value of $6.71 per share. As of December 31, 2011, the Company expects that 60,000 shares of the PRSUs will vest and the fair value of such shares is being amortized on a straight-line basis over the remaining service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $1.5 million as of December 31, 2011.

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Employee Stock Purchase Plan

In August 2011, the Company’s Board of Directors adopted the 2011 Employee Stock Purchase Plan (“ESPP”) that is subject to approval by the stockholders at the next annual meeting. The ESPP reserved a total of 7.0 million shares of the Company’s common stock for issuance under the plan and permits eligible employees to purchase common stock at a discount through payroll deductions.

The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or the last day of the purchase period, whichever is lower. The offering periods are twelve months and include two six month purchase periods that result in a look-back for determining the purchase price of up to 12 months. Employees can invest up to 15% of their gross compensation through payroll deductions. In no event would an employee be permitted to purchase more than 750 shares of common stock during any six-month purchase period. The initial offering period commenced in November 2011. As of the year ended December 31, 2011, there were 245 participants in the plan and no shares were issued under the ESPP.

NOTE 15—INCOME TAXES

The following table presents the U.S. and foreign components of consolidated loss before income taxes and the provision (benefit) for income taxes (in thousands):

	Year Ended December 31,
	2011			2010			2009
(LOSS) INCOME BEFORE INCOME TAXES:
U.S.	$	(26,778	)	$	(15,722	)	$	(25,150	)
Foreign		22			7,659			1,083
Loss before income taxes	$	(26,756	)	$	(8,063	)	$	(24,067	)
PROVISION (BENEFIT) FOR INCOME TAXES:
Current:
Federal	$	-		$	-		$	(2,248	)
State		106			37			25
Foreign		1,038			2,222			2,123
Subtotal		1,144			2,259			(100	)
Deferred:
Federal		-			-			-
State		-			-			-
Foreign		261			(89	)		(58	)
Subtotal		261			(89	)		(58	)
Income tax provision (benefit)	$	1,405		$	2,170		$	(158	)

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

	Year Ended December 31,
	2011			2010			2009
Tax at federal statutory rate	$	(9,364	)	$	(2,822	)	$	(8,423	)
State taxes, net		(1,740	)		(1,646	)		(2,315	)
Non-deductible stock compensation		453			626			659
Non-deductible acquisition costs		878			-			-
Foreign rate differential		1,274			(547	)		1,686
Research credits		(692	)		(991	)		(1,772	)
Change in valuation allowance		10,461			7,026			8,968
Other		135			524			1,039
	$	1,405		$	2,170		$	(158	)

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s assets are as follows (in thousands):

	December 31,
	2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	57,677		$	52,327
Tax credit carryforwards		47,513			40,047
Deferred revenue		1,632			1,717
Capitalized research and development costs		487			596
Intangibles		20,462			21,562
Share-based compensation		4,284			5,422
Accrued compensation		2,025			2,125
Accrued warranty		570			576
Inventory reserves		4,860			5,013
Reserves and other		10,928			11,236
Depreciation and amortization		21,323			21,569
Other, net		1,742			2,844
Total deferred tax assets		173,503			165,034
Valuation allowance for deferred tax assets		(154,107	)		(142,565	)
Net deferred tax assets		19,396			22,469
Net deferred tax liabilities:
Acquired intangibles		(2,459	)		(3,670	)
Cancellation of debt		(9,669	)		(9,653	)
Foreign earnings		(5,139	)		-
Other, net		(1,315	)		(3,181	)
Total deferred tax liabilities		(18,582	)		(16,504	)
Net deferred tax assets	$	814		$	5,965

As of December 31, 2011, the Company had total U.S. net operating loss carryforwards of $288.6 million, comprised of $162.0 million for U.S. federal purposes, which expire in the years 2021 through 2031 if not utilized, and $126.6 million for state purposes, the majority of which expire in the years 2012 through 2031 if not utilized. Additionally, the Company has federal research and development tax credit carryforwards of approximately $23.6 million, which expire in the years 2017 through 2031 if not utilized. The Company also has state research and development tax credit carryforwards and other various tax credit carryforwards of approximately $39.1 million. Substantially all of the state tax credits can be carried forward indefinitely. Utilization of net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of the net operating loss before utilization.

As of December 31, 2011, the Company has recorded a full valuation allowance against all U.S. and certain foreign deferred tax assets. The valuation allowance increased by $11.5 million and $3.2 million for the years ended December 31, 2011 and 2010, respectively. The increase during the year ended December 31, 2011 is attributable to U.S. losses and a release in reserves related to uncertain tax positions. Approximately $28.7 million of the valuation allowance as of December 31, 2011 is attributable to the income tax benefits of share-based compensation, the benefit of which will be credited to stockholders’ equity when, and if, realized.

Not included in the deferred tax assets as of December 31, 2011 is approximately $4.7 million of tax benefits related to share-based compensation. When realized, the tax benefit of these assets will be accounted for as a credit to stockholders’ equity, rather than a reduction of the income tax provision.

Of the total tax benefits realized from the share-based compensation the amounts recorded to stockholders’ equity were approximately less than $0.1 million and $0.1 million for the years ended December 31, 2011 and 2010, respectively.

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During the year ended December 31, 2011, due to potential future transactions that would require cash outflows, the Company changed its assertion such that foreign earnings are no longer intended to be permanently reinvested. As a result, the Company recorded a net deferred tax liability of approximately $0.8 million related to foreign undistributed earnings, which was offset by a reduction in the Company’s valuation allowance against its deferred tax assets.

A portion of the Company’s operations in Singapore operate under various tax holidays and tax incentive programs, which expire in whole or in part at various dates through 2017. There was a minimal net impact of these tax holidays and tax incentive programs for the year ended December 31, 2011.

The following table presents the Company’s total amount of gross unrecognized tax benefits (in thousands):

	2011			2010
Unrecognized tax benefits, beginning of year	$	20,758		$	19,866
Gross increases - tax positions in prior period		517			167
Gross decreases - tax positions in prior period		(201	)		(361	)
Gross increases - current period tax positions		1,203			1,086
Settlements		(5,797	)		-
Unrecognized tax benefits, end of year	$	16,480		$	20,758

If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $2.7 million. As of December 31, 2011, the Company does not anticipate any material changes to the amount of unrecognized tax benefits during the next 12 months. The Company classifies interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2011, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.2 million for a total cumulative amount included in non-current income taxes payable of $0.7 million as of December 31, 2011.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company’s major tax jurisdictions are the U.S., California, Singapore, and the U.K.

During November 2011, the U.S. Internal Revenue Service completed its field examination of the Company’s federal income tax returns for the 2004, 2005, 2006, 2008 and 2009 tax years and issued a Revenue Agent’s Report, or RAR, with no proposed adjustments. The Company considers all tax positions taken in the 2004, 2005, 2006, 2008 and 2009 tax years to be effectively settled, because the U.S. Internal Revenue Service has completed its examination procedures and the Company believes that there is a remote possibility that the U.S. Internal Revenue Service will re-examine the settled positions. As a result, the Company has released $5.8 million of reserves related to uncertain tax positions for those periods and recorded a full valuation allowance against these deferred tax assets. However, the federal and California statute of limitations on assessment still remain open for the tax years 1992 through 2011. The Company’s major foreign jurisdictions remain open for examination in general for tax years 2006 through 2011.

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NOTE 16—SEGMENT AND GEOGRAPHIC INFORMATION

The Company has determined that it operates in one segment as it only reports operating results on an aggregate basis to the chief operating decision maker of the Company.

The Company reported total revenue by region is as follows (in thousands):

	Year Ended December 31,
	2011		2010		2009
Customer location:
United States	$	142,508	$	178,029	$	190,257
Europe		76,286		80,914		87,061
Japan		19,989		22,248		22,588
Other		28,691		29,555		27,188
Total	$	267,474	$	310,746	$	327,094

There were no customers representing 10% or more of total revenue in 2011, 2010 and 2009.

The Company’s long-lived assets other than purchased intangible assets, which the Company does not allocate to specific geographic locations as it is impracticable to do so, are composed principally of net property and equipment.

Net property and equipment, classified by major geographic areas in which the Company operates was as follows (in thousands):

	Year Ended December 31,
	2011		2010
Net property and equipment:
United States	$	32,168	$	42,434
Singapore		6,022		10,206
Other countries		1,393		1,537
Total (1)	$	39,583	$	54,177

(1) Included in the balance as of December 31, 2011 was the Company’s West Sacramento facility that was reclassified to held-for-sale on the Company’s Consolidated Balance Sheets. The facility had an estimated fair value of $9.0 million at December 31, 2011.

NOTE 17—DEFINED-CONTRIBUTION SAVINGS PLANS

The Company maintains a defined-contribution savings plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time U.S. employees. Participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company’s expense associated with matching employee contributions for the years ended December 31, 2011, 2010 and 2009 totaled $3.0 million, $2.8 million and $3.2 million, respectively. Company contributions to employees vest ratably over four years.

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NOTE 18—UNAUDITED QUARTERLY FINANCIAL INFORMATION

	2011											2010
	Fourth			Third			Second			First		Fourth		Third		Second			First
	Quarter			Quarter			Quarter			Quarter		Quarter		Quarter		Quarter			Quarter
	(in thousands, except per share amounts)
Total revenue	$	65,104		$	63,987		$	64,659		$	73,724	$	84,909	$	73,972	$	71,678		$	80,187
Total cost of goods sold		30,412			27,648			25,793			27,099		35,570		33,499		31,089			33,048
Net (loss) income		(14,739	)		(9,789	)		(3,672	)		39		3,960		968		(5,541	)		(9,620	)
Basic net (loss) income per common share		(0.21	)		(0.14	)		(0.05	)		0.00		0.06		0.01		(0.08	)		(0.14	)
Diluted net (loss) income per common share		(0.21	)		(0.14	)		(0.05	)		0.00		0.06		0.01		(0.08	)		(0.14	)

In 2010, the Company recognized total gains of $6.3 million as part of the repurchases of its Notes.

NOTE 19—RELATED PARTY TRANSACTIONS

In December 2011, the Company entered into an agreement under which it assigned one patent application and related know-how to Cellular Research, Inc. (“Cellular Research”), a company founded by the Company’s Chairman, Dr. Stephen P.A. Fodor. Dr. Fodor also owns a majority of the shares of Cellular Research. Pursuant to the agreement, Cellular Research shall pay single digit royalties to Affymetrix on sales of products covered by the assigned technology, and starting in December 2015, an annual minimum fee of $100,000. Affymetrix shall also have a right of first refusal to collaborate with Cellular Research for the development of certain new products and to supply arrays to Cellular Research under certain terms and conditions. As of December 31, 2011, no royalties were earned pertaining to this agreement.

NOTE 20—SUBSEQUENT EVENTS

On January 21, 2012, the Company entered into an agreement to settle the purported class action litigation brought against the Company by holders of the Company’s 3.50% Senior Convertible Notes Due 2038 (the “Notes”) in the Superior Court of California, County of Santa Clara. As part of the settlement, on February 3, 2012, the Company commenced a cash tender offer (the “Offer”) for the entire remaining aggregate outstanding principal amount of $95.5 million of its Notes. The Company offered to purchase the Notes at par plus accrued and unpaid interest up to, but not including, the date of settlement.

The Company will fund the purchases of the Notes tendered in the Offer with cash on hand.

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, Affymetrix’ management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of Affymetrix’ disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Affymetrix’ disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision of our Chief Executive Officer and Chief Financial Officer and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

The effectiveness of our internal control over financial reporting as of December 31, 2011, has been audited by Ernst & Young LLP, our independent registered public accounting firm, as stated in their report which is included as follows.

74

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Affymetrix, Inc.

We have audited Affymetrix, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Affymetrix, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Affymetrix, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Affymetrix, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 31, 2011 of Affymetrix, Inc. and our report dated February 28, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

February 28, 2012

75

ITEM 9B.  OTHER INFORMATION

None.

PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information regarding our directors and executive officers is incorporated by reference to the sections of the Company’s proxy statement for the 2012 Annual Meeting of Stockholders (the “Proxy Statement”) entitled “Election of Directors” and “Management.”

The information concerning our corporate governance, including our audit committee, required by this Item is incorporated by reference to the sections of the Proxy Statement entitled “Governance of the Company” and “Report of the Audit Committee.”

The information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference to the section of the Proxy Statement entitled “Section 16(a) Beneficial Ownership Reporting Compliance.”

CODE OF ETHICS

Affymetrix has adopted a code of business conduct and ethics for directors, officers (including Affymetrix’ Chief Executive Officer, Chief Financial Officer and Corporate Controller) and employees, known as the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on Affymetrix’ website at www.affymetrix.comin the Corporate Governance section under the “Investors” link. Stockholders may request a free copy of the Code of Business Conduct and Ethics by sending an email request to investor@affymetrix.com.

ITEM 11.  EXECUTIVE COMPENSATION

Incorporated by reference to the sections of the Proxy Statement entitled “Executive Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Certain Transactions” and “Compensation of Directors.”

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated by reference to the section of the Proxy Statement entitled “Stock Ownership of Principal Stockholders and Management.”

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated by reference to the sections of the Proxy Statement entitled “Certain Transactions” and “Governance of the Company.”

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

Information about principal accountant fees and services as well as related pre-approval policies appears under “Fees Paid to Ernst & Young LLP” and “Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm” in the Proxy Statement. Those portions of the Proxy Statement are incorporated by reference into this report.

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PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)           Financial Statements. The financial statements as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference.

(a)(2)           Financial Statement Schedule—Schedule II—Valuation and Qualifying Accounts. All other schedules have been omitted as they are not required, not applicable or the information is otherwise included.

(a)(3)           Exhibits:

EXHIBIT NUMBER	DESCRIPTION OF DOCUMENT
2.1(1)	Agreement and Plan of Merger by and among Panomics, Inc., the Company, Panda Acquisition Corporation and the Equityholders’ Representative dated as of November 11, 2008.
2.2(2)	Agreement and Plan of Merger dated as of November 29, 2011 among the Company, eBioscience Holding Company, Inc., Excalibur Acquisition Sub, Inc. and the Securityholders’ Representative.
3.1(3)	Restated Certificate of Incorporation.
3.2(4)	Amended and Restated Bylaws.
4.2(5)	Indenture dated as of November 16, 2007, between the Company and the Bank of New York Trust Company, N.A. as Trustee.
10.1(6)‡	1993 Stock Plan, as amended.
10.2(6)‡	1996 Nonemployee Directors Stock Option Plan.
10.3(7)‡	1998 Stock Incentive Plan.
10.4(8)‡	Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of the Company
10.5(9)‡	Amended and Restated 1996 Non-Employee Directors Stock Plan.
10.6(10)‡	Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan, as adopted effective March 9, 2000 and amended through May 14, 2010.
10.7(11)‡	Form of Non-Qualified Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 1996 Non-Employee Directors Stock Plan.
10.8(11)‡	Form of Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
10.9(1)‡	Form of Restricted Stock Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
10.10(12)	First Amendment to Affymetrix, Inc. 1998 Stock Incentive Plan.
10.11(2)‡	Performance Based Restricted Stock Unit Grant Notice and Agreement between the Company and Frank Witney, Ph.D. dated July 21, 2011.
10.12(13)‡	2011 Employee Stock Purchase Plan.
10.13(14)	Lease between Sobrato Interests and the Company dated June 12, 1996 (3380 Central Expressway, Santa Clara, CA).
10.14(15)	Fifth Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3380 Central Expressway, Santa Clara, CA).
10.15(16)	Sixth Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3380 Central Expressway, Santa Clara, CA)
10.16(14)	Lease between Sobrato Interests and the Company dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA).
10.17(15)	First Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3450 Central Expressway, Santa Clara, CA).
10.18(16)	Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3450 Central Expressway, Santa Clara, CA).
10.19(17)	Lease between Sobrato Interests and the Company dated July 3, 2002 (3420 Central Expressway, Santa Clara, CA).
10.20(17)	First Amendment to Lease between Sobrato Interests and the Company dated September 30, 2003 (3420 Central Expressway, Santa Clara, CA).
10.21(16)	Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3420 Central Expressway, Santa Clara, CA).

77

10.22(18)	Lease between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated as of January 1, 2006 (7 Gul Circle, Singapore 629363).
10.23(19)	Addendum to Lease Agreement between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated June 1, 2010 (7 Gul Circle, Singapore 629363)
10.24(20)	Lease Agreement between SBP Limited Partnership and the Company dated August 10, 2008 (26309 Miles Road, Warrensville Heights, OH).
10.25(20)	First Amendment and Lease Expansion Agreement between SBP Limited Partnership and the Company dated May 20, 2009 (26309 Miles Road, Warrensville Heights, OH).
10.26(20)	Lease Agreement between OTR, acting as the duly authorized nominee of The State Teacher Retirement System of Ohio and Anatrace, Inc. dated February 14, 2001 (434 Dussel Drive, Maumee, OH).
10.27(20)	Assignment and Assumption of Lease between Anatrace, Inc. and USB Acquisition dated April 30, 2005 (434 Dussel Drive, Maumee, OH).
10.28(21)	Lease Agreement between the Company and Miles/Commerce Ltd. dated April 1, 2010 (26101 Miles Road, Warrensville Heights, OH).
10.29(21)	Lease Agreement between the Company and 26111 Miles Road Ltd. dated April 1, 2010 (26111 Miles Road, Warrensville Heights, OH).
10.30(22)‡	Offer Letter from the Company to John F. (Rick) Runkel dated October 6, 2008.
10.31(20)‡	Offer Letter from the Company to Andrew J. Last, Ph.D. dated November 2, 2009.
10.32(21)‡	Offer Letter from the Company to Timothy C. Barabe dated March 9, 2010.
10.33(23) ‡	Offer Letter from the Company to Frank Witney, Ph.D. dated May 26, 2011.
10.34(23)‡	Separation Agreement between the Company and Kevin M. King dated May 31, 2011.
10.35(7)‡	Form of Officer and Director Indemnification Agreement.
10.36(24)‡	Affymetrix, Inc. Change of Control Plan, as amended through May 14, 2010.
10.37(24)‡	Executive Severance Policy dated May 14, 2010.
10.38(25)	Settlement and Release Agreement dated January 9, 2008 between the Company and Illumina, Inc.
10.39(26)	Stipulation of Settlement regarding the Affymetrix Derivative Litigation in the United States District Court, Northern District of California.
10.40(27)	Letter Agreement dated as of January 21, 2012 between the Company and Tang Capital Partners, LP.
21	List of Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
EX-101.INS	XBRL Instance Document
EX-101.SCH	XBRL Taxonomy Schema Document
EX-101.CAL	XBRL Calculation Linkbase Document
EX-101.LAB	XBRL Label Linkbase Document
EX-101.PRE	XBRL Presentation Linkbase Document

(1) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 2, 2009 (File No. 000-28218).

(2) Filed herewith.

(3) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on June 13, 2000 (File No. 000-28218).

(4) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on August 7, 2009 (File No. 000-28218).

(5) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on November 19, 2007 (File No. 000-28218).

(6) Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 333-3648), as amended.

78

(7) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 31, 1999 (File No. 000-28218).

(8) Incorporated by reference to Registrant’s Registration Statement on Form S-3 as filed on July 12, 1999 (File No. 333-82685), as amended.

(9) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on May 15, 2001 (File No. 000-28218).

(10) Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on May 17, 2010 (File No. 333-166894).

(11) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on November 9, 2004 (File No. 000-28218).

(12) Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on April 18, 2001 (File No. 333-59158).

(13) Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on September 1, 2011 (File No. 333-176638).

(14) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on August 14, 1996 (File No. 000-28218).

(15) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 16, 2005 (File No. 000-28218).

(16) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on July 15, 2011 (File No. 000-28218).

(17) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 15, 2004 (File No. 000-28218).

(18) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 9, 2006 (File No. 000-28218).

(19) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on February 28, 2011 (File No. 000-28218).

(20) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 1, 2010 (File No. 000-28218).

(21) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on May 6, 2010 (File No. 000-28218).

(22) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on November 7, 2008 (File No. 000-28218).

(23) Incorporated by reference to Registrant’s Current Report on Form 8-K/A as filed on August 4, 2011 (File No. 000-28218).

(24) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on May 18, 2010 (File No. 000-28218).

(25) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on February 29, 2008 (File No. 000-28218).

79

(26) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on May 20, 2009 (File No. 000-28218).

(27) Incorporated by reference to Registrant’s Schedule TO as filed on February 3, 2012 (File No. 005-48829).

‡ Management contract, compensatory plan, contract or arrangement

80

AFFYMETRIX, INC.

Schedule II—Valuation and Qualifying Accounts

(in thousands)

			Additions
	Balance at		Charged to
	Beginning of		Operations or			Write-offs, net			Balance at
	Period		Other Accounts			of recoveries			End of Period
Allowance for Doubtful Accounts:
Year Ended December 31, 2011	$	949	$	(282	)	$	(171	)	$	496
Year Ended December 31, 2010	$	1,853	$	(685	)	$	(219	)	$	949
Year Ended December 31, 2009	$	2,213	$	(87	)	$	(273	)	$	1,853

81

SIGNATURES

Pursuant to the requirements of Section 13 of 15(d) 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. (Registrant)
February 28, 2012	By:	/s/ frank witney
		Frank Witney DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Each individual whose signature appears below constitutes and appoints John F. Runkel, Jr. and Timothy C. Barabe, and each of them singly, his or her true and lawful attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby ratifies and confirms all that said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue thereof.

	Name	Title	Date
By:	/s/ Frank Witney	Director, President and Chief Executive Officer (Principal Executive Officer)	February 28, 2012
	Frank Witney
By:	/s/ Timothy C. Barabe	Executive Vice President and Chief Financial Officer	February 28, 2012
	Timothy C. Barabe	(Principal Financial and Accounting Officer)
By:	/s/ Stephen P.A. Fodor, Ph.D.	Founder and Chairman of the Board	February 28, 2012
	Stephen P.A. Fodor, Ph.D.
By:	/s/ Nelson C. Chan	Director	February 28, 2012
	Nelson C. Chan
By:	/s/ John D. Diekman, Ph.D.	Director	February 28, 2012
	John D. Diekman, Ph.D.
By:	/s/ Gary S. Guthart, Ph.D.	Director	February 28, 2012
	Gary S. Guthart, Ph.D.
By:	/s/ Jami Dover Nachtsheim	Director	February 28, 2012
	Jami Dover Nachtsheim
By:	/s/ Robert H. Trice, Ph.D.	Director	February 28, 2012
	Robert H. Trice, Ph.D.
By:	/s/ Robert P. Wayman	Director	February 28, 2012
	Robert P. Wayman

82

INDEX TO EXHIBITS

EXHIBIT NUMBER	DESCRIPTION OF DOCUMENT
2.1(1)	Agreement and Plan of Merger by and among Panomics, Inc., the Company, Panda Acquisition Corporation and the Equityholders’ Representative dated as of November 11, 2008.
2.2(2)	Agreement and Plan of Merger dated as of November 29, 2011 among the Company, eBioscience Holding Company, Inc., Excalibur Acquisition Sub, Inc. and the Securityholders’ Representative.
3.1(3)	Restated Certificate of Incorporation.
3.2(4)	Amended and Restated Bylaws.
4.2(5)	Indenture dated as of November 16, 2007, between the Company and the Bank of New York Trust Company, N.A. as Trustee.
10.1(6)‡	1993 Stock Plan, as amended.
10.2(6)‡	1996 Nonemployee Directors Stock Option Plan.
10.3(7)‡	1998 Stock Incentive Plan.
10.4(8)‡	Amendment No. 1 to the 1996 Nonemployee Directors Stock Option Plan of the Company
10.5(9)‡	Amended and Restated 1996 Non-Employee Directors Stock Plan.
10.6(10)‡	Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan, as adopted effective March 9, 2000 and amended through May 14, 2010.
10.7(11)‡	Form of Non-Qualified Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 1996 Non-Employee Directors Stock Plan.
10.8(11)‡	Form of Stock Option Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
10.9(1)‡	Form of Restricted Stock Agreement under the Affymetrix, Inc. Amended and Restated 2000 Equity Incentive Plan.
10.10(12)	First Amendment to Affymetrix, Inc. 1998 Stock Incentive Plan.
10.11(2)‡	Performance Based Restricted Stock Unit Grant Notice and Agreement between the Company and Frank Witney, Ph.D. dated July 21, 2011.
10.12(13)‡	2011 Employee Stock Purchase Plan.
10.13(14)	Lease between Sobrato Interests and the Company dated June 12, 1996 (3380 Central Expressway, Santa Clara, CA).
10.14(15)	Fifth Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3380 Central Expressway, Santa Clara, CA).
10.15(16)	Sixth Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3380 Central Expressway, Santa Clara, CA)
10.16(14)	Lease between Sobrato Interests and the Company dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA).
10.17(15)	First Amendment to Lease between Sobrato Interests and the Company dated July 3, 2002 (3450 Central Expressway, Santa Clara, CA).
10.18(16)	Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3450 Central Expressway, Santa Clara, CA).
10.19(17)	Lease between Sobrato Interests and the Company dated July 3, 2002 (3420 Central Expressway, Santa Clara, CA).
10.20(17)	First Amendment to Lease between Sobrato Interests and the Company dated September 30, 2003 (3420 Central Expressway, Santa Clara, CA).
10.21(16)	Second Amendment to Lease between SI 34, LLC, as successor in interest to Sobrato Interests, and the Company dated July 11, 2011 (3420 Central Expressway, Santa Clara, CA).
10.22(18)	Lease between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated as of January 1, 2006 (7 Gul Circle, Singapore 629363).
10.23(19)	Addendum to Lease Agreement between Keppel Logistics Pte Ltd. and Affymetrix Pte Ltd. dated June 1, 2010 (7 Gul Circle, Singapore 629363)
10.24(20)	Lease Agreement between SBP Limited Partnership and the Company dated August 10, 2008 (26309 Miles Road, Warrensville Heights, OH).
10.25(20)	First Amendment and Lease Expansion Agreement between SBP Limited Partnership and the Company dated May 20, 2009 (26309 Miles Road, Warrensville Heights, OH).
10.26(20)	Lease Agreement between OTR, acting as the duly authorized nominee of The State Teacher Retirement System of Ohio and Anatrace, Inc. dated February 14, 2001 (434 Dussel Drive, Maumee, OH).

83

10.27(20)	Assignment and Assumption of Lease between Anatrace, Inc. and USB Acquisition dated April 30, 2005 (434 Dussel Drive, Maumee, OH).
10.28(21)	Lease Agreement between the Company and Miles/Commerce Ltd. dated April 1, 2010 (26101 Miles Road, Warrensville Heights, OH).
10.29(21)	Lease Agreement between the Company and 26111 Miles Road Ltd. dated April 1, 2010 (26111 Miles Road, Warrensville Heights, OH).
10.30(22)‡	Offer Letter from the Company to John F. (Rick) Runkel dated October 6, 2008.
10.31(20)‡	Offer Letter from the Company to Andrew J. Last, Ph.D. dated November 2, 2009.
10.32(21)‡	Offer Letter from the Company to Timothy C. Barabe dated March 9, 2010.
10.33(23) ‡	Offer Letter from the Company to Frank Witney, Ph.D. dated May 26, 2011.
10.34(23)‡	Separation Agreement between the Company and Kevin M. King dated May 31, 2011.
10.35(7)‡	Form of Officer and Director Indemnification Agreement.
10.36(24)‡	Affymetrix, Inc. Change of Control Plan, as amended through May 14, 2010.
10.37(24)‡	Executive Severance Policy dated May 14, 2010

10.38(25)	Settlement and Release Agreement dated January 9, 2008 between the Company and Illumina, Inc.
10.39(26)	Stipulation of Settlement regarding the Affymetrix Derivative Litigation in the United States District Court, Northern District of California.
10.40(27)	Letter Agreement dated as of January 21, 2012 between the Company and Tang Capital Partners, LP.
21	List of Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
EX-101.INS	XBRL Instance Document
EX-101.SCH	XBRL Taxonomy Schema Document
EX-101.CAL	XBRL Calculation Linkbase Document
EX-101.LAB	XBRL Label Linkbase Document
EX-101.PRE	XBRL Presentation Linkbase Document

(1) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 2, 2009 (File No. 000-28218).

(2) Filed herewith.

(3) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on June 13, 2000 (File No. 000-28218).

(4) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on August 7, 2009 (File No. 000-28218).

(5) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on November 19, 2007 (File No. 000-28218).

(6) Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 333-3648), as amended.

(7) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 31, 1999 (File No. 000-28218).

(8) Incorporated by reference to Registrant’s Registration Statement on Form S-3 as filed on July 12, 1999 (File No. 333-82685), as amended.

(9) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on May 15, 2001 (File No. 000-28218).

(10) Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on May 17, 2010 (File No. 333-166894).

84

(11) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on November 9, 2004 (File No. 000-28218).

(12) Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on April 18, 2001 (File No. 333-59158).

(13) Incorporated by reference to Registrant’s Registration Statement on Form S-8 as filed on September 1, 2011 (File No. 333-176638).

(14) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on August 14, 1996 (File No. 000-28218).

(15) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 16, 2005 (File No. 000-28218).

(16) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on July 15, 2011 (File No. 000-28218).

(17) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 15, 2004 (File No. 000-28218).

(18) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 9, 2006 (File No. 000-28218).

(19) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on February 28, 2011 (File No. 000-28218).

(20) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on March 1, 2010 (File No. 000-28218).

(21) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on May 6, 2010 (File No. 000-28218).

(22) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q as filed on November 7, 2008 (File No. 000-28218).

(23) Incorporated by reference to Registrant’s Current Report on Form 8-K/A as filed on August 4, 2011 (File No. 000-28218).

(24) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on May 18, 2010 (File No. 000-28218).

(25) Incorporated by reference to Registrant’s Annual Report on Form 10-K as filed on February 29, 2008 (File No. 000-28218).

(26) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed on May 20, 2009 (File No. 000-28218).

(27) Incorporated by reference to Registrant’s Schedule TO as filed on February 3, 2012 (File No. 005-48829).

‡ Management contract, compensatory plan, contract or arrangement

85

EX-2.2

EXHIBIT 2.2

EXECUTION VERSION

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

AFFYMETRIX, INC.

EXCALIBUR ACQUISITION SUB, INC.,

EBIOSCIENCE HOLDING COMPANY, INC.

AND

THE SECURITYHOLDERS’ REPRESENTATIVE

NOVEMBER 29, 2011

TABLE OF CONTENTS

ARTICLE I	THE MERGER	2
1.1	Certain Definitions	2
1.2	The Merger	15
1.3	Closing	15
1.4	Closing Deliveries	15
1.5	Effective Time	17
1.6	Effect of the Merger	17
1.7	Certificate of Incorporation and Bylaws	18
1.8	Directors and Officers	18
1.9	Effect on Company Common Stock and Company Options	18
1.10	Funding of Escrow and Reserve; Surrender of Certificates in Exchange for Payments and Payment of Company Options	20
1.11	No Further Ownership Rights in the Company Common Stock or Company Options	22
1.12	Lost, Stolen or Destroyed Certificates	22
1.13	Tax Consequences	23
1.14	Withholding Rights	23
1.15	Taking of Necessary Action; Further Action	23
1.16	Initial Working Capital Adjustments	23
1.17	Determination of Effective Time Net Working Capital	24
1.18	Working Capital Adjustment	25
1.19	Adjusted Net Cash Adjustment	25
1.20	Spreadsheet	27
ARTICLE II	REPRESENTATIONS AND WARRANTIES OF THE COMPANY	27
2.1	Organization, Standing and Power	27
2.2	Subsidiaries	28
2.3	Capital Structure	28
2.4	Authority; Noncontravention	30
2.5	Financial Statements	31
2.6	Undisclosed Liabilities	31

i

TABLE OF CONTENTS (continued)

2.7	Absence of Certain Changes	31
2.8	Litigation	31
2.9	Restrictions on Business Activities	32
2.10	Compliance with Laws; Governmental Permits	32
2.11	Title to Property and Assets	32
2.12	Real Estate	33
2.13	Intellectual Property	33
2.14	Environmental Matters	34
2.15	Taxes	36
2.16	Employee Benefit Plans and Employee Matters	38
2.17	Insurance	40
2.18	Transaction Fees	40
2.19	Material Contracts	40
2.20	Customers and Suppliers	42
2.21	Bank Accounts	42
2.22	Government Funding	43
2.23	Products	43
2.24	Books and Records	43
2.25	No Other Representations or Warranties	43
ARTICLE III	REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB	43
3.1	Organization, Standing and Power	44
3.2	Authority; Noncontravention	44
3.3	No Prior Sub Operations	44
3.4	Financing	45
ARTICLE IV	CONDUCT PRIOR TO THE EFFECTIVE TIME	45
4.1	Conduct of Business of the Company	45
4.2	Restrictions on Conduct of Business of the Company	46
ARTICLE V	ADDITIONAL AGREEMENTS	49
5.1	Stockholder Consent	49
5.2	Confidentiality; Public Disclosure	50
5.3	Regulatory Approvals	50

ii

TABLE OF CONTENTS (continued)

5.4	Commercially Reasonable Efforts; Notice of Certain Events	52
5.5	Access to Information	53
5.6	Expenses	53
5.7	Parachute Payment Waivers	53
5.8	Section 280G Stockholder Approval	53
5.9	Continuing Employee Benefits	53
5.10	Tax Matters	54
5.11	Directors’ and Officers’ Insurance	56
5.12	No Solicitation	58
5.13	Financing	59
5.14	Termination of 401(k) Plan	61
5.15	Financing Source Provisions.	61
ARTICLE VI	CONDITIONS TO THE MERGER	62
6.1	Conditions to Obligations of Each Party to Effect the Merger	62
6.2	Additional Conditions to Obligations of the Company	62
6.3	Additional Conditions to the Obligations of Acquiror	63
ARTICLE VII	TERMINATION, AMENDMENT AND WAIVER	64
7.1	Termination	64
7.2	Effect of Termination	66
7.3	Amendment	66
ARTICLE VIII	INDEMNIFICATION	66
8.1	Survival of Representations and Warranties and Covenants	66
8.2	Indemnification	67
8.3	Indemnifiable Damage Deductible; Other Limitations	67
8.4	Adjustment to Escrow Amount	69
8.5	Securityholders’ Representative	71
8.6	Third-Party Claims	72
8.7	Escrow Release	73
8.8	Allocation of Taxes	73
ARTICLE IX	GENERAL PROVISIONS	73

iii

TABLE OF CONTENTS (continued)

9.1	Notices	73
9.2	Interpretation	75
9.3	Counterparts	75
9.4	Entire Agreement; Parties in Interest	75
9.5	Assignment	76
9.6	Severability	76
9.7	Remedies Cumulative	76
9.8	Governing Law	76
9.9	Rules of Construction	77
9.10	WAIVER OF JURY TRIAL	77
9.11	Waiver of Conflicts	77
9.12	Attorney-Client Privilege	77

Exhibits

Exhibit A - Certificate of Merger

Exhibit B - Form of Escrow Agreement

Exhibit C - Form of FIRPTA Certificate

Exhibit D - Form of Stockholder Consent

Exhibit E - Form of Non-Competition and Non-Solicitation Agreement

Annexes

Annex A List of Persons executing Non-Competition and Non-Solicitation Agreements

Annex B List of Key Employees

Annex C List of Persons executing the Stockholder Consent

Schedules

Schedule 6.3(g) Required Consents

iv

Agreement and Plan of Merger

This AGREEMENT AND PLAN OF MERGER is made and entered into as of November 29, 2011 (the “Agreement Date”), by and among Affymetrix, Inc., a Delaware corporation (“Acquiror”), Excalibur Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Acquiror (“Sub”), eBioscience Holding Company, Inc., a Delaware corporation (the “Company”), and, solely with respect to Sections 1.17, 1.18, 1.19, 5.10, 5.15, 7.3, Article VIII and Article IX hereof, the Securityholders’ Representative (defined herein).

Recitals

A.           The Board of Directors of the Company (the “Company Board”) has determined that it would be advisable and in the best interests of the Company Securityholders (as defined herein) that Sub merge with and into the Company (the “Merger”), with the Company to survive the Merger and to become a wholly owned subsidiary of Acquiror, on the terms and subject to the conditions set forth in this Agreement, and, in furtherance thereof, has (i) approved the Merger, this Agreement and the other transactions contemplated by this Agreement and (ii) resolved to recommend approval of this Agreement by the Company Stockholders in accordance with Section 251 and Section 228 of Delaware Law.

B.           The Board of Directors of each of Acquiror and Sub has approved the Merger, this Agreement and the other transactions contemplated by this Agreement.

C.           Pursuant to the Merger, among other things, the issued and outstanding shares of capital stock of the Company shall be converted into the right to receive cash in the manner set forth herein.

D.           Concurrently with the execution of this Agreement, and as a condition and inducement to Acquiror’s and Sub’s willingness to enter into this Agreement, each of the individuals listed on Annex A hereto has entered into a Non-Competition and Non-Solicitation Agreement in the form attached hereto as Exhibit E (each, a “Non-Competition and Non-Solicitation Agreement”) and each of the individuals listed on Annex B hereto (the “Key Employees”) has executed an offer letter with the Surviving Corporation (each, a “Key Employee Offer Letter”).

E.           It is intended that this Agreement be adopted by the written consent of Company Stockholders listed on Annex C hereto in accordance with Section 228 of Delaware Law as promptly as practicable following the execution and delivery of this Agreement by the parties hereto.

F           The Company, Sub and Acquiror desire to make certain representations, warranties, covenants and other agreements in connection with the Merger as set forth herein.

Now, Therefore, in consideration of the representations, warranties, covenants and other agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1

ARTICLE I

THE MERGER

1.1Certain Definitions.  As used in this Agreement, the following terms shall have the meanings indicated below.  Unless indicated otherwise, all mathematical calculations contemplated hereby shall be rounded to the tenth decimal place.

“Acquiror” has the meaning given to it inthe Preamble.

