NOTE 2—ACQUISITION

On the Acquisition Date, pursuant to the terms of an Amended and Restated Agreement and Plan of Merger (the "Acquisition Agreement"), a wholly-owned subsidiary of the Company merged with and into eBioscience, with eBioscience surviving as a wholly-owned subsidiary of the Company (the "Acquisition"). eBioscience specializes in the development, manufacturing, marketing and distribution of research tools in the areas of flow cytometry, immunoassays, microscopic imaging and other protein-based analyses.

At the Acquisition Date, each share of eBioscience issued and outstanding common stock immediately prior to the Acquisition Date was cancelled and converted into the right to receive cash of $38.18 per each such previously issued and outstanding common share. Further, all options to purchase shares of eBioscience common stock that were outstanding immediately prior to the Acquisition Date became exercisable to the extent not fully vested and were cancelled and retired immediately prior to the Acquisition Date in exchange for cash of $38.18 per each such previously outstanding option, less the exercise price of such option.

The Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the tangible and identifiable intangible assets and liabilities of eBioscience were recorded at their respective fair values as of the Acquisition Date, including an amount for goodwill representing the difference between the Acquisition consideration and the fair value of the identifiable net assets.

At June 30, 2012, the Company had provisionally estimated fair values for the assets acquired and liabilities assumed at the Acquisition Date. The amounts reported were considered provisional as the Company was completing the valuation work required to allocate the purchase price and finalize the working capital adjustments. During the third quarter of 2012, with the help of third-party specialists, the valuation was finished and the determination of the fair value of acquired inventory, property and equipment, and intangible assets was completed. This resulted in purchase accounting adjustments (also referred to as "measurement period adjustments") to the Company's Condensed Consolidated Financial Statements as of and for the period ended June 30, 2012. Under GAAP, changes to the purchase price allocation during the measurement period are recognized as of the date of acquisition. The Company considers purchase accounting to be final except for provisional tax amounts that may change during the measurement period.

The results of operations of the acquired eBioscience business and the fair values of the assets acquired and liabilities assumed have been included in the Company's Condensed Consolidated Financial Statements since the date of the Acquisition. For the three and nine months ended September 30, 2012, the Company recorded $17.6 million and $19.0 million, respectively, in revenue and recognized a net loss of $4.7 million and $4.6 million, respectively, from eBioscience.

Purchase price

The Acquisition Date purchase price totaled $314.9 million and is net of $0.2 million proceeds received during the third quarter of 2012 for final working capital adjustments. Of the total purchase price, $8.3 million was accounted for as share-based compensation expense as a result of the accelerated vesting of certain eBioscience employee options immediately prior to the Acquisition and has been recognized in the accompanying Condensed Consolidated Statement of Operations under Selling, general and administrative expenses for the nine months ended September 30, 2012. The remaining $306.6 million was allocated to the net assets acquired from eBioscience. The Acquisition was financed through a combination of cash on hand, the liquidation of available-for-sale securities, proceeds from third-party financing (the "Term Loan") and the issuance of 4.00% Convertible Senior Notes (the "4.00% Notes"). Refer to Note 9. "Long-Term Debt Obligations" for further information.

The following table summarizes the accounting treatment of the purchase price paid (in thousands):

Purchase consideration	$	306,626
Share-based compensation expense		8,265
Total purchase price	$	314,891

Fair values of assets acquired and liabilities assumed

The following table summarizes the fair values of assets acquired, liabilities assumed and goodwill (in thousands) at the Acquisition Date, as well as retrospective purchase accounting adjustments (also referred to as "measurement period adjustments") made with respect to the six months ended June 30, 2012:

	Before
	Adjustment						After
	of Final						Adjustment
	Allocation			Measurement			of Final
	of Purchase			Period			Allocation of
	Price(1)			Adjustments(2)			Purchase Price
Cash and cash equivalents	$	7,095		$	-		$	7,095
Accounts receivable, net		9,488			(8	)		9,480
Inventories		52,060			(1,380	)		50,680
Prepaid expenses and other assets		7,844			56			7,900
Property and equipment		5,969			551			6,520
Intangible assets		159,755			(22,155	)		137,600
Other non-current assets		1,769			(328	)		1,441
Identifiable assets acquired		243,980			(23,264	)		220,716
Accounts payable and accrued liabilities		(18,681	)		(2,819	)		(21,500	)
Deferred tax liability		(55,542	)		8,264			(47,278	)
Other non-current liabilities		(3,241	)		-			(3,241	)
Identifiable liabilities acquired		(77,464	)		5,445			(72,019	)
Goodwill		140,325			17,604			157,929
Acquisition consideration	$	306,841		$	(215	)	$	306,626

(1) As previously reported in the notes to the Condensed Consolidated Financial Statements included in the Company's Quarterly Report on Form 10-Q as of June 30, 2012 and for the three and six months then ended.

(2) During the third quarter of 2012, the Company finalized the valuations and allocations of the fair value of certain assets and liabilities included in the Acquisition resulting in the purchase accounting adjustments detailed above.