“Acquiror Indemnity Percentage” means the fraction the numerator of which is the Acquiror Refund Portion of the Covered Refunds received on or prior to the Tax Indemnity Calculation Date, and the denominator of which is the total amount of the Covered Refunds received on or prior to the Tax Indemnity Calculation Date.

“Acquiror Remaining Refund” means, at any given time, the amount, if any, equal to (i) the Acquiror Refund Portion of any Covered Refunds received minus (ii) the amount of Indemnifiable Damages with respect to Covered Taxes borne by Acquiror pursuant to Section 8.3(c).

“Acquiror Refund Portion” has the meaning given to it in the definition of “Securityholder Refund Portion” in this Section 1.1.

“Acquisition Proposal” has the meaning given to it in Section 5.12.

“Affiliate” has the meaning set forth in Rule 144 promulgated under the Securities Act.

“Aggregate Exercise Amount” means the amount represented by the aggregate exercise prices of all In-the-Money Stock Options outstanding and exercisable immediately prior to the Effective Time (or which become exercisable as a result of the consummation of the transactions contemplated hereby), which aggregate exercise price for each such In-the-Money Stock Option shall be equal to the product of (i) the number of shares of Company Common Stock represented by such In-the-Money Stock Option multiplied by (ii) the exercise price per share for such In-the-Money Stock Option, and which amounts shall have been used in computing the Company Option-Based Merger Consideration pursuant to Section 1.20.

“Agreed Rate” has the meaning given to it in Section 1.18.

“Agreement” means this Agreement and Plan of Merger as the same may be amended or supplemented from time to time in accordance with its terms.

“Agreement Date” has the meaning given to it in the Preamble.

“Alternative Financing” has the meaning given to it in Section 5.13(a).

“Anticipated Refunds” are the following anticipated refunds of the Company and the Company Subsidiaries: (i) refunds of federal, California, Connecticut, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York and Pennsylvania estimated income taxes for the 2011 tax year, (ii) refunds of federal income taxes for the 2009 and 2010 tax years attributable to the carryback of net operating losses from the 2011 tax year, (iii) a refund of New York income taxes for the 2009 tax year attributable to the carryback of net operating losses from the 2011 tax year and (iv) a refund of federal income taxes for the 2008 tax year attributable to the carryback of research and development credits from the 2009 tax year.

2

“Antitrust Law” means HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the FTC Act, as amended, and any other Legal Requirement that is designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization, restraint of trade, or substantial lessening of competition.

“Business Day” means any day other than Saturday, Sunday, or a day on which commercial banks in California or New York are obligated by any Legal Requirement to close.

“Cap” has the meaning given to it in Section 8.3(b).

“Capital Expenditure Adjustment Amount” means an amount equal to the Closing Capital Expenditure Amount minus the Company Target Capital Expenditure Amount.  The Capital Expenditure Adjustment Amount may be a positive or a negative number.

“Cash” has the meaning given to it in Section 1.1 under the definition “Effective Time Cash.”

“Cash Consideration” has the meaning given to it in Section 1.1 under the definition “Merger Consideration.”

“Certificates” has the meaning given to it in Section 1.10(b)(i).

“Certificate of Merger” has the meaning given to it in Section 1.2.

“Claimed Amount” has the meaning given to in Section 8.4(a)(ii).

“Claim Notice” has the meaning given to it in Section 8.4(a).

“Claim Objection” has the meaning given to it in Section 8.4(b).

“Closing” has the meaning given to it in Section 1.3.

“Closing Capital Expenditure Amount” means an amount equal to the sum of (i) all capital expenditures paid, or incurred or accrued as current liabilities in accordance with GAAP, by the Company and the Company Subsidiaries consistent with Section 4.2(p) of the Company Disclosure Letter (and excluding any amounts paid, or incurred or accrued as current liabilities in accordance with GAAP, in connection with any casualty or damage) and (ii) all amounts paid, or incurred or accrued as current liabilities in accordance with GAAP, under third-party license agreements, consistent with Section 4.2(p) of the Company Disclosure Letter during the period commencing on January 1, 2011 and up to and including the earlier of (x) the Closing Date and (y) December 31, 2011.

3

“Closing Date” has the meaning given to it in Section 1.3.

“Closing Expenses Certificate” means a certificate executed by the Chief Financial Officer of the Company, certifying the amount of Transaction Expenses not paid immediately prior to the Effective Time (including an itemized list of each such Transaction Expense with a description of the nature of such expense and the Person to whom such expense is owed).

“Closing Working Capital Delivery Date” has the meaning given to it in Section 1.17(a).

“Closing Working Capital Statement” has the meaning given to it in Section 1.17(a).

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Collateral Source” has the meaning given to it in Section 8.3(d).

“Collective Bargaining Agreement” has the meaning given to it in Section 2.16(l)).

“Commitment Letter” has the meaning given to it in Section 3.4(a).

“Company” has the meaning given to it in the Preamble.

“Company Adjusted Net Cash” means (a) Effective Time Cash, less (b) the sum of (i) all outstanding Indebtedness immediately prior to the Effective Time and (ii) the amount of Transaction Expenses not paid immediately prior to the Effective Time, plus (c) the Capital Expenditure Adjustment Amount (which may be a positive or a negative number).

“Company Adjusted Net Cash Statement” has the meaning given to it in Section 1.19(b).

“Company Authorizations” has the meaning given to it in Section 2.10.

“Company Balance Sheet” has the meaning given to it in Section 2.5.

“Company Balance Sheet Date” has the meaning given to it in Section 2.6.

“Company Board” has the meaning given to in Recital A.

“Company Cash Certificate” means a certificate executed by the Chief Financial Officer of the Company, certifying on behalf of the Company the amount of the Company’s Cash, on a consolidated basis with the Company Subsidiaries,  immediately prior to the Effective Time.

“Company Certificate of Incorporation” means the Certificate of Incorporation of the Company as currently on file with the Delaware Secretary of State.

4

“Company Common Stock” means the Common Stock, par value of $0.001 per share, of the Company.

“Company Debt Certificate” means a certificate executed by the Chief Financial Officer of the Company, certifying on behalf of the Company an itemized list of all outstanding Indebtedness immediately prior to the Effective Time and the Person to whom such outstanding Indebtedness is owed and an aggregate total of such outstanding Indebtedness.

“Company Disclosure Letter” has the meaning given to it in Article II.

“Company Employee Options” means the In-the-Money Stock Options held by an employee or former employee of the Company of a Company Subsidiary.

“Company Employee Plans” has the meaning given to it in Section 2.16(b).

“Company Excluded Options” means Company Options exercisable for 50,000 shares of Company Common Stock granted to Don Tartre on February 11, 2011.

“Company Intellectual Property” means all Intellectual Property owned or used by the Company and each Company Subsidiary in the conduct of its business.

“Company Net Working Capital” means the total current assets (but excluding (i) Cash, (ii) deferred Tax assets, (iii) income Tax assets and (iv) any other Tax assets other than Tax assets with respect to sales, use and value added Taxes, which shall be included), less the total current liabilities (but excluding (i) Transaction Expenses, (ii) Indebtedness, (iii) deferred Tax liabilities, (iv) income Tax liabilities and (v) any other Tax liabilities other than any Tax liabilities with respect to sales, use and value added Taxes, which shall be included), of the Company and the Company Subsidiaries on a consolidated basis, as determined in accordance with GAAP, applied on a basis consistent with the Company’s past practices used in preparing the Financial Statements, but in all instances in accordance with GAAP.  By way of illustration, a calculation of Company Net Working Capital as of September 30, 2011 is set forth on Section 1.1 of the Company Disclosure Letter.

“Company Net Working Capital Target” means $25,000,000.

“Company Non-Employee Options” means the In-the-Money Stock Options held by a Person who is not an employee or former employee of the Company or a Company Subsidiary.

“Company Option-Based Merger Consideration” has the meaning given to it in Section 1.9(a)(ii).

“Company Option Plans” means the Company’s 2007 Stock Plan, as amended and 2011 Stock Plan.

“Company Optionholders” means the holders of Company Options.

“Company Options” means options to purchase shares of Company Common Stock other than the Company Excluded Options.

5

“Company Owned Intellectual Property” has the meaning given to it in Section 2.13(a).

“Company Securityholders” means the Company Stockholders and Company Optionholders, collectively.

“Company Stockholders” means the holders of outstanding shares of Company Common Stock.

“Company Subsidiary” has the meaning given to it in Section 2.2(a).

“Company Subsidiary Securities” has the meaning given to it in Section 2.2(a).

“Company Target Capital Expenditure Amount” means $3,000,000.

“Confidentiality Agreement” has the meaning given to it in Section 5.2(a).

“Consent” means any consent, waiver, approval, authorization, exemption, registration or declaration.

“Continuing Employees” means the employees of the Company and the Company Subsidiaries who remain employees of the Surviving Corporation (or a Company Subsidiary) or become employees of Acquiror following the Effective Time.

“Contract” means any written or oral contract, agreement, purchase or sale order, instrument, license, commitment, undertaking or arrangement.

“Covered Refund” means any refund of an income Tax paid by the Company or any Company Subsidiary with respect to any Pre-Closing Tax Period (except to the extent resulting from the carryback of any Tax asset arising in a Post-Closing Tax Period), net of (A) any actual Tax cost borne by the Company and the Company Subsidiaries which (i) was not previously taken into account in determining the amount of such refund, and (ii) arises solely as a result of the receipt of such refund (other than as a result of any reduction in a Tax asset that could be carried forward or back to reduce Taxes), and (B) any expenses incurred in connection with the claim for or receipt of such refund.

“Covered Tax” means (A) any income Tax of the Company or any Company Subsidiary described in clause (i) of the definition of Tax related to a Pre-Closing Tax Period; (B) any income Tax described in clause (ii) or (iii) of the definition of Tax; (C) any Tax resulting from the application of Section 280G or Section 4999 of the Code to any payment made pursuant to this Agreement or to any payment made as a result of, or in connection with, any transaction contemplated by this Agreement in each instance that are pursuant to agreements or other obligations established by the Company or any Company Subsidiaries prior to the Closing; and (D) the portion of any Transfer Taxes that should have been, but were not included in the calculation of Merger Consideration.

6

“Deductible” has the meaning given to it in Section 8.3(a).

“Delaware Courts” has the meaning given to it in Section 9.8.

“Delaware Law” means the General Corporation Law of the State of Delaware.

“Dissenting Shares” shall mean any shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and in respect of which appraisal rights have been perfected in accordance with Delaware Law in connection with the Merger.

“Effective Time” has the meaning given to it in Section 1.5.

“Effective Time Cash” means an amount equal to the Company’s and Company Subsidiaries’ consolidated cash and cash equivalents (“Cash”) on hand as of the Effective Time determined in accordance with GAAP.

“Encumbrance” means, with respect to any asset, any mortgage, deed of trust, lien, pledge, or charge, except for restrictions on transfer generally arising under any applicable federal or state or foreign securities laws.

“Environmental Claim” has the meaning given to it in Section 2.14(a)(i).

“Environmental Laws” has the meaning given to in Section 2.14(a)(ii).

“Environmental Permits” has the meaning given to it in Section 2.14(a)(iii).

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

“Escrow Agent” means U.S. Bank National Association.

“Escrow Agreement” has the meaning given to it in Section 1.4(a)(ii).

“Escrow Amount” means $26,400,000.

“Estimated Adjusted Net Cash” has the meaning given to it in Section 1.19(a).

“Estimated Net Working Capital” means the Company Net Working Capital as reflected on the Estimated Net Working Capital Statement.

“Estimated Net Working Capital Statement” has the meaning given to it in Section 1.16(a).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Exchange Agent” means U.S. Bank National Association.

“Exchange Agent Agreement” has the meaning set forth in Section 1.4(a)(iii).

7

“Facilities” has the meaning given to it in Section 2.14(a)(vi).

“Final Adjusted Net Cash” has the meaning given to it in Section 1.19(e).

“Final Adjustment Amount” has the meaning given to it in Section 1.19(f).

“Final Adjusted Net Cash Payment” has the meaning given to it in Section 1.19(e).

“Final Closing Working Capital Statement” has the meaning given to it in Section 1.17(c).

“Final Company Adjusted Net Cash Statement” has the meaning given to it in Section 1.19(d).

“Final Determination” has the meaning given to it in Section 1.19(f).

“Final Escrow Release Date” has the meaning given to it in Section 8.7.

“Final Net Working Capital” has the meaning given to it in Section 1.18.

“Final Net Working Capital Payment” has the meaning given to it in Section 1.18.

“Financial Statements” has the meaning given to it in Section 2.5.

“Financing” has the meaning given to it in Section 3.4(a).

“Financing Sources” means (i) entities that have committed to provide the Financing and (ii) any other entities acting as agents or arrangers or in any similar capacity in connection with such Financing.

“Financing Termination Notice” has the meaning given to it in Section 5.13(a).

“Firm” has the meaning given to it in Section 9.11.

“GAAP” means United States generally accepted accounting principles.

“General Escrow Release Date” has the meaning given to it in Section 8.1.

“Governmental Entity” means any national, supra-national, federal, state, municipal, local or foreign government, or any court, tribunal, arbitrator, administrative agency, commission or other governmental or quasi-governmental authority or instrumentality, in each case whether domestic or foreign, any stock exchange or similar self-regulatory organization or any quasi-governmental body exercising any regulatory, Taxing or other governmental or quasi-governmental authority.

8

“Governmental Funding Authority” has the meaning set forth in Section 2.23.

“Government Funding” has the meaning set forth in Section 2.23.

“Guarantee” means any obligation, contingent or otherwise, of a Person guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, contingent or otherwise, of such Person (i) to purchase or repay such Indebtedness, (ii) to reimburse a bank for amounts drawn under a letter of credit for the purpose of paying such Indebtedness or (iii) entered into for the purpose of assuring in any other manner the holder of such Indebtedness of the payment thereof.

“Hazardous Materials” has the meaning given to it in Section 2.14(a)(iv).

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“In-the-Money Stock Option” has the meaning given to it in Section 1.9(a)(ii).

“Indebtedness” means (i) all indebtedness of the Company and Company Subsidiaries for borrowed money (other than trade debt incurred in the ordinary course of business consistent with past practices), (ii) all long or short term debt obligations of the Company and Company Subsidiaries evidenced by notes, bonds, debentures or similar instruments and (iii) all Guarantees by the Company and Company Subsidiaries of Indebtedness of others.  Indebtedness of the Company and Company Subsidiaries shall include the Indebtedness of any other entity (including any partnership in which the Company or any Company Subsidiary is a general partner) to the extent the Company or any Company Subsidiary is liable therefor as a result of its ownership interest in such entity, except to the extent the terms of such Indebtedness provide that it is not liable therefor.

“Indemnifiable Damages” has the meaning given to it in Section 8.2.

“Indemnified Person” and “Indemnified Persons” have the meaning given to them in Section 8.2.

“Intellectual Property” means all issued patents, patent applications, trademarks and service marks (registered or unregistered), trade names, domain names, copyrights, trade dress, logos, slogans, designs, trade secrets, proprietary or confidential data, know-how, inventions, materials, proprietary cell lines, clones and hybridomas works of authorship, and all pending applications for and registrations of patents, trademarks, service marks and copyrights.

“Key Employee Offer Letter” has the meaning given to it in Recital D.

“Key Employees” has the meaning given to it in Recital D.

“Knowledge of the Company” or “Company’s Knowledge” (or similar words), means the actual knowledge of any individual listed in Annex A after reasonable inquiry of the employees of the Company or any Company Subsidiary that (i) directly report to such individual listed on Annex A in the scope of their employment and (ii) are directly responsible for the information that is the subject of the applicable representation or warranty.

9

“Lease” has the meaning set forth in Section 2.12.

“Leased Real Property” has the meaning set forth in Section 2.12.

“Legal Requirements” means all United States or foreign federal, state, national, supra-national, provincial, or local laws, treaties, constitutions, statutes, codes, rules, common law, regulations, ordinances, orders, judgments, injunctions, permits, decrees or edicts by a Governmental Entity having the force of law.

“Letter of Transmittal” has the meaning given to it in Section 1.10(b)(i).

“Material Adverse Effect” means any change, event, development or effect with respect to the Company or a Company Subsidiary that, individually or in the aggregate, has a material adverse effect on the business, assets, operations, results of operations or financial condition of the Company and the Company Subsidiaries, taken as a whole, other than any change, event, development or effect that results from:  (i) general economic conditions in any of the markets in which the Company and the Company Subsidiaries operate; (ii) any change in the financial, banking, currency or capital markets in the United States; (iii) changes in law, GAAP or other applicable accounting standards or the interpretations thereof, in each case that are proposed, approved or enacted after the date of this Agreement; (iv) acts of God or other calamities in the United States, including the engagement by any country in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence or threatened occurrence of any military or terrorist attack, in each case occurring after the date of this Agreement; (v) any actions taken, or failures to take action, or such other changes or events, in each case, to which Acquiror has specifically consented in advance in writing; (vi) any failure to meet internal projections relating to the Company and the Company Subsidiaries (it being understood that the underlying causes of, or factors contributing to, the failure to meet such projections may be taken into account in determining whether a Material Adverse Effect has occurred); or (vii) the announcement or pendency of, or the taking of any action specifically required by this Agreement and the other agreements contemplated hereby, including by reason of the identity of Acquiror or any communication by Acquiror regarding the plans or intentions of Acquiror with respect to the conduct of business of the Company and its Subsidiaries and including the resignation or termination of any employee following the announcement of the transactions contemplated hereby, in the case of clauses (i), (ii), (iii) and (iv), other than to extent such changes, events, developments or effects disproportionately impact the Company and the Company Subsidiaries relative to the other companies in the industry in which the Company and the Company Subsidiaries operate; or (B) materially impairs or delays the ability of the Company and the Company Subsidiaries to consummate the transactions contemplated by this Agreement.

“Material Contract” has the meaning given to it in Section 2.19.

“Merger” has the meaning given to it in Recital A.

10

“Merger Consideration” shall mean the amount (without duplication), as adjusted pursuant to Section 1.16(b), equal to (a) the sum of (i) $330,000,000 (the “Cash Consideration”), (ii) the Company Adjusted Net Cash (which may be a positive or a negative number) and (iii) the Aggregate Exercise Amount, less (b) 50% of any Transfer Taxes.

“Minimum Claim Amount” has the meaning given to it in Section 8.3(a).

“Necessary Intellectual Property” has the meaning given to it in Section 2.13(b).

“Neutral Auditor” has the meaning given to it in Section 1.17(c).

“New Commitment Letters” has the meaning given to it in Section 5.13(a).

“Non-Competition and Non-Solicitation Agreement” has the meaning given to it in Recital D.

“Objection Period” has the meaning given to it in Section 8.4(b).

“Officer’s Certificate” has the meaning given to it in Section 2.25.

“Option Deductions” means any U.S. federal or state Tax deductions or losses of the Company attributable to the portion of the Company Option-Based Merger Consideration paid or accrued as of the Closing Date.

“Option Surrender Form” has the meaning given to it in Section 1.10(b)(iii).

“Order” has the meaning given to it in Section 5.3(d).

“Outside Date” means 11:59 PM New York City time on March 31, 2012 or any later date as is elected by either Acquiror or the Company or otherwise provided for pursuant to Section 7.1(b).

“Permitted Encumbrances” means:  (a) statutory liens for Taxes that are not yet due and payable or liens for Taxes being contested in good faith by any appropriate proceedings for which adequate reserves have been set forth on the Company Balance Sheet in accordance with GAAP applied on a consistent basis; (b) deposits or pledges made in connection with, or to secure payment of, workers’ compensation, unemployment insurance or similar programs mandated by applicable Legal Requirements; (c) statutory liens in favor of carriers, warehousemen, mechanics and materialmen, to secure claims for labor, materials or supplies and other like liens arising in the ordinary course of business consistent with past purchases which are not yet due and payable or if due, which are being contested in good faith by appropriate proceedings diligently pursued and for which adequate reserves have been established on the Company Balance Sheet; (d) liens in favor of customs and revenue authorities arising as a matter of Legal Requirements in the ordinary course of business, consistent with past practices to secure payments of customs duties in connection with the importation of goods; and (e) any Encumbrances against the interest of the landlord or sublandlord of any real property leased or subleased by the Company or any Company Subsidiary that are not caused by the Company or any Company Subsidiary and do not adversely affect the Company’s or such Company Subsidiary’s leasehold interest in, or the Company’s or such Company Subsidiary’s use of, such real property or otherwise impair the Company’s or such Company Subsidiary’s business operations at or relating to such real property.

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“Per Share Merger Consideration” means (i) the Merger Consideration divided by (ii) the Total Stock.

“Person” means any natural person, company, corporation, limited liability company, general partnership, limited partnership, trust, proprietorship, joint venture, business organization or Governmental Entity.

“Post-Closing Tax Period” means any Tax period beginning after the Closing Date; and, with respect to a Straddle Period, the portion of such Tax period beginning after the Closing Date.

“Pre-Calculation Tax Indemnities” has the meaning given to it in Section 8.3(c).

“Pre-Closing Tax Period” means any Tax period ending on or before the Closing Date; and, with respect to a Straddle Period, the portion of such Tax period ending on the Closing Date.

“Proceeding” has the meaning given to it in Section 5.3(d).

“Property” has the meaning given to it in Section 2.14(a)(v).

“Pro Rata Share” means, with respect to a particular Company Securityholder, the percentage set forth in the Spreadsheet next to such Company Securityholder’s name in the column entitled “Pro Rata Share.”

“Provided Information” has the meaning given to it in Section 5.13(b).

“Refund Disallowance” means any disallowance or reduction of a Covered Refund by a Governmental Entity.

“Release” has the meaning given to it in Section 2.14(a)(vii).

“Representative” means, with respect to a Person, such Person’s officers, directors, employees, investment bankers, attorneys, accountants, consultants or other agents or advisors.

“Reserve” has the meaning given to in Section 8.5(c).

“Resolution Period” has the meaning given to in Section 1.17(b).

“Restraints” has the meaning given to in Section 6.1(a).

“Securities Act” means the Securities Act of 1933, as amended.

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“Securityholder Refund Portion” means the first $4,000,000 of Covered Refunds and with respect to any excess over and above $4,000,000, fifty percent (50%) of such excess, with the other fifty percent (50%) of such excess being attributable to, and retained by the Company (the “Acquiror Refund Portion”).

“Securityholders’ Representative “ has the meaning given to it in Section 8.5(a).

“Seller Group” has the meaning given to it in Section 9.11.

“Specified Representations” has the meaning given to it in Section 8.1.

“Spreadsheet” has the meaning given to it in Section 1.20.

“Stockholder Approval” has the meaning given to it in Section 2.4(a).

“Stockholder Consent” has the meaning given to it in Section 5.1(a).

“Stockholder Consent Delivery Deadline” has the meaning given to it in Section 6.3(h).

“Stockholder Notice” has the meaning given to it in Section 5.1(b).

“Straddle Period” has the meaning given to it in Section 5.10(c).

“Sub” has the meaning given to it in the Preamble.

“Subsidiary” means any corporation, association, business entity, partnership, limited liability company or other Person of which the Company, either alone or together with one or more Subsidiaries (i) directly or indirectly owns or controls securities or other interests representing more than 50% of the voting power of such Person, or (ii) is entitled, by Contract or otherwise, to elect, appoint or designate directors constituting a majority of the members of such Person’s board of directors or other governing body.

“Surviving Corporation” has the meaning given to it in Section 1.2.

“Tax” (and, with correlative meaning, “Taxes” and “Taxable”) means (i) any income, gross receipts, sales, use, ad valorem, value added, franchise, capital stock, profits, employment, excise, severance, stamp, real or personal property or other tax, governmental fee or other like assessment or charge of any kind whatsoever (including, but not limited to, withholding on amounts paid to or by any Person), together with any interest, penalty, addition to tax or additional amount imposed by any Governmental Entity responsible for the imposition or collection of any such amount (each, a “Tax Authority”) and any liability for any of the foregoing as transferee, (ii) in the case of the Company or any of its Subsidiaries, liability for the payment of any amount of the type described in clause (i) as a result of being or having been before the Closing a member of an affiliated, consolidated, combined or unitary group, or a party to any agreement or arrangement, as a result of which liability of the Company or any of its Subsidiaries to a Taxing Authority is determined or taken into account with reference to the activities of any other Person and (iii) liability of the Company or any of its Subsidiaries for the payment of any amount as a result of being party to any Tax Sharing Agreement.

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“Tax Authority” has the meaning given to it in the definition of “Tax” in this Section 1.1.

“Tax Claim” has the meaning given to it in Section 5.10(e).

“Tax Indemnity Calculation Date” shall be the earlier of (A) the date that is two years after the Closing Date or (B) the date when the Company and the Company Subsidiaries have received all of the Anticipated Refunds.

“Tax Referee” has the meaning given to it in Section 5.10(h).

“Tax Return” means any return, statement, declaration, claim for refund, report, document, election, disclosure, schedule or form (including any estimated tax or information return or report) filed or required to be filed with respect to Taxes, including any amendment thereof.

“Tax Sharing Agreement” means any agreement or arrangement (whether or not written) entered into prior to the Closing binding the Company or any of its Subsidiaries that provide for the allocation, apportionment, sharing or assignment of any Tax liability or benefit, or the transfer or assignment of income, revenues, receipts, or gains for the purpose of determining any Person’s Tax liability.

“Third Party Claim” has the meaning given to it in Section 8.6.

“Total Stock” means the sum, without duplication, of (i) the aggregate number of shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time, plus (ii) the aggregate number of shares of Company Common Stock issuable upon the exercise of In-the-Money Stock Options that are issued, outstanding and exercisable immediately prior to the Effective Time (including those which become exercisable as a result of the consummation of the transactions contemplated hereby).

“Transaction Deductions” means with respect to the Company, the sum of all items of loss or deduction for U.S. federal, state and local income tax purposes, resulting from or attributable to (a) the Option Deductions, (b) bonuses paid or accrued as of the Closing Date and (c) the payment of legal, accounting, investment banking and other fees and expenses of the Company incurred in connection with the transactions contemplated hereby including, without limitation, the Transaction Expenses.

“Transaction Expenses” means all third party fees and expenses incurred by the Company or any Company Subsidiary solely in connection with the Merger and this Agreement and the transactions contemplated hereby (including (i) any fees and expenses of the Representatives of the Company, (ii) the amount paid or payable by the Company or the Surviving Corporation pursuant to Section 5.11(b), (iii) any amounts that are or may become payable (including employer-related Taxes resulting therefrom) pursuant to the agreements listed as item 2 of Section 2.16(g) of the Company Disclosure Letter, and (iv) (A) if the Closing occurs prior to January 1, 2012, any employer-related Taxes arising as a result of the payments to the holders of Company Options contemplated by Section 1.9(a)(ii), or (B) if the Closing occurs on or after January 1, 2012, an amount equal to the lesser of (x) the amount of any employer-related Taxes arising as a result of the payments to the holders of Company Options contemplated by Section 1.9(a)(ii) and (y) $600,000).

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“Transfer Taxes” means any transfer, documentary, sales, use, stamp, registration, value added or other similar Tax (including any penalties and interest) incurred in connection with the transaction contemplated by this Agreement.

“U.S. Continuing Employee” has the meaning given to it in Section 5.9.

“Warranty Breach” has the meaning given to it in Section 8.2(a).

Other capitalized terms defined elsewhere in this Agreement and not defined in this Section 1.1 shall have the meanings assigned to such terms in this Agreement.

1.2The Merger.  At the Effective Time, on the terms and subject to the conditions set forth in this Agreement, the Certificate of Merger attached hereto as Exhibit A (the “Certificate of Merger”) and the applicable provisions of Delaware Law, Sub shall merge with and into the Company, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation and become a wholly owned subsidiary of Acquiror.  The Company, as the surviving corporation after the Merger, is hereinafter sometimes referred to as the “Surviving Corporation.”

1.3Closing.  Unless this Agreement is earlier terminated in accordance with Section 7.1, the closing of the transactions contemplated hereby (the “Closing”) shall take place at a time and date to be specified by the parties which will be no later than the second (2nd) Business Day after the satisfaction or waiver of each of the conditions set forth in Article VI (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions) or at such other time as the parties hereto agree.  The Closing shall take place at the offices of DLA Piper LLP (US), 4365 Executive Drive, Suite 1100, San Diego, California, or at such other location as the parties hereto agree.  The date on which the Closing occurs is herein referred to as the “Closing Date.”

1.4Closing Deliveries.

(a)Acquiror Deliveries.  Acquiror shall deliver to the Company, at or prior to the Closing, each of the following:

(i)a certificate, dated as of the Closing Date, executed on behalf of Acquiror by a duly authorized officer of Acquiror, certifying that each of the conditions set forth in clauses (a) and (b) of Section 6.2 has been satisfied;

(ii)an Escrow Agreement, in substantially the form attached hereto as Exhibit B (the “Escrow Agreement”), dated as of the Closing Date and executed by Acquiror;

(iii)an Exchange Agent Agreement (the “Exchange Agent Agreement”) in form and substance reasonably satisfactory to the Company, dated as of the Closing Date and executed by Acquiror and the Exchange Agent;

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(iv)payment to the Exchange Agent by wire transfer of immediately available funds an amount equal to the aggregate Merger Consideration payable pursuant to Section 1.9(a)(i) in exchange for all shares of Company Common Stock and pursuant to Section 1.9(a)(ii) in exchange for cancellation of Company Non-Employee Options that are outstanding and exercisable immediately prior to the Effective Time (or which become exercisable as a result of the consummation of the transactions contemplated hereby), less (y) the Pro Rata Share of the Escrow Amount in respect of the Company Common Stock and Company Non-Employee Options, and (z) the Pro Rata Share of the Reserve in respect of the Company Common Stock and Company Non-Employee Options;

(v)payment to the Company or its designee payroll service provider by wire transfer of immediately available funds an amount equal to the aggregate Merger Consideration payable pursuant to Section 1.9(a)(ii) in exchange for cancellation of Company Employee Options that are outstanding and exercisable immediately prior to the Effective Time (or which become exercisable as a result of the consummation of the transactions contemplated hereby), less (y) the Pro Rata Share of the Escrow Amount in respect of the Company Employee Options and (z) the Pro Rata Share of the Reserve in respect of the Company Employee Options;

(vi)payment to the Escrow Agent by wire transfer of immediately available funds the Escrow Amount and the Reserve in accordance with the provisions of the Escrow Agreement;

(vii)payments of any amounts of money due and owing from the Company to third parties as Transaction Expenses set forth on the Closing Expenses Certificate; and

(viii)payment to holders of outstanding Indebtedness, if any, by wire transfer of immediately available funds that amount of money due and owing from the Company or Company Subsidiary to such holder of outstanding Indebtedness immediately prior to the Effective Time as set forth on the Company Debt Certificate.

(b)Company Deliveries.  The Company shall deliver to Acquiror, at or prior to the Closing, each of the following:

(i)a certificate, dated as of the Closing Date and executed on behalf of the Company by its Chief Executive Officer, certifying: (A) resolutions of the Company Board approving and authorizing the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby; (B) resolutions of the Company Stockholders approving the Merger and adopting this Agreement and (C) that each of the conditions set forth in clauses (a), (b) and (e) of Section 6.3 has been satisfied;

(ii)the Escrow Agreement, dated as of the Closing Date and executed by the Securityholders’ Representative;

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(iii)documents evidencing the resignation of each of the directors and each of the officers of the Company in office immediately prior to the Closing as directors and/or officers, as applicable, of the Company, effective no later than immediately prior to the Effective Time;

(iv)a certificate dated within ten (10) days prior to the Closing Date from the Secretary of State of the State of Delaware and State of California certifying that the Company is in good standing under the laws of the State of Delaware and State of California, respectively;

(v)the Spreadsheet completed to include all of the information specified in Section 1.20;

(vi)the Estimated Net Working Capital Statement and the accompanying certificate executed by the Chief Financial Officer of the Company as contemplated by Section 1.16(a).

(vii)the Closing Expenses Certificate, as contemplated by Section 1.19(a);

(viii)the Company Debt Certificate, as contemplated by Section 1.19(a);

(ix)the Company Cash Certificate, as contemplated by Section 1.19(a); and

(x)FIRPTA documentation, including a notice to the U.S. Internal Revenue Service, in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2), in substantially the form attached hereto as Exhibit C, dated as of the Closing Date and executed by the Company.

1.5Effective Time.  On the Closing Date, after the satisfaction or waiver of each of the conditions set forth in Article VI, Sub and the Company shall cause the Certificate of Merger to be executed and filed with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of Delaware Law.  The Merger shall become effective on the date and time on which the Certificate of Merger has been filed with the Secretary of State of the State of Delaware or such later time as may be agreed to by Acquiror and the Company in writing (and set forth in the Certificate of Merger), such time being referred to herein as the “Effective Time.”

1.6Effect of the Merger.  At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of Delaware Law.  Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of Company and Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of Company and Sub shall become the debts, liabilities and duties of the Surviving Corporation.

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1.7Certificate of Incorporation and Bylaws.

(a)At the Effective Time, the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended.

(b)At the Effective Time, the Bylaws of Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended.

1.8Directors and Officers.

(a)At the Effective Time, the members of the Board of Directors of Sub immediately prior to the Effective Time shall be the members of the Board of Directors of the Surviving Corporation immediately after the Effective Time until their respective successors are duly elected, designated and qualified, or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation of the Surviving Corporation.

(b)At the Effective Time, the officers of Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation immediately after the Effective Time until their respective successors are duly appointed or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation of the Surviving Corporation.

1.9Effect on Company Common Stock and Company Options.

(a)Treatment of Company Common Stock Owned by Company Stockholders; Treatment of Capital Stock of Sub.  On the terms and subject to the conditions set forth in this Agreement, by virtue of the Merger and without any action on the part of Acquiror, Sub, the Company, or any holder of the Company Common Stock and/or Company Options:

(i)Common Stock.  At the Effective Time, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares and shares owned by the Company) shall be automatically converted into the right to receive, subject to and in accordance with Section 1.10(a), an amount of cash (without interest) equal to the Per Share Merger Consideration.  The amount of cash each holder of Company Common Stock is entitled to receive for the shares of Company Common Stock held by such holder shall be rounded to the nearest cent and computed after aggregating cash amounts for all shares of Company Common Stock held by such holder.

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(ii)Company Options.  Prior to the Closing, the Company Board shall have adopted appropriate resolutions and taken all other actions necessary and appropriate to provide that each unexpired and unexercised Company Option shall become vested and exercisable and shall be cancelled and retired and cease to exist effective as of the Effective Time, and, in exchange therefor, each former holder of any such cancelled Company Option that has vested as of immediately prior to the Effective Time (including Company Options receiving accelerated vesting as of the Effective Time) shall be entitled to receive from Acquiror, in consideration of the cancellation of each such Company Option and in settlement therefor, subject to and in accordance with Section 1.10(a), an amount in cash (without interest and subject to any applicable withholding or other Taxes required by applicable Legal Requirements to be withheld or otherwise paid by the Company, including any fringe benefit tax) equal to the product of (A) the total number of shares of vested Common Stock previously subject to such Company Option, and (B) the excess, if any, of the Per Share Merger Consideration over the exercise price per share of Common Stock previously subject to such Company Option (each an “In-the-Money Stock Option”).  The aggregate amount of cash payable with respect to all such Company Options under this Section 1.9(a)(ii) is referred to as the “Company Option-Based Merger Consideration.”  Any Company Option in which the exercise price per share of Common Stock is equal to or greater than the Per Share Merger Consideration shall be considered out of the money and shall be cancelled and no consideration shall be delivered in exchange therefor.  All Company Options that are unvested and unexercisable as of the Effective Time and are not otherwise accelerated as a result of the consummation of the transactions contemplated hereby and the Company Excluded Options shall be cancelled and no consideration shall be delivered in exchange therefor.

(iii)Capital Stock of Sub.  Each share of capital stock of Sub that is issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without further action on the part of Acquiror, Sub, the Company or the sole stockholder of Sub, be converted into and become 100 shares of common stock of the Surviving Corporation (and the shares of Surviving Corporation into which the shares of Sub capital stock are so converted shall be the only shares of the Surviving Corporation’s capital stock that are issued and outstanding immediately after the Effective Time).  Each certificate evidencing ownership of shares of Sub common stock shall evidence ownership of such shares of common stock of the Surviving Corporation.

(b)Treatment of Company Common Stock Owned by the Company.  At the Effective Time, all shares of Company Common Stock that are owned by the Company as treasury stock or reserved for issuance by the Company immediately prior to the Effective Time shall be cancelled and extinguished without any conversion thereof and no amount of Merger Consideration shall be allocated or paid thereto.

(c)Dissenters’ Rights.  Notwithstanding anything contained herein to the contrary, any Dissenting Shares shall not be converted into the right to receive the cash amount provided for in Section 1.9(a), but shall instead be converted into the right to receive such consideration as may be determined to be due with respect to any such Dissenting Shares pursuant to the Delaware Law.  Each holder of Dissenting Shares who, pursuant to the provisions of Delaware Law, becomes entitled to payment thereunder for such shares shall receive payment therefor in accordance with Delaware Law (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions).  If, after the Effective Time, any Dissenting Shares shall lose their status as Dissenting Shares, then any such shares shall immediately be converted into the right to receive the cash payable pursuant to Section 1.9(a) in respect of such shares as if such shares never had been Dissenting Shares, and Acquiror shall issue and deliver to the holder thereof, at (or as promptly as reasonably practicable after) the applicable time or times specified in Section 1.10(b), following the satisfaction of the applicable conditions set forth in Section 1.10(b), the amount of cash to which such holder would be entitled in respect thereof under this Section 1.9 as if such shares never had been Dissenting Shares.  The Company shall give Acquiror prompt notice of any demands for appraisal received by the Company, withdrawals of such demands, and any other instruments regarding demands of  appraisal served pursuant to Delaware Law and received by the Company.  Except with the prior written consent of Acquiror, the Company shall not make any payment with respect to, or settle or offer to settle, any such demands.

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(d)Rights Not Transferable.  The rights of the Company Securityholders as of immediately prior to the Effective Time are personal to each such Company Securityholder and shall not be transferable for any reason otherwise than by operation of law, will or the laws of descent and distribution or with the prior written consent of Acquiror.  Any attempted transfer of such right by any holder thereof (otherwise than as permitted by the immediately preceding sentence) shall be null and void.

1.10Funding of Escrow and Reserve; Surrender of Certificates in Exchange for Payments and Payment of Company Options.

(a)Funding of Escrow and Reserve.  At the Closing, Acquiror shall transfer directly to the Escrow Agent in immediately available funds the Escrow Amount and the Reserve, each of which shall be held in segregated accounts.  The Escrow Amount and Reserve shall be withheld from the cash payable pursuant to Section 1.9(a) to the Company Securityholders as provided for herein.  The Escrow Amount shall constitute security solely for the indemnification obligations of such Company Securityholders pursuant to Article VIII, and shall be held in and distributed in accordance with the provisions of this Agreement and the Escrow Agreement.  The Escrow Agreement shall provide that the remaining balance of funds in the Escrow Account on the General Escrow Release Date and the remaining balance of funds in the Escrow Account on the Final Escrow Release Date shall be released to the Company Securityholders as specified in Section 8.7.  The fees and expenses of the Escrow Agent under the Escrow Agreement shall be borne by Acquiror.  Notwithstanding the foregoing, the Reserve (i) shall not be deemed part of the Escrow Amount and shall not be available to satisfy any indemnification or other obligations to Acquiror hereunder and (ii) shall be available to reimburse the Securityholders’ Representative for expenses incurred by the Securityholders’ Representative promptly following the Securityholders’ Representative delivery to the Escrow Agent of a certificate setting forth the expenses incurred.

(b)Exchange Procedures for Share Certificates; Payments for Company Options.

(i)Prior to the Closing, the Exchange Agent shall mail or cause to be mailed to every Company Stockholder to whom the Company has issued Certificates and that has not previously delivered its Certificates together with a properly completed and duly executed letter of transmittal in form and substance reasonably satisfactory to the Company (the “Letter of Transmittal”) and to each Company Stockholder who is a holder of shares of Company Common Stock as reflected in the stock records of the Company but to whom Certificates have not been issued by the Company (A) a form of Letter of Transmittal, and (B) instructions for use of the Letter of Transmittal in effecting the surrender of certificates or instruments which immediately prior to the Effective Time represent issued and outstanding Company Common Stock (the “Certificates”) that will be converted into the right to receive consideration pursuant to Section 1.9(a).  The Letter of Transmittal shall specify that delivery of Certificates shall be effected, and risk of loss and title to Certificates shall pass, only upon receipt thereof by Acquiror, together with a properly completed and duly executed Letter of Transmittal, duly executed on behalf of each Person effecting the surrender of such Certificates, and shall be in such form and have such other provisions as Acquiror may reasonably specify, including a release by the Company Stockholders and that the Company Stockholders agree to be bound by the provisions of this Agreement.

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(ii)Upon delivery to the Exchange Agent of a Certificate, together with a properly completed and duly executed Letter of Transmittal and any other documentation required thereby, the Exchange Agent shall, either (x) at the Effective Time as to Certificates delivered at least two (2) Business Days prior to the Closing Date or (y) as soon as reasonably practicable (and in no event more than three (3) Business Days) after the date of delivery as to Certificates delivered after the second Business Day prior to the Closing Date, deliver to the holder of record of such Certificate, at the Company Stockholder’s election, either a check or wire transfer, to an account designated by such Company Stockholder pursuant to the Letter of Transmittal, representing the cash amount that such Company Stockholder has the right to receive pursuant to Section 1.9(a) in respect of such Certificate, less such Company Stockholder’s Pro Rata Share of the Escrow Amount and Reserve in respect of such Certificate (as set forth on the Spreadsheet), and such Certificate shall be canceled.

(iii)As a condition to the receipt of the consideration provided in Section 1.9(a)(ii), each Company Optionholder of In-the-Money Stock Options shall agree and acknowledge in form and substance reasonably acceptable to Acquiror and the Company (the “Option Surrender Form”)that such holder (A) approves this Agreement, the Escrow Agreement and all of the arrangements relating thereto, (B) approves the appointment of the Securityholders’ Representative in accordance with the terms of this Agreement, (C) agrees to be bound by the indemnification provisions set forth herein in Article VIII, (D) represents and warrants that it is the owner of all such Company Options free and clear of all Encumbrances, (E) provides a customary release and (F) acknowledges that such Company Optionholder’s portion of the Company Option-Based Merger Consideration constitutes all of the consideration such Company Optionholder is entitled to receive with respect to the Company Options held by such Company Optionholder.  Upon delivery to the Exchange Agent of a properly completed and duly executed Option Surrender Form, the Exchange Agent shall, either (x) at the Effective Time as to Company Non-Employee Options in respect of which properly completed and duly executed Option Surrender Forms have been delivered at least two (2) Business Days prior to the Closing Date or (y) as soon as reasonably practicable (and in no event more than three (3) Business Days) after the date of delivery as to Company Non-Employee Options in respect of which properly completed and duly executed Option Surrender Forms have been delivered after the second Business Day prior to the Closing Date, deliver to such holder of Company Non-Employee Options the cash amount such holder has the right to receive pursuant to Section 1.9(a) in respect of such Company Non-Employee Options as stated in the Spreadsheet, less such Company Optionholder’s Pro Rata Share of the Escrow Amount and Reserve in respect of such Company Non-Employee Option (as set forth on the Spreadsheet).  Upon delivery to the Company of a properly completed and duly executed Option Surrender Form, either (x) at the Effective Time, the Company shall, as to Company Employee Options in respect of which properly completed and duly executed Option Surrender Forms have been delivered at least two (2) Business Days prior to the Closing Date, or (y) as soon as reasonably practicable (and in no event more than three (3) Business Days) after the date of delivery as to Company Employee Options in respect of which properly completed and duly executed Option Surrender Forms have been delivered after the second Business Day prior to the Closing Date, Acquiror shall cause the Company’s current payroll provider, Insperity, on behalf of the Company, to deliver to such holder of Company Employee Options the cash amount such holder has the right to receive pursuant to Section 1.9(a) in respect of such Company Employee Option as stated in the Spreadsheet, less such Company Optionholder’s Pro Rata Share of the Escrow Amount and Reserve in respect of such Company Employee Option (as set forth on the Spreadsheet).

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(c)No Interest; U.S. Funds.  No interest shall accumulate on any cash payable in connection with the Merger (other than pursuant to the Escrow Agreement).  All amounts paid by Acquiror hereunder shall be made in U.S. Dollars.

(d)Transfers of Ownership.  If any cash amount payable pursuant to Section 1.9(a) is to be paid to a Person other than the Person to which the Certificate surrendered in exchange therefor is registered, it shall be a condition of the payment thereof that the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange shall have paid to Acquiror or any agent designated by it any transfer or other Taxes required by reason of the payment of cash in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of Acquiror or any agent designated by it that such Tax has been paid or is not payable.

(e)No Liability.  Notwithstanding anything to the contrary in this Section 1.10, none of Acquiror, Sub, the Surviving Corporation or any party hereto shall be liable to any Person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar Legal Requirement.

1.11No Further Ownership Rights in the Company Common Stock or Company Options.  All cash paid or payable following the surrender for exchange of all shares of Company Common Stock, and all cash paid or payable in respect of the Company Options in accordance with the terms hereof shall be so paid or payable in full satisfaction of all rights pertaining to all shares of Company Common Stock and Company Options including any rights to declared but unpaid dividends, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Company Common Stock which were issued and outstanding immediately prior to the Effective Time. If, after the Effective Time, a Certificate is presented to the Surviving Corporation for any reason, such Certificate shall be canceled and exchanged as provided in this Article I.

1.12Lost, Stolen or Destroyed Certificates.  In the event any Certificate shall have been lost, stolen or destroyed, Acquiror shall issue in exchange for such Certificate, following the making of an affidavit of that fact by the record holder thereof and, if required by the Surviving Corporation, the posting by such record holder of a bond, in such reasonable amount as the Surviving Corporation may direct, as indemnity against any claim that may be made against it with respect to such Certificate, such cash as may be required pursuant to Section 1.9 in respect of such Certificate.

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1.13Tax Consequences.  The parties acknowledge that the Merger does not qualify as a “reorganization” described in Section 368(a) of the Code.  Acquiror makes no representations or warranties to the Company or to any Company Securityholder regarding the Tax treatment of the Merger, or any of the Tax consequences to the Company or any Company Securityholder of this Agreement, the Merger or any of the other transactions or agreements contemplated hereby.  The Company acknowledges that the Company and the Company Securityholder are relying solely on their own Tax advisors in connection with this Agreement, the Merger and the other transactions and agreements contemplated hereby.

1.14Withholding Rights.  Each of Acquiror, Sub, the Surviving Corporation, and the Escrow Agent shall be entitled to deduct and withhold from any amounts otherwise payable under this Agreement such amounts as Acquiror, Sub, the Surviving Corporation or the Escrow Agent reasonably determines that it is required to deduct and withhold with respect to any such payments under the Code or any other provision of federal, state, local or foreign Tax Legal Requirements.  To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been delivered and paid to such Persons in respect of which such deduction and withholding was made.

1.15Taking of Necessary Action; Further Action.  If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and interest in, to and under, and/or possession of, all assets, property, rights, privileges, powers and franchises of the Company or any Company Subsidiary, the officers and directors of the Surviving Corporation are hereby authorized in the name and on behalf of the Company or any Company Subsidiary to take all lawful action necessary or desirable to accomplish such purpose or acts, so long as such action is not inconsistent with this Agreement.

1.16Initial Working Capital Adjustments.

(a)The Company will cause to be delivered to Acquiror, no later than five (5) Business Days prior to Closing, (i) an estimated statement of the Company Net Working Capital as of the Effective Time (the “Estimated Net Working Capital Statement”) and (ii) a certificate as to the preparation of the Estimated Net Working Capital Statement executed by the Chief Financial Officer of the Company.

(b)The Merger Consideration shall be adjusted as follows:

(i)If the Estimated Net Working Capital is less than the Company Net Working Capital Target, the Merger Consideration shall be reduced by an amount equal to the amount by which the Estimated Net Working Capital is less than the Company Net Working Capital Target (subject to the potential true up set forth in Section 1.18 below); and

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(ii)If the Estimated Net Working Capital is greater than the Company Net Working Capital Target, the Merger Consideration shall be increased by an amount equal to the amount by which the Estimated Net Working Capital exceeds the Company Net Working Capital Target (subject to the potential true up set forth in Section 1.18 below).

1.17Determination of Effective Time Net Working Capital.

(a)As soon as practicable, but in no event later than sixty (60) days following the Effective Time, Acquiror shall prepare and deliver to the Securityholders’ Representative  a statement of the Company Net Working Capital as of the Effective Time (the “Closing Working Capital Statement”).  The date on which such Closing Working Capital Statement is delivered shall be the “Closing Working Capital Delivery Date.”  The Closing Working Capital Statement shall be prepared in good faith in conformity with GAAP applied on a basis consistent with the methods used in computing the Company Net Working Capital Target to the extent such methods are in accordance with GAAP.  The Closing Working Capital Statement shall be accompanied by a certificate as to the preparation of the Closing Working Capital Statement executed by an officer of the Acquiror.

(b)The Securityholders’ Representative shall have thirty (30) days following the Closing Working Capital Delivery Date to review the Closing Working Capital Statement.  The Securityholders’ Representative and its advisors and representatives shall have full access to all relevant books and records (in electronic format, if available) and employees of the Company to the extent reasonably related to the Securityholders’ Representative’s review of the Closing Working Capital Statement.  Unless the Securityholders’ Representative delivers written notice to Acquiror on or prior to the thirtieth (30th) day after the Closing Working Capital Delivery Date specifying disputed items and the basis therefor, the Securityholders’ Representative shall be deemed to have accepted and agreed to the Closing Working Capital Statement.  If the Securityholders’ Representative timely notifies Acquiror of the Securityholders’ Representative’s objection to the Closing Working Capital Statement, Acquiror and the Securityholders’ Representative  shall, within fifteen (15) days following the date of such notice (the “Resolution Period”), attempt to resolve their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive.

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(c)If at the conclusion of the Resolution Period there are amounts still remaining in dispute, then all amounts remaining in dispute shall be submitted to McGladrey & Pullen, LLC or another firm of nationally recognized independent public accountants reasonably acceptable to Acquiror and the Securityholders’ Representative (the “Neutral Auditor”).  Acquiror and the Securityholders’ Representative agree to execute, if requested by the Neutral Auditor, a reasonable engagement letter and to abide by procedures to be mutually agreed upon by Acquiror, the Securityholders’ Representative and the Neutral Auditor.  The fees and expenses of the Neutral Auditor Firm shall be paid by Acquiror and the Company Securityholders based on the percentage which the portion of the contested amount not awarded to each such Person bears to the amount contested by such Person, as determined in good faith by the Neutral Auditor.  The Neutral Auditor shall act as an arbitrator to determine, based solely on presentations by Acquiror and the Securityholders’ Representative, and not by independent review, only those items still in dispute.  The Neutral Auditor’s determination shall be made within thirty (30) days of its engagement, shall be set forth in a written statement delivered to Acquiror and the Securityholders’ Representative and shall be final, binding and conclusive.  The term “Final Closing Working Capital Statement,” as used in this Agreement, shall mean the definitive Closing Working Capital Statement agreed to by the Securityholders’ Representative and Acquiror in accordance with Section 1.17(b) hereof or the definitive Closing Working Capital Statement resulting from the determinations made by the Neutral Auditor in accordance with this Section 1.17(c), in each case prepared in conformity with GAAP applied on a basis consistent with methods used to calculate the Company Net Working Capital Target to the extent such methods are in accordance with GAAP.

1.18Working Capital Adjustment.  If the Company Net Working Capital on the Final Closing Working Capital Statement (the “Final Net Working Capital”) is greater than the Estimated Net Working Capital (or, in the event no adjustment was made to the Merger Consideration pursuant to Section 1.17(c), the Company Net Working Capital Target), Acquiror shall owe to the Company Securityholders an amount equal to the excess of the Final Net Working Capital over Estimated Net Working Capital (or, in the event no adjustment was made to the Merger Consideration pursuant to Section 1.17(c), the Company Net Working Capital Target), plus a notional amount equal to interest on the amount of such excess from the Effective Date to the date of deposit at the prime rate published by the Wall Street Journal (New York Edition), as the rate may vary from time to time (“Agreed Rate”).  If the Final Net Working Capital is less than the Estimated Net Working Capital (or, in the event no adjustment was made to the Merger Consideration pursuant to Section 1.17(c), the Company Net Working Capital Target), Acquiror shall be owed by the Company Securityholders an amount equal to the excess of Estimated Net Working Capital (or, in the event no adjustment was made to the Merger Consideration pursuant to Section 1.17(c), the Company Net Working Capital Target) over Final Net Working Capital plus a notional amount equal to interest on the amount of such difference from the Effective Date to the date of payment at the Agreed Rate (such amount described in this Section 1.18, the “Final Net Working Capital Payment”).

1.19Adjusted Net Cash Adjustment.

(a)No later than five (5) Business Days prior to the Closing Date, the Company shall provide Acquiror with the Closing Expenses Certificate, the Company Debt Certificate and the Company Cash Certificate, which shall contain the Company’s estimate of the Company Adjusted Net Cash as of the Effective Time (the “Estimated Adjusted Net Cash”), together with reasonable documentation supporting such estimate.

(b)Acquiror shall prepare and deliver to the Securityholders’ Representative Acquiror’s calculation of the Company Adjusted Net Cash as of the Effective Time (the ”Company Adjusted Net Cash Statement”), together with reasonable documentation supporting such estimate, on the earlier of the Closing Working Capital Delivery Date and the date that is sixty (60) days following the Effective Time.  The Company Adjusted Net Cash Statement shall be accompanied by a certificate as to its preparation executed by an officer of the Acquiror.

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(c)After receipt of the Company Adjusted Net Cash Statement, the Securityholders’ Representative shall have thirty (30) days to review the Company Adjusted Net Cash Statement.  Unless the Securityholders’ Representative delivers written notice to Acquiror on or prior to the thirtieth (30th) day after the Securityholders’ Representative’s receipt of the Company Adjusted Net Cash Statement specifying disputed items and the basis therefor, the Securityholders’ Representative shall be deemed to have accepted and agreed to the Company Adjusted Net Cash Statement.  If the Securityholders’ Representative timely notifies Acquiror of the Securityholders’ Representative’s objection to the Company Adjusted Net Cash Statement, Acquiror and the Securityholders’ Representative shall, within fifteen (15) days following the date of such notice, attempt to resolve their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive.

(d)If Acquiror and the Securityholders’ Representative are unable to reach agreement during the fifteen (15) days following the date of the Securityholders’ Representative’s notice of disagreement, then all amounts remaining in dispute shall be submitted to the Neutral Auditor.  Acquiror and the Securityholders’ Representative agree to execute, if requested by the Neutral Auditor, a reasonable engagement letter and to abide by procedures to be mutually agreed upon by Acquiror, the Securityholders’ Representative and the Neutral Auditor.  The fees and expenses of the Neutral Auditor Firm shall be paid by Acquiror and the Company Securityholders based on the percentage which the portion of the contested amount not awarded to each such Person bears to the amount contested by such Person, as determined in good faith by the Neutral Auditor.  The Neutral Auditor shall act as an arbitrator to determine, based solely on presentations by Acquiror and the Securityholders’ Representative, and not by independent review, only those items still in dispute.  The Neutral Auditor’s determination shall be made within thirty (30) days of its engagement, shall be set forth in a written statement delivered to Acquiror and the Securityholders’ Representative and shall be final, binding and conclusive.  For the avoidance of doubt, the parties agree that any disputed items under Section 1.17 and this Section 1.19 shall be submitted to the same Neutral Auditor.  The term “Final Company Adjusted Net Cash Statement,” as used in this Agreement, shall mean the definitive Company Adjusted Net Cash Statement agreed to by the Securityholders’ Representative and Acquiror in accordance with Section 1.19(c) hereof or the definitive Company Adjusted Net Cash Statement resulting from the determinations made by the Neutral Auditor in accordance with this Section 1.19(d).

(e)If the Company Adjusted Net Cash on the Final Company Adjusted Net Cash Statement (the “Final Adjusted Net Cash”) is greater than the Estimated Adjusted Net Cash, Acquiror shall owe to the Company Securityholders an amount equal to the excess of the Final Adjusted Net Cash over Estimated Adjusted Net Cash, plus a notional amount equal to interest on the amount of such excess from the Effective Date to the date of deposit at the Agreed Rate.  If the Final Adjusted Net Cash is less than the Estimated Adjusted Net Cash, Acquiror shall be owed by the Company Securityholders an amount equal to the excess of Estimated Adjusted Net Cash over Final Adjusted Net Cash plus a notional amount equal to interest on the amount of such difference from the Effective Date to the date of payment at the Agreed Rate (such amount described in this Section 1.19(e), the “Final Adjusted Net Cash Payment”)

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(f)Promptly following the determination of each of the Final Net Working Capital Payment and the Final Adjusted Net Cash Payment (the ”Final Determination”), amounts owed from each party to the other pursuant to Section 1.18 and this Section 1.19 shall be netted (such net amount, the “Final Adjustment Amount”). If Acquiror owes the Final Adjustment Amount to the Company Securityholders, within five (5) Business Days of the Final Determination Acquiror shall deposit (in each case for prompt distribution to the Company Securityholders) with the Exchange Agent (and the Company’s current payroll provider in respect of the portion of such amount allocable to the holders of Company Employee Options per the Pro Rata Share as stated in the Spreadsheet) an amount equal to the Final Adjustment Amount.  If the Company Securityholders owe the Final Adjustment Amount to Acquiror, Acquiror shall be entitled to withdraw from the Escrow Amount an amount equal to the Final Adjustment Amount.  With respect to any payment to Acquiror in connection with adjustments to the Escrow Amount pursuant to this Section 1.19(f), the Securityholders’ Representative and Acquiror shall deliver to the Escrow Agent, within two (2) Business Days following the Final Determination, a written notice executed by both parties instructing the Escrow Agent to make such payment to the Acquiror from the Escrow Amount.

(g)Any amounts paid under Section 1.19(f) shall be treated as an adjustment to the consideration payable to the Company Securityholders under this Agreement, except as otherwise provided by applicable Legal Requirements.

1.20Spreadsheet.  The Company shall prepare and deliver to Acquiror, not later than five (5) Business Days prior to the Closing Date, a spreadsheet (the “Spreadsheet”), certified by the Chief Executive Officer of the Company, which shall set forth all of the following information, as of the Closing Date and immediately prior to the Effective Time:  (a) the names of all the Company Securityholders and their respective addresses; (b) the number and kind of shares of Company Common Stock held by, or subject to the Company Options held by, such Persons; (c) the exercise price per share in effect for each Company Option; (d) each Company Securityholder’s Pro Rata Share (as a percentage interest and the interest in dollar terms) of the Merger Consideration; (e) each Company Securityholder’s Pro Rata Share (as a percentage interest and the interest in dollar terms) of the amount to be contributed to the Escrow Amount and Reserve on behalf of each Company Securityholder; (f) the calculation of the Escrow Amount, Total Stock, Reserve, and Merger Consideration; and (g) the Aggregate Exercise Amount.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Subject to, and except as set forth in the disclosure letter of the Company delivered to Acquiror concurrently with the parties’ execution of this Agreement (the “Company Disclosure Letter”), the Company represents and warrants to Acquiror the following as of the date hereof and as of the Effective Time:

2.1Organization, Standing and Power.  The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.  The Company has full corporate power to own, lease and operate its properties and to conduct its business as currently conducted.  The Company is duly qualified or licensed to do business and is in good standing in each jurisdiction required for the current conduct of its business, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect.  The jurisdictions in which the Company is licensed or qualified to do business as a foreign corporation are set forth on Section 2.1 of the Company Disclosure Letter.  The Company has heretofore provided or made available to Acquiror (or Acquiror’s Representatives) true and complete copies of the Company Certificate of Incorporation and its bylaws as currently in full force and effect.  The Company is not in violation of any of the provisions of the Company Certificate of Incorporation or its bylaws.

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2.2Subsidiaries.

(a)Section 2.2(a) of the Company Disclosure Letter sets forth the name, jurisdiction of incorporation or organization and authorized and outstanding capital of each Company Subsidiary.  Other than with respect to the Company Subsidiaries, the Company does not own, directly or indirectly, any capital stock or other equity securities of any Person, and neither the Company nor any Company Subsidiary has any rights to, or is bound by any commitment or obligation to, acquire any securities or ownership interests of, or to make any investment in or capital contribution to, any Person (other than with respect to any Company Subsidiary).  Except as set forth in Section 2.2(a) of the Company Disclosure Letter, all of the outstanding capital stock (or similar equity interests) of each Company Subsidiary is (or are) owned directly or indirectly by the Company free and clear of all Encumbrances, including any restriction on the right to vote, sell or otherwise dispose of such capital stock or similar equity interests) and is (or are) validly issued, fully paid and nonassessable, and there are no outstanding (i) options, rights or agreements of any kind relating to the issuance, sale or transfer of any capital stock (or similar equity interests) of any such Company Subsidiary or (ii) securities of the Company or of any Company Subsidiary convertible into or exchangeable for shares of capital stock or similar equity interests in any Company Subsidiary (the capital stock (or similar equity interests) of any Company Subsidiary and the items in clauses (i) and (ii) being the “Company Subsidiary Securities”).  As used in this Agreement, the term “Company Subsidiary” means each Person which is a Subsidiary of the Company.  There are no outstanding obligations of the Company or any Company Subsidiary to repurchase, redeem or otherwise acquire any Company Subsidiary Securities.

(b)Each Company Subsidiary is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization.  Each Company Subsidiary has full power and authority to own, lease and operate its properties and to conduct its business as currently conducted.  Each Company Subsidiary is duly qualified or licensed to do business and is in good standing in each jurisdiction required for the current conduct of its business, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect.  No Company Subsidiary is in violation of any of the provisions of its certificate of incorporation or bylaws or equivalent organizational or governing documents.

2.3Capital Structure.

(a)The authorized capital of the Company consists of 20,000,000 shares of Company Common Stock, of which 6,562,875 shares are issued and outstanding as of the close of business on the date hereof.  The Company has no authorized nor issued and outstanding preferred stock.

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(b)Section 2.3(b) of the Company Disclosure Letter sets forth, as of the close of business on the date hereof, (i) the name of each Person that is the registered owner of any shares of Company Common Stock and the number and class or series of such shares so owned by such Person, and (ii) a list of all holders of outstanding Company Options, including the number of shares of Company Common Stock subject to each such Company Option, the grant date, exercise price and vesting schedule for such Company Option and whether and to what extent the exercisability of such option will be accelerated as a result of the transactions contemplated by this Agreement and the date on which such Company Option expires.  Each Company Option was granted with an exercise price per share equal to or greater than the fair market value of the underlying shares on the date of grant.  The Company has heretofore provided or made available to Acquiror (or Acquiror’s Representatives) true and complete copies of the standard form of Company Option agreement and any stock option agreements that differ from such standard form.

(c)Except for (A) currently outstanding Company Options to purchase up to 1,619,000 shares of Company Common Stock which have been granted to employees, consultants or directors pursuant to the Company Option Plans, and (B) a reservation of an additional 1,756,000 shares of its Company Common Stock for direct issuances or purchase upon exercise of Company Options to be granted in the future, under the Company Option Plans (1) no subscription, warrant, option, convertible or exchangeable security, or other right (contingent or otherwise) to purchase or otherwise acquire equity securities of the Company is authorized or outstanding, and (2) there is no commitment by the Company to issue shares, subscriptions, warrants, options, convertible or exchangeable securities, or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness or asset, to repurchase or redeem any securities of the Company or to grant, extend, accelerate the vesting of, change the price of, or otherwise amend any warrant, option, convertible or exchangeable security or other such right.  There are no declared or accrued unpaid dividends with respect to any shares of Company Common Stock.

(d)All issued and outstanding shares of Company Common Stock are, and all shares which may be issued pursuant to the exercise of Company Options, when issued in accordance with the applicable security, will be, duly authorized, validly issued, fully paid and non-assessable, are not subject to preemptive rights created by statute, the Company Certificate of Incorporation or the Company’s bylaws or any agreement to which the Company is a party and are free of any Encumbrances created by the Company in respect thereof.  All issued and outstanding shares of Company Common Stock and Company Options were issued in material compliance with all applicable state and federal securities Legal Requirements.

(e)No outstanding Company Common Stock is subject to vesting or forfeiture rights or repurchase by the Company.  There are no outstanding or authorized stock appreciation, dividend equivalent, phantom stock, profit participation, or other similar rights with respect to the Company or any of its securities.

(f)None of the Company Common Stock or the Company Options is owned by any Company Subsidiary.

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(g)All distributions, dividends, repurchases and redemptions of the capital stock (or other equity interests) of the Company and any Company Subsidiary were undertaken in compliance with the certificate of incorporation and bylaws or equivalent organizational or governing documents of the Company or Company Subsidiary, as applicable, then in effect, any agreement to which the Company or Company Subsidiary, as applicable, then was a party and in material compliance with all state Legal Requirements applicable to general business corporations and all applicable state and federal securities Legal Requirements.

2.4Authority; Noncontravention.

(a)The Company has all requisite corporate power and authority to enter into this Agreement, and subject to adoption of this Agreement through the requisite vote by the Company Stockholders and the approval by the Company Stockholders of the Merger (the “Stockholder Approval”), to consummate the transactions contemplated hereby.  The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby, have been duly and validly authorized by the Company’s Board, which, at a meeting duly called and held, unanimously determined that the Merger is advisable in accordance with Section 251(b) of the Delaware Law and in the best interests of the Company Stockholders, unanimously approved and adopted this Agreement, the Merger and the other transactions contemplated hereby, and unanimously resolved to recommend approval and adoption of this Agreement and approval of the Merger and the other transactions contemplated hereby by the Company Stockholders.  This Agreement has been duly executed and delivered by the Company and, assuming this Agreement constitutes the valid and binding obligation of the other parties hereto, this Agreement constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar Legal Requirements affecting or relating to creditors’ rights generally and principles of equity.

(b)The execution and delivery of this Agreement by the Company do not, and neither the consummation of the transactions contemplated hereby nor compliance by the Company with any provisions of this Agreement will, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or require any consent or other action under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a benefit under (i) any provision of the Company Certificate of Incorporation or its bylaws, (ii) any Legal Requirement, (iii) any Contract binding upon the Company or any Company Subsidiary or (iv) result in the creation or imposition of any Encumbrance on any asset of the Company or any Company Subsidiary except with such exceptions, in the case of each of clauses (ii) through (iv), where such conflict, violation, default, termination, cancellation or acceleration would not be reasonably expected to, individually or in the aggregate, be materially adverse to the Company and the Company Subsidiaries, taken as a whole, or materially impair the ability of the Company to consummate the transactions contemplated by this Agreement.

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(c)No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity, is required by or with respect to the Company or any Company Subsidiary in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger, as provided in Section 1.5, (ii) such filings and notifications as may be required to be made in connection with the Merger under the HSR Act or applicable foreign Antitrust Laws and the expiration or early termination of applicable waiting periods under the HSR Act or applicable foreign Antitrust Laws, and (iii) such other consents, authorizations, filings, approvals, notices and registrations which, if not obtained or made, would not be reasonably expected to, individually or in the aggregate, be materially adverse to the Company and the Company Subsidiaries, taken as a whole, or materially impair the ability of the Company to consummate the transactions contemplated by this Agreement.

2.5Financial Statements.  The Company has provided or made available to Acquiror (or Acquiror’s Representatives) its consolidated audited financial statements for each of the fiscal years ended December 31, 2009 and 2010, respectively, and its unaudited financial statements (balance sheet, statement of operations and statement of cash flows) on a consolidated basis as at and for the nine-month period ended September30, 2011 (collectively, the “Financial Statements”, with the balance sheet included in the September 30, 2011 Financial Statements, sometimes referred to herein as the “Company Balance Sheet”).  The Financial Statements have been prepared in accordance with GAAP (except that the unaudited Financial Statements do not contain footnotes and are subject to normal recurring year-end audit adjustments).  The Financial Statements fairly present in all material respects the consolidated financial condition of the Company and the Company Subsidiaries at the dates therein indicated and the consolidated results of operations and cash flows of the Company and the Company Subsidiaries for the periods therein specified (subject, in the case of unaudited interim period financial statements, to the absence of footnotes and normal recurring year-end audit adjustments).

2.6Undisclosed Liabilities.  Except (a) as disclosed, set forth or reflected or reserved against on the Financial Statements, (b) for liabilities permitted by or incurred pursuant to this Agreement, (c) for liabilities incurred in the ordinary course of business consistent with past practices since September 30, 2011 (the “Company Balance Sheet Date”) or (d) for liabilities set forth on Section 2.6 of the Company Disclosure Letter, neither the Company nor any Company Subsidiary is subject to any material liability or obligation of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise.

2.7Absence of Certain Changes.  Except as expressly contemplated by this Agreement, between the Company Balance Sheet Date and the Agreement Date, (a) the Company and each Company Subsidiary has conducted its business in the ordinary course consistent with past practice, (b) the Company and the Company Subsidiaries have not suffered any damage, destruction or other casualty loss (whether or not covered by insurance) materially affecting the business or assets of the Company or any Company Subsidiary and (c) there has not occurred a Material Adverse Effect.

2.8Litigation.  There is no action, suit or proceeding pending before any Governmental Entity, or, to the Knowledge of the Company, threatened in writing against the Company or any Company Subsidiary or any of their assets or properties or any of their present or former directors, officers or employees (in their capacities as such).  To the Knowledge of the Company, there is no material judgment, award, decree, injunction or order against the Company or any Company Subsidiary, or any of their assets or properties, or any of their present or former directors, officers or employees (in their capacities as such).

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2.9Restrictions on Business Activities.  There is no Contract, judgment or injunction, award, order or decree binding upon the Company, any Company Subsidiary or any of their respective assets or properties, which limits the ability of the Company or any Company Subsidiary to compete in any line of business or with any Person generally or in any geographic area or which could reasonably be expected to so limit the freedom of the Company or any Affiliate after the Effective Time, or which would reasonably be expected otherwise to have the effect of materially impairing any current business practice of the Company or any Company Subsidiary.

2.10Compliance with Laws; Governmental Permits.  The Company and each Company Subsidiary has complied in all material respects with all Legal Requirements applicable to the conduct of its business.  The Company and each Company Subsidiary has obtained each material federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity that is necessary to own, lease and operate its properties and to carry on its business as owned, leased, operated or carried on as of the Agreement Date (all of the foregoing consents, licenses, permits, grants, and other authorizations, collectively, the “Company Authorizations”), and all of the Company Authorizations are in full force and effect.  None of the Company Authorizations will be terminated or impaired or become terminable, in whole or in part, as a result of the transactions contemplated by this Agreement; provided, however, no representation or warranty is made with respect hereto as to facts, circumstances or matters related to Acquiror, Sub and their respective Affiliates and the result or effect of the Surviving Corporation being a wholly-owned subsidiary of Acquiror from and after the Effective Time.  Neither the Company nor any Company Subsidiary has received any written notice from any Governmental Entity regarding (a) any material violation of any Legal Requirements or material violation of any Company Authorization or (b) any revocation, withdrawal, suspension, cancellation, termination or modification of any Company Authorization.

2.11Title to Property and Assets.  The Company and each Company Subsidiary has good and marketable title to all of its material properties, and interests in all of its material properties and assets, real and personal, reflected on the Company Balance Sheet or acquired after the Company Balance Sheet Date (except properties and assets, or interests in properties and assets, sold or otherwise disposed of since the Company Balance Sheet Date in the ordinary course of business consistent with past practice), or, with respect to leased material properties and assets, including, without limitation, the Leased Real Property, valid leasehold interests in such properties and assets which afford the Company or the applicable Company Subsidiary peaceful and undisturbed leasehold possession of such properties and assets, in each case, free and clear of all Encumbrances, except Permitted Encumbrances.  The material property and equipment of the Company and each Company Subsidiary that are used in the operations of its business are in good operating condition and repair, subject to normal wear and tear.

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2.12Real Estate.  Section 2.12 of the Company Disclosure Letter sets forth a list of all leases and subleases (each a “Lease”) under which the Company or any Company Subsidiary occupies or has the right to occupy commercial property (the “Leased Real Property”), including all amendments thereto.  Section 2.12 of the Company Disclosure Letter identifies the address or legal description of each parcel of Leased Real Property.  To the Knowledge of the Company, the Company has adequate rights of ingress and egress into the Leased Real Property.  The Company and the Company Subsidiaries do not own any real property and never have owned any real property.  To the Knowledge of the Company, each Lease is valid, in full force and effect and enforceable against the Person leasing the Leased Real Property to the Company.  The Company or the applicable Company Subsidiary is not in default (and, to the Knowledge of the Company, there is no event or condition that after notice or lapse of time or both would constitute a default by the Company or the applicable Company Subsidiary) under any Lease and, to the Knowledge of the Company, there is no default (or event or condition that after notice or lapse of time or both would constitute a default) by any other party thereto under any Lease.  The Company has heretofore made available to Acquiror true and complete copies of all Leases.

2.13Intellectual Property.

(a)Section 2.13(a) of the Company Disclosure Letter sets forth a true and complete list of all (i) material Company Intellectual Property owned by the Company and each Company Subsidiary and for which (a) the Company and each Company Subsidiary has been issued a registration of any Intellectual Property or (b) the Company and each Company Subsidiary is currently prosecuting applications for registration of any Intellectual Property; (ii) material domain names owned the Company and each Company Subsidiary and used by the Company and each Company Subsidiary in the conduct of the business; and (iii) material unregistered trademarks owned by the Company and each Company Subsidiary and used by the Company and each Company Subsidiary in the conduct of the business (the “Company Owned Intellectual Property”).  All applications for registration of the Company Owned Intellectual Property and all registrations for the Company Owned Intellectual Property are subsisting, and all annuity, maintenance, renewal and other fees necessary to maintain any registered Company Owned Intellectual Property are current.

(b)To the Knowledge of the Company, the Company and/or the Company Subsidiaries own or otherwise have sufficient rights to use all material Intellectual Property necessary to conduct its business as currently conducted (“Necessary Intellectual Property”).  Consummation of the transactions contemplated by this Agreement will not encumber, impair or extinguish any rights of the Company or the Company Subsidiaries in the Material Intellectual Property.

(c)Section 2.13(c) of the Company Disclosure Letter lists all agreements under which the Company or any Company Subsidiary is granted any material license rights with respect to the Intellectual Property of any third party that constitutes Necessary Intellectual Property, excluding any use licenses, label licenses and similar licenses that customarily accompany the sale or license of products, materials or off-the-shelf shrink-wrap, click-through or similar licenses for commercially available software, in each case as may be granted to the Company or the Company Subsidiaries as a result of the Company’s or the Company Subsidiaries’ purchase or licensing of materials, products, services and off-the-shelf shrink-wrap, click-through or similar licenses for commercially available software in the ordinary course of business.  To the Knowledge of the Company, each such agreement is in full force and effect, and the Company has in all material respect performed its obligations thereunder.  Except as set forth in Section 2.13(d) of the Company Disclosure Letter, no Government Entity, university, college, other educational institution or research center has any claim or right in or to the Company Owned Intellectual Property.

(d)The conduct of the business as conducted by the Company and each Company Subsidiary as of the date hereof, does not, to the Knowledge of the Company, constitute infringement, misappropriation or other violation of any Intellectual Property rights of any Person.  The Company and each Company Subsidiary have not received during the four (4) year period prior to the Effective Date, any written notice of infringement, misappropriation or violation of any Intellectual Property right of any other Person.