The Company reduced the fair values of certain intangible assets by $22.2 million to better reflect market participant assumptions about the facts and circumstances existing as of the Acquisition Date.

The adjustments in the table above had a de minimis impact on the amortization of the affected intangible assets for the three and six-months ended June 30, 2012. However, the above change in domestic deferred tax liabilities resulted in a $7.2 million increase in the Company's domestic deferred tax asset valuation allowance. Adjustments to valuation allowances are further discussed in Note 12. "Income Taxes."

The above measurement period adjustments did not result from events that occurred after the Acquisition Date.

Inventories

The inventories acquired include an adjusted step-up in basis of approximately $29.0 million, which represents the fair value of the inventory less a reasonable profit margin on costs to complete and sell. The $29.0 million step-up in basis will be recognized as the inventory is sold, which is expected to be over a period of 12 to 23 months from the Acquisition Date.

Intangible Assets

The following table summarizes the fair value of definite-lived intangible assets acquired at the Acquisition Date and their estimated useful lives (in thousands, except for estimated useful lives):

			Estimated
	Fair Value		Useful Life
Purchased intangible assets:
Customer base	$	61,100	12 years
Developed technologies		58,000	12 years
Trademarks and tradenames		15,500	5 years
Other contractual agreements		3,000	2 years
Total	$	137,600

Purchased intangible assets were recorded at fair value determined using an income approach, which recognizes that the fair value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales projections and estimated direct costs. Indications of value are developed by discounting these benefits to their present worth at a discount rate that reflects the current return requirements of market participants.

Purchased intangible assets are finite-lived intangible assets and are being amortized over their estimated useful lives ranging from two to twelve years.

Deferred tax liabilities

Deferred tax liabilities assumed are primarily comprised of the tax impact of the temporary difference between the fair values of assets acquired and the historical tax basis of those assets. These temporary differences will reverse as the assets are amortized.

Goodwill

The excess of Acquisition consideration over the fair value of assets acquired and liabilities assumed represents goodwill. The Company believes the factors that contributed to goodwill include synergies that are specific to the Company's consolidated business, and not available to market participants, and the acquisition of a talented workforce that expands the Company's expertise in business development and the commercialization of cell and protein analysis products. The Company does not expect any portion of this goodwill to be deductible for tax purposes.

Liabilities

The above determination of fair value excludes potential amounts related to certain litigation in which eBioscience is currently involved. The Acquisition Agreement provides that eBioscience security holders shall, subject to certain limitations, indemnify Affymetrix against damages arising out of or resulting from intellectual property litigation brought against eBioscience by Life Technologies Corporation. The net assets acquired and results of operations do not reflect the potential outcome of this litigation, which is unable to be estimated at September 30, 2012. Under the terms of the Acquisition Agreement, $25.2 million of the purchase price was placed into escrow to secure eBioscience security holders' indemnification obligations to the Company.

Transaction costs

The Company cumulatively incurred approximately $9.0 million of Acquisition-related costs that are recognized as Selling, general and administrative expense in the accompanying Condensed Consolidated Statements of Operations, of which $6.1 million was recognized during the nine months ended September 30, 2012 and $2.9 million was recognized in the year ended December 31, 2011.

Total underwriting and financing fees of approximately $8.5 million associated with the Term Loan and 4.00% Notes were also incurred and are discussed in Note 9. "Long-Term Debt Obligations."

Share-based compensation costs

The share-based compensation expense of $8.3 million recognized for the accelerated vesting of certain eBioscience options immediately vested prior to the Acquisition was recognized in the accompanying Condensed Consolidated Statements of Operations as Selling, general and administrative expense in during the nine months ended September 30, 2012.

Pro Forma Financial Information

The following pro forma financial information presents the combined results of operations for the three and nine months ended September 30, 2012 and 2011 as if the Acquisition had been completed on January 1, 2011, with adjustments to give effect to pro forma events that are directly attributable to the Acquisition. The pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of the Company and eBioscience. Accordingly, these pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues	$	79,624		$	82,122		$	247,021		$	256,035
Net loss		(17,643	)		(17,128	)		(36,399	)		(8,528	)
Basic and diluted earnings per share		(0.25	)		(0.25	)		(0.52	)		(0.12	)

The pro forma financial information includes non-recurring pro forma adjustments for share-based compensation expense of $8.3 million recognized for the accelerated vesting of certain eBioscience stock options immediately prior to the Acquisition, and an adjusted income tax benefit of $37.5 million that were excluded from the pro forma results for the nine months ended September 30, 2012 and included in the pro forma results for the nine months ended September 30, 2011.

The pro forma financial information also excludes non-recurring Acquisition-related transaction costs incurred by the Company of $0.2 million and $6.1 million, respectively, and by eBioscience of $0.1 million and $5.6 million, respectively. For the three and nine months ended September 30, 2011, the Company did not incur any non-recurring Acquisition costs and eBioscience incurred 0.1 million.