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(e)To the Knowledge of the Company, there is no infringement, misappropriation or unauthorized use by any Person of any of the Company Owned Intellectual Property.  No Person has challenged in writing or in any litigation to which the Company is a party the validity or enforceability of any of the Company Owned Intellectual Property or the title of the Company and each Company Subsidiary thereto and, to the Knowledge of the Company, no such litigation has been threatened in writing.

(f)The Company and each Company Subsidiary have taken reasonable actions intended to preserve the confidentiality of all trade secrets that are material to the Company’s current business.

(g)To the extent any Company Owned Intellectual Property has been developed or created by any party (including any current or former employee of the Company or the Company Subsidiaries) for the Company or any of the Company Subsidiaries, the party has assigned exclusive ownership to the Company and/or the Company Subsidiaries with respect thereto.

(h)None of the Company or the Company Subsidiaries has given to any Person an indemnity in connection with any Intellectual Property, other than indemnities that are made in the ordinary course of business consistent with past practices under the Company’s Contracts or otherwise, individually or in the aggregate, that could not result in liability to the Company in excess of $500,000.

2.14Environmental Matters.

(a)As used in this Agreement, the following terms shall have the meanings indicated below:

(i)“Environmental Claim” shall mean any claim, action, cause of action, demand, investigation, summons, complaint, order or written notice by any Governmental Entity or other Person alleging noncompliance or potential liability (including potential liability for investigatory costs, governmental response costs, natural resources damages, property damages, personal injuries, violations or penalties) under, relating to, arising out of, based on or resulting from Hazardous Materials or any Environmental Law.

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(ii)“Environmental Laws” shall mean any Legal Requirements relating to pollution, contamination, or the protection of the indoor or outdoor environment, natural resources, including without limitation, as relating to Releases or threatened Releases of, hazardous materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, Release, transport or handling of or exposure to hazardous materials and all Legal Requirements with regard to recordkeeping, notification, disclosure and reporting requirements respecting hazardous materials.

(iii)“Environmental Permits”shallmean all permits, licenses, franchises, registrations, certificates, approvals and other similar authorizations of any Governmental Entity relating to or required by Environmental Laws and necessary for the conduct of the business of the Company or any Company Subsidiary as currently conducted.

(iv)“Hazardous Materials” shall mean any substance, material, chemical, reagent or waste or any pollutant or contaminant, or toxic, hazardous, infectious, medical or radioactive substance, material, chemical, reagent, waste or any combination of or with any of the foregoing, defined, regulated, listed under, or that can form the basis for liability under, any Environmental Laws, including any asbestos, mold, lead, polychlorinated bipheyls, petroleum or petroleum derivative.

(v)“Property” shall mean all real property leased, operated, owned or controlled by the Company or any Company Subsidiary.

(vi)“Facilities” shall mean all buildings and improvements on the Property.

(vii)“Release” shall mean any release, spill, emission, discharge, leaking, pumping, injection, deposit, escape, pouring, dumping, disposal, dispersal, leaching or migration into the indoor or outdoor environment (including ambient air, surface water, groundwater and surface land or subsurface soils) or into or out of any Facilities or Property, including the movement of Hazardous Materials through or in the air, land, soil, surface water, groundwater, Facilities or Property.

(b)The Company and each Company Subsidiary is and has been in compliance in all material respects with all applicable Environmental Laws and has obtained and is in compliance with all Environmental Permits in all material respects.  There is no Environmental Claim pending or, to the Knowledge of the Company, threatened against the Company or any Company Subsidiary.

(c)Neither the Company nor any Company Subsidiary owns, leases, operates, or controls any property in New Jersey or Connecticut.

(d)There is no material environmental investigation, assessment, study, audit, test, review or other analysis within the possession, custody or control of the Company or any Company Subsidiary in relation to the current or prior business of the Company or any Company Subsidiary or any property or facility now or previously owned, leased, operated or controlled by the Company or any Company Subsidiary which has not been provided or made available to Acquiror (or Acquiror’s Representatives) at least five (5) days prior to the date hereof.

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(e)For purposes of this Section 2.14, the terms “Company” and “Company Subsidiary” shall include any entity which is, in whole or in part, a predecessor of the Company or any Company Subsidiary.

2.15Taxes.

(a)The Company and the Company Subsidiaries have timely filed all Tax Returns required to be filed by them and have timely paid all Taxes reflected as due on any such Tax Return (taking into account extensions to file).  All Tax Returns that have been filed by the Company and the Company Subsidiaries are true, correct and complete in all material respects.  The Company has provided or made available to Acquiror (or Acquiror’s Representatives) correct and complete copies of all material Tax Returns filed by the Company or any Company Subsidiary within the last three (3) calendar years.

(b)The Company Balance Sheet reflects all liabilities for unpaid Taxes of the Company and the Company Subsidiaries for periods (or portions of periods) through the Company Balance Sheet Date.  Since the Company Balance Sheet Date, neither the Company nor the Company Subsidiaries has engaged in any transaction, or taken any other action, other than in the ordinary course of business, that would materially impact any Tax asset or Tax liability of the Company or the Company Subsidiaries.  All information set forth in the Company Balance Sheet (including the notes thereto) relating to Tax matters is true and complete in all material respects.

(c)There is no Tax deficiency proposed in writing, or to the Knowledge of the Company assessed, against the Company or any Company Subsidiary that is not reflected as a liability on the Company Balance Sheet through the Company Balance Sheet Date.

(d)Neither the Company nor any Company Subsidiary is a party to or bound by any Tax Sharing Agreement.  Neither the Company nor any Company Subsidiary has been a member of an affiliated, consolidated, combined or unitary group other than a group the common parent of which was the Company or any Company Subsidiary, or made any election or participated in any arrangement whereby any Tax liability or any Tax asset of the Company or any Company Subsidiary was determined or taken into account for Tax purposes with reference to or in conjunction with any Tax liability or any Tax asset of any other Person.

(e)The Company and each Company Subsidiary has provided or made available to the Acquiror all documentation relating to any utilized Tax holidays.  The Company and each Company Subsidiary has complied in all material respects with the conditions stipulated in each Tax holiday, no submissions made to any Tax Authority in connection with obtaining any Tax holiday contained any material misstatement or omission and the transactions expressly contemplated by this Agreement will not adversely affect the eligibility of the Company or any Company Subsidiary for any Tax holiday.

(f)Neither the Company nor any Company Subsidiary is, nor has ever been, a “United States real property holding corporation” within the meaning of Section 897 of the Code.

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(g)The Company and each Company Subsidiary has withheld from employee wages or amounts owing to any independent contractor, creditor or third party, timely reported and paid over to the proper Tax Authority (or is properly holding for such timely payment) all amounts required to be so withheld, reported or paid over under all applicable Legal Requirements.

(h)There is no power of attorney given by or binding upon the Company or any Company Subsidiary with respect to Taxes for any period for which the statute of limitations (including any waivers or extensions) has not yet expired and which will be in effect after the Closing.

(i)Neither the Company nor any Company Subsidiary has executed any waiver of any statute of limitations on or extended the period for the assessment or collection of any Tax which waiver or extension is currently in effect.

(j)Each of the Company and the Company Subsidiaries is in compliance in all material respects with all applicable transfer pricing Legal Requirements.

(k)There is no claim, audit, action, suit, proceeding or investigation now pending or, to the Knowledge of the Company, threatened against or with respect to the Company or any Company Subsidiary in respect of any Tax or Tax asset.  No adjustment that would increase the Tax liability, or reduce any Tax asset, of the Company or any Company Subsidiary has been proposed or made in writing, or to the Knowledge of the Company, threatened by a Taxing Authority during any audit of a Tax period which could reasonably be expected to be threatened, proposed or made in an audit of any subsequent Tax period.  There are no requests for rulings or determinations in respect of any Tax or Tax asset pending between the Company or any Company Subsidiary and any Taxing Authority.  Neither the Company nor any Company Subsidiary has received a written tax opinion with respect to any material transaction, other than a transaction in the ordinary course of business.  Neither the Company nor any Company Subsidiary has entered into any agreement or arrangement with any Tax Authority affecting any Tax period for which the applicable statute of limitations, after giving effect to extensions or waivers, has not expired.  During the five-year period ending on the date hereof, neither the Company nor any Company Subsidiary has made or changed any Tax election, changed any annual Tax accounting period, adopted or changed any method of Tax accounting, filed any amended Tax Return, entered into any closing agreement, settled any Tax claim or assessment, or surrendered any right to claim a Tax refund, offset or other reduction in Tax liability.

(l)Section 2.15(l) of the Company Disclosure Letter contains a list of all jurisdictions (whether foreign or domestic) to which any material Tax is properly payable by the Company or any Company Subsidiary.  No written claim has been made by any Governmental Entity in a jurisdiction where the Company and/or any Company Subsidiary do not file Tax Returns that the Company or any Company Subsidiary is or may be subject to taxation by, or required to file any Tax Return in, that jurisdiction.

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(m)Neither the Company nor any Company Subsidiary is a direct or indirect beneficiary of a guarantee of tax benefits or any other arrangement that has the same economic effect (including an indemnity from a seller or lessee of property, or other insurance) with respect to any transaction or tax opinion.  Neither the Company nor any Company Subsidiary is a party to any understanding or arrangement described in Section 6662(d)(2)(C)(ii) of the Code, or has participated in a “reportable transaction” within the meaning of Treasury Regulations Section 1.6011-4.  During the two-year period ending on the date hereof, neither the Company nor any Company Subsidiary was a distributing corporation or a controlled corporation in a transaction intended to be governed by Section 355 of the Code.

(n)Neither the Company nor any Company Subsidiary will be required to include any adjustment in taxable income for any Post-Closing Tax Period under Section 481(c) of the Code (or any similar provision of the Tax laws of any jurisdiction) as a result of a change in method of accounting for a Pre-Closing Tax Period.  There is no consolidated overall foreign loss of the Company and the Company Subsidiaries.  Neither the Company nor any Company Subsidiary will be required to include for any Post-Closing Tax Period taxable income attributable to income economically realized in Pre-Closing Tax Period, including as a result of any distributions from an entity that is fiscally transparent for Tax purposes or the use of the installment method or the look-back method (as defined in Section 460(b) of the Code).

(o)Neither the Company nor any Company Subsidiary owns an interest in real property in any jurisdiction in which a Tax is imposed, or the value of the interest is reassessed, on the transfer of an interest in real property and which treats the transfer of an interest in an entity that owns an interest in real property as a transfer of the interest in real property.  None of the property owned by the Company or any Company Subsidiary is “tax-exempt use property” within the meaning of Section 168(h) of the Code.

(p)No election has been made under Treasury Regulations Section 301.7701-3 or any similar provision of Tax law to treat any Company Subsidiary as an association, corporation or partnership.  No Company Subsidiary is disregarded as an entity for Tax purposes.

2.16Employee Benefit Plans and Employee Matters.

(a)The Company has provided or made available to Acquiror (or Acquiror’s Representatives) a list of the names (where permitted by law), titles, annual salaries (or wage rates for non-salaried employees) and other compensation of all employees of the Company and the Company Subsidiaries.

(b)Section 2.16(b) of the Company Disclosure Letter sets forth, as of the date hereof, each deferred compensation and each bonus, incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; each severance or termination pay, medical, surgical, hospitalization, life insurance and other “welfare” plan, fund or program (within the meaning of Section 3(1) of ERISA); each profit-sharing, stock bonus or other “pension” plan, fund or program (within the meaning of Section 3(2) of ERISA); and any other material employee benefit plan, fund, program, agreement or arrangement, in each case, that is currently sponsored, maintained or contributed to or required to be contributed to by the Company or any Company Subsidiary, or to which the Company or any Company Subsidiary, is party, for the benefit of any employee of the Company or any Company Subsidiary (collectively, the “Company Employee Plans”).  A true and complete copy of each Company Employee Plan has been provided or made available to Acquiror (or Acquiror’s Representatives).

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(c)Section 2.16(c) of the Company Disclosure Letter sets forth, and the Acquiror has been provided a copy of, each employment, termination or severance agreement (other than agreements customarily entered into with employees in jurisdictions other than the United States providing the statutory minimum termination notice  period or severance benefits, in which case the form of such agreement has been provided or made available to Acquiror (or Acquiror’s Representatives)) with an employee (or former employee, to the extent obligations of the Company remain outstanding) of the Company or any Company Subsidiary and any service agreement with any independent contractor.

(d)Neither the Company nor any of the Company Subsidiaries, nor any other entity with which the Company would be considered under common control under ERISA, does now, or did at any time in the past, sponsor, maintain or contribute to any plan subject to Title IV of ERISA or a multiemployer plan, as defined in Section 3(37) of ERISA. No liability under Title IV or Section 302 of ERISA has been incurred by the Company with respect to a Company Employee Plan that has not been satisfied in full, and no condition exists that presents a risk to Acquiror of incurring any such liability with respect to a Company Employee Plan.  No non-U.S. Company Employee Plan is a defined benefit plan.

(e)Neither the Company nor any Company Subsidiary has any current or projected liability in respect of post-employment or post-retirement health or medical or life insurance benefits for retired, former or current employees of the Company or any Company Subsidiary, except as required to avoid excise tax under Section 4980B of the Code or similar local, state or non-U.S. laws.

(f)There are no loans outstanding from the Company or any Company Subsidiary to any employee or director.

(g)Except as set forth in Section 2.16(g) of the Company Disclosure Letter, the consummation of the transactions contemplated by this Agreement (whether alone or together with another event, such as a termination of employment) will not (i) entitle any employee or officer of the Company or any Company Subsidiary to severance pay, unemployment compensation or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due or require any funding of any future payment, any such employee or officer.

(h)Except as set forth in Section 2.16(h) of the Company Disclosure Letter, there is no Contract, plan or arrangement (written or otherwise) covering any employee or former employee of the Company or any Company Subsidiary that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G of the Code.

(i)There are no pending, or to the Knowledge of the Company, threatened  claims by or on behalf of any Company Employee Plan, by any employee or beneficiary covered under any such Company Employee Plan (other than routine claims for benefits) and each Company Employee Plan has been established and maintained in all material respects in accordance with applicable Legal Requirements.

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(j)Each Company Employee Plan has been operated in all material respects in accordance with its terms and applicable Legal Requirements.

(k)Each Company Employee Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination or opinion letter from the Internal Revenue Service, or has pending or has time remaining in which to file, an application for such letter from the Internal Revenue Service, and the Company is not aware of any reason why any such letter should be revoked or not be reissued.  The Company has made available to Buyer copies of the most recent Internal Revenue Service determination and/or opinion letters with respect to each such Company Employee Plan.

(l)Section 2.16(l) of the Company Disclosure Letter lists, as of the date hereof, all collective bargaining agreements, union contracts and similar agreements in effect that cover any employees of the Company or any Company Subsidiary (each, a “Collective Bargaining Agreement”).

(m)There is no labor strike, lockout or stoppage pending or, to the Knowledge of the Company, threatened against the Company or any Company Subsidiary.

(n)The Company and the Company Subsidiaries are in compliance in all material respects with all Legal Requirements respecting employment and employment practices, terms and conditions of employment, wages and hours, and worker classification.

2.17Insurance.  Section 2.17 of the Company Disclosure Letter contains a complete and accurate list of, and the Company has provided or made available to Acquiror (or Acquiror’s Representatives) true and complete copies of, all insurance policies and fidelity bonds relating to the assets, business, operations, directors, officers or employees of the Company and the Company Subsidiaries.  There is no claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds.  All premiums due and payable under all such policies and bonds have been paid, the Company and the Company Subsidiaries are otherwise in material compliance with the terms of such policies and bonds and neither the Company nor any Company Subsidiary has received written notice of cancellation or termination with respect to any such insurance.

2.18Transaction Fees.  Except for fees and expenses of Jeffries & Company, Inc. (or its Affiliates), which will be included within the Transaction Expenses to be paid at Closing, neither the Company nor any Company Subsidiary is obligated for the payment of any fees or expenses of any investment banker, broker or finder in connection with the origin, negotiation or execution of this Agreement or in connection with the Merger or any other transaction contemplated by this Agreement.

2.19Material Contracts.  Section 2.19 of the Company Disclosure Letter contains a complete list of all Contracts (other than Company Employee Plans) to which the Company or any Company Subsidiary is a party to or bound, on the one hand, and a third party is a party to or bound, on the other hand, and that fall within any of the following categories (each, a “Material Contract”):

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(a)each Contract with a customer or distributor for the sale or license by the Company or any Company Subsidiary of materials, supplies, goods, products, services, technology or other assets involving annual payments to the Company and the Company Subsidiaries in excess of $500,000;

(b)each Contract with a supplier or other vendor for the purchase or license by the Company or any Company Subsidiary of materials, supplies, goods, products, services, technology or other assets involving annual payments by the Company or the Company Subsidiaries in excess of $500,000;

(c)each Contract involving the exclusive license of Intellectual Property owned by the Company or any Company Subsidiary not terminable at the Company’s or Company Subsidiary’s election;

(d)each Contract, other than any Contract listed in Section 2.9 of the Company Disclosure Letter, (i) which limits or restricts the ability of the Company or any Company Subsidiary to engage or to compete in any line of business or with any Person generally or in any geographic area, or (ii) which could reasonably be expected to so limit the freedom of the Company or any Affiliate after the Effective Time based solely on facts attributable to the Company or its Affiliates immediately prior to the Effective Time;

(e)each lease (whether of real or personal property) providing for annual rentals in excess of $50,000;

(f)each partnership, joint venture or other similar agreement or arrangement;

(g)each Contract relating to the acquisition or disposition of any business (whether by merger, sale of stock, sale of assets or otherwise) which has any outstanding material obligation owed by or to the Company or any Company Subsidiary;

(h)each Contract relating to Indebtedness or the deferred purchase price of property (in each case, whether incurred, assumed, guaranteed, or secured by any asset), except any such Contract with an aggregate outstanding principal amount not exceeding $50,000 and which may be prepaid at the Company’s or Company Subsidiary’s election on not more than 30 days notice;

(i)any development or collaboration Contract for development of products or services for the Company or any of the Company Subsidiaries requiring payments by the Company or any of the Company Subsidiaries in excess of $100,000;

(j)any Contract with any Affiliate of the Company (or any Company Subsidiary), with any director or officer of the Company or any Company Subsidiary, or with any “associate” or any member of the “immediate family” (as such terms are respectively defined in Rules 12b-2 and 16a-1 of the Exchange Act) of any such director or officer;

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(k)any employment or consulting Contract not terminable at the option of the Company without penalty or more than 30 days notice; or

(l)any employment or consulting Contract or any other Contract with severance, change in control or similar arrangements, that will result in any obligation (absolute or contingent) of the Company or any Company Subsidiary to make any payment as a result of the transactions contemplated by this Agreement, termination of employment or both.

Each such Material Contract is in full force and effect, and is valid, binding and enforceable against the Company or a Company Subsidiary party thereto in accordance with its terms, except in each case as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar Legal Requirements affecting or relating to creditors’ rights generally and principles of equity.  None of the Company nor any Company Subsidiary is in default under or in material breach of any Material Contract, and to the Knowledge of the Company, no third party to any Material Contract is in default under or in material breach of such Material Contract.  The Company or the Company Subsidiary party thereto has performed and is performing all material obligations required to be performed by it under the Material Contracts.  The Company has not received any written notice of an intention to terminate any of the Material Contracts by any of the parties to any of the Material Contracts.  True and complete copies of the Material Contracts have been provided or made available to Acquiror (or Acquiror’s Representatives).

2.20Customers and Suppliers.  Section 2.20 to the Company Disclosure Letter sets forth (i) lists of the ten (10) largest customers (including distributors) of the Company and the Company Subsidiaries during the fiscal year ended December 31, 2010 and the nine months ended September 30, 2011, based on the consolidated revenue of the Company during such periods, and (ii) lists of the ten (10) largest suppliers of the Company and the Company Subsidiaries during the fiscal year ended December 31, 2010 and the nine months ended September 30, 2011, based on the consolidated expenses of the Company during such periods.  Since December 31, 2010, there has been no termination of the business relationship of the Company or any Company Subsidiary with any such customer or supplier, nor has any such customer or supplier threatened in writing or, to the Company’s Knowledge, otherwise provided the Company with written notice of its intent to terminate or modify in a manner materially adverse to the Company such business relationship.

2.21Bank Accounts.  Section 2.21 of the Company Disclosure Letter sets forth a true and complete list of the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the Company or any Company Subsidiary maintains safe deposit boxes or accounts.

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2.22Government Funding.  No authorization, approval or consent of, and no notice to, payment to or filing with, any Governmental Entity involved (in the past or at present) in the subsidization or funding of the Company or any Company Subsidiary, including by any subsidy loan administered by a bank (“Government Funding”, and each such Governmental Entity, a “Governmental Funding Authority”), is required in connection with the consummation of the transactions contemplated hereby.  The execution and delivery of this Agreement by the Company do not, and neither the consummation of the transactions contemplated hereby nor compliance by the Company with any provisions of this Agreement will, conflict with, or result in any material violation of, or default under (with or without notice or lapse of time, or both), or require any consent, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under any Government Funding.  Neither the Company nor any Company Subsidiary is in violation of any Contract for any Government Funding, or any regulation of any Governmental Funding Authority with respect thereto, in connection with the conduct of its business.

2.23Products.  There are no material unresolved pending claims or, to the Knowledge of the Company, threatened claims by any customer or other Person against the Company or any of the Company Subsidiaries (i) under or based upon any warranty provided by or on behalf of the Company or any of the Company Subsidiaries that have been received in writing by the Company or any of the Company Subsidiaries, or (ii) under or based upon any other warranty relating to any product sold by the Company or any of the Company Subsidiaries or any services performed by the Company or any of the Company Subsidiaries.  No product manufactured or sold by the Company or any of the Company Subsidiaries is the subject of any recall or other similar action.

2.24Books and Records.  The financial records of the Company have been maintained in accordance with a system of internal controls sufficient to provide reasonable assurance concerning the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.  The minute books of the Company made available to Acquiror contain complete and accurate records of all actions taken, and summaries of all meetings held, by the Company Stockholders, the Company Board, and any committees of the Company Board, as well as their predecessors, from January 1, 2006 until the date hereof.  At the Effective Time, all of those books and records will be in the possession of the Company.  The Company has previously provided or made available all of these books, records and accounts to Acquiror (or Acquiror’s Representatives).

2.25No Other Representations or Warranties.  The representations and warranties contained in Article II or in the certificate delivered by the Company pursuant to Section 1.4(b)(i) hereof (the “Officer’s Certificate”) are the only representations and warranties made by the Company.  The Company and each Company Subsidiary disclaim any and all other representations and warranties other than those contained in this Article II or in the Officer’s Certificate delivered pursuant hereto or in connection herewith, whether express or implied.

ARTICLE III          

REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB

Acquiror represents and warrants to the Company the following as of the date hereof and as of the Effective Time:

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3.1Organization, Standing and Power.  Each of Acquiror and Sub is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization.  Neither Acquiror nor Sub is in material violation of any of the provisions of their respective certificate of incorporation or bylaws.  Each of Acquiror and Sub have the full corporate power to own, lease and operate their properties and to conduct their business as currently conducted.

3.2Authority; Noncontravention.

(a)Each of Acquiror and Sub has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby.  The execution, delivery and performance by Acquiror and Sub of this Agreement and the consummation by Acquiror and Sub of the transactions contemplated hereby have been duly and validly authorized by the boards of directors of Acquiror and Sub and, effective immediately after the execution of this Agreement by Sub, the sole stockholder of Sub has adopted this Agreement and approved the Merger and the transactions contemplated hereby.  This Agreement has been duly executed and delivered by Acquiror and Sub and, assuming this Agreement constitutes the valid and binding obligation of the other parties hereto, this Agreement constitutes the valid and binding obligation of Acquiror and Sub, enforceable against each of them in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar Legal Requirements affecting or relating to creditors’ rights generally and principles of equity.

(b)The execution and delivery of this Agreement by Acquiror and Sub do not, and neither the consummation of the transactions contemplated hereby nor compliance by Acquiror or Sub with any provisions of this Agreement will, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a benefit under (i) any provision of their respective certificates of incorporation or bylaws, as amended to date, or (ii) any Legal Requirement, except where such conflict, violation, default, termination, cancellation or acceleration, individually or in the aggregate, would not be material to Acquiror’s or Sub’s ability to consummate the Merger or to perform their respective obligations under this Agreement.

(c)No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity, is required by or with respect to Acquiror or Sub in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger, as provided in Section 1.5, (ii) such filings as may be required under applicable state securities laws and the securities laws of any foreign country, (iii) such filings and notifications as may be required to be made in connection with the Merger under the HSR Act or applicable foreign Antitrust Laws and the expiration or early termination of applicable waiting periods under the HSR Act or applicable foreign Antitrust Laws, and (iv) such other consents, authorizations, filings, approvals, notices and registrations which, if not obtained or made, would not be material to Acquiror’s or Sub’s ability to consummate the Merger or to perform their respective obligations under this Agreement.

3.3No Prior Sub Operations.  Sub was formed solely for the purpose of effecting the Merger and has not engaged in any business activities or conducted any operations other than in connection with the transactions contemplated hereby.

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3.4Financing.  As of the date hereof:

(a)Acquiror has delivered to the Company a true and complete copy of the fully executed commitment letter and the related fee letter (with only the fee amounts and other customary information not related to conditionality redacted therefrom) (together, the “Commitment Letter”) dated as of November 25, 2011 between Acquiror and General Electric Capital Corporation, GE Capital Markets, Inc., Silicon Valley Bank, CIT Capital Securities LLC, CIT Healthcare LLC and CIT Bank pursuant to which and subject to the terms and conditions thereof the parties thereto (other than Acquiror) have committed to provide the debt financing in connection with the transactions contemplated hereby (the “Financing”).

(b)The Commitment Letter is a valid and binding obligation of Acquiror and, to the knowledge of Acquiror, the other parties thereto.  The Commitment Letter is in full force and effect and has not been amended or modified in any respect, and the respective commitments contained therein have not been withdrawn, rescinded or otherwise modified in any respect.  No event has occurred which, with or without notice, lapse of time or both, would constitute a material default or material breach on the part of Acquiror or Sub under the Commitment Letter, and Acquiror has no reason to believe that it will be unable to satisfy on a timely basis, any term or condition of closing to be satisfied by it, contained in the Commitment Letter.  There are no conditions precedent to the funding of the full amount of the Financing other than the conditions precedent set forth in the Commitment Letter, and Acquiror has no reason to believe that it will not be able to satisfy any term or condition of closing of the Financing that is required to be satisfied as a condition of the Financing, or that the Financing will not be made available to Acquiror on the Closing Date.  There are no other agreements, side letters, or arrangements relating to the Financing that could affect the availability of the Financing.  Subject to the terms and conditions of the Commitment Letter, the aggregate proceeds of the Financing reflected in the Commitment Letter, together with the other financial resources of Acquiror and Sub including cash on hand and marketable securities of Acquiror, the Company and their respective Subsidiaries on the Closing Date, in each case which have been specifically identified to the Company in writing on the date of this Agreement and set aside by such parties for such purposes, are reasonably expected to be sufficient to consummate the Merger upon the terms contemplated by this Agreement, effect any other repayment or refinancing of debt contemplated in connection with the consummation of the Merger and pay all related fees and expenses of Acquiror, Sub and the Company and their respective Representatives pursuant to this Agreement.  Acquiror has fully paid any and all commitment fees or other fees required by the Commitment Letter to be paid by it on or prior to the date of this Agreement.

ARTICLE IV

CONDUCT PRIOR TO THE EFFECTIVE TIME

4.1Conduct of Business of the Company.  During the period from the Agreement Date and continuing until the earlier of the termination of this Agreement and the Effective Time, except as Acquiror shall otherwise consent in advance in writing (such consent not to be unreasonably withheld, conditioned or delayed), the Company will conduct its business in all material respects in the ordinary course consistent with past practices and in material compliance with all applicable Legal Requirements including using its commercially reasonable efforts to:

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(a)preserve intact its present business organization, properties and assets;

(b)maintain in effect all of the Company Authorizations;

(c)keep available the services of its directors, officers and Key Employees;

(d)preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it.

(e)manage its working capital (including the timing of collection of accounts receivable and of the payment of accounts payable and the management of inventory) in the ordinary course of business consistent with past practices;

(f)maintain its assets in good operating condition;

(g)maintain the insurance policies described in Section 2.17, its books and accounts and its Intellectual Property, in each case, consistent with past practice and in accordance, in all material respects, with applicable Legal Requirements; and

(h)preserve the confidentiality of all trade secrets that are material to the Company’s business in a manner consistent with the Company’s past practices.

4.2Restrictions on Conduct of Business of the Company.  Without limiting the generality of Section 4.1, except as expressly contemplated by this Agreement, during the period from the Agreement Date and continuing until the earlier of the termination of this Agreement and the Effective Time, except as expressly contemplated by this Agreement, Acquiror shall otherwise consent in advance in writing (such consent not to be unreasonably withheld, conditioned or delayed), the Company shall not, and the Company shall not permit any Company Subsidiary to, do any of the following:

(a)Charter Documents.  Cause or permit any amendments to its Company Certificate of Incorporation or bylaws or any Company Subsidiary’s certificate of incorporation or bylaws or equivalent organizational or governing documents (whether by merger, consolidation or otherwise);

(b)Dividends; Changes in Capital Stock.  Declare, set aside, or pay any dividend on or make any other distribution (whether in cash, stock or property) in respect of any of its capital stock (or other equity interests), or split, sub-divide, combine or reclassify any of its capital stock (or other equity interests) or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock (or other equity interests), or repurchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock (or other equity interests) except, in the case of the Company only, the repurchase of Company Common Stock from former employees, non-employee directors and consultants as and to the extent required pursuant to agreements providing for the repurchase of shares in connection with any termination of service as in effect on the Agreement Date;

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(c)Issuance of Securities.  Issue, deliver, sell, pledge, encumber or dispose of or authorize or propose the issuance, delivery, sale, pledge, encumbrance or disposition of, or purchase or propose the purchase of any shares of capital stock (or other equity interests) of any other Person or securities convertible into or exchangeable for, or subscriptions, rights, warrants or options to acquire, or other Contracts of any character obligating it to issue any such shares (or other interest) or other convertible or exchangeable securities, other than the issuance of shares of Company Common Stock pursuant to the exercise in accordance with their terms of Company Options outstanding as of the Agreement Date;

(d)Dispositions.  Sell, lease, license or otherwise dispose of or encumber (other than Permitted Encumbrances) any of its properties or assets, other than sales in the ordinary course of business consistent with its past practice, or enter into any Contract with respect to the foregoing;

(e)Indebtedness.  Create, incur, assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently, or otherwise) for any additional Indebtedness or other material monetary obligation, other than trade payables incurred in the ordinary course of business consistent with past practice;

(f)Insurance.  Materially reduce the amount of any insurance coverage naming the Company or any Company Subsidiary as a beneficiary or loss payee, or affirmatively cancel or terminate such insurance;

(g)Employee Benefit Plans; Severance; Pay Increases.  (i) Adopt or amend any employee severance or compensation benefit plan, including any stock issuance or stock option plan, or amend any compensation, benefit, entitlement, grant or award provided or made under any such plan, except in each case as required under ERISA, applicable Legal Requirements or as necessary to maintain the qualified status of such plan under the Code, (ii) grant, pay or increase any bonus, severance or termination pay to any employee or non-employee director or consultant or increase the salaries, wage rates, fees or other benefits of its employees or consultants (other than pursuant to plans, policies or Contracts in effect on the Agreement Date), which shall not be amended or modified on or after the Agreement Date except as required by applicable Legal Requirements) or (iii) establish, adopt or amend (except as required by applicable Legal Requirements) any Collective Bargaining Agreement covering any employees of the Company or any Company Subsidiary;

(h)Lawsuits; Settlements.  Commence or threaten to commence a lawsuit other than for a breach of, or with respect to enforcement of, this Agreement; or settle or offer or propose to settle any litigation to which the Company or any Company Subsidiary is a party;

(i)Acquisitions; Loans.  Except for capital expenditures and third-party licenses, which shall be governed by Section 4.2(p), acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets other than supplies in the ordinary course of business consistent with past practice, or make any loan, advance or capital contribution to or investment in any Person other than transactions with its wholly-owned Company Subsidiaries in the ordinary course of business consistent with past practice;

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(j)Contracts.  (i) Except for capital expenditures and third-party licenses, which shall be governed by Section 4.2(p), enter into any Contract that if in existence as of the Agreement Date would have required such Contract to be listed in Section 2.19 of the Company Disclosure Letter, or amend or modify any Material Contact, (ii) waive, release or assign any material rights, claims or benefits of the Company or any Company Subsidiary under any Material Contract, (iii) shorten or lengthen the customary payment terms or practices of any Material Contracts with customers or suppliers or (iv) fail to enforce, or consent to any matter with respect to which its consent is required under, any confidentiality, standstill or similar agreement to which the Company or any Company Subsidiary is a party;

(k)Accounting.  Change accounting methods or practices or revalue any of its assets (including writing down the value of inventory or writing off notes or accounts receivable otherwise than in the ordinary course of business), except in each case as required by concurrent changes in GAAP or applicable Legal Requirements;

(l)Encumbrances.  Except in the ordinary course consistent with past practice, place or allow the creation of any material Encumbrance (other than a Permitted Encumbrance) on any properties or assets of the Company;

(m)Liquidation; Reorganization.  Adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any Company Subsidiary (other than the Merger);

(n)Intellectual Property.  (i) Transfer, sell or exclusively license to any Person any rights to any Company Owned Intellectual Property or any Intellectual Property rights exclusively licensed to the Company or any Company Subsidiary, or enter into with any Person any distribution agreement, reseller agreement, security agreement, assignment or other conveyance or option for the foregoing, with respect to any Company Owned Intellectual Property or any Intellectual Property rights exclusively licensed to the Company or any Company Subsidiary; (ii) extend, amend or modify any rights to any Company Owned Intellectual Property or any Intellectual Property rights exclusively licensed to the Company or any Company Subsidiary, except as would not be reasonably expected to, individually or in the aggregate, be materially adverse to the Company and the Company Subsidiaries, taken as a whole, (iii) except as set forth in Section 4.2(p) of the Company Disclosure Letter, enter into any agreement under which the Company or any Company Subsidiary is granted any material license rights with respect to the Intellectual Property of any third party that if in existence as of the Agreement Date would have required such agreement to be listed in Section 2.13(c) of the Company Disclosure Letter, or amend or modify any agreement listed therein; (iv) give to any Person an indemnity in connection with any Intellectual Property that if in existence as of the Agreement Date would have required such agreement to be listed in Section 2.13(h) of the Company Disclosure Letter, or (v) permit to lapse or go abandoned any Intellectual Property rights (or any registration or grant thereof or any application relating thereto) to which, or under which, the Company or any Company Subsidiary has any right, title or interest, except as would not be reasonably expected to, individually or in the aggregate, be materially adverse to the Company and the Company Subsidiaries, taken as a whole;

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(o)Affiliate Transactions.  Enter into any transaction or Contract with any Affiliate of the Company or any Company Subsidiary, with any director or officer of the Company or any Company Subsidiary, or with any “associate” or any member of the “immediate family” (as such terms are respectively defined in Rules 12b-2 and 16a-1 of the Exchange Act) of any such director or officer, other than transactions between the Company and its wholly-owned Company Subsidiaries or among the Company’s wholly-owned Company Subsidiaries and other than the payment of employee compensation or expense reimbursements in the ordinary course of business consistent with past practices;

(p)Capital Expenditures; Licensing Fees.  Except as set forth in Section 4.2(p) of the Company Disclosure Letter, make or incur capital expenditures or payments under third-party license agreements (which Section 4.2(p) of the Company Disclosure Letter shall list all such capital expenditures and third-party license payments (A) made or incurred between the Current Balance Sheet Date and the date hereof and (B) anticipated to be made or incurred between the date hereof and the earlier to occur of:  (i) the Closing Date or (ii) December 31, 2011); or

(q)Other.  Agree to take any of the actions described in clauses (a) through (p) in this Section 4.2.

ARTICLE V

ADDITIONAL AGREEMENTS

5.1Stockholder Consent.  (a) The Company shall use its reasonable best efforts to obtain, as soon as reasonably practicable after the execution of this Agreement, the written consent of each of the Company Stockholders listed on Annex B hereto pursuant to which such Company Stockholders approve and adopt this Agreement, the Merger and the other transactions contemplated hereby (the “Stockholder Consent”).  The Stockholder Consent shall be in the form attached hereto as Exhibit D, and shall be irrevocable with respect to all shares of Company Common Stock owned beneficially or of record by the consenting Company Stockholders or as to which they have, directly or indirectly, the right to vote or direct the voting thereof.

(b)Within five (5) Business Days after the date on which the Company obtains the Stockholder Consent, the Company shall prepare and mail a notice (the “Stockholder Notice”) to every Company Stockholder that did not execute the Stockholder Consent.  The Stockholder Notice shall (i) be a statement to the effect that the Company Board unanimously determined that the Merger is advisable in accordance with Section 251(b) of Delaware Law and in the best interests of the Company Stockholders and unanimously approved and adopted this Agreement, the Merger and the other Transactions contemplated hereby, (ii) provide the Company Stockholders to whom it is sent with notice of the actions taken in the Stockholder Consent, including the approval and adoption of this Agreement, the Merger and the other transactions contemplated hereby in accordance with Section 228(e) of Delaware Law and the bylaws of the Company and (iii) notify such Company Stockholders of their dissent and appraisal rights pursuant to Section 262 of Delaware Law.  The Stockholder Notice will include therewith a copy of Section 262 of Delaware Law and all such other information as Acquiror shall reasonably request, and shall be sufficient in form and substance to start the twenty (20) day period during which a Company Stockholder must demand appraisal of such Stockholder’s Company Common Stock as contemplated by 262(d)(2) of Delaware Law.  All materials submitted to Company Stockholders in accordance with this Section 5.1(b) shall be subject to Acquiror’s advance review and reasonable approval.

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5.2Confidentiality; Public Disclosure.

(a)The parties hereto acknowledge that Acquiror and the Company have previously executed a Confidentiality Agreement dated August 29, 2011 (the “Confidentiality Agreement”) which shall continue in full force and effect in accordance with its terms.

(b)The Company and Acquiror will consult with each other and agree before issuing any press release, making any public statement, or otherwise making any disclosure with respect to the terms of this Agreement or the transactions contemplated hereby or the use of either party’s name, and will not issue any such press release or make any such public statement or other disclosure prior to such mutual agreement, except to the extent necessary in order to comply with applicable Legal Requirements or any applicable listing agreement with a national securities exchange.

5.3Regulatory Approvals.

(a)The Company shall (i) no later than three (3) Business Days following the execution of this Agreement, make the initial filing required from the Company under the HSR Act in connection with the consummation of the Merger and the other transactions contemplated hereby; and (ii) as promptly as practicable following the execution of this Agreement, execute and file or, if appropriate, join in the execution and filing of, the applications, notifications, and other documents required for the lawful consummation of the Merger and the other transactions contemplated hereby under the Antitrust Laws of the jurisdictions identified in Section 5.3 of the Company Disclosure Letter.  Acquiror shall pay or cause to be paid all filing fees associated with the above filings, applications, or notifications.  The Company shall use commercially reasonable efforts to obtain, and to cooperate with Acquiror to promptly obtain, all authorizations, approvals, clearances, consents, actions, or non-actions of any Governmental Entity in connection with the above filings, applications, or notifications and, for further clarity, each of the Company and Acquiror shall request early termination of any waiting periods associated with such filings, applications or notifications.  The Company shall promptly inform Acquiror of any material communication between the Company (including its representatives, counsel, or consultants) and any Governmental Entity regarding any of the transactions contemplated hereby.  If the Company or any Affiliate of the Company receives any formal or informal request for supplemental information or documentary material from any Governmental Entity with respect to the Merger or the other transactions contemplated hereby, then the Company shall make, or cause to be made, as soon as reasonably practicable, a response in compliance with such request.  The Company shall direct, in its sole discretion, the making of such response, but shall consider in good faith the views and input of the Acquiror.

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(b)Acquiror shall no later than three (3) Business Days following the execution of this Agreement, make the initial filing required from Acquiror under the HSR Act in connection with the consummation of the Merger and the other transactions contemplated hereby.  Acquiror shall pay or cause to be paid all filing fees associated with the filings required under the HSR Act.  Acquiror shall promptly inform the Company of any material communication between Acquiror (including its representatives, counsel, or consultants) and any Governmental Entity regarding any of the transactions contemplated hereby.  If Acquiror or any Affiliate of Acquiror receives any formal or informal request for supplemental information or documentary material from any Governmental Entity with respect to the transactions contemplated hereby, then Acquiror shall make, or cause to be made, as soon as reasonably practicable, a response in compliance with such request.  Acquiror shall direct, in its sole discretion, the making of such response, but shall consider in good faith the views and input of the Company.

(c)The Company and Acquiror shall keep each other apprised of the status of matters relating to the completion of the transactions contemplated by this Agreement and, to the extent permissible, promptly furnish the other with copies of notices or other communications between the Company (including its representatives and counsel and any Company Subsidiary) or Acquiror (including its representatives, counsel and Subsidiaries), as the case may be, and any third party and/or Governmental Entity with respect to such transactions. The Company, on the one hand, and Acquiror, on the other hand, shall keep the other timely appraised of any inquiries or requests for additional information from any Governmental Entity pursuant to any Antitrust Law, to the extent permissible and shall use its commercially reasonable efforts to comply promptly with any such inquiry or request.  The Company, on the one hand, and Acquiror, on the other hand (including their respective Representatives), shall permit counsel for the other party reasonable opportunity to review in advance, to the extent permissible, and consider in good faith the views and input of the other party in connection with, any proposed written communication to any Governmental Entity relating to the transactions contemplated by this Agreement.  Each of the Company, on the one hand, and Acquiror, on the other hand, agrees not to participate in any substantive meeting or discussion, either in person or by telephone, with any Governmental Entity in connection with the transactions contemplated by this Agreement unless it consults with the other party in advance and, to the extent not prohibited by such Governmental Entity, gives the other party the opportunity to attend and participate.

(d)Notwithstanding anything in this Agreement to the contrary, if any administrative or judicial action or proceeding (each a “Proceeding”) is instituted or threatened to be instituted, or any decree, judgment, injunction or other order, whether temporary, preliminary or permanent (each an “Order”) is entered or threatened to be entered, in each case challenging the consummation of the Merger or any other transaction contemplated by this Agreement as violative of any Antitrust Law, the parties shall use commercially reasonable efforts to contest, avoid, vacate, modify, or suspend each such Proceeding or Order, including through litigation.  Nothing in this Section 5.3 shall limit a party’s right to terminate this Agreement pursuant to Section 7.1(b) if such party has, until such date, complied in all material respects with its obligations under this Section 5.3.

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(e)Notwithstanding anything in this Agreement to the contrary, the parties hereto understand and agree that neither party hereto shall be required by this Section 5.3 to (i) enter into any settlement, undertaking, consent decree, stipulation or agreement with any Governmental Entity in connection with the transactions contemplated hereby, (ii) divest or otherwise hold separate (including by establishing a trust or otherwise) or (iii) take any other action (or otherwise agreeing to do any of the foregoing) with respect to any of its or the Surviving Corporation’s Subsidiaries or any of their respective Affiliates’ businesses, assets or properties.

5.4Commercially Reasonable Efforts; Notice of Certain Events.  (a) Subject to the limitations set forth in Section 5.3, each of the parties hereto agrees to use its commercially reasonable efforts, and to cooperate with each other party hereto, to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, appropriate or desirable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated hereby, including the satisfaction of the respective conditions set forth in Article VI, and including to execute and deliver such other instruments and do and perform such other acts and things as may be necessary or reasonably desirable for effecting completely the consummation of the Merger and the other transactions contemplated hereby.

(b)Each of Acquiror, the Company and the Securityholders’ Representative shall promptly notify the other parties of: (i) any notice or other communication received by such party from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement, or that any compensation or other benefit is due to be paid to such Person on the basis of any of the transactions contemplated by this Agreement, other than payments expressly provided for herein, (ii) any notice or other communication from any Governmental Entity received by such party in connection with the transactions contemplated by this Agreement, (iii) any actions, suits, claims, investigations or proceedings commenced or, to its knowledge, threatened against, relating to or involving or otherwise affecting the Company or any of the Company Subsidiaries that relate to the consummation of the transactions contemplated by this Agreement, (iv) any inaccuracy of any representation or warranty made by such party in this Agreement at any time during the term hereof that would reasonably be expected to cause the conditions set forth in Section 6.2(a) or Section 6.3(a), as the case may be, not to be satisfied; and (v) any failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

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5.5Access to Information.

(a)During the period commencing on the Agreement Date and continuing until the earlier of the termination of this Agreement and the Effective Time, (a) the Company shall (and shall cause each Company Subsidiary to) afford Acquiror and its accountants, counsel and other representatives, reasonable access upon reasonable advance notice during business hours to (i) all of the Company’s and each Company Subsidiary’s properties, books, Contracts and records and (ii) other information concerning the business, properties and personnel of the Company or any Company Subsidiary as Acquiror may reasonably request; provided, that the Company shall not be required to provide Acquiror or its agents with access to any files, books, records or information where such access would (A) waive any privileges or protections under applicable Legal Requirements, (B) violate any privacy rights applicable to employees or (C) violate the terms of any nondisclosure or similar Contract with any third party (provided, that in each case, the Company shall use its commercially reasonable efforts to provide Acquiror with access to such information to the fullest extent practicable without risking loss of privilege or protections under such Legal Requirement, privacy right or Contract, including, for example, providing for such information to be reviewed by counsel for Acquiror on terms reasonably acceptable to counsel for the Company).

(b)From and after the Closing, Acquiror will make or cause to be made available (including by electronic means, to the extent available) to the Securityholders’ Representative all books, records, Tax Returns and documents of the Company (and the assistance of employees responsible for such books, records and documents or whose participation is reasonably necessary or desirable in connection therewith) as may be reasonably necessary for such purposes for which access to such documents is reasonably necessary for the Securityholders’ Representative to exercise its rights and conduct its duties hereunder; provided, however, that any such access or furnishing of information shall be during the Company’s normal business hours, under the supervision of Acquiror’s personnel and in such a manner as not to interfere with the normal operations of Acquiror or the Company.

5.6Expenses.  Whether or not the Merger is consummated, except to the extent otherwise provided herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense.

5.7Parachute Payment Waivers.  The Company shall use commercially reasonable efforts to obtain and deliver to Acquiror, prior to the initiation of the requisite stockholder approval procedure under Section 5.8, a parachute payment waiver from each Person who the Company reasonably believes is, with respect to the Company, a “disqualified individual” (within the meaning of Section 280G of the Code and the regulations promulgated thereunder), as determined immediately prior to the initiation of the requisite stockholder approval procedure under Section 5.8, and who might otherwise have, receive or have the right or entitlement to receive a parachute payment under Section 280G of the Code.

5.8Section 280G Stockholder Approval.  The Company shall use its commercially reasonable efforts to obtain the approval by such number of Company Stockholders as is required by the terms of Section 280G(b)(5)(B) of the Code so as to render the parachute payment provisions of Section 280G of the Code inapplicable to any and all parachute payments that would not be deductible by reason of Section 280G of the Code, with such stockholder vote to be obtained in a manner which satisfies all applicable requirements of Section 280G(b)(5)(B) of the Code and the regulations promulgated thereunder.

5.9Continuing Employee Benefits.  For one year following the Effective Time, Acquiror shall (i) cause the Surviving Corporation (or its respective direct and indirect Subsidiaries) to, continue to pay each Continuing Employee employed in the United States (each, a “U.S. Continuing Employee”) a base salary that is no less than the current base salary for such U.S. Continuing Employee and (ii) provide U.S. Continuing Employees with employee benefits substantially comparable to those provided to similarly situated employees of Acquiror.  For purposes of determining after the Effective Time the extent to which any U.S. Continuing Employee is eligible for or vested in (and, in regard to any severance or vacation entitlement only, the level of benefits under) any Acquiror employee benefit plan, program or arrangement covering the U.S. Continuing Employee, the Acquiror shall credit the U.S. Continuing Employee, to the extent permitted by applicable Legal Requirements, for all service with the Company and any Company Subsidiary before the Effective Time to the same extent such service was credited for such respective purposes by the Company and the Company Subsidiaries as of the Effective Time under a corresponding Company Employee Plan.

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5.10Tax Matters.

(a)Transfer Taxes.  All Transfer Taxes shall be paid by Acquiror when due, and Acquiror will, at its own expense, file all necessary Tax Returns and other documentation with respect to all such Transfer Taxes.

(b)Covenants.  Without the prior written consent of Acquiror, prior to the Closing, neither the Company nor any Company Subsidiary shall make or change any Tax election, change any annual Tax accounting period, adopt or change any method of Tax accounting, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment, surrender any right to claim a Tax refund, offset or other reduction in Tax liability, consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment or, if it would have the effect of increasing the Tax liability or reducing any Tax asset of the Company, any Company Subsidiary, Acquiror or any Affiliate of Acquiror, take or omit to take any other action outside of the ordinary course of business.

(c)Income Tax Returns.  The Acquiror shall prepare and file, or shall cause to be prepared and filed, all Tax Returns of the Company and any Company Subsidiary to be filed for (i) any Tax period ending on or before the Closing Date the due date of which (taking into account extensions) is after the Closing Date, and (ii) any Tax period of the Company or any Company Subsidiary that includes (but does not end on) the Closing Date (a “Straddle Period”); provided that to the extent that such Tax Return (x) could result in a material Tax liability for which the Company Securityholders would be responsible as Indemnifiable Damages or (y) is for a Tax period ending on the Closing Date and is expected to reflect Anticipated Refunds.  The Acquiror shall provide each such Tax Return to the Securityholders’ Representative for its review and comment at least fifteen (15) Business Days prior to the date on which such Tax Return is to be filed (except that in the case of a Tax Return due (taking into account any timely filed extensions) within thirty (30) days following the Closing Date or filed on a monthly basis or more frequently, the Tax Return shall be provided to the Securityholders’ Representative in such shorter period of time prior to filing as the Acquiror shall reasonably determine to be practicable), the Acquiror shall accept the reasonable comments of the Securityholders’ Representative  to each such Tax Return, and the Acquiror shall cause such Tax Return to be signed by the appropriate officer(s) of the Acquiror or the Company or a Company Subsidiary, as the case may be, and timely filed.  Each such Tax Return shall be prepared in a manner that is consistent with the past practice of the Company and the Company Subsidiaries, unless Acquiror reasonably determines that it does not have a more likely than not position with respect to an item on such Tax Return.  The parties agree that, to the extent permitted by applicable law, Transaction Deductions shall be taken into account as losses or deductions in the Tax period ending on the Closing Date, provided that the parties hereto agree that the Company shall make the safe harbor election under Revenue Procedure 2011-29, 2011-18 IRB, to treat 70% of any success-based fees that were paid by or on behalf of the Company or any of the Company Subsidiaries as an amount that did not facilitate the transactions contemplated under this Agreement and therefore treat 70% of such costs as deductible.  As soon as practicable after Closing, the Acquiror shall cause the Company and the Company Subsidiaries to file Tax Returns to obtain a refund of any overpayment of estimated Taxes and to carry back any losses generated in the Tax period ending on the Closing Date to obtain a Tax refund, including, without limitation, any and all Anticipated Refunds.  Neither the Company or any Company Subsidiary shall make the election provided for in Section 172(b)(3) of the Code (or any similar election for state income Tax purposes) to waive the carryback of any net operating loss arising in the Tax period ending on the Closing Date.

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(d)Cooperation on Tax Matters.  Acquiror, the Company and the Securityholders’ Representative  shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Agreement and any action or other proceeding with respect to Taxes.  Such cooperation shall include the retention and (upon the other party’s request) the provision of records and information which are reasonably relevant to any such action or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder.  Acquiror, the Company and the Securityholders’ Representative agree to retain all books and records with respect to Tax matters pertinent to the Company and the Company Subsidiaries relating to any Pre-Closing Tax Period until the expiration of the applicable statute of limitations (and, to the extent notified by Acquiror, any extensions thereof), and to abide by all record retention agreements entered into with any Governmental Entity.  Acquiror and the Securityholders’ Representative further agree, upon request, to use their reasonable best efforts to obtain any certificate or other document from any Governmental Entity or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).

(e)Tax Claims.  If, subsequent to the Closing, any of Acquiror, the Company, any Company Subsidiary or the Securityholders’ Representative receives notice of a claim by any Tax Authority that, if successful, might result in an indemnity payment hereunder or seeks a Refund Disallowance (a “Tax Claim”), then within ten (10) Business Days after receipt of such notice, Acquiror, the Company or the Securityholders’ Representative, as the case may be, shall give written notice of such Tax Claim to the other parties.  The Securityholders’ Representative shall have the right, at its own expense, to (i) participate in and (ii) with respect to any Tax Claim that relates solely to Pre-Closing Tax Periods, assume the defense of any such Tax Claim; provided that (i) the Securityholders’ Representative provides written notice of its intent to assume such defense within fifteen (15) Business Days after it has received written notice of such Tax Claim, (ii) the Securityholders’ Representative’s counsel is reasonably satisfactory to Acquiror, (iii) the Securityholders’ Representative shall thereafter consult with Acquiror upon Acquiror’s reasonable request for such consultation from time to time with respect to such Tax Claim and (iv) the Securityholders’ Representative shall not, without Acquiror’s consent, which consent shall not be unreasonably withheld, conditioned or delayed, agree to any settlement with respect to any Tax.  Acquiror shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Securityholders’ Representative.  Acquiror shall not settle any Tax Claim in respect of which indemnity may be sought hereunder without the consent of the Securityholders’ Representative, which consent shall not be unreasonably withheld, conditioned or delayed.  Notwithstanding the previous sentence, if the Securityholders’ Representative does not respond to any request to settle a Tax Claim within fifteen (15) Business Days, Acquiror may settle such Tax Claim in its sole discretion.  The Company Securityholders shall pay Acquiror promptly for their portion of any Indemnifiable Damages that results from the resolution of any such Tax Claim, to the extent that such amounts have not been recovered from the Escrow Amount.

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(f)The Company Securityholders shall not be liable under Section 8.2 with respect to any Tax resulting from a Tax Claim the defense of which the Securityholders’ Representative was not offered the opportunity to assume as provided under Section 5.10(e) to the extent the Securityholders’ liability under Section 8.2 is materially and adversely affected as a result thereof.  To the extent that this Section 5.10 is inconsistent with Article VIII, this Section 5.10 shall govern any Tax Claims.

(g)If the Company or any Company Subsidiary receives any Covered Refund, Acquiror shall, within thirty (30) days of receipt of any such Covered Refund, pay the Securityholder Refund Portion to the Exchange Agent or, if the Covered Refund is received after the Final Escrow Release Date, the Securityholders’ Representative (and the Company’s current payroll provider in respect of the portion of such amount allocable to the holders of Company Employee Options per the Pro Rata Share as stated in the Spreadsheet) for distribution to the Company Securityholders.  For further clarity, any payments made pursuant to this Section 5.10(g) shall be treated as an adjustment to the Merger Consideration payable to the Company Securityholders under this Agreement for all income Tax purposes.  For the avoidance of doubt, any Refund Disallowance shall be treated as a Covered Tax.

(h)Disputes that arise under this Section 5.10, Section 8.3(c) or Section 8.8 and are not resolved by mutual agreement within 30 days shall be resolved by a nationally recognized expert in the relevant area with no material relationship with the parties or their Affiliates (the “Tax Referee”), chosen and mutually acceptable to both Acquiror and the Securityholders’ Representative within five days of the date on which the need to choose the Tax Referee arises.  The Tax Referee shall resolve any disputed items within 30 days of having the item referred to it pursuant to such procedures as it may require.  The costs, fees and expenses of the Tax Referee shall be paid by Acquiror and the Securityholders’ Representative based on the percentage which the portion of the contested amount not awarded to each such Person bears to the amount contested by such Person, as determined in good faith by the Tax Referee.

5.11Directors’ and Officers’ Insurance.

(a)For a period of six (6) years from and after the Closing Date, Acquiror and the Surviving Corporation agree to indemnify (including advancement of expenses) and hold harmless all past and present officers and directors of the Company and the Company Subsidiaries to the same extent such persons are indemnified by the Company and the Company Subsidiaries as of the date of this Agreement pursuant to their organizational documents, employment agreements, indemnification agreements or under applicable Legal Requirements for acts or omissions which occurred at or prior to the Effective Time; provided, that such indemnification shall be subject to limitation imposed from time to time under applicable Legal Requirements.  The Surviving Corporation’s certificate of incorporation and bylaws of the Surviving Corporation shall contain provisions with respect to indemnification and exculpation that are at least as favorable to the past and present officers and directors of the Company as those provisions contained in the organizational documents in effect on the date hereof, and such provisions shall not be amended, repealed or otherwise modified for a period of six (6) years in any manner that would adversely affect the rights of the past and present officers and directors of the Company.

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(b)(i) Prior to the Effective Time, the Company shall or, if the Company is unable to, Acquiror shall cause the Surviving Corporation as of the Effective Time to, obtain and fully pay the premium for the non-cancellable extension of the Company’s existing directors’ and officers ‘ liability insurance policies,, in each case for a claims reporting or discovery period of at least six years from and after the Effective Time with respect to any claim related to any period or time at or prior to the Effective Time with terms, conditions, retentions and limits of liability that are no less favorable than the coverage provided under the Company’s existing policies with respect to any actual or alleged error, misstatement, misleading statement, act, omission, neglect, breach of duty or any matter claimed against a director or officer of the Company or any Company Subsidiary by reason of him or her serving in such capacity that existed or occurred at or prior to the Effective Time; provided, that the Company shall give Acquiror a reasonable opportunity to participate in the selection of such tail policy and the Company shall give reasonable and good faith consideration to any comments made by Acquiror with respect thereto.  (ii) If the Company or the Surviving Corporation for any reason fail to obtain such “tail” insurance policies as of the Effective Time, the Surviving Corporation shall continue to maintain in effect, for a period of at least six years from and after the Effective Time, the insurance policy in place as of the date hereof with terms, conditions, retentions and limits of liability that are no less favorable than the coverage provided under the Company’s existing policies as of the date hereof, or the Surviving Corporation shall purchase comparable insurance for such six-year period with terms, conditions, retentions and limits of liability that are no less favorable than as provided in the Company’s existing policies as of the date hereof; provided that in no event shall Acquiror or the Surviving Corporation be required to expend for such policies pursuant to this sentence an annual premium amount in excess of 200% of the amount per annum the Company paid in its current fiscal year, which amount is set forth in Section 5.11(b)of the Company Disclosure Letter; and provided further that if the aggregate premiums of such insurance coverage exceed such amount, the Surviving Corporation shall be obligated to obtain a policy with the greatest coverage available, with respect to matters occurring prior to the Effective Time, for a cost not exceeding such amount.  Any amounts paid for such insurance by or on behalf of Acquiror or the Surviving Corporation after the Effective Time shall be recoverable by Acquiror or the Surviving Corporation from the Company Securityholders as Indemnifiable Damages pursuant to Article VIII, without giving effect to the Deductible.

(c)If Acquiror, the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Acquiror or the Surviving Corporation, as the case may be, shall assume the obligations set forth in this Section 5.11.

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(d)The provisions of this Section 5.11 are intended for the benefit of, and shall be enforceable by, all past and present officers and directors of the Company and any Company Subsidiary and his or her heirs and representatives.  The rights of all past and present officers and directors of the Company and any Company Subsidiary under this Section 5.11 are in addition to, and not in substitution for, any other rights to indemnification or contribution that any such person may have by contract, applicable Legal Requirements or otherwise.

5.12No Solicitation.  During the period from the Agreement Date and continuing until the earlier of the termination of this Agreement and the Effective Time, none of the Company or any of its Affiliates shall (i) solicit or initiate any proposals regarding a merger, consolidation, share exchange, business combination, sale of all or substantially all of the assets, or other similar transaction involving the Company or any Company Subsidiary other than the transactions contemplated by this Agreement (any of the foregoing proposals an “Acquisition Proposal”), (ii) engage or participate in negotiations or discussions concerning, or provide any Person with any non-public information regarding the Company or any Company Subsidiary with respect to, an Acquisition Proposal, or (iii) agree to, enter into, accept, approve or recommend the adoption of, any Acquisition Proposal.  Each of the Company and its Affiliates shall (and shall cause its Representatives to) cease immediately any and all discussions or negotiations with any Person (other than Acquiror and its Representatives) regarding any Acquisition Proposal.  Each of the Company and its Affiliates shall enforce the terms and conditions of any confidentiality agreement entered into with such Person with respect to any Acquisition Proposal.  It is understood that any violation of the restrictions set forth above by the Company, its Affiliates or any of the Representatives of the Company and any of its Affiliates shall be deemed to be a breach of this Agreement by the Company.

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5.13Financing.

(a)Acquiror and Sub shall use their commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary to arrange and obtain the Financing on the terms and conditions described in the Commitment Letter as promptly as practicable after the date hereof, including their commercially reasonable efforts to (i) maintain in effect the Commitment Letter, (ii) negotiate and enter into, and keep in effect, definitive agreements with respect thereto on the terms and conditions contained in the Commitment Letter (including the flex provisions) or on other terms no less favorable to Acquiror and Sub, provided such terms do not expand upon in any way that is adverse to the Company the conditions precedent to the Financing and would not otherwise reasonably be expected to impede or delay the consummation of the Financing, (iii) satisfy on a timely basis all conditions applicable to Acquiror and Sub in the Commitment Letter that are within their control, (iv) consummate the Financing at or prior to the Closing, (v) take each of the actions required of the Company and its Subsidiaries in paragraphs (b)(i) through (b)(v) below with respect to themselves and their Subsidiaries, and (vi) enforce their rights under the Commitment Letter (including by seeking specific performance of the parties thereunder).  In the event of any termination of the Commitment Letter or the receipt by Acquiror of written notice that the counterparty to the Commitment Letter no longer intends to provide the Financing, Acquiror shall promptly (but in no event later than one (1) Business Day following Acquiror’s receipt of such termination or written notice) notify the Company (such notice being a “Financing Termination Notice”).  For four (4) Business Days following its receipt of the Financing Termination Notice, the Company may elect to terminate this Agreement in accordance with Section 7.1(f)(i).  If the Company does not terminate this Agreement in accordance with Section 7.1(f)(i), Acquiror and Sub shall use their commercially reasonable efforts to arrange and obtain financing from alternative sources (the “Alternative Financing”), on terms, taken as whole, that are no more adverse to Acquiror and the Company, as promptly as practicable following the occurrence of such event.  Acquiror shall provide the Company regular updates regarding its progress in obtaining such Alternative Financing and shall deliver to the Company true and complete copies of all agreements related to such Alternative Financing (excluding fee letters and engagement letters to the extent Acquiror is prohibited from providing such letters) promptly following the execution thereof.  In furtherance of the provisions of this Section 5.13, the Commitment Letter may be amended, restated, supplemented or otherwise modified or superseded at the option of Acquiror after the date of this Agreement but prior to the Effective Time by instruments (the “New Commitment Letters”) that replace the existing Commitment Letter or contemplate financing from one or more other or additional parties; provided that the terms of the New Commitment Letters shall not (1) expand upon the conditions precedent to the Financing as set forth in the existing Commitment Letter, (2) reasonably be expected to prevent, impede, delay or hinder the Closing or (3) reduce the aggregate amount of available Financing.  In such event, the term “Commitment Letter” as used herein shall be deemed to include the Commitment Letter that are not so superseded at the time in question and the New Commitment Letters to the extent then in effect.  Acquiror shall deliver to the Company true and complete copies of all agreements related to such New Commitment Letters (excluding fee letters and engagement letters to the extent Acquiror is prohibited from providing such letters) promptly following the execution thereof.

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(b)The Company shall use its commercially reasonable efforts to, and shall cause the Company Subsidiaries and their respective Representatives to use their reasonable best efforts to, provide all cooperation in connection with the arrangement of the Financing as may be reasonably requested by Acquiror (provided that such requested cooperation does not unreasonably interfere with the ongoing operations of the Company and the Company Subsidiaries), including (i) making senior management of the Company available to participate in meetings, due diligence sessions, presentations, “road shows” and sessions with rating agencies, (ii) assisting with the preparation of customary materials for rating agency presentations, offering documents, private placement memoranda, bank information memoranda, prospectuses and similar documents required in connection with the Financing, (iii) furnishing Acquiror and its financing sources with financial and other pertinent information regarding the Company and the Company Subsidiaries (the “Provided Information”), including financial statements, pro forma financial information, financial data, audit reports and other information of the type and form customarily included in such documents, (iv) assisting Acquiror in obtaining accountants’ comfort letters, legal opinions, surveys, environmental assessments and title insurance and (v) executing and delivering any commitment letters, underwriting or placement agreements, registration statements, pledge and security documents, other definitive financing documents or other requested certificates or documents, including a customary solvency certificate by the Chief Financial Officer of the Company (provided that (A) none of the letters, agreements, registration statements, documents and certificates shall be executed, delivered or filed except in the Closing and (B) the effectiveness thereof shall be conditioned upon, or become operative after, the occurrence of the Closing).  Notwithstanding the foregoing, in the case of each of clauses (i) through (v) above of the prior sentence, (A) none of the Company or any of its Subsidiaries shall be required to pay any commitment or other fee, provide any security or incur any other liability or obligation in connection with the Financing prior to the Closing, and (B)(I) all non-public or other confidential information provided by the Company or any of its Representatives pursuant to this Section 5.13 shall be kept confidential in accordance with the Confidentiality Agreement, except that Acquiror shall be permitted to disclose such information to potential syndicate members during syndication, subject to customary confidentiality undertakings by such potential syndicate members and (II) the Company shall be permitted a reasonable period to comment on any documents or other information circulated to potential financing sources that contain or are based upon any such non-public or other confidential information.  Acquiror shall indemnify and hold harmless the Company, its Subsidiaries and the Company’s representatives from and against any and all liabilities, losses, damages, claims, attorneys’ fees, out-of-pocket costs, awards, judgments and penalties (including all fines, interest, reasonable consultant and attorneys fees and expenses and amounts paid in settlement) suffered or incurred by them in respect of any third-party claims arising out of or resulting from their participation in the arrangement of the Financing (including any action taken in accordance with this Section 5.13(b)) and any information utilized in connection therewith, except for any of the foregoing to the extent the same is the result of fraud, intentional misrepresentation or willful misconduct of the Company, any Affiliate or their respective Representatives.  Acquiror shall, promptly upon request by the Company, reimburse the Company for all documented and reasonable out-of-pocket costs incurred by the Company or its Subsidiaries in connection with this Section 5.13(b); provided, that Acquiror’s aggregate reimbursement obligation pursuant to this Section 5.13(b) shall not exceed $50,000.  The Company hereby consents to the reasonable use of its and its Subsidiaries’ logos in connection with the Financing in a manner customary for similar financing transactions.  Nothing in this Section 5.13 shall limit a party’s right to terminate this Agreement pursuant to Section 7.1(b) or 7.1(f) if such party has, until such date, complied in all material respects with its obligations under this Section 5.13.

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5.14Termination of 401(k) Plan.  If requested by Acquiror in writing at least five business days before the Closing Date, the Company shall terminate any and all 401(k) plans sponsored or maintained by the Company or any of its Subsidiaries, and prior to the Closing Date shall provide evidence to Acquiror of such termination pursuant to resolutions of its Board of Directors.

5.15Financing Source Provisions.                                                      

(a)The Company and the Securityholders’ Representative will not, will not permit any of their Affiliates to, and will not support any third party (including any Company Securityholder) to bring any action against the Financing Sources for damages or for specific performance.

(b)The Company and the Securityholders’ Representative agree that any action or proceeding involving the Financing Sources in connection with this Agreement will be subject to the exclusive jurisdiction of a state or a federal court sitting in New York County, State of New York.

(c)The Company and the Securityholders’ Representative will not, will not permit any of their affiliates to, and will not support any third party (including any Company Securityholder) to bring any action or proceeding against the Financing Sources in a court that is not a state or federal court sitting in New York County, State of New York.

(d)THE COMPANY AND THE SECURITYHOLDERS’ REPRESENTATIVE HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WITH AND UPON THE ADVICE OF COMPETENT COUNSEL IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING INVOLVING THE FINANCING SOURCES IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR THE ACTIONS OF ANY PARTY HERETO IN NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.

(e)Without limiting subsection (a) of this Section 5.15, the Company and the Securityholders’ Representative agree that the Financing Sources shall have the same benefits as Acquiror and Sub with respect to any liability cap or other limitation of remedies or damages applicable to the Company, the Securityholders’ Representative or any Company Securityholder.

(f)The parties hereto acknowledge that the Financing Sources are express third-party beneficiaries of the provisions contained in this Section 5.15.

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ARTICLE VI

CONDITIONS TO THE MERGER

6.1Conditions to Obligations of Each Party to Effect the Merger.  The respective obligations of each party hereto to consummate the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions:

(a)Illegality.  No temporary restraining order, preliminary or permanent injunction, order, decree, writ, ruling or award issued by any court or other Governmental Entity of competent authority preventing the consummation of the Merger or the other transactions contemplated by this Agreement shall be in effect, and no Legal Requirement shall have been enacted, entered, enforced or deemed applicable to the Merger, which prohibits the consummation of the Merger or the other transactions contemplated by this Agreement (collectively, “Restraints”).

(b)Antitrust Approvals.  The waiting period (and any extension thereof) applicable under the HSR Act with respect to the consummation of the transactions contemplated hereby shall have expired or been terminated and any equivalent pre-clearance period or approval required by the Antitrust Laws of the jurisdictions identified in Section 5.3 of the Company Disclosure Letter shall have been likewise completed or obtained.

(c)Stockholder Approval.  The Company shall have obtained the Stockholder Approval in accordance with applicable Legal Requirements and the Stockholder Approval shall be in full force and effect.

6.2Additional Conditions to Obligations of the Company.  The obligations of the Company to consummate the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions (it being understood that each such condition is solely for the benefit of the Company and may be waived by the Company in writing in its sole discretion without notice, liability or obligation to any Person):

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(a)Representations and Warranties.  The representations and warranties of Acquiror in this Agreement shall be true and correct in all material respects (except for such representations and warranties that are qualified by their terms by a reference to materiality or “Material Adverse Effect”, which representations and warranties as so qualified shall be true and correct in all respects) on and as of the Agreement Date and on and as of the Effective Time as though such representations and warranties were made on and as of such time (except for representations and warranties which address matters only as to a specified date, which representations and warranties shall be so true and correct with respect to such specified date).

(b)Covenants.  Acquiror shall have performed and complied in all material respects with all covenants, obligations and agreements of this Agreement required to be performed and complied with by it at or prior to the Closing.

(c)Officer’s Certificate.  The Company shall have received a certificate, dated as of the Closing Date, executed on behalf of Acquiror by a duly authorized officer of Acquiror, to the effect that the conditions set forth in Section 6.2(a) and Section 6.2(b) have been satisfied.

(d)Deposit of Initial Merger Consideration At the Closing.  On or prior to the Closing Date, Acquiror shall have deposited (a) the Merger Consideration (less the Escrow Amount and Reserve) with the Exchange Agent, and (b) the Escrow Amount and Reserve with the Escrow Agent, in each case in accordance with the terms of this Agreement.

(e)Receipt of Closing Deliveries.  Acquiror shall have received each of the agreements, instruments and other documents set forth in Section 1.4(a).

6.3Additional Conditions to the Obligations of Acquiror.  The obligations of Acquiror and Sub to consummate the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions (it being understood that each such condition is solely for the benefit of Acquiror and Sub and may be waived by Acquiror and Sub in writing in their sole discretion without notice, liability or obligation to any Person):

(a)Representations and Warranties.  The representations and warranties of the Company in this Agreement shall be true and correct in all material respects (except for such representations and warranties that are qualified by their terms by a reference to materiality or “Material Adverse Effect”, which representations and warranties as so qualified shall be true and correct in all respects) on and as of the Agreement Date and on and as of the Effective Time as though such representations and warranties were made on and as of such time (except for representations and warranties which address matters only as to a specified date, which representations and warranties shall be so true and correct with respect to such specified date).

(b)Covenants.  The Company shall have performed and complied in all material respects with all covenants, obligations and agreements of this Agreement required to be performed and complied with by the Company at or prior to the Closing.

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(c)Officer’s Certificate.  Acquiror shall have received the Officer’s Certificate.

(d)Receipt of Closing Deliveries.  Acquiror shall have received each of the agreements, instruments and other documents set forth in Section 1.4(b).

(e)No Material Adverse Effect.  Since the Agreement Date, there shall not have occurred a Material Adverse Effect or any change, development or effect which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

(f)No Governmental Litigation.  There shall not be pending before any court of competent jurisdiction any legal proceeding commenced by a Governmental Entity that challenges or seeks (i) to make illegal, restrain, delay materially or prohibit the consummation of the Merger or (ii) to prohibit or limit in any material respect Acquiror’s ability to vote, receive dividends with respect to or otherwise exercise ownership rights with respect to the Company Common Stock to be acquired in the Merger or its operation of all or any material portion of the Company or any of the Company Subsidiaries, or of Acquiror and its Subsidiaries taken as a whole, or (iii) to compel Acquiror or Sub to dispose of or hold separate all or any material portion of the business or assets of the Company or any of the Company Subsidiaries, or of Acquiror and its Subsidiaries taken as a whole.

(g)Consents.  The Company shall have received all consents and approvals set forth in Schedule 6.3(g) and all consents, approvals, orders or authorizations from the Governmental Entities referred to in Section 2.4(c), in each case in form and substance reasonably satisfactory to Acquiror, and no such consent, approval, order or authorization shall have been revoked.

(h)Written Consent.  The Stockholder Consent shall be delivered to Acquiror no later than 11:59 PM, New York City time, on the Business Day immediately succeeding the date hereof (the “Stockholder Consent Delivery Deadline”).

(i)Dissenting Shares.  No more than ten percent (10%) of the outstanding shares of Company Common Stock shall be Dissenting Shares.

(j)Financing.  Acquiror shall have received the proceeds of the Financing contemplated by the Commitment Letter, Alternative Financing or New Commitment Letters, as applicable.

ARTICLE VII

TERMINATION, AMENDMENT AND WAIVER

7.1Termination.  At any time prior to the Effective Time, this Agreement may be terminated and the Merger abandoned by authorized action taken by the terminating party (notwithstanding approval and adoption of this Agreement by the Company Stockholders):

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(a)by mutual written consent duly authorized by the Company’s Board and the Board of Directors of Acquiror;

(b)by either Acquiror or the Company, if the Merger shall not have occurred on or before 11:59 PM, New York City time, on March 31, 2012, or such other date that Acquiror and the Company may agree upon in writing; provided, however, that the right to terminate this Agreement under this clause (b) of Section 7.1 shall not be available to any party whose breach of this Agreement has been the proximate cause of or resulted in the failure of the Merger to occur on or before the “Outside Date”; provided, further, that if the condition set forth in Section 6.1(b) shall not have been satisfied prior to such date, but all the other conditions in Article VI have been satisfied or waived, (other than those conditions that by their terms are to be satisfied at Closing), then each of Acquiror and the Company may elect to extend the term of this Agreement until a date and time not later than 11:59 PM, New York City time, on June 30, 2012.

(c)by either Acquiror or the Company, if (i) the Stockholder Consent shall not have been obtained by the Company and delivered to Acquiror by the Stockholder Consent Delivery Deadline or (ii) a Restraint shall be in effect and shall have become final and non-appealable;

(d)by Acquiror, if the Company shall have breached any representation, warranty, covenant or agreement contained herein and such breach shall not have been cured within thirty (30) Business Days after receipt by the Company of written notice of such breach and if not cured within the timeframe above and at or prior to the Closing, such breach would result in the failure of the condition set forth in Section 6.3(a) or (b);

(e)by the Company, if Acquiror shall have breached any representation, warranty, covenant or agreement contained herein and such breach shall not have been cured within thirty (30) Business Days after receipt by Acquiror of written notice of such breach and if not cured within the timeframe above and at or prior to Closing, such breach would result in the failure of the conditions set forth in Section 6.2(a) or (b); or

(f)by the Company, (i) at any time on or after the date on which Acquiror delivers to the Company a Financing Termination Notice and prior to the fifth Business Day after such date or (ii) at any time on or after the 26th Business Day after the date on which Acquiror delivers to the Company a Financing Termination Notice, if Acquiror shall not have arranged Alternative Financing prior to such date.

In the event of termination by Acquiror or the Company pursuant to this Section 7.1 (other than Section 7.1(a)), written notice thereof shall be given to other parties hereto.

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7.2Effect of Termination.  In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Acquiror, Sub, the Company or their respective officers, directors, stockholders, Affiliates, employees, agents, advisors, attorneys or representatives; provided, however, that (a) the provisions of this Section 7.2 (Effect of Termination), Article IX (General Provisions) and the Confidentiality Agreement shall remain in full force and effect and survive any termination of this Agreement and (b) no such termination shall relieve any party hereto for any damages incurred or suffered by the other party as a result of an intentional or willful breach of this Agreement.

7.3Amendment.  Subject to the provisions of applicable Legal Requirements, the parties hereto may amend this Agreement by authorized action at any time (notwithstanding approval and adoption of this Agreement by the Company Stockholders) pursuant to an instrument in writing signed on behalf of each of the parties hereto (provided that no amendment shall be made which by Legal Requirement requires further approval by the Company Stockholders without such further stockholder approval).  To the extent permitted by applicable Legal Requirements, Acquiror and the Securityholders’ Representative may cause this Agreement to be amended at any time after the Effective Time by execution of an instrument in writing signed on behalf of Acquiror and the Securityholders’ Representative.

ARTICLE VIII

INDEMNIFICATION

8.1Survival of Representations and Warranties and Covenants.  If the Merger is consummated, the representations and warranties of the Company contained in this Agreement or in the Officer’s Certificate shall survive the Closing and remain in full force and effect for a period of fifteen (15) months after the Closing Date and then shall terminate (the “General Escrow Release Date”); provided that the representations and warranties contained in Sections 2.1, 2.2, 2.3(a) through (c), 2.3(g), 2.4(a), 2.15 and 2.18 (the “Specified Representations”) shall survive the Closing and remain in full force and effect indefinitely or until the latest date permitted by law; provided further that the representations and warranties contained in Section 2.14 shall survive the Closing and remain in full force and effect until the fifth anniversary of the Closing Date but, for further clarity, shall not be considered Specified Representations.  The covenants of the parties contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith (including the covenants set forth in Article IV and Article V) shall survive the Closing indefinitely or for the shorter period explicitly specified therein, except that for such covenants and agreements that survive for such shorter period, breaches thereof and claims relating thereto shall survive until the expiration of the applicable statute of limitations period.  Notwithstanding the preceding sentences, any breach of representation, warranty, covenant or agreement and any claim in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentences, if notice of the inaccuracy or breach thereof or claim giving rise to such right of indemnity shall have been given by any Indemnified Person to the party against whom such indemnity may be sought prior to such time.

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8.2Indemnification.  Effective at and after the Closing, and subject to the limitations set forth in this Article VIII, the Company Securityholders shall severally, and not jointly, each, in accordance with each Company Securityholder’s Pro Rata Share of the Merger Consideration, indemnify Acquiror, Acquiror’s Affiliates and, if applicable, their respective officers, directors, agents and employees, and their respective successors and assigns (each of the foregoing being referred to individually as an “Indemnified Person” and collectively as “Indemnified Persons”) from and against and agree to hold each of them harmless from any and all claims, actions, causes of action, judgments, awards, liabilities, out-of-pocket costs, damages and losses (including all fines, interest, reasonable consultant and attorneys fees and expenses and amounts paid in settlement), but (i) excluding punitive damages, provided, that if an Indemnified Person is held liable to another Person based on any final judgment of a court of competent jurisdiction for any such damages and the Company Securityholders are obligated to indemnify such Indemnified Person for the matter that gave rise to such damages, then the Company Securityholders shall be liable for, and obligated to reimburse such Indemnified Person for, such damages, and (ii) excluding lost profits or consequential, special, indirect or similar damages (collectively, “Indemnifiable Damages”), incurred or suffered by any Indemnified Person arising out of or resulting from:

(a)the failure of any of the representations or warranties of the Company contained in this Agreement or in the Officer’s Certificate to be true and correct at and as of the Agreement Date and at and as of the Effective Time (except in the case of representations and warranties which by their terms speak only as of a specific date or dates, which representations and warranties shall be true and correct as of such date or dates), determined without regard to any express limitations or qualifications set forth in such representation or warranty as to materiality or Material Adverse Effect (or other similar materiality qualifier) (each, a “Warranty Breach”);

(b)any breach or nonfulfillment of any covenant made by the Company in this Agreement;

(c)the matters set forth in Section 8.2(c) of the Company Disclosure Letter; and

(d)any Covered Tax.

For purposes of calculating Indemnifiable Damages arising under this Article VIII, in respect of any breach of any covenant or obligation, or Warranty Breach, any express qualifications or limitations set forth in such covenant or obligation, or representation or warranty as to materiality or Material Adverse Effect (or other similar materiality qualifier) contained therein, shall be disregarded.

8.3Indemnifiable Damage Deductible; Other Limitations.

(a)Notwithstanding anything contained herein to the contrary, (i) no Warranty Breach (or series of related Warranty Breaches) shall be considered for indemnification under Section 8.2 unless the Indemnifiable Damages for such Warranty Breach (or series of related Warranty Breaches) exceeds $25,000 (the “Minimum Claim Amount”), other than a Warranty Breach resulting from the Company’s fraud or intentional misrepresentation as to which the Minimum Claim Amount shall not apply, and (ii) no indemnification shall be available under Section 8.2 for any Warranty Breach, other than a Warranty Breach with respect to a Specified Representation or resulting from the Company’s fraud or intentional misrepresentation, unless and until all Indemnifiable Damages exceed $2,000,000 (the “Deductible”), in which case indemnification in respect of such Warranty Breaches shall only be available for all Indemnifiable Damages in excess of the Deductible.

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(b)If the Merger is consummated, recovery from the Escrow Amount shall be the sole and exclusive remedy available to the Indemnified Persons for any claims by the Indemnified Persons against the Company Securityholders arising out of or resulting from (i) any Warranty Breach, other than with respect to a Specified Representation or resulting from the Company’s fraud or intentional misrepresentation and (ii) the matters set forth in Section 8.2(c) of the Company Disclosure Letter.  Any claim by Indemnified Persons for indemnification under this Article VIII for the matters set forth in Section 8.2(c) of the Company Disclosure Letter must be asserted prior to the fifth anniversary of the Effective Date, and following the fifth anniversary of the Effective Date the Company Securityholders’ obligation to indemnify Indemnified Persons for unasserted claims associated with the matters set forth in Section 8.2(c) of the Company Disclosure Letter shall terminate.  Without limiting the generality of the foregoing, the Company Securityholders’ maximum liability for all Indemnifiable Damages, other than those arising out of or resulting from (i) any breach of a Specified Representation, (ii) any Warranty Breach resulting from the Company’s fraud or intentional misrepresentation, (iii) any breach or nonfulfillment of any covenant made by the Company in this Agreement, or (iv) any Covered Tax, shall not exceed the Escrow Amount (the “Cap”); provided, however, and notwithstanding anything to the contrary contained herein, the Company Securityholders’ maximum liability for all Indemnifiable Damages arising out of or resulting from the matters set forth in Section 8.2(c) of the Company Disclosure Letter shall be $5,000,000.  For the avoidance of doubt, amounts actually paid by the Company Securityholders in respect of Indemnifiable Damages arising out of or resulting from the matters set forth in Section 8.2(c) of the Company Disclosure Letter shall be credited against the Cap.  No Company Securityholder’s liability under this Article VIII shall exceed the aggregate amount such Company Securityholder has the right to receive in exchange for its shares of Company Common Stock and its Company Options pursuant to Section 1.9(a).

(c)With respect to the matters that are the subject of Section 8.2(d) hereof, the Company Securityholders shall pay all claims of Indemnifiable Damages with respect to any Covered Tax that are payable on or prior to the Tax Indemnity Calculation Date (the “Pre-Calculation Tax Indemnities”).  Within 30 days after the Tax Indemnity Calculation Date, Acquiror shall pay to the Exchange Agent (and the Company’s current payroll provider in respect of the portion of such amount allocable to the holders of Company Employee Options per the Pro Rata Share as stated in the Spreadsheet) for distribution to the Company Securityholders the Acquiror Indemnity Percentage of the Pre-Calculation Tax Indemnities, up to an amount equal to the Acquiror Refund Portion of the Covered Refunds received on or prior to the Tax Indemnity Calculation Date.  Acquiror shall bear the Acquiror Indemnity Percentage of any Indemnifiable Damages with respect to Covered Taxes that arise after the Tax Indemnity Calculation Date, up to the amount of the “Acquiror Remaining Refund”, and the Company Securityholders shall bear the remainder in accordance with the terms of this Article VIII.

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(d)Indemnifiable Damages that may be recovered from the Escrow Amount shall take account of and be reduced by (i) any amounts actually recovered by the Indemnified Persons pursuant to any indemnification by or indemnification agreement with any third party, net of any expenses reasonably incurred in connection with the recovery of such amounts, and (ii) the net amount of any insurance proceeds actually received by the Indemnified Person in respect thereof, which amount may be reduced by the amount by which insurance premiums of the Indemnified Persons are increased as a result of the Indemnifiable Damages for which such insurance proceeds were received by the Indemnified Persons (each source identified in clauses (i) and (ii), a “Collateral Source”).  The Indemnified Persons shall use commercially reasonable efforts to seek recovery from relevant Collateral Sources.  If the amount to be netted hereunder from any payment required under Section 8.2 is determined after payment by the Company Securityholders of any amount otherwise required to be paid to an Indemnified Person under this Article VIII, the Indemnified Persons shall repay to the Company Securityholders, promptly after such determination, a sum equal to the lesser of (i) the actual amount of such indemnification or insurance proceeds (in each case, after giving effect to any deductible) with respect to such Indemnifiable Damages or (ii) the actual amount of the indemnification payment previously paid by the Company Securityholders with respect to such Indemnifiable Damages.

(e)The Company Securityholders and the Acquiror agree to treat any indemnity payment made pursuant to this Agreement as an adjustment to the consideration payable to the Company Securityholders under this Agreement for all income tax purposes.

8.4Adjustment to Escrow Amount.

(a)In order to seek indemnification under Section 8.2 from the Escrow Amount, an Indemnified Person shall, prior to the General Escrow Release Date, deliver to the Escrow Agent and the Securityholders’ Representative a certificate signed by any officer of Acquiror (a ”Claim Notice”) promptly after the Acquiror has knowledge of a bona fide claim for indemnification pursuant to this Article VIII:

(i)stating that the Indemnified Person has a claim for Indemnifiable Damages;

(ii)stating the amount of such Indemnifiable Damages that have been or may be incurred, paid, reserved or accrued (the “Claimed Amount”); and

(iii)specifying in reasonable detail (based upon the information then possessed by Acquiror) the individual items of such Indemnifiable Damages included in the amount so stated and the nature of the claim to which such Indemnifiable Damages are related and the provision of the Agreement which gives rise to the claim;

provided, that the Indemnified Persons may seek indemnification from the remaining balance of funds in the Escrow Account from and after the General Escrow Release Date by delivering a Claim Notice to the Escrow Agent and the Securityholders’ Representative prior to the Final Escrow Release Date.

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(b)The Securityholders’ Representative  may, at any time on or before the thirtieth (30th) day following its and the Escrow Agent’s receipt of a Claim Notice (the “Objection Period”), object (a “Claim Objection”) to a claim made in such Claim Notice by delivering written notice to the Escrow Agent and the Acquiror.  The Claim Objection shall set forth in reasonable detail the reasons for the objection to such claim and the portion of the Claimed Amount which is disputed.  If Acquiror and the Escrow Agent do not receive a Claim Objection in respect of any Claim Notice within the Objection Period in accordance with this section, the Escrow Agent shall, within two (2) Business Days following the end of the Objection Period, deliver to the Acquiror, the full amount of the Claimed Amount from the Escrow Amount.  If Acquiror and the Escrow Agent receive a Claim Objection in respect of any Claim Notice within the Objection Period in accordance with this section, the Escrow Agent shall within two (2) Business Days following the end of the Objection Period, deliver to Acquiror, an amount equal to the portion of the Claimed Amount not subject to dispute from the Escrow Amount (if any).

(c)During the twenty (20) day period following the delivery of a Claim Objection in accordance with Section 8.4(b), the Securityholders’ Representative and the Indemnified Person shall attempt in good faith to resolve such dispute.  If the dispute is not resolved within such twenty (20) day period, either the Securityholders’ Representative or the Indemnified Person may bring suit in the Delaware Courts.  Within two (2) days of the resolution of the dispute (whether by mutual agreement or by final judicial decision), a written notice executed by the Securityholders’ Representative and Acquiror (or a final judicial decision) shall be delivered to the Escrow Agent instructing the Escrow Agent as to what (if any) payment is to be made to Acquiror from the Escrow Amount (which notice shall be consistent with the terms of the resolution of the dispute).

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8.5Securityholders’ Representative.

(a)Each Company Securityholder by virtue of the approval and adoption of this Agreement or other appointment authorization documentation (other than such Company Stockholders, if any, who have perfected appraisal rights under Delaware Laws) or by accepting any consideration payable hereunder shall be deemed to have agreed to appoint Fortis Advisors LLC, a Delaware limited liability company, as its agent and attorney-in-fact (the ”Securityholders’ Representative”) for and on behalf of the Company Securityholders to act for the Company Securityholders with regard to matters pertaining to Sections 1.17, 1.18, 1.19, 5.10, 5.15, 7.3, Article VIII and Article IX, give and receive notices and communications, authorize payment to any Indemnified Person from the Escrow Amount in satisfaction of claims by any Indemnified Person, object to such payments, agree to, negotiate, enter into settlements and compromises of, and comply with orders of courts with respect to such claims, assert, negotiate, enter into settlements and compromises of, and comply with orders of courts with respect to, any other claim by any Indemnified Person against any Company Securityholder or by any Company Securityholder against any Indemnified Person or any dispute between any Indemnified Person and any such Company Securityholder, in each case relating to this Agreement or the transactions contemplated hereby and to take all other actions that are either (i) necessary or appropriate in the judgment of the Securityholders’ Representative for the accomplishment of the foregoing or (ii) specifically mandated by the terms of this Agreement or the Escrow Agreement.  All actions of the Securityholders’ Representative shall be deemed to be facts ascertainable outside this Agreement and shall be binding on the Company Securityholders as a matter of contract law.  Each Company Securityholder agrees to receive correspondence from the Securityholders’ Representative, including in electronic form.  Such agency may be changed by the Company Securityholders with the right to a majority of the Escrow Amount from time-to-time.  Notwithstanding the foregoing, the Securityholders’ Representative may resign at any time by providing written notice of intent to resign to the Company Securityholders, which resignation shall be effective upon the earlier of (A) thirty (30) calendar days following delivery of such written notice or (B) the appointment of a successor by the holders of a majority in interest of the Escrow Amount.  If the Securityholders’ Representative shall be removed, resign or otherwise be unable to fulfill its responsibilities hereunder, the Company Securityholders shall appoint a successor to the Securityholders’ Representative, and shall immediately thereafter notify Acquiror the identity of such successor.  Any such successor shall succeed the former the Securityholders’ Representative as the Securityholders’ Representative hereunder.  If for any reason there is no Securityholders’ Representative at any time, all references herein to the Securityholders’ Representative shall be deemed to refer to the Company Securityholders.  No bond shall be required of the Securityholders’ Representative, and the Securityholders’ Representative  shall not receive any compensation for its services.  A decision, act, consent or instruction of the Securityholders’ Representative, including an amendment, extension or waiver of this Agreement pursuant to its authority hereunder, shall constitute a decision of the Company Securityholders and shall be final, binding and conclusive upon the Company Securityholders.

(b)By executing this Agreement under the heading “Securityholders’ Representative,” Fortis Advisors LLC, a Delaware limited liability company, hereby (i) accepts its appointment and authorization to act as Securityholders’ Representative  as attorney-in-fact and agent on behalf of the Company Securityholders in accordance with the terms of this Agreement, and (ii) agrees to perform its obligations under, and otherwise comply with, this Section 8.5.

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(c)The Securityholders’ Representative shall not be liable to any former Company Securityholder for any act done or omitted hereunder as the Securityholders’ Representative without gross negligence or willful misconduct or bad faith (and any act done or omitted pursuant to the bona fide advice of counsel, accountants and other professionals and experts retained by the Securityholders’ Representative shall be conclusive evidence of good faith).  To the fullest extent permitted by applicable Legal Requirements, the Company Securityholders shall severally indemnify the Securityholders’ Representative and hold it harmless against any loss, liability or expense incurred without gross negligence, willful misconduct or bad faith on the part of the Securityholders’ Representative and arising out of or in connection with the acceptance or administration of its duties hereunder, including any out-of-pocket costs and expenses and legal fees and other legal costs reasonably incurred by the Securityholders’ Representative.  If not paid directly to the Securityholders’ Representative by the Company Securityholders, such losses, liabilities or expenses may be recovered by the Securityholders’ Representative from the Reserve (as defined below) and the Escrow Amount otherwise distributable to the Company Securityholders (and not distributed or distributable to an Indemnified Person or subject to a pending indemnification claim of an Indemnified Person) after the Final Escrow Release Date, pursuant to the terms hereof and of the Escrow Agreement, at the time of distribution, and such recovery will be made from the Company Securityholders s according to their respective Pro Rata Share of the Merger Consideration.  The Securityholders’ Representative shall only have the duties expressly stated in this Agreement and shall have no other duty, express or implied.  The Securityholders’ Representative shall establish a reserve to be held by the Escrow Agent in an amount not to exceed Seven Hundred Fifty Thousand Dollars ($750,000) (the “Reserve”) from the Merger Consideration with respect to the Company Securityholders based upon their Pro Rata Share to fund potential expenses of the Securityholders’ Representative in carrying out its authorized duties.  The Securityholders’ Representative  may engage attorneys, accountants, investment bankers, advisors, consultants and clerical personnel and obtain such other professional and expert assistance, and maintain such records, as the Securityholders’ Representative may deem necessary or desirable and incur other out-of-pocket expenses related to performing its services hereunder and paid out of the Reserve.  The Securityholders’ Representative  may in good faith rely conclusively upon information, reports, statements and opinions prepared or presented by such professionals, and any action taken by the Securityholders’ Representative  based on such reliance shall be deemed conclusively to have been taken in good faith.  On the Final Escrow Release Date, the Escrow Agent shall, in accordance with the terms and conditions of the Escrow Agreement, release all remaining funds held by the Escrow Agent with respect to the Reserve (and not distributed or distributable to the Securityholders’ Representative in accordance with this Section 8.5(a)) to the Company Securityholders in accordance with each such Company Securityholder’s Pro Rata Share as set forth on the Spreadsheet.  No provision of this Agreement or the Escrow Agreement shall require the Securityholders’ Representative to expend or risk its own funds or otherwise incur any financial liability in the exercise or performance of any of its powers, rights, duties or privileges under this Agreement or the Escrow Agreement.

(d)All of the immunities and powers granted to the Securityholders’ Representative under this Agreement shall survive the Closing and/or any termination of this Agreement and the Escrow Agreement.  The grant of authority provided for in this Section 8.5: (i) is coupled with an interest and shall be irrevocable and survive the death, incompetence, bankruptcy or liquidation of the respective Company Securityholder and shall be binding on any successor thereto and (ii) shall survive the delivery of an assignment by any Company Securityholders of the whole or any fraction of his, her or its interest in the Escrow Fund.

(e)The Company shall deliver to the Securityholders’ Representative a copy of the following documents: (i) the Estimated Net Working Capital Statement, (ii) the calculation of the Merger Consideration, (iii) the Spreadsheet, (iv) the Closing Expenses Certificate, (iv) the Company Debt Certificate and (v) the Company Cash Certificate.

8.6Third-Party Claims.

(a)In respect of any third party claim that is subject of a claim by an Indemnified Person indemnification under this Article VIII (other than a claim with respect to Taxes, as to which Section 5.10 shall govern) (a “Third Party Claim”), the Indemnified Person shall, without qualification of the right to the Indemnified Person to be indemnified for Indemnifiable Damages incurred in connection with such Third Party Claim, control the defense of the Third Party Claim and shall be entitled to appoint counsel for such defense (such counsel to be reasonably acceptable to the Securityholders’ Representative).  No Indemnified Person shall consent to the entry of any judgment or enter into any settlement or resolution of such Third Party Claim without the consent of the Securityholders’ Representative, such consent not to be unreasonably withheld, conditioned or delayed.  The Securityholders’ Representative shall have the right to participate at its own expense in the defense of the liability asserted therein.  The consent by the Securityholders’ Representative to the entry of any judgment, or any settlement or resolution, of any Third Party Claim shall not compromise or limit in any way the Securityholders’ Representative’s rights hereunder to object to the claim for indemnification by the Indemnified Person or the amount of Indemnifiable Damages with respect to such Third Party Claim.

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(b)The Indemnified Person shall furnish or cause to be furnished to the Securityholders’ Representative copies of all pleadings, responsive pleadings, motions and other similar legal documents and papers received or filed in connection the Third Party Claim as may be requested by the Securityholders’ Representative.  The parties hereto agree to reasonably cooperate with each other in connection with the defense, negotiation or settlement of any Third Party Claim, including by attending such conferences, discovery proceedings, hearings, trials or appeals as may be reasonably requested in connection therewith and providing reasonable access to each other’s relevant business records and other documents and employees.

8.7Escrow Release.  On the General Escrow Release Date, the Escrow Agent shall, in accordance with the terms and conditions of the Escrow Agreement, release an amount equal to the excess (if any) of (x) the remaining balance of funds in the Escrow Account on the General Release Date (and not distributed or distributable to the Securityholders’ Representative in accordance with Section 8.5(a) or subject to a pending indemnification claim of an Indemnified Person) over (y) $5,000,000, to the Company Securityholders in accordance with each such Company Securityholder’s Pro Rata Share as set forth on the Spreadsheet.  On the earlier of (a) the fifth anniversary of the Closing Date, (b) the fifth Business Day following the execution of a settlement agreement and release of the matters set forth in Section 8.2(c) of the Company Disclosure Letter, which settlement agreement and release shall be approved in accordance with Section 8.6(a) hereof, and (c) the fifth Business Day following the final and non-appealable determination of the matters set forth in Section 8.2(c) of the Company Disclosure Letter (the “Final Escrow Release Date”), the Escrow Agent shall, in accordance with the terms and conditions of the Escrow Agreement release an amount equal to the remaining balance of funds in the Escrow Account (and not distributed or distributable to the Securityholders’ Representative in accordance with Section 8.5(a) or subject to a pending indemnification claim of an Indemnified Person) to the Company Securityholders’ in accordance with each such Company Securityholder’s Pro Rata Share as set forth on the Spreadsheet; provided that, if the Final Escrow Release Date is prior to the General Escrow Release Date, the Final Escrow Release Date shall be the date that is fifteen (15) months after the Closing Date.

8.8Allocation of Taxes.  For purposes of the determination of the Covered Tax described in Clause (A) of the definition thereof in respect of a Straddle Period, the definition of Covered Tax shall be deemed to include the amount that would be payable if the relevant Tax period ended on and included the Closing Date.  All determinations necessary to give effect to the allocation set forth in the foregoing sentence shall be made in a manner consistent with prior practice of the Company and the Company Subsidiaries.

ARTICLE IX

GENERAL PROVISIONS

9.1Notices.  Any notices and other communications hereunder shall be in writing and shall be deemed given and received (i) on the date of delivery if delivered personally, (ii) on the date of confirmation of receipt (or, the first Business Day following such receipt if the date is not a Business Day) if delivered by a nationally recognized overnight courier service (providing written proof of delivery), such as Federal Express, (iii) on the date of confirmation of receipt (or, the first Business Day following receipt if the date is not a Business Day) if sent via facsimile to the parties hereto at the following address, or at such other address for a party as shall be specified by like notice, provided that a notice of change in address shall not be deemed to have been given until received by the addressee:

(i)           if to Acquiror or Sub, to:

Affymetrix, Inc.

3420 Central Expressway

Santa Clara, California 95051

Attention:  General Counsel

Facsimile No.:  (408) 731-5380

Telephone No.:  (408) 731-5000

with a copy (which shall not constitute notice) to:

Davis Polk & Wardwell LLP

1600 El Camino Real, Suite 100

Menlo Park, California 94025

Attention:  William M. Kelly

Sarah K. Solum

Facsimile No.:  (650) 752-2111

Telephone No.:  (650) 752-2000

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(ii)           if to the Company, to:

eBioscience Holding Company, Inc.

10255 Science Center Drive

San Diego, California 92121

Attention:  Chief Executive Officer

Facsimile No.:  (858) 430-5207

Telephone No.:  (858) 784-5075

with a copy (which shall not constitute notice) to:

DLA Piper LLP (US)

4365 Executive Drive, Suite 1100

San Diego, California 92121

Attention:  Jeffrey T. Baglio

Facsimile No.:  (858) 638-5058

Telephone No.:  (858) 677-1400

(iii)           If to the Securityholders’ Representative, to:

Fortis Advisors LLC

10505 Sorrento Valley Road, Suite 220

San Diego, California 92121

Attention:  Notice Department

Facsimile No.:  (858) 408-1843

Telephone No.:  (858) 227-9280

with a copy (which shall not constitute notice) to:

DLA Piper LLP (US)

4365 Executive Drive, Suite 1100

San Diego, California 92121

Attention:  Jeffrey T. Baglio

Facsimile No.:  (858) 638-5058

Telephone No.:  (858) 677-1400

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9.2Interpretation.  When a reference is made in this Agreement to Articles, Sections or Exhibits, such reference shall be to an Article or Section of, or an Exhibit to this Agreement unless otherwise indicated.  The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.  The words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.”  The phrases “provided to,” “furnished to,” and phrases of similar import when used herein, unless the context otherwise requires, shall mean that a true, correct and complete copy of the information or material referred to has been provided to the party to whom such information or material is to be provided.  Unless the context of this Agreement otherwise requires:  (a) words of any gender include each other gender; (b) words using the singular or plural number also include the plural or singular number, respectively; and (c) the terms “hereof,” “herein,” “hereunder” and derivative or similar words refer to this entire Agreement.

9.3Counterparts.  This Agreement may be executed manually, by electronic transmission or by facsimile by the parties hereto, in one or more counterparts, all of which shall be considered one and the same instrument and shall become effective when one or more counterparts have been signed by each of the parties hereto and delivered to the other parties hereto; it being understood that all parties hereto need not sign the same counterpart.

9.4Entire Agreement; Parties in Interest.  This Agreement and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto, including all the exhibits attached hereto, and the Schedules, including the Company Disclosure Letter, (a) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter hereof, except for the Confidentiality Agreement, the Escrow Agreement and the Letters of Transmittal, which shall continue in full force and effect, and shall survive any termination of this Agreement, in accordance with their respective terms and (b) are not intended to confer, and shall not be construed as conferring, upon any Person other than the parties hereto any rights or remedies hereunder (except that Section 5.11 is intended to benefit former, current and future officers and directors of the Company and the Company Subsidiaries and Article VIII is intended to benefit Indemnified Persons).

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9.5Assignment.  Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise by any of the parties hereto without the prior written consent of the other parties hereto, and any such assignment without such prior written consent shall be null and void, except that Acquiror may assign this Agreement to any direct or indirect wholly owned subsidiary of Acquiror without the prior consent of the Company; provided, however, that Acquiror shall remain liable for all of its obligations under this Agreement.  Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and assigns.

9.6Severability.  In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and shall be interpreted so as reasonably to effect the intent of the parties hereto.  The parties hereto shall use all reasonable efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that shall achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

9.7Remedies Cumulative.  Except as provided by Section 8.3(b), any and all remedies herein expressly conferred upon a party hereto shall be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party hereto of any one remedy shall not preclude the exercise of any other remedy and nothing in this Agreement shall be deemed a waiver by any party of any right to specific performance or injunctive relief.  It is accordingly agreed that the parties, including without limitation, Acquiror, Sub, the Company, or if after the Effective Time, the Securityholders’ Representative on behalf of the Company Securityholders, shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which they are entitled at law or in equity, and the parties hereby waive the requirement of any posting of a bond in connection with the remedies described herein.

9.8Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to such state’s principles of conflicts of law.  Each of the parties hereby expressly and irrevocably submits to the exclusive jurisdiction of the United States District Court for the District of Delaware and the jurisdiction of any other competent court of the State of Delaware (collectively, the “Delaware Courts”), preserving, however, all rights of removal to such federal court under 28 U.S.C. 1441, in respect of all disputes arising out of or in connection with this Agreement and the documents referred to in this Agreement or the transactions contemplated hereby and thereby (including resolution of disputes under Section 8.3), and hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding arising out of or in connection with this Agreement and the documents referred to in this Agreement or the transactions contemplated hereby and thereby, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in the Delaware Courts.  The parties hereby consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 9.1 or in such other manner as may be permitted by applicable Legal Requirements, shall be valid and sufficient service thereof.  Notwithstanding the foregoing, each party agrees that each of the other parties shall have the right to bring any action or proceeding for enforcement of any order or judgment entered by a Delaware Court in any other court having jurisdiction.

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9.9Rules of Construction.  The parties hereto have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, hereby waive, with respect to this Agreement, each Schedule and each Exhibit attached hereto, the application of any Legal Requirement, regulation, holding or rule of construction providing that ambiguities in an agreement or other document shall be construed against the party drafting such agreement or document.

9.10WAIVER OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WITH AND UPON THE ADVICE OF COMPETENT COUNSEL IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING BETWEEN THE PARTIES HERETO ARISING OUT OF  OR RELATING TO THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR THE ACTIONS OF ANY PARTY HERETO IN NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.

9.11Waiver of Conflicts.  Each of the parties hereto acknowledges and agrees, on its own behalf and on behalf of its directors, stockholders, partners, officers, employees, and Affiliates that the Company, and not any of its individual Company Securityholders, is the client of DLA Piper LLP (US) (“Firm”).  After the Closing, it is possible that Firm will represent the Company Securityholders, the Securityholders’ Representative and their respective Affiliates (individually and collectively, the “Seller Group”) in connection with the transactions contemplated herein or in the Escrow Agreement, the Escrow Amount and any claims made thereunder pursuant to this Agreement or the Escrow Agreement.  Acquiror and the Company hereby agree that the Firm (or any successor) may represent the Seller Group after the Closing in connection with issues that may arise under this Agreement or the Escrow Agreement, the administration of the Escrow Amount and any claims that may be made thereunder pursuant to this Agreement or the Escrow Agreement.  After the Closing, the Firm (or any successor) may serve as counsel to all or a portion of the Seller Group or any director, stockholder, partner, officer, employee, representative, or Affiliate of the Seller Group, in connection with any litigation, claim or obligation arising out of or relating to this Agreement, the Escrow Agreement, or the transactions contemplated by this Agreement or the Escrow Agreement.  Each of the parties hereto consents thereto, and waives any conflict of interest arising from such representation, and each such party shall cause any Affiliate thereof to consent to waive any conflict of interest arising from such representation.  Each such party acknowledges that such consent and waiver is voluntary, that it has been carefully considered, and that the parties have consulted with counsel or have been advised they should do so in this connection.  The foregoing agreement and conflict of interest waiver set forth in this Section 9.11 will become effective upon receipt by the Acquiror at the address set forth in Section 9.1, addressed to the attention of the General Counsel, of written confirmation from that Firm that: (1) it will not disclose or use any confidential information that it has obtained from the Company without the prior consent of the Acquiror and will not otherwise use or disclose any such confidential information in connection with any representation of the Seller Group and (2) it will deliver the Company’s files (excluding accounting records or other internal Firm documents, e-mails or communications or drafts of any documents) upon request by the Company.

9.12Attorney-Client Privilege.  Notwithstanding the Merger, Acquiror and the Company agree that neither the Company nor Acquiror shall have the right to assert the attorney-client privilege as to pre-closing and post-closing communications between the Company Securityholders or the Company (for the Company, only with respect to pre-closing communications), on one hand, and its counsel, the Firm, on the other hand, to the extent that the privileged communications relate to this Agreement or any of the ancillary agreements or to the transactions contemplated hereby and thereby.  The parties agree that only the Company Securityholders shall be entitled to assert or waive such attorney-client privilege in connection with such communications following the Closing.  The files generated and maintained by the Firm as a result of the Firm’s representation of the Company Securityholders and the Company in connection with this Agreement or any of the ancillary agreements or any of the transactions contemplated hereby or thereby shall be and become the exclusive property of the Company Securityholders and shall be segregated from the Firm’s files related to all other elements of its representation of the Company prior to the Closing (which shall remain the property of the Company).  The attorney-client privilege may be waived on behalf of the Company Securityholders only by the Securityholders’ Representative.  The foregoing shall not extend to (i) any communication unrelated to this Agreement, any of the ancillary agreements or the transactions contemplated hereby and thereby, (ii) communications between the Company Securityholders or the Company, on the one hand, and any Person other than the Firm, on the other hand, or (iii) any post-closing communications between the Company and the Firm or any other legal counsel.

77

IN WITNESS WHEREOF, Acquiror, Sub and the Company have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized, all as of the date first written above.

	AFFYMETRIX, INC. By: /s/ Frank Witney Name: Frank Witney Title: President and Chief Executive Officer
	EXCALIBUR ACQUISITION SUB, INC. By: /s/ Frank Witney Name: Frank Witney Title: President
	EBIOSCIENCE HOLDING COMPANY, INC. By: /s/ Don Tartre Name: Don Tartre Title: President, Chief Executive Officer, Chief Financial Officer
APPOINTMENT AND DUTIES ACCEPTED AND AGREED:
Securityholders’ Representative (solely in its capacity as the Securityholders’ Representative) with respect to Sections 1.17, 1.18, 1.19, 5.10, 5.15, 7.3 and article viii and article ix hereof) FORTIS ADVISORS LLC By: /s/ Adam Lezack Name: Adam Lezack Title: Managing Director

EX-10.11

EXHIBIT 10.11

AFFYMETRIX, INC.

PERFORMANCE BASED RESTRICTED STOCK UNIT GRANT NOTICE AND AGREEMENT

Franklin R Witney

219 Cross Road

Oakland, CA United States 94618                                                                     Option Number: 987138

ID: 903874

Plan: Affymetrix, Inc. Amended and 2000 Equity Incentive Plan (the “Plan)

1.      Grant of Restricted Stock Units.  AFFYMETRIX, INC., a Delaware corporation (the “Company”) hereby grants to Franklin R Witney (“Recipient”) the number of restricted stock units as specified below (the “RSUs”), subject to (i) the terms specified below and the Terms and Conditions of RSUs attached as Exhibit A, and (ii) the Plan incorporated herein by reference.

2.      Definitions.  As used in this Agreement, including the Terms and Conditions of RSUs attached as Exhibit A, the following terms shall have the meanings set forth in this Section 2.

Grant Date: July 21, 2011

Number of Shares: 240,000

Settlement Date: For each RSU, except as otherwise provided in Exhibit A hereto, the date on which such RSU becomes vested in accordance with the Performance Goals and Vesting Schedule set forth below.

Performance Goals and Vesting Schedule: The RSUs are eligible to be earned in four equal annual installments on the performance conditions specified in the following table, but any earned portion of the RSUs shall remain unvested until the Vesting Date specified in the following table:

Performance

Period                  Shares                 Performance Goal                                                                                                                        Vesting Date

2011                      60,000                 Board’s approval of CEO’s long-term strategic plan                                                             December 31, 2012

2012                     60,000                 To be defined by Board or Committee*                                                                                   December 31, 2013

2013                     60,000                 To be defined by Board or Committee*                                                                                   December 31, 2014

2014                     60,000                 To be defined by Board or Committee*                                                                                   December 31, 2015

* Performance goal for each of these annual performance periods (2012-2014) will be approved no later than March of the applicable year.

For each annual performance period specified in the table above, to the extent the performance goal for any performance period is not met, the applicable installment of RSUs shall be forfeited (in whole or in part, as applicable, as determined by the Committee) as of the end of such performance period.  For the avoidance of doubt, there shall be no “catch up” in any future performance period to the extent any portion of an installment for a prior performance period is not earned.

1

3.      Treatment on Change of Control.  Notwithstanding anything to the contrary in the Plan or any other Company policy or plan, in the event of a Change in Control:  (a) to the extent any portion of the RSUs has not yet been “earned” in accordance with the foregoing performance conditions, 100% of the installment for the then-current performance period shall be deemed earned and 50% of future installments shall be deemed earned immediately prior to such Change in Control, and such earned portions shall be considered “Equity Awards” under the Company’s Change of Control Plan (as such policy may be amended or any successor change of control policy, plan or agreement applicable to Recipient, the “Change of Control Plan”); (b) any remaining unearned portion of the RSUs shall terminate immediately prior to the Change in Control and shall not be eligible for vesting in connection with, or following, the Change in Control; and (c) any previously earned (but still unvested) portion of the RSUs shall be considered “Equity Awards” under the Change of Control Plan.

AFFYMETRIX, INC.                                                                           RECIPIENT

/s/ Franklin Witney                                                                

Franklin Witney

/s/Timothy C. Barabe                                                                          July 21, 2011

Timothy C. Barabe                                                                              Date

2

Exhibit A

TERMS AND CONDITIONS OF RSUs

1.Grant.  Pursuant to the Restricted Stock Unit Grant Notice (the “Grant Notice”) to which these Terms and Conditions are attached (together with the Grant Notice, this “Agreement”), AFFYMETRIX, INC., a Delaware corporation (the “Company”), has granted to Recipient the right to receive the number of Restricted Stock Units (the “RSUs”) under the Plan as set forth in the Grant Notice (terms used but not defined herein have the meaning set forth in the Grant Notice or the Plan).  Each RSU represents the right to receive on a date determined in accordance with this Agreement one (1) Common Share.

2.Settlement of RSUs.  The Company shall issue to Recipient, on the Settlement Date with respect to each RSU to be settled on such date, one (1) Common Share.  The Company will not issue any shares hereunder if the issuance of shares at that time would violate any law or regulation and shall not be required to issue any fractional shares.

3.Tax Treatment.  Any withholding tax liabilities incurred in connection with the grant or vesting of the RSUs or the issuance of the Common Shares or otherwise incurred in connection with the RSUs and any other amounts or rights hereunder shall be satisfied by (x) only at the option and request of the Company, Recipient paying to the Company in cash or by check an amount equal to the minimum amount of taxes that the Company concludes it is required to withhold under applicable law within one business day of the day the tax event arises or (y) unless not permitted by the Committee or the Board, the Company withholding a portion of the Common Shares that would be issued on settlement of the vested RSUs having a fair market value approximately equal to the minimum amount of taxes that the Company concludes it is required to withhold under applicable law.  Notwithstanding the foregoing, Recipient acknowledges and agrees that he or she is responsible for all taxes that arise in connection with the RSUs.  The Company shall not be obligated to release any shares to Recipient unless and until satisfactory arrangements to pay such withholding taxes have been made and shall be entitled to withhold from any amounts or shares due to Recipient hereunder or otherwise in an amount sufficient to pay its withholding obligations.  This Agreement and the RSUs are intended to comply with the short-term deferral rules of Section 409A of the Code and the Treasury Regulations thereunder and shall be interpreted in a manner consistent with that intention.

4.Vesting.  The RSUs shall become vested in installments, as shown in the Grant Notice.  No additional shares become vested after Recipient’s service in any one of the positions of an employee, consultant or director of the Company (or a subsidiary of the Company) has terminated for any reason.

5.Termination of Service.  If Recipient’s service in any one of the positions of an employee, consultant or director of the Company or a subsidiary of the Company terminates for any reason, then all RSUs that have not vested on or before the date of termination of service shall automatically be forfeited to the Company and all of Recipient’s rights with respect thereto shall cease immediately upon termination. The Company determines when Recipient’s service terminates for this purpose.

6.Leaves of Absence.  For purposes of this Agreement, service does not terminate as a result of a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of service is required by the terms of the leave or by applicable law; provided that service shall terminate when the approved leave ends, unless Recipient immediately returns to active work.

7.Restrictions on Transfer.  Recipient may not sell, transfer, pledge or otherwise dispose of any of the Common Shares underlying the RSUs until after the applicable shares have been issued to Recipient on the schedule set forth in the Grant Notice and may not sell, transfer, pledge or otherwise dispose of the RSUs, other than transfer by will or by the laws of descent and distribution.  Recipient further agrees not to sell, transfer or otherwise dispose of any shares at a time when applicable laws or Company policies prohibit a sale, transfer, pledge or other disposition.  Recipient agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent.

3

8.Stock Certificates.  Certificates evidencing the Common Shares that are issued hereunder shall be registered in the name of Recipient on the stock transfer books of the Company.

9.Stockholder Rights.  Recipient will have no voting or other rights with respect to the Common Shares underlying the RSUs until such shares are issued in accordance with this Agreement.

10.No Retention Rights.  The RSUs and this Agreement do not give Recipient the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate Recipient’s service at any time, with or without cause.

11.Adjustments.  In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this Agreement may be adjusted pursuant to the Plan.

12.Applicable Law.  This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions).

13.The Plan and Other Agreements.  The text of the Plan is incorporated in this Agreement by reference.

This Agreement and the Plan constitute the entire understanding between Recipient and the Company regarding this Agreement. Any prior agreements, commitments or negotiations concerning the RSUs are superseded. This Agreement may be amended only by another written agreement.

BY ACCEPTING THIS AWARD, RECIPIENT AGREES TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THIS AGREEMENT AND IN THE PLAN.

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EX-21

EXHIBIT 21

AFFYMETRIX, INC.

LIST OF SUBSIDIARIES

Affymetrix, UK Ltd, wholly-owned subsidiary incorporated in the United Kingdom and doing business under such name.

Affymetrix France S.A.S., wholly-owned subsidiary incorporated in France and doing business under such name.

Affymetrix GmbH, wholly-owned subsidiary incorporated in Germany and doing business under such name.

Affymetrix Japan K.K., a wholly-owned subsidiary incorporated in Japan and doing business under such name.

Affymetrix Pte Ltd, wholly-owned subsidiary incorporated in Singapore and doing business under such name.

Affymetrix Italia, SRL, wholly-owned subsidiary incorporated in Italy and doing business under such name.

Affymetrix Biotech Shanghai Ltd., incorporated in China and doing business under such name.

Anatrace, Inc., wholly-owned subsidiary incorporated in Ohio and doing business under such name.

Panomics, L.L.C., wholly-owned subsidiary incorporated in California and doing business under such name.

Panomics SRL, wholly-owned subsidiary incorporated in Italy and doing business under such name.

USB Corporation, wholly-owned subsidiary incorporated in Ohio and doing business under such name.

USB Europe, GmbH, wholly-owned subsidiary incorporated in Germany and doing business under such name.

Affymetrix Biotech Ltda., wholly-owned subsidiary incorporated in Brazil and doing business under such name.

Excalibur Acquisition Subsidiary, Inc., a wholly-owned subsidiary incorporated in Delaware and doing business under such name.

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-11299, No. 333-35287, No. 333-85575, No. 333-34320, No. 333-52804, No. 333-59158, No. 333-59160, No. 333-123452, No. 333-129269, No. 333-151771, No. 333-166984 and No. 333-176638) pertaining to the 1993 Stock Plan, the 1996 Nonemployee Directors Stock Option Plan, the 1998 Stock Incentive Plan, the GMS/Affymetrix 1998 Stock Plan, the Affymetrix/Neomorphic, Inc. 1998 Stock Option Plan, the Amended and Restated 2000 Equity Incentive Plan of Affymetrix, Inc., the ParAllele BioScience, Inc. 2001 Stock Option Plan of Affymetrix, Inc. and the 2011 Employee Stock Purchase Plan of our reports dated February 28, 2012, with respect to the consolidated financial statements and schedule of Affymetrix, Inc., and the effectiveness of internal control over financial reporting of Affymetrix, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2011.

/s/ Ernst & Young LLP

San Jose, California

February 28, 2012

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Frank Witney, certify that:

1. I have reviewed this Annual Report on Form 10-K of Affymetrix, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 28, 2012	/s/ FRANK WITNEY
	Name:	Frank Witney
	Title:	Director, President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Timothy C. Barabe, certify that:

1. I have reviewed this Annual Report on Form 10-K of Affymetrix, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 28, 2012	/s/ TIMOTHY C. BARABE
	Name:	Timothy C. Barabe
	Title:	Executive Vice President and Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with this Annual Report on Form 10-K for the year ended December 31, 2011 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Each of the undersigned certifies that, to his knowledge:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Affymetrix, Inc.

February 28, 2012	/s/ FRANK WITNEY
	Name:	Frank Witney
	Title:	Director, President and Chief Executive Officer
	/S/ TIMOTHY C. BARABE
	Name:	Timothy C. Barabe
	Title:	Executive Vice President and Chief Financial Officer

This certification accompanying the Report is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities such Section, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before, on or after the date of the Report), irrespective of any general incorporation language contained in such filing.

XML

UNAUDITED QUARTERLY FINANCIAL INFORMATION

12 Months Ended

Dec. 31, 2011

UNAUDITED QUARTERLY FINANCIAL INFORMATION [Abstract]

UNAUDITED QUARTERLY FINANCIAL INFORMATION

NOTE 18—UNAUDITED QUARTERLY FINANCIAL INFORMATION

	2011											2010
	Fourth			Third			Second			First		Fourth		Third		Second			First
	Quarter			Quarter			Quarter			Quarter		Quarter		Quarter		Quarter			Quarter
	(in thousands, except per share amounts)
Total revenue	$	65,104		$	63,987		$	64,659		$	73,724	$	84,909	$	73,972	$	71,678		$	80,187
Total cost of goods sold		30,412			27,648			25,793			27,099		35,570		33,499		31,089			33,048
Net (loss) income		(14,739	)		(9,789	)		(3,672	)		39		3,960		968		(5,541	)		(9,620	)
Basic net (loss) income per common share		(0.21	)		(0.14	)		(0.05	)		0.00		0.06		0.01		(0.08	)		(0.14	)
Diluted net (loss) income per common share		(0.21	)		(0.14	)		(0.05	)		0.00		0.06		0.01		(0.08	)		(0.14	)

In 2010, the Company recognized total gains of $6.3 million as part of the repurchases of its Notes.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2011

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

Certain prior year amounts on the Company’s Consolidated Statements of Comprehensive Loss and Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.

USE OF ESTIMATES

The preparation of the consolidated financial statements is in conformity with U.S. generally accepted accounting principles (“US GAAP”) which require management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

FOREIGN CURRENCY

Assets and liabilities of non-U.S. subsidiaries that use the local currency as their functional currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income (loss) within stockholders’ equity. Income and expense accounts are translated at average exchange rates during the year. Foreign currency transaction gains and losses are recognized, net of hedging activity, in interest income and other, net and were comprised of net losses of $2.5 million, less than $0.1 million and $2.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.

CASH EQUIVALENTS, AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS

Restricted Cash

The Company’s restricted cash balances consist primarily of outstanding letters of credits that are fully cash collateralized and reserves for value added tax in foreign locations.

Marketable Securities

The Company’s investments consist of marketable equity and debt securities, including U.S. government notes and bonds; corporate notes, bonds and asset-backed securities; mortgage-backed securities, municipal notes and bonds; and publicly traded equity securities. The Company reports all securities with maturities at the date of purchase of 90 days or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. The Company’s investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity. The cost of its marketable securities is adjusted for the amortization of premiums and discounts to maturity. This amortization is included in interest income and other, net. Realized gains and losses, as well as interest income, on available-for-sale securities are also included in interest income and other, net. The cost of securities sold is based on the specific identification method. The fair values of securities are based on quoted market prices. The Company includes its available-for-sale securities that have an effective maturity of less than twelve months as of the balance sheet date in current assets and those with a maturity greater than twelve months as of the balance sheet date in non-current assets.

Non-marketable Securities

As part of the Company’s strategic efforts to gain access to potential new products and technologies, it invests in equity securities of certain private biotechnology companies. These investments are included in other assets in the Consolidated Balance Sheets and are carried at cost. The Company also owns approximately 6% interest in a limited partnership investment fund that is accounted for under the equity method.

Other-than-temporary Impairment

All of the Company’s marketable and non-marketable securities are subject to quarterly reviews for impairment that is deemed to be other-than-temporary (“OTTI”). An investment is considered other-than-temporarily impaired when its fair value is below its amortized cost and (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis or (3) the present value of expected cash flows is not expected to recover the entire amortized cost basis. Below is a summary of the Company’s analysis:

● Marketable securities –As part of its review, the Company is required to take into consideration current market conditions, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities and other factors when evaluating for the existence of OTTI in its securities portfolio. OTTI is separated into credit-related losses, which exist when amortized cost basis is not expected to be fully recovered, and non-credit related losses, which are the result of all other factors, such as illiquidity. Any credit-related OTTI is recognized in earnings while noncredit-related OTTI is recorded in other comprehensive income (loss) (“OCI”). During the year ended December 31, 2011, the Company recorded an impairment charge of $0.8 million due to OTTI of its investment in a publicly-traded company. Refer to Note 5. “Financial Instruments – Investments in Debt and Equity Securities” for further information.

● Non-marketable securities – The Company periodically monitors the liquidity and financing activities of its non-marketable securities to determine if any impairment exists and accordingly writes down, to the extent necessary, the carrying value of the non-marketable equity securities to their estimated fair values. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook of the issuer for the company, including key operational and cash flow metrics, current market conditions; and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in estimated fair value. During the year ended December 31, 2011, the Company recorded impairment charges totaling $1.3 million, primarily related to its investment in a limited partnership investment fund. Refer to Note 5. “Financial Instruments – Non-Marketable Securities” for further information.

ACCOUNTS RECEIVABLE

Trade accounts receivable are recorded at net invoice value. The Company considers amounts past due based on the related terms of the invoice. The Company reviews its exposure to amounts receivable and provides an allowance for specific amounts if collectability is no longer reasonably assured. The Company also provides an allowance for a percentage of the gross trade receivable balance (excluding any specifically reserved amounts) based on its collection history. The allowance for doubtful accounts was not material at December 31, 2011 and 2010.

DERIVATIVE INSTRUMENTS

The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges must be adjusted to fair value through earnings at each reporting date.

For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the Company measures the effectiveness of the derivative instruments by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. The effective portion of the gain or loss on the derivative instrument is reported as a component of OCI in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. Refer to Note 5. “Financial Instruments – Derivative Financial Instruments” for further information.

INVENTORIES

Inventory cost is computed on an adjusted standard basis (which approximates actual cost on a first-in, first-out basis). Provisions for slow moving, potentially excess and obsolete inventories are provided based on estimated demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets or the lease term, whichever is shorter. Equipment and furniture is depreciated over useful lives generally ranging from 3 to 7 years and leasehold improvements are depreciated over the shorter of the expected life of the asset or lease terms generally ranging from 3 to 15 years. Maintenance and repair costs are expensed as incurred. The Company reassesses the useful life on its property and equipment on a periodic basis and may adjust the lives accordingly.

In the fourth quarter of 2011, the Company entered into a non-binding letter of intent to sell its facility located in West Sacramento, California to a third-party. As a result of the letter of intent, the Company reclassified the facility from long-lived assets held and used to held-for-sale and recognized an impairment charge of $1.7 million to bring the carrying value of the facility to its estimated fair market value, which is the anticipated selling price under the non-binding letter of intent. As of December 31, 2011, an executed purchase agreement has not been entered into and neither party has any binding obligations under the letter of intent.

ACQUIRED TECHNOLOGY RIGHTS

Acquired technology rights are carried at cost less accumulated amortization and are comprised of licenses to technology covered by patents held by third parties or acquired by the Company. Purchased intangible assets other than goodwill are required to be amortized over their useful lives unless these lives are determined to be indefinite. Amortization is recorded over the estimated useful life of the underlying patents, which has historically ranged from one to thirteen years. In 2011 and 2010, the Company did not identify any indicators of impairment during its annual test on the acquired technology rights and did not recognize any impairment losses. Refer to Note 8, “Acquired Technology Rights”, for further information.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. For the years ended December 31, 2011 and 2010, the Company recognized $1.7 million and $0.3 million, respectively, of impairment charges on its long-lived assets. No impairment was recorded for the year ended December 31, 2009.

INCOME TAXES

Income tax expense is based on pre-tax financial accounting income. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. To the extent the Company believes that realization of the deferred tax assets is not more likely than not, the Company establishes a valuation allowance. Significant estimates are required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance to be recorded against net deferred tax assets. Some of these estimates are based on interpretations of existing tax laws or regulations. The Company believes that its estimates are reasonable and that its reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on the Company’s future effective tax rate. These factors include, but are not limited to, changes in overall levels of characterization and geographical mix of pretax earnings (losses), changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of deferred tax assets or liabilities, future levels of research and development spending, nondeductible expenses, applicability of tax holidays and ultimate outcomes of income tax audits. Relative to uncertain tax positions, the Company only recognizes the tax benefit if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Company’s financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

CONTINGENCIES

The Company is subject to various legal proceedings principally related to intellectual property matters. Based on the information available at the most recent balance sheet date, the Company assesses the likelihood of any material adverse judgments or outcomes that may result from these matters, as well as the range of possible or probable loss, if any. If losses are probable and reasonably estimable, the Company will record a reserve. Any reserves recorded may change in the future due to new developments in each matter.

REVENUE RECOGNITION

Overview

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or system is required or performance obligations remain, revenue is deferred until all the acceptance criteria or performance obligations have been met.

The Company derives the majority of its revenue from product sales of probe arrays, reagents, and related instrumentation that may be sold individually or combined with any of the products, services or other sources of revenue. When a sale combines multiple elements upon delivery or performance of multiple products, services and/or rights to use assets, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value.

Effective January 1, 2010, the Company adopted Auditing Standards Update (“ASU”) No. 2009-13, Revenue Recognition (ASC Topic 605) – Multiple-Deliverable Revenue Arrangements on a prospective basis, which establishes the relative selling price method whereby the Company is required to allocate consideration to all deliverables at the inception of the arrangement based on their relative selling prices. This change in accounting principle did not have a material impact on the Company’s financial results.

Product Sales

Product sales include sales of probe arrays, reagents and related instrumentation. Probe array, reagent and instrumentation revenue is recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.

Services

Services revenue includes equipment service revenue; scientific services revenue, which includes associated consumables; and revenue from custom probe array design fees. Revenue from equipment service contracts are recognized ratably over the life of the contract.

Revenue from scientific and DNA analysis services are recognized upon shipment of the required data to the customer.

Revenue from custom probe array design fees associated with the Company’s GeneChip® CustomExpress™ and CustomSeq™ products are recognized when the associated products are shipped.

Royalties and Other Revenue

Royalties and other revenue include license revenue; royalties earned from third party license agreements; milestones and royalties earned from collaborative product development and supply agreements; subscription fees earned under GeneChip® array access programs; research revenue, which mainly consists of amounts earned under government grants.

License revenue is generally recognized upon the execution of an agreement or is recognized ratably over the period of expected performance.

Revenue from royalties is recognized under the terms of the related agreement.

The Company enters into collaborative arrangements which generally include a research and product development phase and a manufacturing and product supply phase. These arrangements may include up-front nonrefundable license fees, milestones, the rights to royalties based on the sale of final product by the partner, product supply agreements and distribution arrangements.

Any up-front, nonrefundable payments from collaborative product development agreements are recognized ratably over the research and product development period, and at-risk substantive based milestones are recognized when earned. Any payments received which are not yet earned are included in deferred revenue.

Transactions with Distributors

The Company recognizes revenue from transactions with distributors when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectability is reasonably assured. The Company’s agreements with distributors do not include rights of return.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist of costs incurred for internal, collaborative and grant-sponsored research and development. Research and development expenses include salaries, contractor fees, building costs, utilities and allocations of shared corporate services. In addition, the Company funds research and development at other companies and research institutions under agreements which are generally cancelable. All such costs are charged to research and development expense as incurred.

SOFTWARE DEVELOPMENT COSTS

Development Costs of Software to Be Sold, Leased or Marketed

Certain software development costs subsequent to the establishment of technological feasibility are capitalized. The Company’s software is deemed to have achieved technological feasibility at the point a working model of the software product is developed. For the years ended December 31, 2011 and 2010, the Company did not capitalize any software development costs. Amortization costs for the years ended December 31, 2011 and 2010 on software development costs previously capitalized were $0.7 million for both years and $1.1 million for the year ended December 31, 2009. The costs of developing routine software enhancements are expensed as research and development when incurred because of the short time between the determination of technological feasibility and the date of general release of the related products.

Internal-Use Software

For the year ended December 31, 2011, the Company did not capitalize any costs associated with internal-use software. For the year ended December 31, 2010, the Company capitalized approximately $0.7 million. All costs associated with software developed for internal use will be amortized from the time at which the software is ready for its intended use. As of December 31, 2011, the Company had recognized total cumulative amortization costs of $0.5 million.

ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs recorded for the years ended December 31, 2011, 2010 and 2009 were $0.6 million, $1.2 million and $0.9 million, respectively.

SHARE-BASED COMPENSATION

The Company estimates the fair value of its stock options using the Black-Scholes-Merton (“BSM”) option pricing model. This model requires the use of certain estimates and assumptions such as the expected term of options, estimated forfeitures, expected volatility of the Company’s stock price, expected dividends and the risk-free interest rate at the grant date to determine the fair value of the stock options. The fair value of its restricted stock and restricted stock units, collectively referred to as restricted stock awards (“RSAs”), is based on the market price of the Company’s common stock on the grant date. The Company recognizes the fair value of its share-based compensation as expense on a straight-line basis over the requisite service period of each award, generally four years. Refer to Note 14, “Stockholders’ Equity and Share-Based Compensation Expense” for further information.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on the Company’s available-for-sale securities that are excluded from net loss, unrealized gains and losses on cash flow hedges and foreign currency translation adjustments. Total comprehensive income (loss) has been disclosed in the Company’s Consolidated Statements of Comprehensive Loss.

At December 31, 2011 and 2010, the components of accumulated other comprehensive income, net of tax, are as follows (in thousands):

	2011		2010
Foreign currency translation adjustment	$	821	$	742
Unrealized gains on available-for-sale and non-marketable securities		845		634
Unrealized gains on cash flow hedges		826		-
Accumulated other comprehensive income, net of tax	$	2,492	$	1,376

NET LOSS PER COMMON SHARE

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

Diluted earnings per share, if any, include certain potential dilutive securities from common stock subject to repurchase, outstanding stock options (on the treasury stock method), shares purchased under the employee stock purchase plan and convertible notes (on the as-if-converted basis). The potentially dilutive securities excluded from diluted earnings per common share because their effect would have been anti-dilutive, on an actual outstanding basis, were as follows (in thousands):

	Year Ended December 31,
	2011		2010		2009
Employee stock options		6,276		6,636		6,216
Restricted stock and restricted stock units		2,597		1,953		2,154
Employee stock purchase plan		64		-		-
Convertible notes		3,169		3,169		8,207
Total		12,106		11,758		16,577

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted this guidance on a retrospective basis and the adoption did not have a material effect on its consolidated financial statements.

In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this standard in the first quarter of 2012 and the adoption will not have a material impact on its financial statements and disclosures.

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Schedule II-Valuation and Qualifying Accounts

12 Months Ended

Dec. 31, 2011

Schedule II-Valuation and Qualifying Accounts [Abstract]

Schedule II-Valuation and Qualifying Accounts

Schedule II-Valuation and Qualifying Accounts

(in thousands)

			Additions
	Balance at		Charged to
	Beginning of		Operations or			Write-offs, net			Balance at
	Period		Other Accounts			of recoveries			End of Period
Allowance for Doubtful Accounts:
Year Ended December 31, 2011	$	949	$	(282	)	$	(171	)	$	496
Year Ended December 31, 2010	$	1,853	$	(685	)	$	(219	)	$	949
Year Ended December 31, 2009	$	2,213	$	(87	)	$	(273	)	$	1,853

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NATURE OF OPERATIONS

12 Months Ended

Dec. 31, 2011

NATURE OF OPERATIONS

NOTE 1—NATURE OF OPERATIONS

Affymetrix, Inc. (“Affymetrix” or the “Company”) is engaged in the development, manufacture, sale and service of consumables and systems for genetic analysis in the life sciences and clinical healthcare markets. Affymetrix has developed its GeneChip® system and related microarray technology as the platform of choice for acquiring, analyzing and managing complex genetic information. The Company’s integrated GeneChip® microarray platform includes: disposable DNA probe arrays (chips) consisting of nucleic acid sequences set out in an ordered, high density pattern, certain reagents for use with the probe arrays, a scanner and other instruments used to process the probe arrays, and software to analyze and manage genomic or genetic information obtained from the probe arrays. Related microarray technology also offered by Affymetrix includes licenses for fabricating, scanning, collecting and analyzing results from complementary technologies. The Company currently sells its products directly to pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies as well as academic research centers, government research laboratories, private foundation laboratories and clinical reference laboratories in North America and Europe. The Company also sells some of its products through life science supply specialists acting as authorized distributors in Latin America, India, the Middle East and Asia Pacific regions, including China.

On November 29, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire eBioscience Holding Company, Inc. (“eBioscience”) for approximately $330 million in cash, subject to certain adjustments as provided in the Merger Agreement. eBioscience is a privately-held San Diego, California-based company engaged in the development, manufacture and sale of flow cytometry and immunoassay reagents for immunology and oncology research and diagnostics. The merger is subject to customary closing conditions, including the receipt of financing for the merger.

In connection with the Merger Agreement, the Company entered into a commitment letter with financing sources providing for $190 million of senior secured credit. The conditions to funding these facilities have not been satisfied, and as a result we will not be able to complete the eBioscience acquisition unless the terms of the acquisition and the financing are restructured. The Company is in discussions with financing sources and with eBioscience regarding the possibility of restructuring the committed financing but no agreements or understandings has been reached. The Company has waived eBioscience’s obligations under the non-solicitation provisions set forth in the Merger Agreement and understands that eBioscience is considering alternatives to the merger. The Merger Agreement may be terminated by either party if the closing of the merger has not occurred by March 31, 2012, so long as the breach of the Merger Agreement by the party seeking to terminate has not been the proximate cause of or resulted in the failure of the merger to occur on or before such date.

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 201,937	$ 35,484
Restricted cash	692	287
Available-for-sale securities-short-term portion	7,937	67,223
Accounts receivable, net	44,021	52,281
Inventories	42,851	49,373
Deferred tax assets-short-term portion	364	1,071
Property and equipment, net-held for sale	9,000	0
Prepaid expenses and other current assets	7,785	9,422
Total current assets	314,587	215,141
Available-for-sale securities-long-term portion	54,501	134,190
Property and equipment, net	30,583	54,177
Acquired technology rights, net	29,525	38,858
Deferred tax assets-long-term portion	450	4,894
Other long-term assets	8,369	13,525
Total assets	438,015	460,785
Current liabilities:
Accounts payable and accrued liabilities	44,774	44,259
Deferred revenue-short-term portion	9,852	10,950
Total current liabilities	54,626	55,209
Deferred revenue-long-term portion	3,959	4,601
Other long-term liabilities	9,127	11,748
Convertible notes	95,469	95,472
Stockholders' equity:
Convertible redeemable preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued and outstanding at December 31, 2010 and 2009	0	0
Common stock, $0.01 par value; 200,000 shares authorized; 70,454 and 70,578 shares issued and outstanding at December 31, 2011 and 2010, respectively	704	706
Additional paid-in capital	750,332	742,206
Accumulated other comprehensive income	2,492	1,376
Accumulated deficit	(478,694)	(450,533)
Total stockholders' equity	274,834	293,755
Total liabilities and stockholders' equity	$ 438,015	$ 460,785

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $) In Thousands, except Share data, unless otherwise specified	Convertible redeemable preferred stock [Member]	Common stock [Member]	Additional paid-in capital [Member]	Accumulated other comprehensive income (loss) [Member]	Accumulated deficit [Member]	Total
Balance at Dec. 31, 2008	$ 0	$ 703	$ 721,641	$ (2,296)	$ (416,391)	$ 303,657
Balance (in shares) at Dec. 31, 2008	0	70,267				70,267
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Common stock issued upon exercise of stock options and restricted stock, net of tax withholding related to vesting of restricted stock units		7	(820)			(813)
Share-based compensation expense			11,148			11,148
Common stock issued upon exercise of stock options and restricted stock, net of tax withholding related to vesting of restricted stock units (in shares)		733				733
Income tax benefit from share-based compensation			1,409			1,409
Unrealized gain (loss) on investments, net of tax				6,063		6,063
Unrealized gain on hedging contracts, net of tax				0		0
Foreign currency translation adjustment, net of tax				284		284
Net loss					(23,909)	(23,909)
Balance at Dec. 31, 2009	0	710	733,378	4,051	(440,300)	297,839
Balance (in shares) at Dec. 31, 2009	0	71,000				71,000
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Common stock issued upon exercise of stock options and restricted stock, net of tax withholding related to vesting of restricted stock units		(4)	(1,178)			(1,182)
Share-based compensation expense			9,910			9,910
Common stock issued upon exercise of stock options and restricted stock, net of tax withholding related to vesting of restricted stock units (in shares)		(422)				(422)
Income tax benefit from share-based compensation			96			96
Unrealized gain (loss) on investments, net of tax				(3,090)		(3,090)
Unrealized gain on hedging contracts, net of tax				0		0
Foreign currency translation adjustment, net of tax				415		415
Net loss					(10,233)	(10,233)
Balance at Dec. 31, 2010	0	706	742,206	1,376	(450,533)	293,755
Balance (in shares) at Dec. 31, 2010	0	70,578				70,578
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Common stock issued upon exercise of stock options and restricted stock, net of tax withholding related to vesting of restricted stock units		(2)	(681)			(683)
Share-based compensation expense			8,771			8,771
Common stock issued upon exercise of stock options and restricted stock, net of tax withholding related to vesting of restricted stock units (in shares)		(124)				(124)
Income tax benefit from share-based compensation			36			36
Unrealized gain (loss) on investments, net of tax				211		211
Unrealized gain on hedging contracts, net of tax				826		826
Foreign currency translation adjustment, net of tax				79		79
Net loss					(28,161)	(28,161)
Balance at Dec. 31, 2011	$ 0	$ 704	$ 750,332	$ 2,492	$ (478,694)	$ 274,834
Balance (in shares) at Dec. 31, 2011	0	70,454				70,454

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INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES [Abstract]

INCOME TAXES

NOTE 15—INCOME TAXES

The following table presents the U.S. and foreign components of consolidated loss before income taxes and the provision (benefit) for income taxes (in thousands):

	Year Ended December 31,
	2011			2010			2009
(LOSS) INCOME BEFORE INCOME TAXES:
U.S.	$	(26,778	)	$	(15,722	)	$	(25,150	)
Foreign		22			7,659			1,083
Loss before income taxes	$	(26,756	)	$	(8,063	)	$	(24,067	)
PROVISION (BENEFIT) FOR INCOME TAXES:
Current:
Federal	$	-		$	-		$	(2,248	)
State		106			37			25
Foreign		1,038			2,222			2,123
Subtotal		1,144			2,259			(100	)
Deferred:
Federal		-			-			-
State		-			-			-
Foreign		261			(89	)		(58	)
Subtotal		261			(89	)		(58	)
Income tax provision (benefit)	$	1,405		$	2,170		$	(158	)

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

	Year Ended December 31,
	2011			2010			2009
Tax at federal statutory rate	$	(9,364	)	$	(2,822	)	$	(8,423	)
State taxes, net		(1,740	)		(1,646	)		(2,315	)
Non-deductible stock compensation		453			626			659
Non-deductible acquisition costs		878			-			-
Foreign rate differential		1,274			(547	)		1,686
Research credits		(692	)		(991	)		(1,772	)
Change in valuation allowance		10,461			7,026			8,968
Other		135			524			1,039
	$	1,405		$	2,170		$	(158	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s assets are as follows (in thousands):

	December 31,
	2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	57,677		$	52,327
Tax credit carryforwards		47,513			40,047
Deferred revenue		1,632			1,717
Capitalized research and development costs		487			596
Intangibles		20,462			21,562
Share-based compensation		4,284			5,422
Accrued compensation		2,025			2,125
Accrued warranty		570			576
Inventory reserves		4,860			5,013
Reserves and other		10,928			11,236
Depreciation and amortization		21,323			21,569
Other, net		1,742			2,844
Total deferred tax assets		173,503			165,034
Valuation allowance for deferred tax assets		(154,107	)		(142,565	)
Net deferred tax assets		19,396			22,469
Net deferred tax liabilities:
Acquired intangibles		(2,459	)		(3,670	)
Cancellation of debt		(9,669	)		(9,653	)
Foreign earnings		(5,139	)		-
Other, net		(1,315	)		(3,181	)
Total deferred tax liabilities		(18,582	)		(16,504	)
Net deferred tax assets	$	814		$	5,965

As of December 31, 2011, the Company had total U.S. net operating loss carryforwards of $288.6 million, comprised of $162.0 million for U.S. federal purposes, which expire in the years 2021 through 2031 if not utilized, and $126.6 million for state purposes, the majority of which expire in the years 2012 through 2031 if not utilized. Additionally, the Company has federal research and development tax credit carryforwards of approximately $23.6 million, which expire in the years 2017 through 2031 if not utilized. The Company also has state research and development tax credit carryforwards and other various tax credit carryforwards of approximately $39.1 million. Substantially all of the state tax credits can be carried forward indefinitely. Utilization of net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation may result in the expiration of the net operating loss before utilization.

As of December 31, 2011, the Company has recorded a full valuation allowance against all U.S. and certain foreign deferred tax assets. The valuation allowance increased by $11.5 million and $3.2 million for the years ended December 31, 2011 and 2010, respectively. The increase during the year ended December 31, 2011 is attributable to U.S. losses and a release in reserves related to uncertain tax positions. Approximately $28.7 million of the valuation allowance as of December 31, 2011 is attributable to the income tax benefits of share-based compensation, the benefit of which will be credited to stockholders’ equity when, and if, realized.

Not included in the deferred tax assets as of December 31, 2011 is approximately $4.7 million of tax benefits related to share-based compensation. When realized, the tax benefit of these assets will be accounted for as a credit to stockholders’ equity, rather than a reduction of the income tax provision.

Of the total tax benefits realized from the share-based compensation the amounts recorded to stockholders’ equity were approximately less than $0.1 million and $0.1 million for the years ended December 31, 2011 and 2010, respectively.

During the year ended December 31, 2011, due to potential future transactions that would require cash outflows, the Company changed its assertion such that foreign earnings are no longer intended to be permanently reinvested. As a result, the Company recorded a net deferred tax liability of approximately $0.8 million related to foreign undistributed earnings, which was offset by a reduction in the Company’s valuation allowance against its deferred tax assets.

A portion of the Company’s operations in Singapore operate under various tax holidays and tax incentive programs, which expire in whole or in part at various dates through 2017. There was a minimal net impact of these tax holidays and tax incentive programs for the year ended December 31, 2011.

The following table presents the Company’s total amount of gross unrecognized tax benefits (in thousands):

	2011			2010
Unrecognized tax benefits, beginning of year	$	20,758		$	19,866
Gross increases - tax positions in prior period		517			167
Gross decreases - tax positions in prior period		(201	)		(361	)
Gross increases - current period tax positions		1,203			1,086
Settlements		(5,797	)		-
Unrecognized tax benefits, end of year	$	16,480		$	20,758

If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $2.7 million. As of December 31, 2011, the Company does not anticipate any material changes to the amount of unrecognized tax benefits during the next 12 months. The Company classifies interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2011, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.2 million for a total cumulative amount included in non-current income taxes payable of $0.7 million as of December 31, 2011.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company’s major tax jurisdictions are the U.S., California, Singapore, and the U.K.

During November 2011, the U.S. Internal Revenue Service completed its field examination of the Company’s federal income tax returns for the 2004, 2005, 2006, 2008 and 2009 tax years and issued a Revenue Agent’s Report, or RAR, with no proposed adjustments. The Company considers all tax positions taken in the 2004, 2005, 2006, 2008 and 2009 tax years to be effectively settled, because the U.S. Internal Revenue Service has completed its examination procedures and the Company believes that there is a remote possibility that the U.S. Internal Revenue Service will re-examine the settled positions. As a result, the Company has released $5.8 million of reserves related to uncertain tax positions for those periods and recorded a full valuation allowance against these deferred tax assets. However, the federal and California statute of limitations on assessment still remain open for the tax years 1992 through 2011. The Company’s major foreign jurisdictions remain open for examination in general for tax years 2006 through 2011.

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DEFINED-CONTRIBUTION SAVINGS PLANS

12 Months Ended

Dec. 31, 2011

DEFINED-CONTRIBUTION SAVINGS PLANS [Abstract]

DEFINED-CONTRIBUTION SAVINGS PLANS

NOTE 17-DEFINED-CONTRIBUTION SAVINGS PLANS

The Company maintains a defined-contribution savings plan which is qualified under Section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time U.S. employees. Participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company's expense associated with matching employee contributions for the years ended December 31, 2011, 2010 and 2009 totaled $3.0 million, $2.8 million and $3.2 million, respectively. Company contributions to employees vest ratably over four years.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES [Abstract]
Net loss	$ (28,161)	$ (10,233)	$ (23,909)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization	32,309	35,460	45,125
Amortization of investment premiums, net	0	0	1,219
Excess tax benefits for share-based compensation	(200)	(416)	(1,409)
Share-based compensation	8,771	9,910	11,148
Unrealized gain on hedging instruments	(826)	0	0
Unrealized gain on investments	(211)	0	0
Realized loss (gain) on debt and equity investments	2,717	(970)	(204)
Other-than-temporary impairment on securities	2,121	5,617	1,121
Provision for note receivable	2,151	0	0
Deferred tax assets	415	(73)	1,358
Amortization of debt offering costs	408	841	1,207
Gain from repurchase of convertible notes	0	(6,297)	(17,447)
Loss (gain) on disposal of property and equipment	342	784	(231)
Impairment of property and equipment	1,710	348	0
Changes in operating assets and liabilities [Abstract]
Accounts receivable, net	8,260	12,599	(2,207)
Inventories	6,522	5,117	(3,157)
Prepaid expenses and other assets	3,297	10,802	4,115
Accounts payable and accrued liabilities	(448)	(12,801)	(5,374)
Deferred revenue	(1,740)	(2,881)	(1,349)
Other long-term liabilities	1,900	168	(677)
Net cash provided by operating activities	39,337	47,975	9,329
CASH FLOWS FROM INVESTING ACTIVITIES [Abstract]
Capital expenditures	(5,779)	(7,726)	(10,249)
Purchases of available-for-sale securities	(86,252)	(453,138)	(381,560)
Proceeds from sales of available-for-sale securities	189,440	417,981	261,029
Proceeds from maturities of available-for-sale securities	32,982	110,477	124,090
Proceeds from sale of property and equipment	493	0	0
Purchase of technology rights	(3,250)	(1,383)	(500)
Net cash provided by (used in) investing activities	127,634	66,211	(7,190)
CASH FLOWS FROM FINANCING ACTIVITIES [Abstract]
Issuance of common stock, net	(683)	(1,182)	(813)
Repurchase of convertible notes	(3)	(143,993)	(50,669)
Excess tax benefits for share-based compensation	200	416	1,409
Net cash used in financing activities	(486)	(144,759)	(50,073)
Effect of exchange rate changes on cash and cash equivalents	(32)	415	284
Net increase (decrease) in cash and cash equivalents	166,453	(30,158)	(47,650)
Cash and cash equivalents at beginning of year	35,484	65,642	113,292
Cash and cash equivalents at end of year	201,937	35,484	65,642
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION [Abstract]
Cash paid for interest	3,341	9,284	9,963
Cash paid for income taxes	$ 633	$ 1,450	$ 144

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CONSOLIDATED BALANCE SHEETS (Parenthetical) In Thousands, except Share data (USD $)	Dec. 31, 2011	Dec. 31, 2010
Stockholders' equity
Convertible redeemable preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Convertible redeemable preferred stock, shares authorized (in shares)	5,000	5,000
Convertible redeemable preferred stock, shares issued (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	200,000	200,000
Common stock, shares issued (in shares)	70,454	70,578
Common stock, shares outstanding (in shares)	70,454	70,578

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COMMITMENTS

12 Months Ended

Dec. 31, 2011

COMMITMENTS [Abstract]

COMMITMENTS

NOTE 10—COMMITMENTS

Operating Leases

The Company leases laboratory, office and manufacturing facilities under non-cancelable operating leases that expire at various times through 2023. Some of these leases contain renewal options ranging from two to five years and escalation clauses. Rent expense related to operating leases for the years ended December 31, 2011, 2010 and 2009 was approximately $11.0 million, $9.7 million and $10.2 million, respectively. In connection with some of these facility leases, the Company has made security deposits totaling $1.8 million, which are included in long-term other assets in the Company’s Consolidated Balance Sheets.

Future minimum lease obligations, net of sublease income, at December 31, 2011 under all non-cancelable operating leases are as follows (in thousands):

For the Year Ending December 31,	Amount
2012	$	8,315
2013		8,344
2014		6,277
2015		6,204
2016		4,418
Thereafter		31,862
Total	$	65,420

Sublease income is expected to be approximately $0.9 million and $0.7 million for the years ended December 31, 2012 and 2013, respectively, and $0 thereafter.

Non-Cancelable Supply Agreements

As of December 31, 2011, the Company had approximately $1.3 million of non-cancelable inventory supply agreements that are in effect through 2012.

Indemnifications

From time to time the Company has entered into indemnification provisions under certain of its agreements with other companies in the ordinary course of business, typically with business partners, customers, and suppliers. Pursuant to these agreements, the Company generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties on a case by case basis for losses suffered or incurred by the indemnified parties in connection with any U.S. patent or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification provisions is generally perpetual from the time of the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. In addition, the Company has entered into indemnification agreements with its officers and directors. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As of December 31, 2011, the Company had not accrued a liability for this guarantee, because the likelihood of incurring a payment obligation in connection with this guarantee is remote.

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Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Feb. 22, 2012	Jun. 30, 2011
Entity Registrant Name	AFFYMETRIX INC
Entity Central Index Key	0000913077
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	No
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 552,544,248
Entity Common Stock, Shares Outstanding		70,447,986
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2011

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WARRANTIES

12 Months Ended

Dec. 31, 2011

WARRANTIES [Abstract]

WARRANTIES

NOTE 11—WARRANTIES

The Company provides for anticipated warranty costs at the time the associated revenue is recognized. Product warranty costs are estimated based upon the Company’s historical experience and the warranty period. The Company periodically reviews the adequacy of its warranty reserve and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. In 2010, the Company experienced more warranty claims for instruments than expected. Information regarding the changes in the Company’s product warranty liability for the years ended December 31, 2011 and 2010 is as follows (in thousands):

	Amount
Balance at December 31, 2009	$	1,685
Additions charged to cost of product sales		2,673
Repairs and replacements		(3,509	)
Adjustments		644
Balance at December 31, 2010	$	1,493
Additions charged to cost of product sales		879
Repairs and replacements		(872	)
Balance at December 31, 2011	$	1,500

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
REVENUE [Abstract]
Product sales	$ 241,273	$ 277,743	$ 279,186
Services	20,158	20,565	39,563
Royalties and other revenue	6,043	12,438	8,345
Total revenue	267,474	310,746	327,094
COSTS AND EXPENSES [Abstract]
Cost of product sales	97,815	117,384	126,377
Cost of services and other	13,137	15,822	23,949
Research and development	63,591	67,934	77,358
Selling, general and administrative	109,572	114,773	130,838
Restructuring charges	0	0	2,180
Goodwill impairment adjustment	0	0	(450)
Total costs and expenses	284,115	315,913	360,252
Loss from operations	(16,641)	(5,167)	(33,158)
Interest income and other, net	(6,302)	(1,487)	2,589
Interest expense	3,813	7,706	10,945
Gain from repurchase of convertible notes	0	6,297	17,447
Loss before income taxes	(26,756)	(8,063)	(24,067)
Income tax provision (benefit)	1,405	2,170	(158)
Net loss	$ (28,161)	$ (10,233)	$ (23,909)
Basic and diluted net loss per common share (in dollars per share)	$ (0.40)	$ (0.15)	$ (0.35)
Shares used in computing basic and diluted net loss per common share (in shares)	70,877	68,856	68,722

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FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2011

FINANCIAL INSTRUMENTS [Abstract]

FINANCIAL INSTRUMENTS

NOTE 5-FINANCIAL INSTRUMENTS

Investments in Debt and Equity Securities

The following is a summary of available-for-sale securities as of December 31, 2011 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government obligations and agency securities*	$	19,421	$	177	$	-		$	19,598
U.S. corporate debt*		24,942		259		(101	)		25,100
Non-U.S. government obligations and agency securities		2,805		6		(1	)		2,810
Non-U.S. corporate debt and equity securities		15,157		41		(268	)		14,930
Total available-for-sale securities	$	62,325	$	483	$	(370	)	$	62,438
Amounts mature in:
Less than one year								$	7,937
One to two years									25,785
More than two years									28,716
Total available-for-sale securities								$	62,438

* As of December 31, 2011, the Company had no investments in mortgage-backed securities in its portfolio.

The following is a summary of available-for-sale securities as of December 31, 2010 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government obligations and agency securities*	$	52,047	$	85	$	(76	)	$	52,056
U.S. corporate debt*		103,601		275		(684	)		103,192
U.S. and Non-U.S. money markets		3,642		-		(8	)		3,634
Non-U.S. government obligations and agency securities		8,155		24		(73	)		8,106
Non-U.S. corporate debt and equity securities		40,724		48		(243	)		40,529
Total securities	$	208,169	$	432	$	(1,084	)	$	207,517
Amounts included in:
Cash equivalents								$	6,103
Available-for-sale securities									201,414
Total securities								$	207,517
Amounts mature in:
Less than one year								$	73,326
One to two years									45,690
More than two years									88,501
Total available-for-sale securities								$	207,517

* As of December 31, 2010, approximately 4% of the Company's total portfolio was in mortgage-backed investments.

Realized gains for the years ended December 31, 2011 and 2010 were $0.6 million and $0.8 million, respectively. For the years ended December 31, 2011 and 2010, realized losses were $1.6 million and $0.3 million, respectively. Realized gains and losses are included in interest income and other, net in the Company's Consolidated Statements of Operations. The gross unrealized losses as of December 31, 2010 were primarily related to a mortgage-backed security with a carrying value of $0.6 million that was impacted by the weakening of the global economy caused by a lack of liquidity in the credit markets which had not fully recovered. The mortgage-backed security was sold in 2011 for a realized loss of $0.3 million. During the year ended December 31, 2011, an equity security that experienced a decline in fair value was deemed other-than-temporarily impaired and impairment charges totaling $0.8 million was recorded. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company's other securities.

Non-Marketable Securities

As of December 31, 2011 and 2010, the carrying amounts of the Company's non-marketable securities, totaling $5.0 million and $6.8 million, respectively, equaled their estimated fair values. Their estimated fair values were based on liquidation and net realizable values. During the year ended December 31, 2011, the Company recorded impairment charges on its non-marketable securities totaling $1.3 million primarily related to its limited partnership investment fund. During the year ended December 31, 2010, the Company recorded impairment charges on its non-marketable securities totaling $5.6 million, primarily due to declines in the estimated fair values of two of its investments in private biotechnology companies that were determined to be other-than-temporary as a result of the respective price per share paid by investors in the most recent round of financing for each company which, in each case, was significantly lower than the carrying value of the Company's investment. Net investment losses are included in interest income and other, net in the Company's Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment portfolio in the future.

Derivative Financial Instruments

The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets are held in the nonfunctional currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company's foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company's accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on the Company's Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in OCI until the hedged item is recognized in operations. As of December 31, 2011, the Company's existing foreign currency forward exchange contracts mature within 12 months. The deferred amount related to the Company's derivatives currently recorded in OCI and expected to be recognized into earnings over the next 12 months is a net gain of $0.8 million. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in other comprehensive income (loss) associated with such derivative instruments are reclassified immediately into operations through other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during 2011.

As of December 31, 2011, the total notional values of the Company's foreign currency forward contracts that mature within 12 months are as follows (in thousands):

	Contracts
	Qualifying
	as Hedges
December 31, 2011:
Euro	$	11,851
Japanese yen		7,008
British pound		4,459
Total	$	23,318

As of December 31, 2010, the Company did not have any unsettled foreign currency contracts in place.

As a result of the use of derivative instruments, the Company is exposed to the risk that the counterparties may be unable to meet the terms of the agreements. To mitigate the risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred, however, no losses as a result of counterparty defaults are expected. The Company does not require and is not required to pledge collateral for these financial instruments. The Company does not enter into foreign currency forward contracts for trading or speculative purposes and is not party to any leveraged derivative instruments.

The following table shows the Company's foreign currency derivatives measured at fair value as reflected on the Company's Consolidated Balance Sheets as of December 31, 2011 (in thousands):

				Fair Value of
		Fair Value of		Derivatives Not
		Derivatives		Qualifying or
	Balance Sheet	Designated as		Designated as		Total
	Location	Hedge Instruments		Hedge Instruments		Fair Value
December 31, 2011:
Derivative assets:
Foreign exchange contracts	Other current assets	$	940	$	-	$	940
Derivative liabilities:
Foreign exchange contracts	Accrued expenses		217		-		217

The Company did not have any foreign currency derivatives as of December 31, 2010.

The following table shows the pre-tax effect of the Company's derivative instruments on OCI for the years ended December 31, 2011 and 2010 (in thousands):

	Amount of Gain (Loss) Recognized
	in OCI (Effective Portion)
	Year Ended December 31,
	2011		2010
Derivatives designated as cash flow hedges
Foreign exchange contracts	$	826	$	-

There were no amounts classified from OCI into operations during the year ended December 31, 2011.

The following table shows the pre-tax effect of the Company's derivative instruments on the Company's Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 (in thousands):

	Amount of Gain (Loss) Recognized
	in Statements of Operations
	(Amount Excluded from
	Effectiveness Testing)
	Year Ended December 31,					Location of Gain (Loss) Recognized
	2011			2010		in Statements of Operations
Derivatives designated as cash flow hedges
Foreign exchange contracts	$	(103	)	$	-	Interest Income and Other, Net
Derivatives not designated as hedging instruments
Foreign exchange contracts		(1,720	)		957	Interest Income and Other, Net

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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2011

FAIR VALUE MEASUREMENTS [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 4—FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

A fair value hierarchy was established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are as follows:

● Level 1: quoted prices in active markets for identical assets or liabilities;

● Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

● Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

The fair values of the Company’s Level 1 and Level 2 available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities—short-term portion and available-for-sale securities—long-term portion on the Company’s Consolidated Balance Sheets based on the maturity of the securities. As of December 31, 2011 and 2010, the Company had no financial assets or liabilities requiring Level 3 classification, including those that have unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets and liabilities.

The fair value of the Company’s foreign currency derivative assets and liabilities is determined based on the estimated consideration the Company would pay or receive to terminate these agreements on the reporting date. The foreign currency derivative assets and liabilities are located in other current assets and accrued expenses, respectively, in the Company’s Consolidated Balance Sheets.

The fair value of the Company’s convertible notes is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for the convertible notes of the same remaining maturities. As of December 31, 2011 and 2010, the estimated fair value of the convertible notes was $95.5 million.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010 (in thousands):

			Significant
	Quoted Prices		Other
	In Active		Observable
	Markets		Inputs
	(Level 1)		(Level 2)		Total
December 31, 2011:
Assets:
U.S. government obligations and agency securities*	$	-	$	19,598	$	19,598
U.S. corporate debt*		-		25,100		25,100
Non-U.S. government obligations and agency securities		-		2,810		2,810
Non-U.S. corporate debt and equity securities		105		14,825		14,930
Total	$	105	$	62,333	$	62,438
Foreign currency derivative assets	$	-	$	940	$	940
Liabilities:
Foreign currency derivative liabilities	$	-	$	217	$	217
December 31, 2010:
Assets:
U.S. government obligations and agency securities*	$	-	$	52,056	$	52,056
U.S. corporate debt*		-		103,192		103,192
U.S. and non-U.S. money market funds		-		3,634		3,634
Non-U.S. government obligations and agency securities		-		8,106		8,106
Non-U.S. corporate debt and equity securities		804		39,725		40,529
Total	$	804	$	206,713	$	207,517

* As of December 31, 2011, the Company had no investments in mortgage-backed securities in its portfolio. As of December 31, 2010, approximately 4% of the Company’s total portfolio was in mortgage-backed investments.

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SEGMENT AND GEOGRAPHIC INFORMATION

12 Months Ended

Dec. 31, 2011

SEGMENT AND GEOGRAPHIC INFORMATION [Abstract]

SEGMENT AND GEOGRAPHIC INFORMATION

NOTE 16—SEGMENT AND GEOGRAPHIC INFORMATION

The Company has determined that it operates in one segment as it only reports operating results on an aggregate basis to the chief operating decision maker of the Company.

The Company reported total revenue by region is as follows (in thousands):

	Year Ended December 31,
	2011		2010		2009
Customer location:
United States	$	142,508	$	178,029	$	190,257
Europe		76,286		80,914		87,061
Japan		19,989		22,248		22,588
Other		28,691		29,555		27,188
Total	$	267,474	$	310,746	$	327,094

There were no customers representing 10% or more of total revenue in 2011, 2010 and 2009.

The Company’s long-lived assets other than purchased intangible assets, which the Company does not allocate to specific geographic locations as it is impracticable to do so, are composed principally of net property and equipment.

Net property and equipment, classified by major geographic areas in which the Company operates was as follows (in thousands):

	Year Ended December 31,
	2011		2010
Net property and equipment:
United States	$	32,168	$	42,434
Singapore		6,022		10,206
Other countries		1,393		1,537
Total (1)	$	39,583	$	54,177

(1) Included in the balance as of December 31, 2011 was the Company’s West Sacramento facility that was reclassified to held-for-sale on the Company’s Consolidated Balance Sheets. The facility had an estimated fair value of $9.0 million at December 31, 2011.

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LEGAL PROCEEDINGS

12 Months Ended

Dec. 31, 2011

LEGAL PROCEEDINGS [Abstract]

LEGAL PROCEEDINGS

NOTE 12—LEGAL PROCEEDINGS

The Company has been in the past, and continues to be, a party to litigation which has consumed, and may continue to consume, substantial financial and managerial resources. While the results of any litigation or any other legal proceedings are uncertain, the Company does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on the Company’s financial position or results of operations.

Illumina Lawsuit

On May 4, 2009 and November 3, 2009, the Company was named as a defendant in complaints filed by plaintiff Illumina, Inc., in the United States District Court for the Western District of Wisconsin (the “District Court”). In the complaints, plaintiff alleged that the Company is infringing Patent Nos. 7,510,841 and 7,612,020 (the “Patents”) by making and selling certain of the GeneChip® products. In December 2010, the District Court granted the Company’s motion for summary judgment that it did not infringe the patents held by Illumina. Illumina appealed the District Court’s decision and the Court of Appeals for the Federal Circuit affirmed the District Court’s decision.

E8 Pharmaceuticals LLC

On July 1, 2008, the Company was named as a defendant in a complaint filed by plaintiffs E8 Pharmaceuticals LLC and Massachusetts Institute of Technology ("MIT") in the United States District Court of Massachusetts. In the complaint, the plaintiffs allege that the Company is infringing one patent owned by MIT and licensed to E8 Pharmaceuticals by making and selling the Company’s GeneChip® products to customers and teaching its customers how to use the products. The plaintiffs seek a permanent injunction enjoining the Company from further infringement, unspecified monetary damages, enhanced damages pursuant to 35 U.S.C. §284, costs, attorneys’ fees and other relief as the court deems just and proper. The Company will vigorously defend against plaintiffs’ claims. There is no trial date set in this matter.

Enzo Litigation

On October 28, 2003, Enzo Life Sciences, Inc., a wholly-owned subsidiary of Enzo Biochem, Inc. (collectively “Enzo”), filed a complaint against the Company that is pending in the United States District Court for the Southern District of New York for breach of contract, injunctive relief and declaratory judgment. The Enzo complaint relates to a 1998 distributorship agreement with Enzo under which the Company served as a non-exclusive distributor of certain reagent labeling kits supplied by Enzo. In its complaint, Enzo seeks monetary damages and an injunction against the Company from using, manufacturing or selling Enzo products and from inducing collaborators and customers to use Enzo products in violation of the 1998 agreement. Enzo also seeks the transfer of certain Affymetrix patents to Enzo. In connection with its complaint, Enzo provided the Company with a notice of termination of the 1998 agreement effective on November 12, 2003.

On November 10, 2003, the Company filed a complaint against Enzo in the United States District Court for the Southern District of New York for declaratory judgment, breach of contract and injunctive relief relating to the 1998 agreement. In its complaint, the Company alleges that Enzo has engaged in a pattern of wrongful conduct against it and other Enzo labeling reagent customers by, among other things, asserting improperly broad rights in its patent portfolio, improperly using the 1998 agreement and distributorship agreements with others in order to corner the market for non-radioactive labeling reagents, and improperly using the 1998 agreement to claim ownership rights to the Company’s proprietary technology. The Company seeks declarations that it has not breached the 1998 agreement and that nine Enzo patents that are identified in the 1998 agreement are invalid and/or not infringed by it. The Company also seeks damages and injunctive relief to redress Enzo’s alleged breaches of the 1998 agreement, its alleged tortuous interference with the Company’s business relationships and prospective economic advantage, and Enzo’s alleged unfair competition. The Company filed a notice of related case stating that its complaint against Enzo is related to the complaints already pending in the Southern District of New York against eight other former Enzo distributors. The Company’s case has been related to complaints previously pending in the Southern District of New York against eight other former Enzo distributors. There is no trial date in the actions between Enzo and the Company.

Noteholder Litigation

On December 29, 2011, Tang Capital Partners, LP, a holder of the Company's 3.50% Senior Convertible Notes Due 2038 (the "Notes"), commenced class action litigation against the Company in the Superior Court of California, County of Santa Clara. The complaint alleges a variety of claims relating to the Company's proposed acquisition of eBioscience Holding Company, Inc., including that the acquisition would constitute a Fundamental Change under the indenture governing the Notes. The complaint seeks unspecified damages, temporary and permanent injunctive relief against completion of the eBioscience acquisition, and other remedies. On January 21, 2012, the Company entered into an agreement to settle the purported class action litigation. As part of the settlement, the Company agreed to commence a tender offer to repurchase the entire aggregate outstanding principal amount of Notes at par plus accrued interest. Tang Capital Partners, LP, which owns approximately $78.3 million principal amount of the Notes, agreed to tender all of its Notes into the offer. Refer to Note 20, “Subsequent Events” for further discussion.

Administrative Proceedings

The Company’s intellectual property is subject to a number of significant administrative actions. These proceedings could result in the Company’s patent protection being significantly modified or reduced, and the incurrence of significant costs and the consumption of substantial managerial resources. For the year ended December 31, 2011, the Company had not incurred significant costs in connection with administrative proceedings.

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ACQUIRED TECHNOLOGY RIGHTS

12 Months Ended

Dec. 31, 2011

ACQUIRED TECHNOLOGY RIGHTS [Abstract]

ACQUIRED TECHNOLOGY RIGHTS

NOTE 8-ACQUIRED TECHNOLOGY RIGHTS

Acquired technology rights, with a gross carrying value of $113.7 million, are comprised of customer relationships, licenses to technology covered by patents owned by third parties or patents acquired by the Company and are amortized over the expected useful lives of these assets, which range from two to fifteen years. At December 31, 2011 and 2010, accumulated amortization of these rights amounted to $84.2 million and $71.6 million, respectively.

During the years ended December 31, 2011 and 2010, the Company concluded that here were no indicators of impairment during its annual impairment test of its acquired technology rights and the remaining balance at December 31, 2011 is expected to be recoverable.

The expected future annual amortization expense of the Company's acquired technology rights is as follows (in thousands):

	Amortization
For the Year Ending December 31,	Expense
2012	$	11,092
2013		8,617
2014		6,736
2015		1,332
2016		421
Thereafter		1,327
Total	$	29,525

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INVENTORIES

12 Months Ended

Dec. 31, 2011

INVENTORIES [Abstract]

INVENTORIES

NOTE 6-INVENTORIES

Inventories consist of the following at December 31, 2011 and 2010 (in thousands):

	2011		2010
Raw materials	$	8,635	$	15,477
Work-in-process		10,554		9,235
Finished goods		23,662		24,661
Total	$	42,851	$	49,373

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PROPERTY AND EQUIPMENT

12 Months Ended

Dec. 31, 2011

PROPERTY AND EQUIPMENT [Abstract]

PROPERTY AND EQUIPMENT

NOTE 7-PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of December 31, 2011 and 2010 (in thousands):

	2011			2010
Property and equipment:
Construction-in-progress	$	837		$	1,013
Equipment and furniture		113,690			147,493
Building and leasehold improvements		96,390			99,206
Land		1,310			1,310
		212,227			249,022
Less: accumulated depreciation and amortization		(172,645	)		(194,845	)
Net property and equipment (1)	$	39,582		$	54,177

(1) Included in the balance as of December 31, 2011 was the Company's West Sacramento facility that was reclassified to held-for-sale on the Company's Consolidated Balance Sheets. The facility had an estimated fair value of

$9.0 million at December 31, 2011.

For the years ended December 31, 2011, 2010 and 2009, the Company recorded depreciation expense of $19.0 million, $22.2 million and $29.6 million, respectively.

For the year ended December 31, 2011, the Company recognized $1.7 million of impairment charges on its facility in West Sacramento, California.

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ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

12 Months Ended

Dec. 31, 2011

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES [Abstract]

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

NOTE 9-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities as of December 31, 2011 and 2010 consist of the following (in thousands):

	2011		2010
Accounts payable	$	15,629	$	12,897
Accrued compensation and related liabilities		12,169		14,840
Accrued interest		1,531		1,531
Accrued taxes		5,067		6,860
Accrued legal		1,808		518
Accrued warranties		1,500		1,493
Other		7,070		6,120
Total	$	44,774	$	44,259

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STOCKHOLDERS EQUITY AND SHARE-BASED COMPENSATION

12 Months Ended

Dec. 31, 2011

Stockholders Equity And Share Based Compensation Abstract

STOCKHOLDERS EQUITY AND SHARE-BASED COMPENSATION

NOTE 14—STOCKHOLDERS' EQUITY AND SHARE-BASED COMPENSATION EXPENSE

Convertible Preferred Stock

The Company's Board of Directors has authorized 5.0 million shares of convertible redeemable preferred stock, $0.01 par value. At December 31, 2011 and 2010, there were no such shares issued or outstanding.

Share-based Compensation Plans

The Company has a share-based compensation program that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and RSAs, granted under various stock plans. Stock options are issued at a price of at least 100% of the fair value of the Company's common stock on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options generally expire 7 to 10 years from the grant date and may be granted with different vesting terms from time to time as determined by the Board of Directors, usually over a period of four years on each anniversary of the grant date. In general, RSAs vest on an annual basis over a period of four years on each anniversary of the grant date, are subject to the employees' continued employment and are paid upon vesting in shares of the Company's common stock on a one-for-one basis. As of December 31, 2011, the Company had approximately 4.9 million shares of common stock reserved for future issuance under its share-based compensation plans. New shares are issued as a result of stock option exercises, restricted stock units vesting and restricted stock award grants. A more detailed description of the Company's current share-based compensation plans follows below.

In 1998, the Board of Directors adopted the Affymetrix 1998 Stock Incentive Plan (the "1998 Stock Plan") under which nonqualified stock options and restricted stock may be granted to employees and outside consultants, except that members of the Board of Directors and individuals who are considered officers of the Company under the rules of the National Association of Securities Dealers shall not be eligible. Options granted under the 1998 Stock Plan expire no later than ten years from the date of grant. A total of 3.6 million shares of common stock are authorized for issuance under the 1998 Stock Plan.

In 2000, the Board of Directors adopted the Amended and Restated 2000 Equity Incentive Plan (the "2000 Stock Plan"), which was amended and restated in 2001, under which RSAs, stock options, performance-based shares and stock appreciation rights may be granted to employees, outside directors and consultants. In the second quarter of 2010, 4.5 million shares of common stock were added under the 2000 Stock Plan bringing the total shares of common stock authorized for issuance under the 2000 Stock Plan to 16.2 million.

The following table sets forth the total share-based compensation expense resulting from stock options and RSAs included in the Company's Consolidated Statements of Operations (in thousands):

	Year Ended December 31,
	2011		2010		2009
Costs of sales	$	1,143	$	994	$	1,677
Research and development		1,850		2,136		2,207
Selling, general and administrative		5,778		6,780		7,264
Total share-based compensation expense	$	8,771	$	9,910	$	11,148

As of December 31, 2011, $16.0 million of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2015. The weighted-average term of the unrecognized share-based compensation expense is 2.7 years.

Stock Options

The fair value of options was estimated at the date of grant using the BSM option pricing model with the following weighted-average assumptions:

	Year Ended December 31,
	2011			2010			2009
Risk free interest rate		1.5	%		1.1	%		1.7	%
Expected dividend yield		0.0	%		0.0	%		0.0	%
Expected volatility		67	%		76	%		70	%
Expected option term (in years)		4.5			4.1			4.1

The risk free interest rate for periods within the contractual life of the Company's stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company's historical exercise trends over ten years. The expected volatility for the years ended December 31, 2011 and 2010 is based on a blend of historical and market-based implied volatility. Using the assumptions above, the weighted-average grant date fair value of options granted during the years ended December 31, 2011, 2010 and 2009 was $2.86, $2.66 and $3.03, respectively.

Activity under the Company's stock plans for the year ended December 31, 2011 is as follows (in thousands, except per share amounts):

				Weighted-Average		Weighted-Average		Aggregate
				Exercise Price		Remaining		Intrinsic
	Shares			Per Share		Contractual Terms		Value
						(in years)
Outstanding at December 31, 2010		6,636		$	12.44
Grants		1,952			5.31
Exercises		(180	)		3.29
Forfeitures or expirations		(2,132	)		15.63
Outstanding at December 31, 2011		6,276		$	9.41		4.69	$	520,725
Exercisable at December 31, 2011		2,722		$	14.32		3.31	$	253,898
Vested and expected to vest at December 31, 2011		5,548		$	9.95		4.51	$	490,116

The following table summarizes information concerning currently outstanding and exercisable options at December 31, 2011:

		Options Outstanding						Options Exercisable
				Weighted-Average		Weighted-Average				Weighted-Average
				Remaining		Exercise Price				Exercise Price
Range of Exercise Prices		Number		Contractual Life		Per Share		Number		Per Share
		(in thousands)		(in years)				(in thousands)
$	1.32 - 4.09		593		4.62	$	3.21		236	$	3.02
$	4.22 - 4.22		975		5.50	$	4.22		253	$	4.22
$	4.26 - 4.85		820		6.54	$	4.75		46	$	4.61
$	4.88 - 5.74		941		5.59	$	5.39		231	$	5.50
$	5.78 - 8.29		1,120		5.37	$	7.40		362	$	7.83
$	8.71 - 11.30		844		3.14	$	10.33		664	$	10.35
$	12.11 - 25.67		459		2.71	$	20.15		406	$	20.31
$	25.68 - 57.08		524		1.54	$	33.92		524	$	33.92
Total			6,276		4.69	$	9.41		2,722	$	14.32

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company's closing stock price on the last trading day of its fourth quarter of 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. The amount changes based on the fair market value of the Company's common stock. For the years ended December 31, 2011, 2010 and 2009, total intrinsic value of options exercised was $0.4 million, $0.2 million and less than $0.1 million, respectively.

Reserved Shares

At December 31, 2011, the Company has shares reserved for future issuance as follows (in thousands):

Options outstanding	6,276
Options available for future grants	4,878
Convertible subordinated notes	3,169
	14,323

Restricted Stock

The following table summarizes the Company's RSAs activity for the year ended December 31, 2011 (in thousands, except per share amounts):

	Number			Weighted-Average
	of Shares			Grant Date Fair Value
Restricted stock awards
Non-vested stock outstanding at December 31, 2010		1,248		$	8.14
Granted		-		$	-
Vested		(467	)	$	9.63
Forfeited		(241	)	$	7.09
Non-vested stock outstanding at December 31, 2011		540		$	7.32
Restricted stock units
Non-vested stock outstanding at December 31, 2010		705		$	4.47
Granted		1,688		$	5.39
Vested		(169	)	$	4.79
Forfeited		(167	)	$	4.48
Non-vested stock outstanding at December 31, 2011		2,057		$	5.20

For the years ended December 31, 2011 and 2010, total fair value of RSAs vested was $14.6 million and $13.3 million, respectively.

Performance-Based Awards

In 2011, the Compensation Committee approved a grant of performance-based restricted stock units ("PRSUs") under the Plan to an executive officer that is earned annually in four equal tranches (the "Performance Period"). The PRSUs entitle the executive to receive a certain number of shares of the Company's common stock based on the Company's satisfaction of certain financial and strategic performance goals as set and approved by the Board of Directors annually during the first quarter of the specific performance period. Based on the achievement of the performance conditions during the Performance Period, the final settlement of the PRSU award will vest twelve months following the end of the Performance Period. The PRSU award will be forfeited if the performance goals are not met or if the executive officer is no longer employed at the vest date.

The number of shares underlying the PRSUs that were granted to the executive officer during the year ended December 31, 2011 totaled 240,000 shares and had a grant date fair value of $6.71 per share. As of December 31, 2011, the Company expects that 60,000 shares of the PRSUs will vest and the fair value of such shares is being amortized on a straight-line basis over the remaining service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $1.5 million as of December 31, 2011.

Employee Stock Purchase Plan

In August 2011, the Company's Board of Directors adopted the 2011 Employee Stock Purchase Plan ("ESPP") that is subject to approval by the stockholders at the next annual meeting. The ESPP reserved a total of 7.0 million shares of the Company's common stock for issuance under the plan and permits eligible employees to purchase common stock at a discount through payroll deductions.

The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or the last day of the purchase period, whichever is lower. The offering periods are twelve months and include two six month purchase periods that result in a look-back for determining the purchase price of up to 12 months. Employees can invest up to 15% of their gross compensation through payroll deductions. In no event would an employee be permitted to purchase more than 750 shares of common stock during any six-month purchase period. The initial offering period commenced in November 2011. As of the year ended December 31, 2011, there were 245 participants in the plan and no shares were issued under the ESPP.

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RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2011

RELATED PARTY TRANSACTIONS [Abstract]

RELATED PARTY TRANSACTIONS

NOTE 19-RELATED PARTY TRANSACTIONS

In December 2011, the Company entered into an agreement under which it assigned one patent application and related know-how to Cellular Research, Inc. ("Cellular Research"), a company founded by the Company's Chairman, Dr. Stephen P.A. Fodor. Dr. Fodor also owns a majority of the shares of Cellular Research. Pursuant to the agreement, Cellular Research shall pay single digit royalties to Affymetrix on sales of products covered by the assigned technology, and starting in December 2015, an annual minimum fee of $100,000. Affymetrix shall also have a right of first refusal to collaborate with Cellular Research for the development of certain new products and to supply arrays to Cellular Research under certain terms and conditions. As of December 31, 2011, no royalties were earned pertaining to this agreement.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS [Abstract]
Net loss	$ (28,161)	$ (10,233)	$ (23,909)
Other comprehensive income (loss), net of tax [Abstract]
Foreign currency translation adjustment	79	415	284
Unrealized gains (losses) on available-for-sale and non-marketable securities	2,271	(4,093)	6,979
Reclassification adjustment for realized (losses) gains recognized in net loss	2,060	(1,003)	916
Unrealized gains on cash flow hedges	826	0	0
Net change in other comprehensive income (loss), net of tax	1,116	(2,675)	6,347
Comprehensive loss	$ (27,045)	$ (12,908)	$ (17,562)

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CONCENTRATIONS OF RISK

12 Months Ended

Dec. 31, 2011

CONCENTRATIONS OF RISK [Abstract]

CONCENTRATIONS OF RISK

NOTE 3-CONCENTRATIONS OF RISK

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

The Company has not experienced significant credit losses from its accounts receivable. Affymetrix performs a regular review of its customer activity and associated credit risks and does not require collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable.

Certain raw materials or components used in the synthesis of probe arrays or the assembly of instrumentation are currently available only from a single source or limited sources. No assurance can be given that these raw materials or other components of the GeneChip� system will be available in commercial quantities at acceptable costs from other vendors should the need arise. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive.

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

For the years ended December 31, 2011, 2010 and 2009, approximately 47%, 43% and 42%, respectively, of the Company's total revenue was generated from sales outside the United States. The Company's results of operations are affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns and changes in regional or worldwide economic or political conditions. The risks of the Company's international operations are mitigated in part by the extent to which its sales are geographically distributed.

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SUBSEQUENT EVENTS

12 Months Ended

Dec. 31, 2011

SUBSEQUENT EVENTS [Abstract]

SUBSEQUENT EVENTS

NOTE 20—SUBSEQUENT EVENTS

On January 21, 2012, the Company entered into an agreement to settle the purported class action litigation brought against the Company by holders of the Company’s 3.50% Senior Convertible Notes Due 2038 (the “Notes”) in the Superior Court of California, County of Santa Clara. As part of the settlement, on February 3, 2012, the Company commenced a cash tender offer (the “Offer”) for the entire remaining aggregate outstanding principal amount of $95.5 million of its Notes. The Company offered to purchase the Notes at par plus accrued and unpaid interest up to, but not including, the date of settlement.

The Company will fund the purchases of the Notes tendered in the Offer with cash on hand.

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SENIOR CONVERTIBLE NOTES

12 Months Ended

Dec. 31, 2011

SENIOR CONVERTIBLE NOTES [Abstract]

SENIOR CONVERTIBLE NOTES

NOTE 13-SENIOR CONVERTIBLE NOTES

On November 13, 2007, the Company issued $316.3 million principal amount of 3.50% Senior Convertible Notes (the "Notes") due January 15, 2038. The net proceeds after issuance costs from the Notes offering were approximately $309.4 million. The Notes bear interest of 3.50% per year on the principal amount payable semi-annually in arrears on January 15 and July 15 of each year. The Company incurred underwriter discount and issuance costs of approximately $6.9 million, which are being amortized over the effective life of the Notes which is five years, the period up to the first date that the holders of the Notes (the "Holders") can require the Company to repurchase the Notes.

The Notes are convertible into 33.1991 shares of Affymetrix common stock per $1,000 principal amount of Notes which equates to 10,499,215 shares of common stock, or a conversion price equivalent of $30.12 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of the following specified events:

. issuing shares of the Company's common stock as a dividend or distribution of the Company's common stock;

. effecting a stock split or stock combination;

. issuing to all or substantially all Holders of the Company's common stock any rights or warrants under certain circumstances and with certain entitlements;

. distributing shares of the Company's common stock, evidences of indebtedness or other assets or property, to all or substantially all Holders of the Company's common stock, with certain exceptions;

. making cash distributions to all or substantially all Holders of the Company's common stock; or

. should the Company or any of its subsidiaries purchase shares of its common stock pursuant to a tender offer at a premium to market.

Holders may convert their Notes into shares of Affymetrix stock at any time at their option at the initial conversion rate, subject to adjustment, prior to the close of business on the business day prior to the maturity date.

On January 15, 2013, 2018 and 2028, the security holders have the option to require the Company to repurchase the Notes at a price equal to 100% of the principal amount of the Notes plus accrued interest. Additionally, on or after January 15, 2013, Affymetrix has the option of redeeming for cash at 100% of the principal amount all or part of the then outstanding Notes plus accrued interest.

The Notes are unsecured and rank equally with the Company's other existing and future senior indebtedness. The Notes are structurally subordinated to any current or future indebtedness and other liabilities of the Company's subsidiaries.

There were no purchases of Notes in 2011. In 2010 and 2009, the Company repurchased a total of $220.8 million of aggregate principal amount of the Notes for total cash consideration of $194.2 million, including accrued interest of $2.4 million. The recognized gain on debt repurchase of $23.7 million is net of transaction costs of $1.3 million and accelerated amortization of deferred financing costs of $2.4 million.

As of December 31, 2011, the balance remaining on the Notes was $95.5 million.

On February 3, 2012, the Company commenced a cash tender offer to repurchase the entire aggregate outstanding principal amount of its Notes at par plus accrued and unpaid interest from the last interest payment date applicable to the Notes to, but not including, the settlement date for the tender offer. Refer to Note 20, "Subsequent Events" for further information.